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PRINCIPLES OF MANAGEMENT, , Charles W.L. Hill, UNIVERSITY OF WASHINGTON, , Steven L. McShane, UNIVERSITY OF WESTERN AUSTRALIA, , Boston Burr Ridge, IL Dubuque, IA Madison, WI New York San Francisco St. Louis, Bangkok Bogotá Caracas Kuala Lumpur Lisbon London Madrid Mexico City, Milan Montreal New Delhi Santiago Seoul Singapore Sydney Taipei Toronto, , hiL30123_fm_i-xvii.indd i, , 11/10/06 9:52:23 PM

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PRINCIPLES OF MANAGEMENT, Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of, the Americas, New York, NY, 10020. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights, reserved. 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 DOW/DOW 0 9 8 7 6, ISBN 978-0-07-353012-3 (student edition), MHID0-07-353012-3 (student edition), ISBN 978-0-07-331626-0 (instructor’s edition), MHID 0-07-331626-1 (instructor’s edition), Editorialdirector: John E. Biernat, Senior sponsoring editor: Ryan Blankenship, Developmental editors: Natalie Ruffatto and Laura Griffin, Senior marketing manager: Anke Braun, Mediaproducer: Greg Bates, Lead project manager: Mary Conzachi, Leadproduction supervisor: Michael R. McCormick, Seniordesigner: Kami Carter, Senior photo research coordinator: Jeremy Cheshareck, Photoresearcher: Keri Johnson, Supplementproducer: Ira C. Roberts, Senior media project manager : Susan Lombardi, Cover and interior design: Kami Carter, Cover image: © CorbisImages, Typeface: 10/12 Times New Roman, Compositor:Techbooks, Printer:R. R. Donnelley, Library of Congress Cataloging-in-Publication Data, Hill, Charles W. L., Principles of management / Charles W.L. Hill, Steven L. McShane., p. cm., Includes index., ISBN-13: 978-0-07-353012-3 (student edition : alk. paper), ISBN-10: 0-07-353012-3 (student edition : alk. paper), ISBN-13: 978-0-07-331626-0 (instructor’s edition : alk. paper), ISBN-10: 0-07-331626-1 (instructor’s edition : alk. paper), 1. Management. I. McShane, Steven Lattimore. II. Title., HD31.H4885 2008, 658--dc22, 2006033368, , www.mhhe.com, , hiL30123_fm_i-xvii.indd ii, , 11/10/06 9:52:23 PM

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Fo r L a n e, — C . W. L . H ., , Dedicated with Love, a n d d evo t i o n to D o n n a ,, and to our wonderful, daughters, Bryton and, Madison, —S.L.M., , hiL30123_fm_i-xvii.indd iii, , 11/10/06 9:52:23 PM

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about the // AUTHORS, Charles W. L. Hill, , Steven L. McShane, , Charles, W. L. Hill is the, Hughes M. Blake Professor, of International Business at, the School of Business,, University of Washington., Professor Hill recei ved his, PhD from the University of, Manchester’s Institute, of Science and Technology, (UMIST) in Britain. In addition, to the Uni versity of Washington,, he has ser ved on the f aculties of UMIST , Texas A&M, University, and Michigan State University., Professor Hill has pub lished over 40 ar ticles in peer reviewed academic jour nals, including the Academy of, Management J ournal, Academy of Mana gement Re view,, Strategic Management Journal, and Organization Science ., He has also pub lished two college texts: one on strate gic, management and the other on inter national business. Professor Hill has served on the editorial boards of several academic journals, including the Strategic Management Journal and Organization Science. Between 1993 and 1996 he, was consulting editor at the Academy of Mana gement, Review ., Professor Hill teaches in the MB A, Ex ecutive MB A,, Management, and PhD pro grams at the Uni versity of, Washington. He has recei ved awards for teaching e xcellence in the MBA, Executive MBA, and Management programs. He has also taught customized executive programs., Professor Hill works on a consulting basis with a number of organizations. His clients have included ATL, Boeing,, BF Goodrich, Hexcel, House of F raser, Microsoft, Seattle, City Light, Tacoma City Light, Thompson F inancial, Services, and Wizards of the Coast., , ven, Ste L. McShaneis Professor of Management in, the Graduate School of, Management at the Uni versity of Western Australia,, where he recei ves high, teaching ratings from students in P erth, Singapore,, and other cities in Asia where, UWA offers its pro grams. He is, also an Honorar y Professor at Universiti Tunku Abdul Rahman (UTAR) in Malaysia and previously taught in the business f aculties at Simon F raser, University and Queen’s University in Canada. Ste ve has, conducted e xecutive seminars with Nokia, Wesfarmers, Group, ALCOA World Alumia Australia, and many other, organizations. He is also a popular visiting speaker, having, given four dozen talks to f aculty and students in almost a, dozen countries over the past three years., Steve earned his PhD from Michigan State University in, organizational beha vior, human resource management,, and labor relations. He also holds a Master of Industrial, Relations from the Uni versity of Toronto, and an under graduate degree from Queen’s University in Canada. Steve, has served as President of the Administrative Sciences Association of Canada (the Canadian equi valent of the Academy of Management) and Director of Graduate Pro grams, in the business faculty at Simon Fraser University., Along with co-authoring Organizational Behavior, 4e,, Steve is the author of Canadian Organizational Behaviour,, 6th ed. (2006), co-author (with Tony Travaglione) of, Organisational Behaviour on the P acific Rim, 2e (2007),, and co-author (with Mar y Ann von Glinow) of Organizational Behaviour: Essentials (2007). He has also published, several dozen ar ticles, book chapters, and conference, papers on di verse topics, including managerial decision, making, or ganizational lear ning, socialization of ne w, employees, gender bias in job e valuation, wrongful dismissal, media bias in business magazines, and labor union, participation., Steve enjoys spending his leisure time s wimming, body, board surfing, canoeing, skiing, and traveling with his wife, and two daughters., , hiL30123_fm_i-xvii.indd iv, , 11/10/06 9:52:23 PM

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/// BRIEF CONTENTS, PART 1, , PART 2, , PART 3, , PART 4, , PART 5, , Managers and the Environment, Chapter 1, , Management 2, , Chapter 2, , The External and Internal Environments 26, , Chapter 3, , Globalization and the Manager 54, , Chapter 4, , Stakeholders, Ethics, and Corporate Social Responsibility 80, , Strategizing, Chapter 5, , Planning and Decision Making 104, , Chapter 6, , Strategy 132, , Chapter 7, , Managing Operations 156, , Organization Architecture, Chapter 8, , Organizing 180, , Chapter 9, , Control Systems, , Chapter 10, , Organizational Culture 230, , Chapter 11, , Developing High-Performance Teams, , 206, , 254, , Leading, Chapter 12, , Staffing and Developing a Diverse Workforce, , 284, , Chapter 13, , Motivating and Rewarding Employee Performance, , Chapter 14, , Managing Employee Attitudes and Well-Being 346, , Chapter 15, , Managing through Power, Influence, and Negotiation, , Chapter 16, , Effective Leadership, , Chapter 17, , Communication 426, , 314, , 376, , 402, , Change, Chapter 18, , Managing Innovation and Change 452, , Glossary 478, Index 487, , hiL30123_fm_i-xvii.indd v, , 11/10/06 9:52:24 PM

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// TABLE OF CONTENTS, PART 1, , Managers and the Environment, Chapter 1, , Management, , 2, , The Functions of Management 4, Planning and Strategizing 4, Organizing 5, Controlling 6, Leadingand Developing Employees 6, Types of Managers 7, Corporate-Level General Managers 8, Business-Level General Managers 9, FunctionalManagers 9, Frontline Managers 10, Becoming a Manager 10, From Specialist to Manager, Masteringthe Job 11, , Dynamic Changes in the External Environment, Incremental versus Discontinuous Change 42, Environmental Uncertainty 43, , 42, , The Internal Environment 44, Internal Organization 44, Employees (Human Capital) 45, Resources 46, In Conclusion: Why Does It Matter? 48, Management Challenges 49, , 10, , Managerial Roles 12, Interpersonal Roles 13, Informational Roles 14, DecisionalRoles 15, SomeQualifications 15, Management Competencies:, Do You Have What It Takes? 16, Managerial Skills 16, Managerial Values 19, Managerial Motivation 20, In Conclusion: Why Does It Matter? 21, Management Challenges 21, Management Portfolio 22, CLOSING CASE, George David 22, , Chapter 2, , The External and Internal, Environments 26, The Task Environment 29, The Threat of Entry 30, Bargaining Power of Buyers 31, Bargaining Power of Suppliers 32, TheThreat of Substitutes 32, The Intensity of Rivalry 33, ASixth Force: Complementors 37, Synthesis 37, , hiL30123_fm_i-xvii.indd vi, , The General Environment 38, Political and Legal Forces 39, Macroeconomic Forces 39, Demographic Forces 40, Sociocultural Forces 41, Technological Forces 41, InternationalForces 41, , Management Portfolio, , 50, , CLOSING CASE, The Pharmaceutical Industry 50, , Chapter 3, Globalization and the Manager, , 54, , The Process of Globalization 56, The Spread of Market-Based Systems 56, Falling Barriers to Trade and Investment 58, Tumbling Communication and Transportation Costs 58, Implications of Globalization 59, The Globalization of Production 60, The Globalization of Markets 61, Technology: The Great Facilitator 61, Constraints on Globalization 62, Protectionist Countertrends 63, National Differences in Consumer Behavior 64, National Differences in Business Systems 64, Differences in Social Culture 65, The Benefits of Going Global 66, Expanding the Market 67, Realizing Scale Economies 67, Realizing Location Economies 67, GlobalLearning 68, Management Challenges in the Global, Enterprise 69, Global Standardization or Local Customization 69, EntryMode 70, LocatingActivities 71, Managing People in the Multinational Firm 72, , 11/10/06 9:52:24 PM

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Contents, , In Conclusion: Why Does It Matter?, Management Challenges, Management Portfolio, , The Benefits and Pitfalls of Planning 118, The Pitfalls of Planning 119, Improving Planning 120, , 74, , 75, , 75, , Decision Making 121, The Rational Decision-Making Model 122, Bounded Rationality and Satisficing 122, Decision-Making Heuristics and Cognitive Biases, Prospect Theory 125, Groupthink 126, Improving Decision Making 127, , CLOSING CASE, Planet Starbucks 75, , Chapter 4, Stakeholders, Ethics, and Corporate, Social Responsibility 80, Stakeholders and Stakeholder Management, Stakeholders and the Organization 83, Taking Stakeholders into Account 83, Business Ethics 86, EthicalIssues in Management 86, The Roots of Unethical Behavior 90, PhilosophicalApproaches to Ethics 92, BehavingEthically 94, Social Responsibility 97, Arguments for Social Responsibility, The Friedman Doctrine 99, , Management Challenges, Management Portfolio, , In Conclusion: Why Does It Matter? 127, 82, , Management Challenges 128, Management Portfolio, , 128, , Chapter 6, , Strategy 132, Superior Performance and Competitive, Advantage 134, 100, , 100, , 101, , CLOSING CASE, Working Conditions at Wal-Mart, , 123, , CLOSING CASE, Boom and Bust in Telecommunications 129, , 98, , In Conclusion: Why Does It Matter?, , vii, , 101, , Business-Level Strategy 137, Competitive Theme: Differentiation or Low Cost?, Segmenting the Market 139, Choosing Segments to Serve 140, Segmentation and Strategy 140, TheLow Cost–Differentiation Frontier 141, , 137, , Implementing Business-Level Strategy 143, Configuring the Value Chain 144, Competitive Advantage and Strategic Fit 146, , PART 2, Strategizing, Chapter 5, , Planning and Decision Making 104, Planning within Organizations 106, Levels of Planning 107, PlanningHorizons 108, Single-Use Plans and Standing Plans 109, Contingency Planning 110, Strategic Planning: A Closer Look 112, Setting the Context: Mission, Vision,, Values, and Goals 113, External and Internal Analysis 116, SWOT Analysis: Formulating Strategies 116, ActionPlans 117, Implementation 117, Review and Adjustments 117, , hiL30123_fm_i-xvii.indd vii, , Competitive Tactics 147, Tactical Pricing Decisions 147, Tactical Product Decisions 148, Corporate-Level Strategy 148, Focus on a Single Business 149, Vertical Integration 149, Diversification 150, InternationalExpansion 151, In Conclusion: Why Does It Matter? 152, Management Challenges 152, Management Portfolio, , 153, , CLOSING CASE, Google’s Quest for Competitive Advantage 153, , Chapter 7, , Managing Operations 156, Productivity and Efficiency 158, , 11/10/06 9:52:24 PM

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viii, , Contents, , Management Challenges 203, , Configuring the Production System 159, Traditional Production Systems 159, Production Systems, Flexibility, and Costs 160, New Production Technologies: Mass, Customization 162, Optimizing Work Flow: Process Reengineering and, Process Innovation 164, Asset Utilization, , Management Portfolio, CLOSING CASE, Dow Chemical 203, , Chapter 9, , 165, , Control Systems 206, , Quality Management 167, Managing Inventory 169, Economic Order Quantity and Setup Time, Just-in-Time Inventory Systems 171, Buildto Order and Inventory 172, , Control Systems 208, Establishing Goals and Standards 208, MeasuringPerformance 210, Comparing Performance against, Goals and Standards 210, Taking Corrective Action 211, Providing Reinforcement 211, , 170, , Supply Chain Management and, Information Systems 174, Product Development and Productivity, , 175, , In Conclusion: Why Does It Matter? 176, Management Challenges, Management Portfolio, , 203, , 176, , 177, , CLOSING CASE, Improving Productivity in the Auto Industry 177, , PART 3, , Methods of Control 212, Personal Controls 212, Bureaucratic Controls 213, OutputControls 214, Cultural Control 216, Control through Incentives 217, Market Controls 218, Summary 219, Matching Controls to Strategy, and Structure 220, Controls in the Single Business 220, Controls in Diversified Firms 221, Choosing Control Metrics:, The Balanced Scorecard 223, , Organization Architecture, , Backchannel Control Methods 225, , Chapter 8, Organizing, , In Conclusion: Why Does It Matter? 226, , 180, , Management Challenges 226, Organization Architecture, , 182, Management Portfolio, , Designing Structure: Vertical Differentiation, Centralization and Decentralization 184, Tall versus Flat Hierarchies 188, , CLOSING CASE, Lincoln Electric 227, , Designing Structure: Horizontal, Differentiation 191, Functional Structure 192, MultidivisionalStructure 193, Geographic Structure 194, MatrixStructure 196, , Chapter 10, Organizational Culture, , Designing Structure: Integrating Mechanisms, Formal Integrating Mechanisms 198, Informal Integrating Mechanisms: Knowledge, Networks 199, Strategy, Coordination, and Integrating, Mechanisms 201, In Conclusion: Why Does It Matter?, , hiL30123_fm_i-xvii.indd viii, , 226, , 184, , 202, , 198, , 230, , What Is Organizational Culture? 232, Shared Values 233, Shared Assumptions 234, Content of Organizational Culture 234, Organizational Subcultures 235, Deciphering an Organization’s Culture 236, Organizational Stories and Legends 237, Rituals and Ceremonies 237, Organizational Language 238, Physical Structures and Décor 238, , 11/16/06 3:47:50 PM

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Contents, , Is Organizational Culture Important? 239, Organizational Culture Strength and Fit 239, Corporate Cults and Suppressing Dissent 240, AdaptiveCultures 241, Organizational Culture and Business Ethics 241, How to Change and Strengthen, Organizational Culture 242, Actions of Founders and Leaders 243, AligningArtifacts 245, Introducing Culturally Consistent Rewards 245, Selectingand Socializing Employees 246, , Management Challenges, Management Portfolio, , 249, , 250, 250, , Chapter 11, Developing High-Performance, Teams 254, Why Rely on Teams? 256, Why People Belong to Informal Groups, The Trouble with Teams, Social Loafing 258, , 257, , 258, , Types of Teams 258, Self-Directed Teams 260, Virtual Teams 261, A Model of Team Effectiveness, Team Design Features 264, Task Characteristics 264, Team Size 264, Team Composition 265, Team Roles 265, , CLOSING CASE, The Shipping Industry Accounting Team, , 279, , PART 4, Leading, , Human Resource Planning: Translating Strategy, into Staffing Requirements 286, Step 1: Conduct Job Analysis 287, Step 2: Estimate Human Resource Demand 287, Step 3: Document Current Human Resource Supply 288, Step 4: Estimate Future Internal Human Resource, Supply 288, Step 5: Estimate Future External Human Resource, Supply 289, Relying on the Contingent Workforce 289, Staffing a Diverse Workforce 290, Surface-Level and Deep-Level Diversity 290, IsDiversity Important? 291, Recruiting Job Applicants 294, Nurturing the Employer Brand 295, Internal versus External Recruitment 296, Choosing Recruiting Channels 297, Recruitmentand Diversity 299, , 301, , Orienting and Developing Employees 304, Employee Orientation 304, Training Needs Analysis 305, Training Methods 305, Supporting the Training Process 307, , Team Processes 266, Team Development 267, Team Norms 269, Team Cohesiveness 271, Team Trust 272, , In Conclusion: Why Does It Matter? 308, , Managing Team Conflict 274, Task versus Relationship Conflict 274, Interpersonal Conflict Management Styles 275, Structural Solutions to Team Conflict 277, , hiL30123_fm_i-xvii.indd ix, , 278, , Selecting Job Applicants 299, Reliability and Validity of Selection Methods 299, Application Forms, Résumés, and Reference Checks, Work Sample Tests 301, Employment Interviews 302, Abilityand Personality Tests 303, Selection and Diversity 303, , 262, , In Conclusion: Why Does It Matter?, , Management Portfolio, , Staffing and Developing a Diverse, Workforce 284, , 250, , CLOSING CASE, Schwab Acquires U.S. Trust, , Management Challenges 278, , Chapter 12, , Managing Organizational Culture, during Mergers 246, Strategies to Merge Different, Organizational Cultures 247, In Conclusion: Why Does It Matter?, , ix, , 277, , Management Challenges 308, Management Portfolio, , 309, , CLOSING CASE, Rebranding McJobs 309, , 11/10/06 9:52:24 PM

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x, , Contents, , Job Satisfaction 351, Job Satisfaction and Work Behavior 352, Job Satisfaction and Performance 354, Job Satisfaction and Customer Satisfaction 354, , Chapter 13, Motivating and Rewarding Employee, Performance 314, MARS Model of Individual Behavior and Results 316, Motivation 316, Ability 317, RolePerceptions 317, SituationalFactors 318, Using MARS to Diagnose Employee Disengagement 318, Motivating Employees: A Three-Part Process, , 318, , Part 1: Managing Motivation through, Drives and Needs 319, Maslow’s Needs Hierarchy Theory 319, LearnedNeeds Theory 322, Four-Drive Theory 322, Part 2: Managing Motivation through Goals,, Expectations, and Feedback 325, Goal Setting and Feedback 325, ExpectancyTheory of Motivation 327, Part 3: Managing Motivation through Extrinsic and, Intrinsic Rewards 329, , Organizational Commitment 355, Watch Out for Continuance Commitment! 356, Building Organizational Commitment 356, Work-Related Stress and Its Management, General Adaptation Syndrome 358, Consequences of Distress 358, Stressors: The Sources of Stress 359, Managing Work-Related Stress 361, Work–Life Balance 364, , Personality Effects on Attitudes and Well-Being 365, The Big Five Personality Dimensions 365, Effects of Personality on Emotions and Attitudes 366, Effects of Personality on Stress and Well-Being 366, Effects of Personality on Performance 367, Effects of Personality on Career Satisfaction 367, In Conclusion: Why Does It Matter? 369, Management Challenges 369, Management Portfolio, , 370, , Motivating Employees through Extrinsic, Rewards 329, Membership- and Seniority-Based Rewards 329, Job Status–Based Rewards 330, Competency-BasedRewards 330, Performance-Based Rewards 330, Nonfinancial Rewards 332, Improving Performance Appraisals 332, Rewarding Employees Equitably 333, , Chapter 15, , Motivating Employees through Intrinsic, Rewards 335, Job Characteristics Model 336, Motivating Employees through Job Enrichment 337, MotivatingEmployees through Empowerment 337, , Sources of Power 379, Formal Hierarchical Position 379, Expertise 381, Control over Information 381, Networks of Allies 383, IndividualAttributes 383, , In Conclusion: Why Does It Matter?, Management Challenges, Management Portfolio, , 338, , 339, , 340, , CLOSING CASE, Buddy’s Snack Company, , 340, , Chapter 14, Managing Employee Attitudes and, Well-Being 346, Emotions in the Workplace 348, Emotions, Attitudes, and Behavior 349, Co, gnitive Dissonance 351, , hiL30123_fm_i-xvii.indd x, , 357, , CLOSING CASE, Rough Seas on the LINK650 370, , Managing through Power, Influence,, and Negotiation 376, Power in Organizations 378, , Contingencies of Power 385, Influence 386, Influence Tactics 386, Consequences and Contingencies 391, Negotiation: The Art of Conflict Resolution, Bargaining Zone Model of Negotiations 393, Negotiating Effectively 394, , 392, , In Conclusion: Why Does It Matter? 396, Management Challenges 396, Management Portfolio, , 396, , CLOSING CASE, The Rise and Fall of Mike Sears 397, , 11/10/06 9:52:25 PM

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Contents, , Improving Communication 442, Match Media to Messages 442, ReduceInformation Overload 442, GetYour Message Across 443, Engage in Active Listening 443, Proactively Use the Grapevine 444, Communicate Directly with Employees 445, Facilitate Communication through Workspace Design 445, , Chapter 16, Effective Leadership, , 402, , Managing and Leading, , 404, , What Makes an Effective Leader? 405, The Power–Influence Perspective, , 406, , The Competency (Trait) Perspective, Strategic Thinking 407, Achievement Motivation 408, Power Motivation 408, Charisma 409, EmotionalIntelligence 409, Limitations and Implications 410, , xi, , 407, , In Conclusion: Why Does It Matter? 446, Management Challenges 447, Management Portfolio, CLOSING CASE, The Challenger Disaster, , 447, 447, , The Behavior Perspective 410, The Contingency Perspective 411, Fiedler’s Contingency Theory 411, Path–Goal Theory 413, Leadership Substitutes 416, , PART 5, Change, , Transformational Leadership 416, Elements of Transformational Leadership 417, EvaluatingTransformational Leadership 419, , Management Challenges, Management Portfolio, , 420, , 421, , 421, , Organizational Inertia 460, Cognitive Schemata 460, InternalPolitical Constraints 461, Organizational Culture 461, Commitmentsand Capabilities 462, ExternalInstitutional Constraints 463, , CLOSING CASE, A.G. Lafley 421, , Chapter 17, Communication 426, The Communication Process, , Organizational Communication 434, Formal Communication Channels 434, Informal Communication Channels 435, , hiL30123_fm_i-xvii.indd xi, , Organizational Change 463, Leadership Committed to Change 463, Unfreezing the Organization 464, Moving the Organization 465, Refreezing the Organization 466, , 428, , Communication Channels 429, Verbal Communication 430, Nonverbal Communication 431, Selecting the Best Communication Channel, , Communication Barriers and, Breakdowns (Noise) 436, Perceptions 436, Filtering 438, Language Barriers 438, Information Overload 439, Cultural Differences 440, GenderDifferences 441, , 452, , Paradigm Shifts 454, Natural Limits to Technology 455, DisruptiveTechnology 456, New Business Model 458, PunctuatedEquilibrium 459, , Gender Differences in Leadership 419, In Conclusion: Why Does It Matter?, , Chapter 18, Managing Innovation and Change, , 432, , Failed Change Efforts and the Secret of Success 466, Driving Innovation 468, New Product Failures 468, Generating Successful Innovations, , 469, , In Conclusion: Why Does It Matter? 473, Management Challenges 473, Management Portfolio, , 473, , CLOSING CASE, Transforming Reuters 473, Glossary 478, Index 487, , 11/10/06 9:52:25 PM

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\\ PREFACE \\\, The management textbook market is crowded, so why did, we write another one? The answer, quite frankl y, is that a, huge gap exists between what managers actually do or think, about and what the e xisting gaggle of management books, say are contemporary practices. Some topics that managers, say are important (such as strategizing and shaping cor porate culture) need much more attention in management, courses; other concepts and practices long for gotten b y, most managers shouldn’t be required reading in a colle ge, management course. Management theor y has also mo ved, forward, and in some cases has become w ell-established, practice in the cor porate world. Again, we were surprised, by the gap in what students have been reading. So, this book, was crafted to close that g ap, to help students have a more, realistic understanding about w hat managers actuall y do, and what management theory actually recommends. We offer this rele vant view of management in a w ay that has a, logical flow of content, is succinct and clear in its writing, style, rich in real-world examples, and remains focused on, the role of managers., , error that planning and strate gizing are interchangeab le, terms, this book has the distinction of presenting separate, chapters for both practices., , // RELEVANCE: A BOOK FOR THE, TWENTY-FIRST CENTURY, , Leading and Developing Employees, , Almost 100 years ago, French industrialist Henri Fayol proposed f ive functions of management, four of w hich (planning, organizing, leading, and controlling) have become the, foundation of management books o ver the past 40 y ears., While some management functions are timeless, we firmly, believe that the late-1800s managers w ho inspired Fayol to, describe these functions are markedly different from effective managers toda y. In other w ords, it is time for a 21stcentury management book written for 21st-centur, y, managers. At the same time, w e reco gnize that F ayol’s, management functions have become deeply entrenched in, management courses, so this book proposes an evolutionary, rather than re volutionary approach to change. We retain, four management functions, and with similar names to the, past, but these subtle dif ferences are more pronounced in, the chapters and emphasis throughout this book. Let’s look, at a few of these emerging perspectives., , Planning and Strategizing, Most management books focus on planning, w hereas we, write about planning and strategizing. A trivial difference?, Hardly! While planning is a formal process for periodically, (e.g., once a y ear) generating or ganizational strate gies,, strategizing is a continual process for thinking through what, a firm should pursue to attain its goals. In other words, successful managers are continually strategizing, sometimes in, the absence of planning. Thus, we repeatedly emphasize, how managers strate gize. And to a void per petuating the, , Organizing and Controlling—Organization, Architecture, Most management textbooks treat organizing and controlling as completely separate functions. Yet managers will tell, you that organizing people into departments and teams is an, important form of control. They also point out that v arious, control systems—such as incentive systems and budgets—, are closely connected to the or ganization’s structure. Furthermore, managers emphasize that or ganizational culture, is an important control system, no matter how difficult it is, to shape; it should ne ver be viewed as an untouchable fixture of the inter nal environment (as other books assume)., Thus, we apply the contemporar y management vie w that, organizing and controlling belong to gether as two parts of, the underlying management process, called organizational, architecture ., , Leadership is impor tant; in f act, it is vital for guiding the, organization toward its objectives and for applying the other, management functions. But managers toda y do more than, motivate, influence, and direct others. Although missing, from Fayol’s original functions, this book highlights the fact, that managers also devote much of their time to developing, staff. In f act, General Electric and other top-perfor ming, companies insist that managers give the highest priority to, hiring, training, mentoring, and re warding employees. In, contemporary management parlance, these companies consider human capital as their competiti ve adv antage, and, managers play a vital role in enhancing the v alue of that, resource., , // ORGANIZATION: A LOGICAL, INTEGRATED FLOW OF TOPICS, We held se veral meetings, transmitted numerous e-mail, messages, and consulted with dozens of instr uctors to, hammer out the right or ganization of chapters and topics, for this book. The fact is, by finding the right sequence of, chapters and topics, w e can more successfull y help students to understand management roles and their interconnections. The chapter sequence also reflects how managers, actually think and act, w hich explains why this book is, organized somewhat differently from management te xtbooks that rely on past models. For example, the chapters, on organizational structure and controls are side-b y-side, for the reasons noted earlier . We also or ganize staffing,, , xii, , hiL30123_fm_i-xvii.indd xii, , 11/10/06 9:52:25 PM

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motivating, and maintaining the w ell-being of employees, in a sequence, because this is how managers actually view, the process of building human capital. More generall y,, this book moves from macro, through midle vel issues, to, micro issues, and closes by switching back to a macro perspective (managing innovation and change)., This book also takes an integrated rather than piecemeal, approach to management topics. This means that later, chapters build upon concepts introduced in earlier chapters., Students can’t make sense of planning and strate gizing, for, example, unless they have learned about the e xternal environment. The goal is to get students to see the big picture,, and to understand the impor tant linkages between different, aspects of management. To drive this home, w e frequently, refer to concepts introduced in prior chapters, and show how, they related to the material being discussed in the cur rent, chapter. At the same time, w e are sensitive to the desire of, some instructors to skip certain chapters. We have not pushed, the level of integration so far that this cannot be done., , // SUCCINCT: FOCUSING ON, WHAT IS IMPORTANT, The f ield of management co vers a lar ge ter ritory, but w e, were amazed at how many pages the leading management, textbooks required to cover this territory. Most management, courses are one semester, which makes it very difficult for, students to read through their te xtbook. Ev en in a tw osemester course, the reading requirements could potentially, undermine rather than impro ve the lear ning process., Although deciding what to include and exclude from a textbook is never easy, we were determined to keep this book to, a more reasonable length. This book has no chapter on management history, choosing instead to discuss historical developments where appropriate throughout the book. We also, avoided special chapters found in other books (entrepreneurship, information systems, and so on). These topics are, peripheral to the management discipline and , indeed, are, usually the focus of other courses. Through these and other, adjustments, we have crafted a management book with a, manageable 18 chapters and a more reasonab le number of, pages of reading., , // CONTENT: UP-TO-DATE, Along with its contemporar y management str ucture, this, book offers students up-to-date management concepts and, examples. Cur rent management thinking is apparent, throughout, such as reco gnizing social concer ns with globalization (Chapter 3), practicing backchannel control, methods (Chapter 9), building an emplo yer brand (Chapter 12), impro ving customer satisf action through better, job satisfaction (Chapter 14), and recognizing the effects of, disruptive technologies (Chapter 18)., , Students want real-world examples that are fresh, not ancient histor y (lik e the 1980s or e ven the 1990s), so w e, scanned the latest sources to link management concepts to, recent events. For instance, w e describe ho w Chick-Fil-A, CEO Dan Cathy serves as a figurehead by camping out with, customers (Chapter 1), how Intel CEO Paul Otellini is steering the microchip mak ers to ward a ne w strate gic plan, (Chapter 5), ho w Unilever has reconf igured its or ganizational str ucture in recent y ears to f ind the right balance, among competing demands in the marketplace (Chapter 8),, how Dell executives have attempted to shift the computer maker’s corporate culture (Chapter 10), how Google attracts, top talent b y engaging in guer rilla recr uitment practices, (Chapter 12), and ho w Xerox CEO Anne Mulcahy led the, company’s dramatic tur naround despite her status as an, “outside-insider.”, , // READABILITY: INTERESTING, AND ACCESSIBLE, Management textbooks don’t have to be dense, boring, and, dull. Our tactic for engaging students has been to illustrate, concepts through stories, using examples that are cur rent,, interesting, and, w hen appropriate, pro vocative. We are, story tellers, and w e belie ve that the e vocative stories, throughout this book will help students to understand the, content and moti vate them to read through the assigned, pages. At the end of the day, we have written this book for, students; we want to reach them through lively and accessible communication., To improve readability, we have also cleared out the clutter found in most management books. Gone is the w eighty, boxed material because instr uctors and students alik e told, us that content or anecdotes placed in bo xes are not read., Instead, these examples are embedded in the text so they are, more clearly interwoven with the discussion of k ey concepts. Each chapter also opens not with the traditional boxed, case, but with a brief story that is used to illustrate the concepts covered in the chapter. The goal, again, is to capture, the attention of students and draw them in., , // MANAGEMENT CENTRIC, A management textbook should write about what managers do and ho w they can perfor m their jobs more ef fectively. This principle seems obvious, but it is often lost in, practice as management textbooks become steeped in theory without connecting back to management practice., Aware of this tendenc y, we have tried to mak e managers, the center piece of this book. Essentiall y, w e adopt an, action-oriented approach by focusing on w hat successful, managers do and why those actions work well (and under, what conditions they work well). We repeatedly emphasize, xiii, , hiL30123_fm_i-xvii.indd xiii, , 11/10/06 9:52:25 PM

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hiL30123_fm.indd Page xiv 5/19/07 12:22:13 AM epg, , xiv, , /Volumes/108/MHIA051/hiLfm, , Preface, , why the concepts discussed in a chapter matter for managers. We also dri ve these points home at the end of e very, chapter with a closing section appropriately entitled “Why, does it matter?”, , course. Not onl y do y ou receive the instr uctor’s material,, but we also provide you with additional student e xercises, such as threaded discussion questions, quizzes, and more!, , // HIGH-QUALITY SUPPORT, MATERIALS, , // ADDITIONAL RESOURCES FOR, YOUR PRINCIPLES OF, MANAGEMENT COURSE, , Unlike revised texts/resource packages, where materials are, refitted, resized, and repur posed, the resources suppor ting, this text have been freshly created in close conjunction with, the text and each other to provide you with a truly integrated, support package organized by chapter lear ning objectives,, measures lear ning outcomes, and incor porating AACSB, standards., The Instructor’s Manual (authored by Barbara Carlin,, University of Houston, and Chris Quinn-Trank, Texas Tech, University) closely follows the te xtbook’s learning objectives and includes e xtra war stories and teaching tips. The, Instructor’s Manual also incor porates ideas and guidelines, for implementing the Management P ortfolio Project into, your management course., The Test Bank (authored by Carol Johnson, University, of Denver) includes over 150 questions per chapter, including multiple-choice, true/false, and short answer questions, at v arious le vels of Bloom’ s Taxonomy. Ev ery test bank, question is tagged to the cor responding te xtbook page,, learning objecti ve, Bloom’s Taxonomy, and the AACSB, requirement it assesses. A test table is also provided to help, you easily choose questions to fit your needs. An additional, set of practice quizzes, also written by the test bank author,, is available on the text’s Online Learning Center., PowerPoint Package (authored by Amit Shah, Frostburg, State University) includes over 350 slides, each tied to the, textbook page and learning objective. Slides include teaching notes to help reduce y our prep time. A set of student, slides is available on the text’s Online Learning Center., Instructor’s Resource CD. All of our instructor supplements are available in this one-stop, multimedia resource,, which includes the PowerPoint Package, Test Bank, and Instructor’s Manual., Videos. A set of ne w videos on management issues, accompanying this text is suitable to suppor t your classroom or student lab, or for home viewing. These thoughtprovoking video clips are available upon adoption of this, text., Online Learning Center (OLC). Our Web site mirrors the, text chapter-by-chapter. OLCs can be delivered in multiple, ways—professors and students can access them directl y, through the textbook Web site, through PageOut, or within, a course management system such as WebCT, Blackboard,, TopClass, or eCollege., Enhanced Cartridge. McGraw-Hill/Irwin is pleased to, offer an enhanced car tridge to help y ou or ganize y our, , Group and Video Resour ce Man ual: An Instructor’s, Guide to an Active Classroom. This electronic manual for, instructors includes a menu of items the y can use as teaching tools in class. Included are detailed teaching notes and, PowerPoints for self-assessments, test your knowledge exercises, the Manager’s Hot Seat DVD, as well as new group, exercises, complete with any handouts or worksheets you’ll, need to accompany them., Manager’s Hot Seat. This interactive, video-based software puts students in the manager’ s hot seat w here the y, have to apply their knowledge to make decisions on the spot, on hot issues such as ethics, di versity, working in teams,, and the virtual workplace. This resource is available for student purchase with the Hill/McShane te xt. Resources to, support these videos are located in the Group and Video, Resource Manual., Team Lear ning Assistant (TLA). This online tool, makes it easy for y ou to implement team lear ning in your, class. Monitor the team process, f acilitate peer feedback, and evaluation, teach the value of team contracts and conflict resolution, and g rade individual performance quickly, and easily by using TLA., Hill/McShane in eBook format. Real Texts—Real Savings! Are you interested in giving your students the option, to access the te xtbook contents digitally, with interactive,, dynamic features and sa ve your students some mone y? If, so, our eBooks are for you. They are identical to our printed, textbooks but cost about half as much. Your students will, be able to search, highlight, bookmark, annotate, and print, the eBook! McGra w-Hill Higher Education’ s eBooks, can be vie wed online on an y computer with an Inter net, connection or downloaded to an individual’s computer. For, more information, please visit http://ebooks.primisonline., com/or contact your McGraw-Hill rep., You can customize this te xt. McGraw-Hill/Primis, Online’s digital database of fers y ou the fle xibility to, customize your course including material from the lar gest online collection of te xtbooks, readings, and cases., Primis leads the w ay in customized eBooks with hundreds of titles available at prices that save your students, over 20 percent off bookstore prices. Additional information is available at 800-228-0634., BusinessWeek Edition. Your students can subscribe to, BusinessWeek for a speciall y priced rate of $8.25 in addition to the price of the te xt. Students will recei ve a pass, code card shrink-wrapped with their ne w te xt. The card

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hiL30123_fm.indd Page xv 5/19/07 12:31:58 AM epg, , /Volumes/108/MHIA051/hiLfm, , Preface, , directs students to a Web site where they enter the code and, then gain access to BusinessWeek’s registration page to enter, address info and set up their print and online subscription as, well. Passcode ISBN 007-251530-9., The Wall Str eet J ournal Edition. Your students can, subscribe to the The Wall Street Journal for a speciall y, priced rate of $20.00 in addition to the price of the te xt., Students will receive a “How To Use the WSJ ” handbook, plus a pass code card shrink-wrapped with the te xt. The, card directs students to a Web site w here they enter the, code and then gain access to the WSJ registration page to, enter address info and set up their print and online subscription, and also set up their subscription to Do w Jones, Interactive online for the span of the 10-w eek period., Passcode ISBN 007-251950-9., , // FOR STUDENTS, Most or you will start your careers as functional specialists—, as accountants, engineers, salespeople, f inance specialists,, and so on. If you are successful in your entry-level job, you, will be promoted , and more than lik ely, before long y ou, will be put in charge of other people. At this point, you will, have become a manager. As a manager, further advancement, will be dependent upon y our ability to get things done, though others—to moti vate, persuade, encourage, and, coach others so that they perform better. This book is about, , // ACKNOWLEDGMENTS, We would like to g raciously thank the follo wing text and, survey reviewers as w ell as symposium and focus g roup, participants who provided the input and advice which greatly, contributed to this first edition., Gary D. Abbott, John Wood Community College;, Laura Alderson, Memphis State University;, Daniel V. Anderson, Concordia College;, Rashmi H. Assundani, Xavier University;, James D. Bell, Texas State University;, Joy Benson, University of Wisconsin—Green Bay;, Patricia Bernson, County College of Morris;, Melanie Jackson Bookout, Greenville Technical College;, Peggy Brewer, Eastern Kentucky University;, Dennis Brode, Sinclair Community College;, Jon Bryan, Bridgewater State College;, Barbara A. Carlin, University of Houston;, Jim Cashman, University of Alabama;, Robert Mitchell Crocker, Stephen F. Austin State University;, David V. Curtis, Governors State University;, Laurie Dahlin, Worcester State University;, De’Arno De’Armond, West Texas A&M University;, Matthew DeLuca, Baruch University;, , xv, , what it tak es to become an ef fective manager. It is about, how to make good decisions, how to exert influence on the, strategies and policies of y our employer (even when you, are an entry-level employee), how to motive and lead others, ho w to communicate ef fectively, ho w to manage, change, and much more. Becoming a good manager is not, easy, but it is a way to have a successful career and have an, impact upon the organizations in which you work. Becoming a great manager is more than that—g reat managers, build organizations that change the world. Great managers, of the last quar ter-century include Sam Walton, who built, Wal-Mart from nothing into the w orld’s lar gest retailer,, Jack Welch, who transformed General Electric from a lumbering conglomerate into a dynamic and producti ve enterprise, Howard Schultz, who was the inspiration behind the, growth of Starbucks, and Michael Dell, w ho starting from, his dorm room created the world’s largest manufacturer of, personal computers., We have written this book to help y ou get started on the, road to becoming a good—or e ven a g reat—manager. We, have tried to put to gether a book that is written in a li vely, and accessible style, that is crammed full of interesting and, relevant examples, and that introduces you to the most useful concepts and theories for managers, y et presents these, concepts and theories in a way that is easy to understand., We hope you enjoy the book, but more than that, we hope, that the ideas contained herein stay with you for the rest of, your careers, and help you to advance in the world of work., Fred Dorn, University of Mississippi;, Michael Drafke, College of DuPage;, W. Michael Fagan, Raritan Valley Community College;, Virginia Fairchild, Lexington Community College;, Thomas W. Falcone, Indiana University of Pennsylvania;, David Fearon, Central Connecticut State University;, David Foote, Middle Tennessee State University;, Paul Gagnon, Central Connecticut State University;, Janice S. Gates, Western Illinois University;, Jackie Gilbert, Middle Tennessee State University;, A. Banu Goktan, University of North Texas;, Selina A. Griswold, University of Toledo;, Melissa Gruys, Washington State University;, Laurence P. Hagan, DeVry University;, Semere Haile, Grambling State University;, Stephen F. Hallam, University of Akron;, Russell Hardy, New Mexico State University;, Kenneth J. Harris, Bradley University;, Samuel Hazen, Tarleton State University;, Kim Hester, Arkansas State University;, Robert C. Hoell, Georgia Southern University Statesboro;, Arakal C. Joseph, University of the District of Columbia;, Rusty Juban, Southeastern Louisiana State University;, C.A. Keeth-Williams, Central Virginia Community College;, Gary R. Kettlitz, Ramapo College of New Jersey;

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hiL30123_fm.indd Page xvi 5/19/07 12:32:15 AM epg, , xvi, , /Volumes/108/MHIA051/hiLfm, , Preface, , Jerry Kinard, Western Carolina University;, Nada Kobeissi, Long Island University;, Beverly Little, Western Carolina University;, Geoffrey Love, University of Illinois;, Carlstien Lutchmedial, PACE University;, Joan Mahoney, Worcester State University;, Hank Moczul, Davenport University;, Stephen A. Morreale, Worcester State University;, David Oliver, Edison College;, Terry Pearson, West Texas A&M University;, Shelia Petcavage, Cuyahoga Community College;, Antoinette S. Phillips, Southeastern Louisiana University;, Carl Phillips, Southeastern Louisiana University;, Erin Pleggenkuhle, Northwest Missouri State University;, , Jeffrey Podoshen, DeVry University;, Christine Quinn-Trank, Texas Tech University;, Robert W. Raspberry, Southern Methodist University;, Clint Relyea, Arkansas State University;, Susan Roach, Georgia Southern University Statesboro;, Cynthia Ruszkowski, Illinois State University;, Robert H. Schwartz, University of Toledo;, Mary Ann Short, Franklin University;, Richard L. Smith, Iowa State University;, Cindy Sutton, Metro State—Denver;, James Swenson, Minnesota State University Moorhead;, Gary Taylor, South Dakota State University;, Stan Williamson, University of Louisiana at Monroe; and, Xian Yi, Western Illinois University.

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PRINCIPLES OF MANAGEMENT, , hiL30123_fm_i-xvii.indd 1, , 11/10/06 9:52:26 PM

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1, , // PART 1, Managers and the Environment, , LEARNING OBJECTIVES, , MANAGEMENT, After Reading This Chapter You Should Be Able to:, 1, , Describe the basic functions of management., , 2, , Identify where in an organization managers are located., , 3, , Discuss the challenges people encounter as they become first-time managers., , 4, , Describe the roles managers adopt to perform the basic functions of management., , 5, , Outline the competencies managers must have to be effective., , / / / / / / / / / / / / / / /, , The Functions of, Management, Planning and Strategizing, Organizing, Controlling, Leading and Developing, Employees, Types of Managers, Corporate-Level General, Managers, Business-Level General, Managers, Functional Managers, Frontline Managers, Becoming a Manager, From Specialist to Manager, Mastering the Job, , hiL30123_ch01_002-025.indd 2, , Managerial Roles, Interpersonal Roles, Informational Roles, Decisional Roles, Some Qualifications, Management, Competencies: Do You Have, What It Takes?, Managerial Skills, Managerial Values, Managerial Motivation, In Conclusion: Why Does It, Matter?, Management Challenges, Management Portfolio, Closing Case: George David, , 10/23/06 4:24:00 PM

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The Essence of Hip—, The Burberry Trench, Coat, Under the leadership, of Rose Marie Bravo,, London fashion house, Burberry underwent a, renaissance. Between, 1997 and 2003 profits, increased almost, fivefold as Burberry, was repositioned as a, hip, high-end global, brand., © McGraw-Hill Companies/, Lars A. Niki Photographer., , / / / / / / / / / / / / / / / / / / / / /, , W, , hen Rose Marie Bravo, the highly regarded president of Saks, Fifth Avenue, announced in 1997 that she was leaving to, become CEO of ailing British fashion house Burberry, people thought, she was crazy. Burberry, best known as a designer of raincoats with, trademark tartan linings, had been described as “an outdated business with a fashion cachet of almost zero.” Seven years later Bravo, was being heralded in Britain and the United States as one of the, world’s best managers. In her tenure at Burberry she engineered a, remarkable turnaround, leading a transformation of Burberry into, what one commentator called an “achingly hip” high-end fashion, brand whose raincoats, clothes, handbags, and other accessories, were must-have items for well-heeled, fashion-conscious consumers. When asked how she achieved the transformation, Bravo explained that hidden value in the brand was unleashed by constant, creativity and innovation. Although she hired good designers to reenergize the brand, she also noted that “creativity doesn’t just come, from designers…ideas can come from the sales floor, the marketing department, even from accountants, believe it or not. People at, whatever level they are working have a point of view and have, something to say that is worth listening to.” Bravo also emphasized, the importance of teamwork. “One of the things I think people, , hiL30123_ch01_002-025.indd 3, , overlook is the quality of the team. It isn’t one person, and it isn’t, two people. It is a whole group of people—a team that works cohesively toward a goal—that makes something happen or not.” She, notes that her job is to build the team and then motivate them, “keeping them on track, making sure that they are following the vision.”1, By all accounts Rose Marie Bravo is a remarkable manager. Her, story illustrates the important and powerful role that managers, can play in an organization. Bravo didn’t redesign Burberry’s tired, fashion line; she didn’t personally create the ads featuring supermodel Kate Moss that helped reposition the brand; it wasn’t her, job to coordinate Burberry’s global manufacturing system to make, sure suppliers adhered to Burberry’s exacting quality standards;, nor did she directly participate in the redesign of Burberry’s retail, stores. But she did help to hire, motivate, lead, and reward the, people who did these things. Bravo saw the hidden value in the, Burberry brand, pushed for a new hip vision, asked people at all, levels in the organization for ideas, and built and managed the, teams that transformed Burberry. Rose Marie Bravo embodies, what great managers do: They make things happen; they develop, strategy; they organize people, projects, and processes; they energize others in the organization; and they lead., , 11/9/06 7:35:59 PM

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4, , PART 1 // Managers and the Environment, , management, The art of getting things, done through people., , This book is about management, which can be def ined as the ar t of getting things done, through people in organizations.2 As we will see, management can be an enor mously creative endeavor. Managers are not bureaucrats. They do more than just k eep the trains r unning on time. Managers can also gi ve organizations a sense of pur pose and direction. As, Wal-Mart’s founder Sam Walton was fond of saying, they can motivate “ordinary people to, do extraordinary things.”3 They can transform organizations; they can create new ways of, producing and distributing goods and ser vices; and they can change how the world works, through their actions. Think about w hat some of the g reatest managers of this era ha ve, done. Sam Walton built Wal-Mart from scratch into the lar gest retailer in the w orld. Lou, Gerstner repositioned IBM from a troubled manufacturer of mainframe computers into the, dominant provider of computer software services in the world. Jack Welch reenergized General Electric, transforming a tired engineering conglomerate into an ef ficient, vibrant, entrepreneurial enterprise that set the standard for e xcellence in many industries in which it, competed. In the late 1970s Ste ve Jobs of Apple Computer gave the world the f irst massmarketed, easy-to-use personal computers; toda y Apple under Jobs’ s management is, still driving innovation with its iP od music player. Meg Whitman provided the leadership, that helped eBay become the world’s first and most successful online auction house, revolutionizing the auction industry., Throughout this book w e will discuss ho w g reat managers lik e these w ork through, people to do remarkab le things. F irst, ho wever, w e must better understand the basic, functions of management, w here y ou can f ind managers in an or ganization, how one, becomes a manager, the nature of managerial work, the roles managers adopt to get things, done through people, and the dif ferent competencies that are required to become a good, manager., , // The Functions of Management, , planning, A formal process whereby, managers choose goals,, identify actions to attain, those goals, allocate, responsibility for, implementing actions to, specific individuals or, units, measure the success, of actions by comparing, actual results against the, goals, and revise plans, accordingly., strategy, An action that managers, take to attain the goals of, an organization., , hiL30123_ch01_002-025.indd 4, , In the early 20th century a French industrialist named Henri Fayol stated that management, had five main functions: planning, organizing, commanding (that is, leading), coordinating,, and controlling. 4 A lot of w ater has passed under the bridge since F ayol wrote about, management, and we have learned much about the theory and practice of management; but, in a testament to the robustness of F ayol’s original for mulation, a modif ied v ersion of, Fayol’s list is still widel y used. This list identif ies four management functions: planning,, organizing, controlling, and leading (Fayol’s fifth function, coordinating, is now treated as, an aspect of or ganizing). In this book w e focus on these four main functions of management, but we have broadened the definition of those functions somewhat to better represent, the realities of management practice in the 21st century. The four functions that we discuss, are (1) planning and strategizing, (2) organizing, (3) controlling, and (4) leading and developing employees., , // PLANNING AND STRATEGIZING, Planning is a formal process whereby managers choose goals, identify actions to attain those, goals, allocate responsibility for implementing actions to specif ic individuals or units, measure the success of actions by comparing actual results against the goals, and revise plans accordingly. Planning takes place at multiple levels in an organization and is an ingrained part of, a manager’s job. Planning is used by senior managers to develop overall strategies for an organization (a strategy is an action that managers tak e to attain the goals of an or ganization)., Planning, however, goes beyond strategy development to include the regulation of a wide variety of organizational activities. Managers plan expenditures every year in a budgeting process. Managers draw up plans for building new factories, opening new offices, implementing, new information systems, improving inventory control systems, introducing ne w products,, launching new marketing campaigns, rolling out emplo yee benefits programs, dealing with, , 10/23/06 4:24:28 PM

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Management \\ CHAPTER 1, , crises, and so on. To be sure, many of these plans are link ed to the strategy of the enterprise., The allocation of f inancial resources specif ied in an organization’s budget for the coming, year, for example, should be driven by the strategy of the organization. However, planning is, often about formalizing a strategy that has already been selected and documenting the steps, that managers must follow within the organization to put that strategy into effect., Although planning is a useful process for generating strategies, strategizing involves more, than planning. Strategizing is the process of thinking through on a continual basis w hat, strategies an organization should pursue to attain its goals. Strate gizing involves being aware, of and analyzing what competitors are doing; thinking about how changes in the external environment, such as changes in technology or government regulations, impact the organization;, weighing the pros and cons of alter native strategies; anticipating how competitors might respond to these strategies; and choosing a course of action. When Rose Marie Bravo decided to, reposition Burberry as a hip, high-end fashion brand, she was strategizing., Whereas planning is a formal process for generating the strategies of an organization, strategies can also arise in the absence of planning. 5 For example, anyone who has walked into a, Starbucks store may have noticed that in addition to v arious coffee beverages and food, the, company also sells music CDs. Most Starbucks stores no w have racks displaying about 20, CDs. Reports suggest that when Starbucks decides to carry a CD, it typically ranks among the, top four retailers selling it. The interesting thing about Starbucks’ entry into music retailing is, that it w as not the result of a for mal planning process. The company’s journey into music, retailing started in the late 1980s w hen Tim Jones, then the manager of Starbucks’ store in, Seattle’s University Village, started to bring his own tapes of music compilations into the store, to pla y. Soon Jones w as getting requests for copies from customers. Jones told this to, Starbucks’ CEO Howard Schultz and suggested that Starbucks star t to sell its own music. In, other words, Jones was strategizing. At first Schultz was skeptical, but after repeated lobbying, by Jones he eventually took up the suggestion. Today Starbucks not only sells CDs; it is also, moving into music downloading with its Hear Music Starbucks stores, w here customers can, listen to music from Starbucks’ 200,000-song online music library while sipping their coffee, and burning their own CDs.6, Starbucks’ strategy to enter the music retailing business emer ged from the g rass roots of, the organization in the absence of planning. It w as the result of strategizing by an individual, store manager, and only after some time was the strategy adopted by senior managers. As we, will see later in this book, strate gy often develops in this w ay. Managers at all le vels in an, organization spend a lot of time strategizing. It is an important aspect of their jobs. Sometimes, they do this as par t of a formal planning process, but strategic thinking also goes on without, planning. This is not to belittle the impor tance of planning, w hich has an important role in, organizations. However, strategizing is more than just planning—it involves constantly thinking through strategic alternatives., , // ORGANIZING, Organizing refers to the process of deciding who within an organization will perform what, tasks, where decisions will be made, who reports to whom, and how different parts of the organization will coordinate their activities to pursue a common goal. In a business, organizing, typically involves dividing the enter prise into subunits based on functional tasks—such as, procurement, R&D, production, mark eting, sales, customer ser vice, human resources, accounting, and finance—and deciding how much decision-making authority to give each subunit. Organizing is part of planning and strategizing: As we discuss later in this book, strategy, is implemented through organization. For example, to implement the decision to expand Starbucks’ operations into online music, Howard Schultz set up a separate unit within Starbucks, called Hear Music; placed an executive, Don MacKinnon, in charge of that unit; and gave him, the task of rolling out Hear Music in Starbucks’ stores across the country. MacKinnon, together with his unit, is thus responsib le for implementing the strategy of growing Starbucks’, music business., , hiL30123_ch01_002-025.indd 5, , 5, , strategizing, The process of thinking, through on a continual, basis what strategies an, organization should pursue, to attain its goals., , ■ Strategy development at, Starbucks., , ■, , Organizing at Starbucks., organizing, The process of deciding, who within an organization, will perform what tasks,, where decisions will be, made, who reports to, whom, and how different, parts of the organization, will coordinate their, activities to pursue a, common goal., , 10/23/06 4:24:30 PM

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6, , PART 1 // Managers and the Environment, , // CONTROLLING, controlling, The process of monitoring, performance against goals,, intervening when goals are, not met, and taking, corrective action., , ■ Controls and incentives at, Starbucks., , incentive, A factor, monetary or, nonmonetary, that, motivates individuals to, pursue a particular course, of action., , leading, The process of motivating,, influencing, and directing, others in the organization, to work productively in, pursuit of organization, goals., developing, employees, The task of hiring, training,, mentoring, and rewarding, employees in an, organization, including, other managers., , hiL30123_ch01_002-025.indd 6, , Controlling is the process of monitoring, performance against goals, intervening when, goals are not met, and taking cor rective action. Controlling is just as important as planning, strategizing, and or ganizing. Without, control systems to verify that performance is, hitting goals, an or ganization can v eer of f, course. Controlling is also linked to planning, and strategizing and to organizing. Drafting, plans is the f irst step in controlling an or ganization. Controlling requires managers to, compare perfor mance ag ainst the plans to, monitor how successful an organization is at, implementing a strategy. Thus at Starbucks,, Don MacKinnon has been given goals related to the rollout and sales of Hear Music,, and his success at implementing the strategy, will be assessed by comparing actual performance against the goals., An impor tant aspect of controlling is, creating incentives that align the interests of, individual emplo yees with those of the, Caffeine Music Starbucks has a, organization, helping to ensure that e veryone, profitable sideline selling select music CDs., is pulling in the same direction.An incentive, Since 2004 customers have been able to, is a f actor, monetar y or nonmonetar y, that, download music and burn their own CDs at, motivates individuals to pursue a par ticular, its Hear Music stores. The strategy to enter, course of action. Starbucks, for e xample, has, the music retailing business was not, a long histor y of gi ving stock-based, planned—it was adopted after lobbying by, compensation to emplo yees. The thinking, an individual store manager., here is that stock-based incenti ve pa y will, induce employees to look for ways to improve, © Axel Koester, Axel Koester Photography., the perfor mance of the or ganization, thus, increasing the company’s stock price and their o wn wealth. So perhaps it is no sur prise that, Tim Jones, who was not only a store manager but also a stockholder , actively lobbied senior, management to persuade them to sell music in the stores. With the right incentives in place,, employees will work productively and control their own behavior, which reduces the need for, close personal supervision and other intrusive control methods., , // LEADING AND DEVELOPING EMPLOYEES, Leading is the process of motivating, influencing, and directing others in the organization to, work productively in pursuit of organization goals.7 Leading also entails ar ticulating a grand, strategic vision for an or ganization and becoming a tireless adv ocate for that vision. Rose, Marie Bravo was thought of as a g reat manager in par t because she was good at persuading, other employees to accept her transformational strategic vision for Burberry, and she excelled, at motivating, influencing, and directing people. As in the case of Rose Marie Bravo, leading, also involves listening to others, learning from them, and empowering them to pursue actions, that benefit the organization., An important aspect of leading is developing employees. Developing employees refers, to the task of hiring, training, mentoring, and rewarding employees in an organization, including other managers. It is often said that people are the most important asset of an organization., , 11/9/06 7:36:26 PM

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Management \\ CHAPTER 1, , Academics talk about the value of the human capital of an enterprise, by which they mean, the skills and motivations of its employees; they assert that human capital can be a source of, competitive advantage.8 Rose Marie Bravo recognized the importance of human capital when, she took on the top management position at Burberry. One of her first actions was to recruit a, top-notch team of managers and creative designers through which she could get things done., Management expert Peter Drucker has emphasized that hiring and promoting the right people, are among the most important management tasks because they have lasting consequences for, the organization and are difficult to reverse. Unfortunately Drucker also estimates that many, managers are not good at this function.According to Drucker, about one in three selection and, promotion decisions is onl y minimally effective. 9 The legendary for mer CEO of General, Electric, Jack Welch, seen by many as one of the best managers of the 20th century, estimated, that he spent 70 percent of his time as CEO developing and selecting other managers, mentoring them, and evaluating their performance.10, Leading and developing employees are in many ways the core connection among planning, and strategizing, organizing, controlling, and creating incentives. Skilled leaders, , 7, , human capital, The knowledge, skills, and, capabilities embedded in, individuals., ■, , Leadership at Burberry., , • Drive strategic thinking (strategizing) deep within the organization while articulating their, own vision for the organization., • Have a plan for their organization and push others to develop plans., • Proactively structure the organization to implement their chosen strategy., • Exercise control with a deft hand, never seeming too overbearing or demanding, while at, the same time never taking their eyes off the ball., • Put the right kinds of incentives in place., • Get the best out of people by persuading them that a task is worthy of their effort., • Build a high-quality team of other managers and employees through which they can work, to get things done., Without skilled leaders strategy may fail. The organization may become bureaucratic; control, may be lost; employees will lack incentives and motivation; and the organization may suffer, insufficient human capital., , // Types of Managers, Managers are found at multiple le vels in an organization. They may lead an entire organization as Rose Marie Bravo did at Burberry; or they may head functions, departments, or units., There are three main types of managers: general managers, functional managers, and frontline, managers. General managers are responsible for the overall performance of an organization or one of its major self-contained subunits or di visions. Functional managers lead a, particular function or a subunit within a function. They are responsible for a task, activity, or, operation such as accounting, marketing, sales, R&D, production, information technology, or, logistics. Frontline managers manage employees who are themselves not managers. They, are found at the lowest level of the management hierarchy., For illustration, consider a large diversified enterprise like General Electric. General Electric, is active in many different businesses: Among other things, it mak es jet engines, power plants,, medical equipment, railway locomotives, and lighting products. GE also sells insurance, o wns, NBC, and offers a wide range of f inancial services, particularly to industrial customers. GE is, organized into different business divisions, and each division has its own functions, such as R&D,, production, marketing, sales, and customer services. GE is thus known as a multidivisional enterprise (see Figure 1.1). Multidivisional enterprises like GE have four main levels of management:, the corporate level, the business level, the functional level, and frontline managers. General managers are found at the cor porate and business levels. Functional managers are found within the, divisions where they manage functions or subunits within those functions. Frontline managers are, found deep within functions managing teams of nonmanagement employees., , hiL30123_ch01_002-025.indd 7, , general managers, Managers responsible for, the overall performance of, an organization or one of, its major self-contained, subunits or divisions., functional managers, Managers responsible for, leading a particular, function or a subunit, within a function., frontline managers, Managers who manage, employees who are, themselves not managers., , 10/23/06 4:24:34 PM

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8, , PART 1 // Managers and the Environment, , FIG UR E 1 .1, Corporate-level, general managers, , Frontline managers, , T, Team, , T, Team, , Division, , Division, , Sales, , Division, , Marketing, , Functional managers, , Division, , Production, , Business-level, general managers, , CEO, , R&D, , A Multidivisional, Management Hierarchy, , Team, , // CORPORATE-LEVEL GENERAL MANAGERS, , ■ Corporate management, at GE., , hiL30123_ch01_002-025.indd 8, , The principal general manager at the corporate level is the chief executive officer (CEO), who, leads the entire enter prise. In a multidivisional enterprise the CEO formulates strategies that, span businesses—deciding, for e xample, whether to enter ne w businesses through acquisitions or whether to exit a business area. The CEO decides how the enterprise should be organized into different divisions and signs off on major, strategic initiatives proposed b y the heads of di visions. The CEO e xercises control o ver di visions,, monitoring their performance and deciding what incentives to give divisional heads. Finally, the CEO, helps develop the human capital of the enterprise., At General Electric Jeffery Immelt has been the, CEO since 2001. Immelt has articulated a grand vision that includes pushing GE into environmentally, friendly technolo gies.11 Immelt is doing this because he thinks it mak es good business sense. He, believes that tighter environmental standards are inevitable, that environmentally friendly technologies, are also cost-ef ficient, and that customers will increasingly demand them. Thus GE is in vesting in, more fuel-ef ficient locomoti ves and jet engines;, coal-based po wer plants that use technolo gies to, strip almost all pollutants out; technolo gies for sequestering carbon dioxide emissions; water purif ication systems; and po wer-generating windmills., Green in Green The vision of CEO, Under, Immelt GE is also e xiting some businesses, Jeffery Immelt for General Electric, that, do, not f it his strate gic vision, including GE’s, calls for the company to invest in, insurance, business, which he sold to Swiss Reinsurgreen technologies. GE now sells over, ance, Co., in, 2006 for $6.8 billion.12, $2 billion worth of power-generating, The, CEO, of a cor poration also manages relawindmills annually., tionships, with, the people w ho own the company—, Courtesy of GE Energy, its shareholders. The CEO repor ts to the board of, , 10/23/06 4:24:34 PM

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Management \\ CHAPTER 1, , 9, , directors, whose primary function is to mak e sure the strate gy of the company is consistent, with the best interests of shareholders. The CEO also nor mally sits on the board and spends, considerable time describing company strategy to shareholders., Members of the top management team help the CEO in all of this.The team normally includes, a chief financial officer (CFO), who is responsible for the overall financing of the corporation. It, may also include a chief operating officer (COO), who makes sure operations are run efficiently, within the company; and in some high-technology enterprises a chief technology officer (CTO) is, responsible for developing new technologies and products within the corporation., , // BUSINESS-LEVEL GENERAL MANAGERS, With a multidivisional enterprise such as General Electric, business-le vel general managers, head the different divisions. GE has general managers running its power generation business,, medical equipment business, lighting business, and so on. These general managers report directly to Jeffery Immelt. Within an organization that is active in just one line of business, such, as Burberry or Starbucks, the business and corporate levels are the same., Business-level general managers lead their divisions—motivating, influencing, and directing their subordinates—and are responsib le for divisional performance. Business-level general managers translate the overall strategic vision for the corporation into concrete strategies, and plans for their units. Thus the head of GE’s locomotive business, together with that team,, has formulated strategies for making locomoti ves more environmentally friendly. These include the development of diesel locomotives with lower emissions and hybrid diesel–electric, engines. Business-level managers often have considerable latitude to develop and implement, strategies that they believe will improve the performance of their divisions, so long as those, strategies are consistent with the overall goals and vision for the entire corporation. Businesslevel general managers organize operations within their division, deciding how best to divide, tasks into functions and departments and how to coordinate those subunits so that strategy can, be successfully implemented. Business-level general managers also control acti vities within, their divisions, monitoring perfor mance against goals, inter vening to take corrective action, when necessary, and developing human capital., , ■ Business-level managers, at GE., , // FUNCTIONAL MANAGERS, Below general managers we find functional managers, who are responsible for specific business functions that constitute a company or one of its divisions. Thus a functional manager’s, sphere of responsibility is generally confined to one organizational activity (purchasing, marketing, production, or the like), whereas general managers oversee the operation of the entire, company or a self-contained division., The head of each function leads that function. Functional managers moti vate, influence,, and direct others within their areas. Although the y are not responsib le for the o verall, performance of the organization, functional managers nevertheless have a major strategic role:, to develop functional strategies and draft plans in their areas that help fulf ill the strategic objectives set by business- and cor porate-level general managers. In GE’s aerospace business,, for instance, manuf acturing managers develop manufacturing strategies consistent with the, corporate objective of producing environmentally friendly products and generating high performance. They might, for example, decide to implement process improvement programs to, improve quality and boost emplo yee productivity. Moreover, functional managers pro vide, most of the information that makes it possible for business- and corporate-level general managers to formulate realistic and attainable strategies. Indeed, because they are closer to customers than are typical general managers, functional managers themselv es may generate important ideas that subsequentl y may become major strate gies for the compan y. Thus it is, important for general managers to listen closely to the ideas of their functional managers. An, equally great responsibility for managers at the functional le vel is strategy implementation:, the execution of corporate- and business-level strategies., , hiL30123_ch01_002-025.indd 9, , ■, , Functional managers at GE., , 10/23/06 4:24:44 PM

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10, , PART 1 // Managers and the Environment, , The heads of functions are responsible for developing human capital within their organizations. They also organize their functions into subunits such as departments or teams; exercise, control over those subunits; set goals; monitor performance; provide feedback; and make adjustments if necessary. Thus the manufacturing function might be further subdivided into departments responsible for specif ic aspects of the manuf acturing process. There might be a, procurement department, a production planning depar tment, an inventory management department, and a quality assurance depar tment. Each department will have its own managers,, who report to their superiors, the functional heads; those managers will be responsib le for, leading their units, or ganizing and controlling them as necessar y, strategizing for the tasks, under their control, and developing employees within their units., , // FRONTLINE MANAGERS, , ■, , Frontline managers at BP., , Furthest down the management hierarchy are frontline managers, w ho manage employees who, are themselves not managers. A frontline sales manager might manage 10 salespeople; a frontline, manager in manufacturing might manage a work group of employees who physically assemble a, product; and a frontline engineering manager in a softw are company might manage a g roup of, developers writing computer code. Most comple x organizations have many frontline managers., For example, the oil and energy company BP has some 10,000 frontline managers w ho oversee, 80 percent of the organization’s 100,000 employees. They work in every part of the company—, from solar plants in Spain to drilling rigs in the North Sea and marketing teams in Chicago. Their, decisions, in aggregate, have an enormous impact on BP’s performance.13 Most successful managers begin their managerial careers as frontline managers. In this job they encounter the realities, of management, which as we will see in the next section often differ from their expectations., Frontline managers are critical to maintaining the perfor mance of an or ganization. They, lead their teams and units. They strategize about the best way to do things in their units and, about the best strategies for their functions and the compan y. They plan how best to perform, the tasks of their units. They organize tasks within their teams, monitor the perfor mance of, their subordinates, and try to develop the skills of their subordinates. As we saw in the case of, Tim Jones at Starbucks, who was a frontline manager responsible for the performance of an, individual store, frontline managers can ha ve an impact signif icantly beyond their jobs. In, some cases they can influence the destiny of an entire organization., , // Becoming a Manager, As we have just seen, managers are found at multiple levels within an organization. Although, their precise roles and responsibilities v ary depending on their le vels in the or ganization,, all managers have to lead and de velop other employees, plan and strate gize for their units,, organize their units, and apply controls and incentives. How do people become managers, and, what is the job like?, , // FROM SPECIALIST TO MANAGER, Becoming a manager at, Microsoft., ■, , hiL30123_ch01_002-025.indd 10, , The journey into management typically begins when people are successful at a specialist task, for which they were initially hired. For example, Microsoft hires man y software engineers., Initially these people are recruited for their ability to write computer code; but if they succeed, at this job, they may find themselves in charge of other software engineers, becoming development leads (a frontline position at Microsoft). At this point their management skills are just, as important as their technical skills in fulfilling their responsibilities. People who cannot get, things done through other people will not adv ance further. If they are successful, the y may, be promoted again and one da y become general managers. A relevant case is John DeVaan,, who was hired to write computer code after f inishing an under graduate computer science, program at Oregon State University in 1985. Initially he worked on Excel. DeVaan’s technical, success soon brought him to the attention of his superiors, and he was promoted, becoming a, , 10/23/06 4:24:45 PM

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Management \\ CHAPTER 1, , development lead. He managed this successfull y too, and fur ther promotions, followed. He directed software development for Office 95 and Office 97 and was, ultimately promoted to lead Microsoft’s Desktop Applications Business (the unit, responsible for Of fice), growing that to a $7 billion business. DeV aan then became the general manager of Microsoft’ s TV division. Today he is senior vice, president of engineering excellence at Microsoft and part of the business leadership team. To be sure, DeVaan was valued and promoted for his technical skills;, but he would not have advanced had he not also been a g reat manager who excelled at leading and developing employees, planning and strategizing, organizing,, and controlling., More generally, whatever people’s disciplinary backgrounds and initial functional assignments, if they are successful they may find themselves promoted into, managerial roles. Accountants and f inance professionals may manage other accounts and f inance professionals; engineers working in production may manage, other engineers; scientists in R&D may manage other scientists; and salespeople, might find themselves managing part of the sales force. In these new roles technical skills remain important, but now people also have to manage. If they succeed,, like John DeVaan they may f ind themselves promoted to general management, positions, running entire divisions of an or ganization where their ability to lead ,, plan, develop strategy, organize, control, and motivate through incentives becomes, of paramount importance. So the art of management is relevant to almost anyone, who joins an organization with ambition and the ability to succeed, whatever his or, her disciplinary background., , 11, , Software Man The career of, John DeVaan at Microsoft, exemplifies how many people, become managers. DeVaan started, out as a software engineer writing, code, but he was promoted to, become a software development, lead and then a general manager., DeVaan, a 20-year Microsoft, veteran, is now a member of the, business leadership team at, Microsoft and senior vice president, for engineering excellence., © Microsoft Corporation., , // MASTERING THE JOB, Harvard Business School Professor Linda Hill w anted to discover what work life, was like for functional specialists who had been newly appointed to management, positions, so she follo wed 19 newly appointed frontline managers through their, first year as managers. 14 These managers had all been star perfor mers as functional specialists, and their promotions to management positions w ere seen as rewards and an opportunity for career advancement. Hill documented the enormous, difference between their expectations as they entered the job and the reality the y, soon encountered. Initially the new managers believed that their job w as to exercise formal, authority, making decisions and telling others w hat to do—in ef fect, to be the “boss. ” They, also thought they would be able to continue doing the technical w ork they had been doing,, “only with more power and control.”15 These expectations were shattered by reality., After six months the new managers found themselves struggling with the fast-paced nature of the job. The managers found that they were in constant demand from subordinates,, peers, and their o wn bosses. There was little time for quiet reflection. The workload was, heavier than they had anticipated, and the job w as more fragmented with man y issues requiring attention during a typical da y. Some yearned for the “simple da ys” when all they, had to do was focus on their functional tasks. Now they had to process a significant amount, of mail, deal with personal issues, and meet with peers and their o wn bosses, customers,, suppliers, and so on. These observations echoed work by Henry Mintzberg, who followed, managers around and found that on a verage they processed 36 pieces of mail each da y, attended eight meetings, and took a tour through the building or plant. 16 Recent work by, Mintzberg conf irms the impression that a da y in the life of an a verage manager is fragmented, full of dif ferent tasks, and characterized b y constant inter ruptions and in volves, significant interpersonal networking.17, Before long most of the new managers in Linda Hill’s study discovered that formal authority was a limited source of power: Their subordinates didn’t necessarily listen to them! Moreover, they found out that to get things done, the y had to w ork closely with peers and their, bosses—people over whom the ne w managers had no for mal authority. Hill noted that the, most demanding issues managers encountered in their f irst year on the job all had to do with, , hiL30123_ch01_002-025.indd 11, , 10/23/06 4:24:45 PM

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12, , PART 1 // Managers and the Environment, , “people challenges.” They had to lear n how to influence subordinates, peers, and their o wn, bosses to get things done, and the y had to estab lish trust and credibility with their subordinates, peers, and bosses before the y could influence them. Being kno wn as a star indi vidual, contributor is rarely enough; managers earn trust and credibility largely through interpersonal, interactions on the job., Over time the managers in Hill’s study discovered that they had two sets of responsibilities:, agenda setting for their teams and netw ork building within the organization. Most new managers grasped the importance of agenda setting quickl y, but the impor tance of building networks took longer to sink in. Managers must realize that to get things done and to help their, own team succeed, they must work closely with a network of peers and superiors, persuading, them to buy into the agenda of the manager’s team. They have to be network builders, good at, managing relationships. Hill concluded that new managers go through a psychological change, during their first year on the job. They learn through experience to see themselves not as technical experts or functional specialists, but as leaders and network builders—not as bosses who, get things done through command and control, but as people w ho get things done through, their ability to influence and persuade others., , // Managerial Roles, managerial roles, Specific behaviors, associated with the task of, management., , Managerial roles are specif ic behaviors associated with the task of management. Managers, adopt these roles to accomplish the basic functions of management just discussed—planning, and strategizing, organizing, controlling, and leading and de veloping employees. One of the, earliest and most enduring descriptions of managerial roles comes from Henr y Mintzberg,, who (as we have already noted) shadowed managers observing what they did during the day.18, Mintzberg developed a list of roles that he g rouped into three categories: interpersonal roles,, informational roles, and decisional roles (see Figure 1.2). Mintzberg emphasized that managing is an inte grated activity, so these roles are rarel y distinct. Visiting clients, for instance,, usually relates to two or more roles simultaneously., , personal roles, Inter, , Leader, , Negotiator, , Monitor, , Disseminator, , ol, es, , io n, , at, , rm, , lr, , Spokesperson, , fo, , na, , Entrepreneur, , al r, , Disturbance, handler, , sio, , Management Roles, , Managerial, roles, , Resource, allocator, , D e ci, , FIG UR E 1 .2, , Liaison, , ole s, , Figurehead, , In, , Source: Based on H., Mintzberg, The Nature of, Managerial Work (New York:, Harper & Row, 1973)., , hiL30123_ch01_002-025.indd 12, , 10/23/06 4:24:53 PM

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Management \\ CHAPTER 1, , 13, , Mintzberg’s work has been replicated man y times. Most researchers ha ve found similar, sets of roles (although there are some v ariations in labels and cate gories).19 The roles that, Mintzberg identified flesh out the richness of managerial work and tell us how managers behave and what they do when trying to perform the main functions of management., , // INTERPERSONAL ROLES, Interpersonal roles are roles that in volve interacting with other people inside and outside, the organization. Management jobs are people-intensive: Research suggests that managers, spend somewhere between 66 and 80 percent of their time in the compan y of others. 20 Seldom do managers w ork alone for long periods without outside communication. As Linda, Hill noted, managers get things done through their netw ork of interpersonal relationships., Mintzberg identified three types of interpersonal roles: a figurehead role, a leader role, and a, liaison role., Managers at all levels are figureheads. They greet visitors, represent the company at community events, serve as spok espeople, and function as emissaries for the or ganization. For, example, when Atlanta-based Chick-f il-A opens a new restaurant, it gives a year’s worth of, free meal coupons to the f irst 100 customers. This incentive draws big crowds, who camp, outside the restaurant before opening day in the hope of being among the first 100 customers., The chain’s president, Dan Cathy, joins them,, camping outside the night before the opening, chatting with them, and then signaling, the grand opening by playing his trumpet. By, doing this, Cathy is acting as a figurehead for, Chick-fil-A. At lower levels in a compan y,, functional and frontline managers perfor m a, variety of f igurehead roles. They welcome, new staff, help their teams celebrate perfor mance milestones, give performance awards, to employees, accompany senior e xecutives, or outside visitors on tours through the w ork, area, and so on., Earlier w e noted that leadership is one, function of management, and it is perhaps, the most pi votal. Ho wever, leadership is, more than a function that managers must fulfill. Managers also take on a leadership role, to get things done within or ganizations., Managers beha ve as leaders to influence,, motivate, and direct others within or ganizations and to strate gize, plan, or ganize, control, and develop. A central task of leaders is, to give their organizations a sense of direction and pur pose. They do this b y identify, and articulating strategic visions for the or The CEO as a Figurehead Dan Cathy, the, ganizations (by strategizing) and then by mopresident and COO of Atlanta-based Chick-filtivating others to w ork to ward this vision., A restaurants, blows his trumpet to signal a, This is exactly what Rose Marie Bravo did at, new store opening. Cathy takes his, Burberry: She gave the organization a stratefigurehead role seriously. He particularly, gic vision, repositioning it as a hip, high-end, enjoys participating in the grand opening of a, brand, and she eng aged Burber ry’s employnew store.21, ees in that vision., Photo courtesy of Chick-fil-A, Inc. Photograph by Joe, In their liaison role managers connect, Siebold., with people outside their immediate units., , hiL30123_ch01_002-025.indd 13, , 10/23/06 4:24:54 PM

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14, , PART 1 // Managers and the Environment, , These may be the managers of other units within the organization or people outside the organization, such as suppliers, buyers, and strategic partners. An important purpose of such, liaisons is to build a network of relationships. Managers can use their networks to help coordinate the w ork of their units with others, to gain access to v aluable infor mation, and, more generally to get things done and further their own agendas within the organization. As, Linda Hill observed in her research, building a netw ork is one of the most impor tant tasks, that new managers face., , // INFORMATIONAL ROLES, , ■ Information roles at, Nordstrom., , hiL30123_ch01_002-025.indd 14, , Informational roles are concerned with collecting, processing, and disseminating information., Managers collect information from various sources both inside and outside the or ganization,, process that information, and distribute it to others who need it. Mintzberg found that managers spend 40 percent of their time in these tasks. Mintzber g divided the information roles of, management into three types: monitor, disseminator, and spokesperson., As monitors managers scan the environment both inside and outside the or ganization. At, Microsoft, for example, CEO Steve Ballmer is constantly reviewing competitive, technological, and regulatory trends in the markets in which Microsoft competes. He also monitors the, performance of the dif ferent units within Microsoft, assessing, for e xample, how well the, Windows, Office, and Xbox businesses are performing against targets., Managers rely on both formal and informal channels to collect the information required, for effective monitoring. Formal channels include the organization’s own internal accounting infor mation systems and data pro vided by impor tant external agencies. Managers at, Microsoft, for example, can access through the company’s intranet a vast electronic library, of research reports produced by external consulting companies and stock analysts that profile competitive trends and competitors in all the rele vant markets. Informal channels include the manager’s own personal network, which can be a great source of qualitative information and useful gossip. By monitoring the e, xternal competiti ve and inter nal, organizational environment for infor mation, managers tr y to gain kno wledge about ho w, well the organization is performing and whether any changes in strategy or operational processes are required. At Seattle-based retailer Nordstrom, for example, the f irst thing President Blake Nordstrom does when he gets to his desk every day is review sales figures from, all company stores for the previous day. He compares these figures against targets; looks for, trends; and if there is variance considers whether the company should take corrective action., In this respect the monitoring role of management is par t of the controlling function. In, addition, the information collected from monitoring can help managers think more clearl y, about the company’s strategy., One thing managers do with this infor mation is disseminate it to direct repor ts and others, inside the organization. In their dissemination role managers regularly inform staff about the, company’s direction and sometimes about specif ic technical issues. At the supervisory level,, the disseminator role often takes the form of one-to-one informal conversations with specific, employees about particular matters., In their spokesperson role, managers deliver specific information to individuals and groups, located outside their department or organization. Sales managers communicate with business, partners regarding new sales strategies. Division heads give presentations to their colleagues, in other divisions about strategies and resource requirements. CEOs meet with investors, government officials, community leaders, and others to con vey information about company developments of interest to those stakeholders. These are more than f igurehead activities: They, communicate valuable information to important constituencies, and in doing so they can help, to shape their perception of the organization and the way they interact with it. For example, if, by sharing information the CEO of a company can successfully persuade investment analysts, that his company is pursuing a good strate gy, they may write a f avorable investment report., In turn, this might lead to an increase in the compan y’s stock price, making it easier for the, company to raise additional capital from investors in the future by issuing new stock., , 11/9/06 7:36:30 PM

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Management \\ CHAPTER 1, , 15, , // DECISIONAL ROLES, Management gur u Peter Dr ucker once wrote that w hatever managers do, the y do through, making decisions.22 The information collected through monitoring is directed toward discovering problems or opportunities, weighing options, making decisions, and ensuring that those, decisions are put into action. Whereas interpersonal roles deal with people and informational, roles deal with kno wledge, decisional roles deal with action. They translate the people and, information into processes with the pur pose of moving the organization toward its strategic, goals. Mintzberg identif ied four decision roles: entrepreneur , disturbance handler, resource, allocator, and negotiator., To survive in competitive markets, firms must be entrepreneurial. They must pioneer new, products and processes and quickly adopt those pioneered by others. In their role as entrepreneurs, managers must make sure that their organizations innovate and change when necessary,, developing or adopting ne w ideas and technolo gies and improving their own products and, processes. They must make decisions that are consistent with such entrepreneurial behavior. If, they do not, their organizations will be quickly outflanked by more nimble competitors. Rose, Marie Bravo is a good example of what happens when a manager successfully adopts the entrepreneur role. She made decisions that encouraged creati vity within Burber ry, leading directly to the development of new product offerings that appealed to a wider customer base., Managing is full of paradoxes, and this is par tly apparent when we contrast the proactive, entrepreneurial role with the reactive disturbance handler role. Disturbance handling includes, addressing unanticipated problems as they arise and resolving them expeditiously. In managerial work unanticipated problems arise often. Sales ma y grow more slowly than anticipated;, excess inventory may accumulate; production processes may break down; valuable employees, might leave for jobs else where; and so on. Managers must decide w hat to do about these, unanticipated problems—often quickly., An important class of management decisions involves resource allocation .Organizations, never have enough money, time, facilities, or people to satisfy all their needs. Resources are, scarce and can be used in many different ways. A crucial decision responsibility of managers, is to decide how best to allocate the scarce resources under their control betw een competing, claims in order to meet the organization’s goals. As a resource allocator, a manager in charge, of product development, for example, may have to assign people, mone y, and equipment to, three dif ferent product de velopment teams. A mark eting manager ma y appor tion mone y, between media adv ertising and point-of-sale promotions. A production manager ma y have, limited funds for new equipment. In general, resource allocation decisions should be guided, by the strategy of the organization., Negotiating is continual for managers. 23 They negotiate with suppliers for better deli very,, lower prices, and higher-quality inputs. They negotiate with customers over the pricing, delivery, and design of products and services. They negotiate with peers in their own organization, over shared resources and cooperative efforts. They negotiate with their superiors for access to, scarce resources, including capital, personnel, and facilities. They even negotiate with subordinates in their own work unit, trying to allocate employees between tasks to meet the goals of, both the organization and individual employees. Managers who are successful when making, negotiation decisions can lower input costs, strike better deals with customers, gain access to, more high-quality resources within the or ganization, and better organize their own subordinates. Skilled ne gotiators are more lik ely to successfull y implement strate gy and raise the, performance of their organizations., , ■, , Decision roles at Burberry., , // SOME QUALIFICATIONS, Mintzberg’s work is useful for what it tells us about the nature of managerial work and the, behaviors managers must adopt to execute successfully the functions of management. Nevertheless, his model of managerial roles has limitations. F irst, the model tells us w hat, managers do, but it does not tell us what they should do. Remember, the model was derived, , hiL30123_ch01_002-025.indd 15, , 10/23/06 4:24:56 PM

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16, , PART 1 // Managers and the Environment, , by watching managers at work. Simply because managers routinely engage in an activity, does not mean that the y should pursue that activity. As a practical matter, all of the roles, described in Mintzberg’s model seem important, and most successful practicing managers, probably engage in all of them at least occasionall y. However, some roles ma y be more, important than others and more deser ving of management time and ef fort. The leader, role, for example, is probably far more important than the f igurehead role for managerial, success., Second, Mintzberg does not mention some impor tant roles of managers. F or example,, evidence shows that managers can impro ve strategic thinking and decisions within their, organization by taking on the role of devil’s advocate, questioning the logic underlying proposed decisions to expose flawed thinking. 24 Similarly, many successful managers adopt a, mentoring role with their subordinates. As mentors, managers dra w on their o wn experiences to offer important insights to their subordinates, coaching them on ho w to become, better managers., A further limitation of Mintzberg’s managerial roles model is that it is context dependent., The managerial roles model tries to describe what all managers do in all situations. The reality, of course, is that w hat managers do depends par tly on the situation. F or instance, one, study noted that chief e xecutives in local go vernment agencies do not perfor m the pub lic, figurehead role because it is assigned to politicians. Similarl y, some decision-making roles, are limited for managers in government agencies because key decisions are made by politicians. Other studies have reported that the size of an organization has an impact on management roles. One study repor ted that managers of small g rowth-oriented businesses experience more brevity and fragmentation in their work than do managers in large companies. The, absence of for mal structure in these companies also changes the amount of time spent on, some roles versus others. Studies also report that the importance of specific managerial roles, varies across cultures.25, A f inal limitation of the model is that it does not re veal much about how to per form these different roles. To be sure, it is interesting to kno w that managers eng age in, negotiations all the time, that the y have an important monitoring role, and that the y allocate resources betw een competing claims. But w hat a practicing manager reall y wants, to know is how to improve the perfor mance of these tasks. This is precisely the focus of, this book., , // Management Competencies: Do You Have What It Takes?, competencies, A manager’s skills, values,, and motivational, preferences., , To fulf ill the roles that w ere just described, managers need to ha ve the “right stuff.” They, must possess several competencies—skills, values, and motivational preferences—that, allow them to perfor m their jobs effectively and become prof icient at planning and strategizing, organizing, controlling, developing, and leading. 26 We might be gifted with some, competencies at birth, but most are de veloped through upbringing, education, and e xperience. No single set of competencies represents the perfect combination for successful management. Instead managers can be equall y effective with different combinations of these, personal characteristics., , // MANAGERIAL SKILLS, Management is a challenging and complex task, and performing it effectively requires a variety, of skills. These skills are or ganized into three cate gories: conceptual, technical, and human., They apply in varying degrees of importance to managers at all levels in an organization.27, conceptual skills, The ability to see the big, picture., , hiL30123_ch01_002-025.indd 16, , Conceptual Skills When 3,600 managers at 250 companies in se veral regions of the world, ranked the importance of 24 competencies for midlevel managers, two of the top five categories in every culture studied were “analyze issues” and “sound judgment.”28 These categories, fall under the domain of conceptual skills—the ability to see the “big picture,” understand, , 10/23/06 4:24:56 PM

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Management \\ CHAPTER 1, , 17, , how the various parts of the organization affect each other, and conceptualize how those parts, can be organized to improve the performance of the overall organization. In other words, conceptual skills are the foundation for strategizing and organizing., A common misunderstanding is that conceptual skills for managers are all about the capacity for structured analysis. Rational, logical thinking is certainly important; but managers also, require conceptual skills to think outside the box.29 Many issues on managers’ desk are exceptions with no existing solutions. Thus managers must be able to creatively figure out the real, problem (or opportunity), the variety of options available to solve that problem, and the best, choice in the context of that novel situation., Managers at all levels require conceptual skills, but they are paramount in top management, positions. This makes sense because CEOs and vice presidents ha ve more scope to under stand. They also face more novelty and uncertainty, which require plenty of creative thinking., In general, managers fur ther down in an organization, such as frontline managers, f ace narrowly focused tactical issues as opposed to bigger strate gic issues, and the prob lems they, confront tend to be routine rather than exceptional., Technical Skills Technical skills enable managers to perform specific activities involving, methods, processes, or techniques. These skills include mastery of specif ic equipment (such, as configuring intranet servers) or correctly following procedures (such as conducting an accounting audit). Frontline managers work directly with employees with technical expertise, so, they typically require some of this e xpertise themselves to monitor employee performance,, provide meaningful feedback, and help emplo yees solve unusual problems. As an example,, call center managers spend up to half of their time monitoring customer calls and gi ving employees feedback about how to improve their dialogue in the future. These managers would be, ineffective in this mentoring role if the y lacked sufficient knowledge about the product and, the correct procedures for handling customer calls., The general rule is that technical knowledge and skills are more impor tant for frontline managers than for more senior management positions. The reasoning is that managers in the lo wer, part of the hierarchy work directly with technical staff, whereas managers further up the hierarchy, work more with other managers. Studies of management careers repor t that managers need to, shift away from reliance on technical skills to more reliance on conceptual skills as they advance, within an organization. The breakpoint occurs when a manager is responsible for people across, functional units, such as managing a plant where employees have various forms of expertise.30, Although the demand for technical skills diminishes as a manager is promoted up the hierarchy, they remain important for managers at all levels. In fact, higher-level managers usually require technical knowledge and skills across a broader spectr um of functional areas (marketing,, production, accounting, and so on) than is necessar y for lower-level managers operating within, one functional area. For instance, consider Ed Dunlap, the chief f inancial officer of Wild Oats, Markets, a health food super market chain based in Boulder , Colorado. Dunlap had acquired, considerable financial expertise throughout his career and retained many of those technical skills, as chief financial officer. However, Dunlap’s promotion to chief operating officer required him, to learn technical skills beyond finance and accounting, such as in-store operations. “One thing, I still need experience in is merchandising, so I’m working very closely with our merchandising, staff to develop an eye for that side of the business,” says Dunlap. “That starts to give me all the, pieces to take on even greater responsibility if it’s presented to me.”31, , technical skills, Skills that include mastery, of specific equipment or, following technical, procedures., , ■ Technical skills: at Wild, Oats Markets., , Human Skills Star emplo yees are often promoted into management jobs due to their, technical prowess, but many soon get into trouble because they lack the requisite human skills., Several years ago this began to emerge as an endemic problem at Microsoft, where great software programmers, once promoted into management positions, often e xhibited poor human, skills. Many subordinates complained that their managers had poor communication skills and, organization capabilities, that they engaged in micromanagement, that they could be abrasive, and arrogant, and that they demoralized rather than motivated team members. To fix this problem, for more than a decade Microsoft has devoted a great deal of attention to training its new, managers, teaching them how to be more effective in their new role.32, , hiL30123_ch01_002-025.indd 17, , 11/9/06 7:36:30 PM

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18, , PART 1 // Managers and the Environment, , The Technical CEO People in top management positions generally use their conceptual and, human skills more than technical skills. However, the latter remain important; some experts even, suggest that CEOs need enough technical bench strength to effectively execute strategies, developed with their conceptual skills. Apple CEO Steve Jobs is a case in point. Jobs closely, inspects many of Apple’s products, even suggesting initial designs and features. “The interesting, thing about the iPod is that since it started, it had 100 percent of Steve Jobs’s time,” says Ben, Knauss, who worked on Apple’s digital music player while a senior manager at Portal Player., “Every day there were comments from Steve saying where it needed to be.” Knauss claims the, iPod is even a little louder than other players because Steve Jobs has less than ideal hearing.33, © AP Photo/Marcio Jose Sanchez., , human skills, Skills that managers need,, including the abilities to, communicate, persuade,, manage conflict, motivate,, coach, negotiate, and lead., , hiL30123_ch01_002-025.indd 18, , The human skills that managers need include the abilities to communicate, persuade,, manage conflict, moti vate, coach, ne gotiate, and lead. Ef fective managers understand the, needs of their subordinates and act on this kno wledge to improve employee well-being while, also achieving organizational objectives. Human skills include working with other units, not, just with employees within the manager’s own unit. In other words, successful managers use, their human skills to reconcile the needs and goals of their own team members with people in, other work units, as well as with the needs of customers, suppliers, and others outside the organization., Human skills go be yond interacting ef fectively with others. They include the manager’s, self-awareness and self-management. 34 Good managers kno w how to manage themselv es,, which lets them manage others more ef fectively. They are mindful of their own needs, emotions, and impulses and can control or appl y them at appropriate times and places. After all,, managers are role models, so they must manage their emotions, words, and deeds accordingly., They must be able to lead by example., Human skills are important whether you are a night manager at a 7-Ele ven store, a development manager at Microsoft, or the chief e xecutive officer at Bank of America. This makes, sense when we recall that, by definition, managers accomplish organizational goals through, others. You cannot get employees to work together toward common goals if you lack the ability, , 10/23/06 4:24:57 PM

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Management \\ CHAPTER 1, , 19, , to manage y ourself and others. A recent study of thousands of managers at IBM, Lucent,, PepsiCo, British Airways, and hundreds of other di verse organizations revealed that human, skills are more impor tant than technical and conceptual skills for managers across a wide, range of levels.35 The analysis showed that people get promoted into management, and promoted from lo wer to higher le vels of management, b y demonstrating acceptab le levels of, technical and co gnitive skills. However, these skills are secondar y to human skills w hen it, comes to distinguishing between successful and mediocre managers, , // MANAGERIAL VALUES, Another important characteristic of successful managers is the values they hold and the strength, of those values.36 Values are stable, evaluative beliefs that guide our preferences for outcomes, or courses of action in a variety of situations.37 They are perceptions about what is good or bad,, right or wrong. Values tell us what we “ought” to do. They serve as a moral compass that directs our decisions and actions. People organize the dozens of values that exist into a hierarchy, of importance. Values at the top tak e priority over values further down the hierarchy. Some, individuals value new challenges more than the y value conformity. Others v alue generosity, more than frugality. We are referring here to the values that actually guide behavior (enacted, values), not what people say is important to them (espoused values)., Values have gained a lot of respect in business circles over the past decade.38 Top executives in, most Fortune 500 companies have carefully identified the core values that they believe employees, should embrace in the workplace. These shared values—values held by several people—are, important because they create a sense of collective purpose, which increases loyalty and satisfaction within the team and or ganization. Equally important, when employees embrace and follow, shared values, their actions are more consistent with team or organizational objectives., This point brings us to the tw o reasons w hy values represent an impor tant characteristic, of successful managers. Across all levels of the organization, managers are ultimately responsible, for forming, strengthening, and, where necessary, reprioritizing the shared values of their staff., To accomplish this, they must personally hold the values that steer the team and organization in, the right direction. “You can’t lead other people unless you have a strong set of beliefs,” advises, former New York mayor Rudy Giuliani. 39 Managers who act by their values are more likely to, instill those values in others. Thus the personal values of middle and frontline managers need to, echo and amplify the values that top management wants to spread throughout the organization., The other reason why values represent an important characteristic of successful managers is, that they stabilize and guide managers through ambiguous circumstances. 40 Managers are constantly buffeted by many forces, some of which are strong enough to steer them toward ineffective, or unethical results. Values serve as beacons that keep managers steadfastly on course under these, conditions. “I’ve always thought that values are a core par t of leadership,” says Richard Brajer,, CEO of LipoScience, a diagnostic testing and anal ytical company headquartered in Raleigh,, North Carolina. “Why? … Because, quite frankly, the stresses of a leadership role are very strong., You need to have a solid foundation.”41 The stabilizing effects of values not only steer managers, clear of bad decisions; they also improve the consistency of their decisions and actions. Through, this consistency, employees learn that managers have integrity and can be trusted.42, Managing with the Right Values Managers don’t just require strong values; they require the, right values. What are these? The answer to this question has two parts. First, managers need to, embrace values that are consistent with the situation in w hich they work. If precision and accuracy are critical, then managerial v alues should emphasize confor mity and tradition more, than stimulation and change. If the compan y’s success is threatened b y a shor tage of talent,, then managers need values that place employee well-being near the top of the priority list., The second par t of the ans wer is that all managers in all situations must al ways engage in, ethical behavior, so they must embrace ethical v alues. Ethical values are values that society, expects people to follow because they distinguish right from wrong in that society. These values, are unwavering across time and, according to various studies, are similar across most cultures., For example, when 70,000 respondents located on six continents w ere asked what values they, , hiL30123_ch01_002-025.indd 19, , values, Stable, evaluative beliefs, that guide our preferences, for outcomes or courses of, action in a variety of, situations., enacted values, Values that actually guide, behavior., espoused values, What people say is, important to them., shared values, Values held in common by, several people., , ethical values, Values that society expects, people to follow because, they distinguish right from, wrong in that society., , 10/23/06 4:24:57 PM

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20, , PART 1 // Managers and the Environment, , look for and admire in a leader, well over 80 percent included honesty in their lists. Honesty remained the most often identif ied value in three sets of sur veys over 15 years. It was also at the, top of the list in most cultures and was in the top four traits (out of 225 traits) in others.43, , // MANAGERIAL MOTIVATION, Along with the right combination of managerial skills and v alues, truly great managers also, possess needs that moti vate them to manage others ef fectively. Several specif ic managerial, motivations have been discussed over the years, but the four discussed here stand out.44, Desire to Compete for Management Jobs Managers are more successful w hen they are, motivated to compete for their jobs. Even in collegial firms, managers vie for promotion to positions further up the hierarch y. These tournaments are so pronounced for top-le vel jobs that w e, often read about executives leaving the company because they lost the fight. For example, Jeffery, Immelt, the current CEO of General Electric, was one of three managers groomed by Jack Welch, to succeed him as CEO. When Immelt won the competition to become CEO, the other two managers left GE. Effective managers thrive rather than wither in the f ace of this competition. The, desire to compete for managerial jobs is so important that one expert warns that if this motivation, declines, the United State could face a shortage of high-performance leaders in the future.45, , personalized power, orientation, Seeking power for, personal gain., socialized power, orientation, Accumulating power to, achieve social or, organizational objectives., , ■ Allied Signal looks for, action oriented managers., , hiL30123_ch01_002-025.indd 20, , Desire to Exercise Power Successful managers are moti vated to seek po wer. However,, they don’t want this po wer for personal gain or for the thrill the y might e xperience from, wielding power over others (called personalized power orientation )., Instead good managers have a socialized power orientation. They do not seek po wer for its o wn sake;, rather they accumulate power to accomplish organizational objectives. Management theorist, Jeffery Pfeffer has argued that organizations are political entities characterized b y different, centers of power and influence. To get things done in such a setting, Pfeffer argues that managers need to accumulate power and use that power in a constructive way.46 Power comes not, just from formal authority: It also comes from personal traits, such as ability to influence others through communication; from a network of allies; and from control over crucial information or resources. According to Pfeffer, the wise and constructive use of power is an important, characteristic of successful managers., Desire to Be Distinct or Different Successful managers need to be—or at least feel, comfortable being—different from the people the y lead. Why? One reason is that managers, need to broker the interests of many stakeholders, so the need to be distinct or different from, others allows them to act neutrall y. This is consistent with studies repor ting that ef fective, managers have a moderatel y low need for affiliation—they have less concer n about being, liked and are less sensiti ve to the pressure others impose to confor m to their wishes. 47 The, other reason for the need to be different is that managers need to take center stage to communicate and symbolize the or ganization’s or work unit’s future direction. Emplo yees look to, managers as guides and role models of future beha vior. Managers w ho feel uncomfor table, with standing out from the group have difficulty leading people in new directions., Desire to Take Action One of the most important challenges for managers is to create momentum—motivating employees (as well as suppliers and other stak eholders) to achieve the, organization’s ambitions for the future. A recent survey of 3,600 bosses identif ied the “drive, for results” as one of the f ive most important competencies of effective managers. This evidence is back ed up b y Lar ry Bossidy’s experience leading thousands of managers. “When, assessing candidates, the f irst thing I look ed for was energy and enthusiasm for e xecution,”, says the former CEO of Honeywell and Allied Signal. Bossidy says that this bias for action is, so important that “if you have to choose between someone with a staggering IQ…and someone with a lower IQ who is absolutely determined to succeed, you’ll always do better with the, second person.”48, , 10/23/06 4:24:58 PM

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Management \\ CHAPTER 1, , IN CO N CL U SI ON, , 21, , WH Y DOE S IT M ATT E R ?, , If you are on track to become an accountant, a finance professional, an engineer, a, salesperson, a creative marketer, you may wonder, “Why am I studying management”?, The answer is straightforward: If you are successful as a functional specialist within an, organization, it is almost inevitable that you will be offered a management position. If, you have ambition, you will see that offer as a route to career advancement. As you, transition into the job of management, however, you will discover what many others, before you have realized—management is a very different and challenging job. Being a, good manager requires more than technical skills. It requires an ability to get work done, through others; planning and strategizing; organizing; controlling; and developing and, leading a team, unit, function, or entire organization. It requires you to perform multiple, roles effectively. You must be a good leader, figurehead, and liaison; be able to collect,, analyze, and disseminate information; and function effectively as a negotiator, resource, allocator, disturbance handler, and entrepreneur. It requires that you have the right, human and conceptual skills, the right values, and the right motivations. It requires that, you know how to craft a strategic vision, energize others through communication, build, networks, accumulate power, and use that power wisely and constructively. Some, people may be born with these skills, but many of us have to learn them. This book is, designed to help you do that. It represents the first step on the road toward becoming a, successful manager., , MANAGEMENT CHALLENGES, 1. Every January BusinessWeek produces a list of “The Best and Worst Managers of the, Year.” Take a look at the most recent list and pick one of the best managers and one of, the worst managers:, a. What makes them good or bad?, b. Can you find an example of a management function they performed well or poorly?, c. Can you find examples of management roles they performed well or poorly?, d. What are the strongest and weakest skills of these managers?, 2. Jack Welch, the CEO of General Electric from 1981 to 2001, was regarded by many as, one of the best managers in recent business history. Do some research to identify the, characteristics and behaviors that made Welch so admired. Can you see drawbacks to his, management style?, 3. What skills and competencies must a newly appointed frontline manager develop to, perform his or her job effectively? How do these skills and competencies differ from, those required to perform a technical specialist job effectively?, 4. Why might strategizing be an important part of the job of a frontline manager? Can you, find examples of frontline managers who have influenced the strategies of their organizations?, , hiL30123_ch01_002-025.indd 21, , 10/23/06 4:24:58 PM

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22, , PART 1 // Managers and the, Environment, Environment, , MANAGEMENT PORTFOLIO, There is a management portfolio exercise at the end of every chapter in this book. To, complete this exercise, you are asked to pick an organization that you can track as you work, through the chapters in this book. At the end of each chapter you will be asked to look into, an aspect of the organization that matches the content of the chapter. It is probably best if, you pick a large business organization that is well known and has publicly traded stock. For, such an organization you can typically find lots of information in news reports and magazine, articles. Students at most universities can now access much of this material online through, their libraries. In addition, a wealth of information can often be extracted from company, Web sites, including Securities and Exchange Commission (SEC) documents and annual, financial reports. It can also help if you know someone who works at the organization (a, family member perhaps) who can be a source of information., , FOR THE ORGANIZATION YOU HAVE CHOSEN TO FOLLOW:, 1., , 2., 3., 4., , CLOSING CASE, , Describe the firm. How old is it? What industry (or industries) is the firm active in?, What products or services does it sell? Who are its principal competitors? Is it active, internationally? How many employees does it have? What are its sales and profits?, How well has the firm performed recently compared to rivals? Has it outperformed, rivals or underperformed them? Why?, Who is the CEO? How long has she or he been in this position? What has been the, career track of the CEO?, Can you find examples of how the CEO has performed the basic tasks of management—strategizing, planning, organizing, controlling, developing, and leading his or, her organization?, , G E O R G E D AV I D, , George David has been CEO of United Technologies Corporation (UTC) for more than a decade. During that time he has, received numerous accolades and awards for his performance, as a CEO. Under his leadership UTC, a $343 billion conglomerate whose operating units include manuf acturers of elevators (Otis Ele vator), aerospace products (including Pratt &, Whitney jet engines and Sikorsky helicopters), air conditioning systems, and f ire and security systems, has seen ear nings, grow at 10–14 percent annually—impressive numbers for any, company but particularly for a manufacturing enterprise., According to David, a key to United Technologies’ success has been sustained impro vements in producti vity and, product quality. The story goes back to the 1980s when David was running the international operations of Otis Ele vator. There he encountered a Japanese engineer , Yuzuru Ito,, who had been brought in to deter mine why a new elevator, product was performing poorly. David was impressed with, Ito’s methods for identifying quality prob lems and improving perfor mance. When he w as promoted to CEO , David, , hiL30123_ch01_002-025.indd 22, , realized that he had to lower the costs and improve the quality of UTC’s products. One of the f irst things he did w as, persuade Ito to work for him at UTC. Under Da vid, Ito developed a program for improving product quality and productivity, kno wn as Achieving Competiti ve Excellence, (ACE), which was subsequently rolled out across UTC. The, ACE program has been one of the dri vers of producti vity, improvements at UTC ever since., Early in his tenure as CEO, David also radically reorganized UTC. He dramatically cut the size of the head of fice, and decentralized decision making to business di visions., He also directed his accounting staf f to de velop a ne w, financial reporting system that would give him good information about how well each division was doing and make it, easier to hold divisional general managers accountable for, the performance of the units under them. He then gave them, demanding goals for earnings and sales growth and pushed, them to improve processes within their units by implementing the ACE program., , 10/23/06 4:53:09 PM

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Management \\ CHAPTER 1, , 23, , At the same time Da vid has always, “You have to have the same trusting restressed that management is about more, lationships. You kno w people; the y, than goal setting and holding people, know you. You can predict them; the y, accountable. Values are also important., can predict you. All of that kind of beDavid has insisted that UTC employees, gins to work, and it accelerates over the, adhere to the highest ethical standards,, tenure of a CEO . If y ou ha ve people, that the compan y produce goods that, bouncing in and out e very two to three, have minimal en vironmental impact,, years, that’s not good.”, and that employee safety remain the top, According to Sandy Weill, for consideration in the workplace., mer chair man of Citicor p and a UTC, When ask ed w hat his g reatest, board member, David has the right mix, achievement as a manager has been,, of toughness and sensiti vity. “When, David refers to UTC’s worldwide emsomebody can’t do the job he’ ll tr y to, ployee scholarship pro gram. Implehelp; but if that person is not going to, mented in 1996 and considered the, make it work, that person won’t be on the, hallmark of UTC’ s commitment to, job forever.” At the same time Weill says,, employee de velopment, the pro gram, “He does a lot of things that emplo yees, pays the entire cost of an emplo yee’s, respect him for. I think he is a very good, Values Manager! George David,, college or g raduate school education,, manager. Even though David is demandthe CEO of United Technologies, is, allows employees to pursue an y subing, he can also listen—he has a recei ve, seen as something of a paradox. A, ject at an accredited school, pro vides, mode as well as a send mode.”49, tough, no-nonsense, manager, who, paid study time, and a wards UTC, holds people accountable for, stock (up to $10,000 w orth in the, CASE DISCUSSION QUESTIONS, measurable performance, he also, United States) for completing degrees., stresses the importance of helping, Explaining the program, David states,, . What, 1, makes George David such a, employees improve themselves and, “One of the ob ligations that an emhighly regarded manager?, maintaining the highest ethical,, ployer has is to give employees oppor2. How does Da vid get things done, environmental, and safety standards., tunities to better themselv es. And we, through people?, Courtesy of United Technologies Corporation., feel it’s also very good business for us, 3. What evidence can y ou see of Dabecause it generates a better workforce, vid’s, planning and strategizing, organizthat stays longer.”, ing,, controlling,, leading,, and developing?, David states that one of his central tasks has been to, build a management team that functions smoothl y over the, 4. Which managerial competencies does Da vid seem to, long term. “People come to rely upon each other,” he says., possess? Does he seem to lack any?, , ENDNOTES, 1. Quotes from S. Beatty, “Bass Talk: Plotting Plaid’s Future,” The Wall Street Journal, September 9, 2004, p. B1. Also see C.M. Moore and G. Bir twistle, “The, Burberry Business Model, ” International J ournal of Retail and Distribution, Management 32 (2004), pp. 412–22., , 8. N.W. Hatch and J.H. Dyer, “Human Capital and Learning as a Source of Sustainable Competiti ve Advantage,” Strategic Mana gement J ournal 25 (2004), pp., 1155–79; J. Pfeffer, Competitive Advantage through People (Boston: Har vard, Business School Press, 1996)., , 2. The def inition w as f irst of fered b y Mar y P arker F ollett in the 1920s. See, P. Graham (ed.), Mary Parker Follett: Prophet of Management (Boston: Harvard, Business School Press, 1995)., , .9 P. Drucker, Peter Drucker on the Pr ofession of Management (Boston: Harvard, Business School Press, 1998), pp. 33–34., , 3.S. Walton, Made in America (New York: Doubleday, 1992)., 4. This view dates back to the F rench industrialist Henri F ayol, although F ayol, talked about “planning” rather than “strate gizing.” See H. F ayol, General and, Industrial Management (London: Pitman, 1986). Original edition pub lished in, 1916., 5. H. Mintzber g, “P atterns in Strate gy F ormulation,” Management Science 24, (1978), pp. 934–48., 6. S. Gray and E. Smith, “Coffee and Music Create a Potent Mix at Starbucks,” The, Wall Street Journal, July 19, 2005, p. A1., 7. G. Yukl and R. Lepsinger, “Why Integrating the Leading and Managing Roles Is, Essential for Organizational Effectiveness,” Organizational Dynamics 34, no. 4, (2005), pp. 361–75., , hiL30123_ch01_002-025.indd 23, , 10.GE’s Two Decade Transformation, Harvard Business School Case #9-399-150., 11.D. Fisher, “GE Turns Green,” Forbes, August 15, 2005, pp. 3–5., 12. K. Kranhold, “GE Takes Big Steps in Its Strate gy to Exit Insurance,” The Wall, Street Journal, November 21, 2005, p. C7., 13. A. Priestland and R. Hanig, “Developing First Level Leaders,” Harvard Business, Review, June 2005., 14.L.A. Hill, Becoming a Mana ger (Boston: Har vard Business School Press,, 1992)., 15. L.A. Hill, “What It Really Means to Manage,” Harvard Business School Teaching, Note #9-400-041 (February 2000)., 16.H. Mintzberg, “Managerial Work: Analysis from Obser vation,” Management, Science18 (1971), pp. B97–B110., , 10/23/06 4:24:58 PM

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24, , PART 1 // Managers and the Environment, , 17. H. Mintzberg, “The Yin and the Yang of Managing,” Organizational Dynamics, 29 (2001), pp. 306–12; H. Mintzber g, “Managing Exceptionally,” Organization, Science 12 (2001), pp. 759–71., 18.H. Mintzberg, The Natur e of Mana gerial Work (Ne w York: Har per & Ro w,, 1973)., 19.Mintzberg, The Nature of Managerial Work; H. Mintzberg, “The Manager’s, Job: Folklore and Fact,” Harvard Business Review, July–August 1975, pp. 49–, 61; L.B. Kurke and H. Aldrich, “Mintzberg Was Right! A Replication and, Extension of The Nature of Managerial Work ,” Management Science 29, no. 8, (August 1983), pp. 975–84; C.P. Hales, “What Do Managers Do? A Critical, Review of the Evidence,” Journal of Management Studies 23, no. 1 (January, 1986), pp. 88–115; S. Chareanpunsirikul and R.C. Wood, “Mintzberg,, Managers, and Methodology: Some Observations from a Study of Hotel, General Managers,” Tourism Management 23 (2002); pp. 551–56. Mintzberg, recently proposed a revised model of managerial work, but few writers have, taken up this model, possibly due to its messiness and gaps. See Mintzberg,, “Managing Exceptionally.”, 20. Hales, “What Do Managers Do? A Critical Review of the Evidence.”, 21. C. Salter, “Customer-Centered Leader Chick-fil-A,” Fast Company ,October 2004,, pp. 83–84; L. Cannon, “2005 Golden Chain: Dan T. Cathy,” Nation’s Restaurant, News, September 19, 2005; H. Jett, “Businesses Use Grand Openings to Attract, Audience, Estab lish Roots,” Free Lance-Star (F redericksburg, VA), March 24,, 2005., 22.P. Drucker, The Practice of Mana gement (New York: Har per & Row, 1954),, Chapter 28., , 31. D. Buss, “How to Pick Your Number 2,” Financial Times (London), December, 16, 2004, p. 16., 32. The author consults with Microsoft on these issues and teaches se veral in-house, management development programs., 33. L. Kahney, “Inside Look at Birth of the iPod,” Wired News, July 21, 2004., 34.D. Goleman, R. Bo yatzis, and A. McK ee, Primal Leader s (Boston: Harvard, Business School Press, 2002)., 35.L.M. Spencer and S.M. Spencer , Competence at Work: Models f or Superior, Performance (New York: John Wiley & Sons, 1993), Chapter 16; D . Goleman,, “Emotional Intelligence: Issues in P aradigm Building,” in The Emotionall y, Intelligent Workplace, ed. C. Cher niss and D. Goleman (San Francisco: JosseyBass, 2001), pp. 13–26., 36. E.E. Ghiselli, “Interaction of Traits and Motivational Factors in the Determination of the Success of Managers, ” Journal of Applied Psyc hology 52, no. 6, (1968), pp. 480–83., 37. B.M. Meglino and E.C. Ravlin, “Individual Values in Organizations: Concepts,, Controversies, and Research, ” Journal of Mana gement 24, no. 3 (1998),, pp. 351–89; B.R. Agle and C.B. Caldwell, “Understanding Research on Values in, Business,” Business and Society 38, no. 3 (September 1999), pp. 326–387;, S. Hitlin and J.A. Pilavin, “Values: Reviving a Dormant Concept,” Annual Review, of Sociology 30 (2004), pp. 359–93., 38.J.C. Collins and J .I. P orras, Built to Last: Successful Ha bits of Visionary, Companies(London: Centur y, 1995); C.A. O’Reill y III and J . Pfeffer, Hidden, Value (Cambridge, MA: Harvard Business School Press, 2000)., , 23.L. Hill, Becoming a Mana ger: How New Managers Master the Challeng es of, Leadership (Boston: Harvard Business School Press, 2003), pp. 41–42., , 39. R. Giuliani, “Rudy Giuliani on Leadership,” Leadership Excellence, June 2005,, pp. 17–18., , 24. J.S. Valacich and C. Schwenk, “Structuring Conflict in Individual, Face-to-Face,, and Computer-Mediated Group Decision Making,” Decision Sciences 26 (1995),, pp. 369–94; D.N. Stoe, M.P. Sivitanides, and A.P. Magro, “Formalized Dissent, and Cognitive Complexity in Group Processes and Performance,” Decision Science 25 (1994), pp. 243–62., , 41. “Building a Solid Foundation on Value-Driven Principles,” Business Leader 14, (June 2003), p. 6., , 25. C. Dargie, “The Role of Public Sector Chief Executives,” Public Administration, 776 (Spring 1998), pp. 161–77; M. Noordegraaf and R. Stewart, “Managerial, Behavior Research in Pri vate and Pub lic Sectors: Distincti veness, Disputes,, and Directions, ” Journal of Mana gement Studies 37, no. 3 (Ma y 2000),, pp. 427–43; C. O’Gor man, S. Bourk e, and J .A. Mur ray, “The Nature of, Managerial Work in Small Gro wth-Oriented Businesses, ” Small Business, Economics25 (2005), pp. 1–16., 26.R. Boyatzis, The Competent Mana ger: A Model f or Ef fective P erformance, (New York: John Wiley & Sons, 1982), p. 21; R. Jacobs, “Using HumanResource, Functions to Enhance Emotional Intelligence, ” in The Emotionally Intelligent, Workplace, ed. C. Cherniss and D. Goleman (San Francisco: Jossey-Bass, 2001),, pp. 159–81; S.L. Tubbs and E. Schulz, “Exploring a Taxonomy of Global, Leadership Competencies and Meta-Competencies, ” Journal of American, Academy of Business 8, no. 2 (2006), pp. 29–34., 27. R.L. Katz, “Skills of an Ef fective Administrator,” Harvard Business Review 52,, no. 5 (September–October 1974), pp. 90–102., 28.D. Nilsen, B. Kowske, and A. Kshanika, “Managing Globall y,” HRMagazine ,, August 2005, pp. 111–15., 29. M.D. Mumford et al., “Leadership Skills for a ChangingWorld: Solving Complex, Social Problems,” Leadership Quarterly 11, no. 1 (2000), pp. 11–35., 30. R.E. Hill and J . Collins-Eaglin, “Technical Professionals, Technical Managers,, and the Integration of Vocational Consciousness,” Human Resource Management, 24, no. 2 (Summer 1985), pp. 177–89; H.G. Enns, S.L. Huf f, and B.R. Golden,, “CIO Influence Behaviors: The Impact of Technical Background,” Information &, Management 40, no. 5 (2003), p. 467., , hiL30123_ch01_002-025.indd 24, , 40.J.L. Badaracco Jr., “The Discipline of Building Character ,” Harvard Business, Review 76, no. 2 (March–April 1998), pp. 114–24; J .M. Kouzes and B.Z. Posner,, The Leadership Challenge, 3rd ed. (San Francisco: Jossey-Bass, 2002), Chapter 3., , 42.T. Simons, “Behavioral Integrity: The Perceived Alignment between Managers’, Words and Deeds as a Research Focus,” Organization Science 13, no. 1 (January–, February 2002), pp. 18–35., 43.Kouzes and Posner, The Leadership Challenge, Chapter 2., 44.J.B. Miner, Studies in Mana gement Education (Atlanta: Organizational, Measurement Systems Press, 1965); J.B. Miner, “Twenty Years of Research on, Role Motivation Theory of Managerial Ef fectiveness,” Personnel Psychology, 31 (1978), pp. 739–60; B.P. Ebrahimi, S.A. Young, and V.W.M. Luk, “Motivation to Manage in China and Hong Kong: A Gender Comparison of Managers,”, Sex Roles 45, no. 5–6 (2001), pp. 433–53., 45. J.B. Miner, B.P. Ebrahimi, and J.M. Wachtel, “How Deficiencies in Motivation to, Manage Contribute to the United States’ Competitiveness Problem (and What Can, Be Done about It),” Human Resource Management 34, no. 3 (1995), pp. 363–86., 46.J. Pfeffer, Managing with Power (Boston: Harvard Business School Press, 1992)., 47. D.C. McClelland and D.H. Burnham, “Power Is the Great Moti vator,” Harvard, Business Re view 73 (Januar y–February 1995), pp. 126–39 (reprint; original, article published in 1976)., 48. R. Charan, C. Burke, and L. Bossidy, Execution: The Discipline of Getting Things, Done (New York: Crown Business, 2002). The survey of managerial competencies, is reported in Nilsen, Kowske, and Kshanika, “Managing Globally.”, 49. Sources: J.S. McClenahen, “UTC’s Master of Principle,” Industry Week ,January, 2003, pp. 30–34; D . Brady, “The Unsung CEO ,” BusinessWeek, October 25,, 2005, pp. 74–75; W.J. Holstein, “George David Steps Out,” Chief Executive ,May, 2005, pp. 3–35., , 10/23/06 4:53:09 PM

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2, LEARNING OBJECTIVES, , THE EXTERNAL, INTERNAL ENVIRONMENTS, AND, , After Reading This Chapter You Should Be Able to:, 1, , Identify the major components of an organization’s task environment., , 2, , Explain how each component in the task environment impacts the organization., , 3, , Identify the major components of an organization’s general environment., , 4, , Explain how each component in the general environment impacts the organization., , 5, , Discuss the nature of change in the external environment., , 6, , Outline the main components of the internal environment of an organization and articulate their, implications for managerial actions., , / / / / / / / / / / / / / / /, , The Task Environment, The Threat of Entry, Bargaining Power of Buyers, Bargaining Power of Suppliers, The Threat of Substitutes, The Intensity of Rivalry, A Sixth Force: Complementors, Synthesis, The General Environment, Political and Legal Forces, Macroeconomic Forces, Demographic Forces, Sociocultural Forces, Technological Forces, International Forces, , hiL30123_ch02_026-053.indd 26, , Dynamic Changes in the, External Environment, Incremental versus, Discontinuous Change, Environmental Uncertainty, The Internal Environment, Internal Organization, Employees (Human Capital), Resources, In Conclusion: Why Does It, Matter?, Management Challenges, Management Portfolio, Closing Case: The, Pharmaceutical Industry, , 10/25/06 2:26:46 PM

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Can It Stay Airborne?, United Airlines is one, of the carriers, struggling to survive, in the beleaguered, airline industry., Hamstrung by high, labor costs, United, has found it hard to, compete with lowcost airlines like Jet, Blue. In 2004 United, started operating, under bankruptcy, protection for the third, time in a decade., © Reuters/Corbis., , / / / / / / / / / / / / / / / / / / / / /, , M, , anagers in the airline industry have their work, cut out for them; they face one of the most challenging environments in business. Since 2001 this, industry has been characterized by volatile demand conditions and intense competition from low-cost carriers, such as Jet Blue, Air Tran, and Southwest Airlines. Consumers have plenty of options to choose from, and they, tend to select carriers with the lowest prices, putting, downward pressure on pricing. When adjusted for inflation, the price consumers paid to fly one mile in the, United States fell from $0.091 in 1980 to $0.042 in, , hiL30123_ch02_026-053.indd 27, , 2004. Moreover, the cost structure of airlines is closely, linked to volatile fuel prices. Every 5 percent increase in, fuel costs reduces airline profitability by 1 percent, and, the price of jet fuel increased from $0.71 a gallon on, average in 2002 to $1.80 a gallon in late 2005. To complicate matters, many long-established airlines also, have to work with powerful labor unions that historically have resisted attempts to reduce employee pay, and introduce flexible work processes. This has kept, labor costs high. Due to these conditions, between 2001, and 2004 the industry lost a staggering $32.3 billion.1, , 10/25/06 11:27:52 PM

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28, , external, environment, Everything outside a firm, that might affect the ability, of the enterprise to attain, its goals., task environment, Actual and potential, competitors, suppliers, and, buyers (customers or, distributors); firms that, provide substitute products, to those sold in the, industry; and firms that, provide complements., general environment, Political and legal forces,, macroeconomic forces,, demographic forces,, sociocultural forces,, technological forces, and, international forces., , PART 1 // Managers and the Environment, , If managers in the airline industr y are going to r un their organizations efficiently, they have to, understand the external environment confronting them, anticipate ho w changes in the en vironment might affect the prof itability of their airlines, and tak e appropriate actions. These actions, might include reducing capacity as demand declines, purchasing more fuel-ef ficient jets, avoiding price wars with low-cost airlines if possible, and reducing labor costs. At the same time the, ability of managers to tak e such actions is shaped b y the airlines’ internal environment. For, example, some long-established airlines, such as United , have powerful labor unions that ha ve, resisted attempts by managers to cut pay for pilots, flight attendants, and ground staff, or to introduce flexible work practices that boost labor productivity. This constraint has kept costs high and, made it more difficult for managers to do what is required to make the airline profitable., The situation confronting managers in the airline industr y, while dramatic, is not unique., The work of all managers is affected by two main environments: the external environment and, the internal environment. The external environment constitutes everything outside a firm, that might affect the ability of the enterprise to attain its goals. The external environment itself, can be subdivided into two main components (see Figure 2.1). There is the industry or task, environment confronting the or ganization, which typically includes actual and potential, competitors, suppliers, and buy ers (customers or distributors); f irms that provide substitute, products to those sold in the industr y; and firms that provide complements. Then there is the, more encompassing general environment within which the task environment is embedded., The general en vironment includes political and le gal forces, macroeconomic forces,, demographic forces, sociocultural forces, technological forces, and international forces. The, general environment impacts the firm through its influence on the task environment., When managers analyze the external environment they typically look for opportunities and, threats. Opportunities arise from circumstances or developments in the external environment, that, if exploited through strategies, enable managers to better attain the goals of their enter prise. For example, according to the most recent forecast from Boeing, airline travel is predicted, to grow at 4.8 percent per y ear compounded o ver the ne xt 20 y ears, which is considerab ly, faster than the growth rate over the last 20 years.2 Rising demand for airline travel can be seen, , l, ga, , I, , t, , lier, , Buy, ers, , pp, , s, , ntors, me, ple, , mic, , om, , Ec o n o, , Resources, , The, manager, , E m plo y e es, , als, , ic al, , Riv, , Technolog, , anization, Org, , Pol, , al environm, en, ern, t, n, , Su, , itic, , al, a, , nd, , k environmen, Tas, t, , l, ona, ati, rn, te, In, , le, , eral environment, Gen, , C, , D, , FIG UR E 2 .1, , em, , S u b stit u t e s, og, , rap, , hic, , ul, S o cio c, , tura, , l, , The Environment of, Managers, , hiL30123_ch02_026-053.indd 28, , 10/25/06 2:26:50 PM

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The External and Internal Environments \\ CHAPTER 2, , as an opportunity, the exploitation of which might better enable airlines to increase revenues, and profits. Threats arise from circumstances or developments in the external environment that, may adversely affect the ability of managers to attain the goals of their enter prise. Thus the, entry of budget carriers into the airline industry is a threat to the position of established carriers, such as United and American Airlines, which have a higher cost structure than firms like South, West Airlines and Jet Blue. Rising fuel costs are another significant threat., Theinternal environment constitutes everything inside the firm that might affect the ability of managers to pursue cer tain actions or strate gies. The internal environment includes the, organization of the firm (its structure, culture, controls, and incentives), the employees of the firm, (its human capital), and the resources of the f irm (its tangible and intangible assets). As we will, see, each of these elements can be a strength or a w eakness. A strength is an acti vity the, organization is good at; it is a potential source of competitive advantage. A weakness is an activity, that the organization does not excel at; it may be a source of competitive disadvantage., When managers analyze the inter nal environment of their own f irm, they often do so b y, identifying its strengths and weaknesses. This inward focus complements the identification of, opportunities and threats in the external environment. Taken together, an inventory of internal, strengths and weaknesses and external opportunities and threats can help managers de velop, strategy. This methodology, which is often refer red to b y the acron ym of SWOT analysis, (s trengths,w eaknesses,opportunities, and threats), is a standard part of strategic planning and, decision making; we will discuss it in more detail in Chapter 5., In this chapter we take a close look at the components of the external and internal environments and discuss how they shape managerial actions and gi ve rise to opportunities, threats,, strengths, and weaknesses. We start with the e xternal environment, looking f irst at the task, environment and then at the general en vironment. We discuss the task en vironment f irst, because it is closest to the firm and thus of most immediate concern for managers. Moreover,, because the general environment affects the firm through its impact on the task environment,, we cannot discuss the impor tance of the general en vironment until we understand the task, environment. We close the chapter with a discussion of the internal environment., , 29, , internal, environment, Everything inside a firm, that affects managers’, ability to pursue actions or, strategies., , SWOT, Strengths, weaknesses,, opportunities, and threats., , // The Task Environment, One of the most popular frameworks for analyzing the task or industry environment is a model, developed by Michael Porter known as the five forces model (see Figure 2.2).3 According, to Porter, the ability of a f irm to make a prof it is influenced by five competitive forces: the, , Five forces model:, Model of competitive, forces that determine the, intensity of competition in, an industry., , Threat of, entry, , Bargaining, power of, suppliers, , Intensity of, rivalry, , Threat of, substitutes, , hiL30123_ch02_026-053.indd 29, , Bargaining, power of, buyers, , F I G U R E 2 .2, Porter’s Competitive, Forces Model, Source: M.E. Porter, Competitive Strategy, (New York, Free Press,, Copyright ©1980,1998)., Adapted with permission of, The Free Press, a division of, Simon & Schuster Adult, Publishing Group. All rights, reserved., , 10/25/06 11:30:02 PM

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30, , PART 1 // Managers and the Environment, , threat of entry by potential competitors, the power of buyers, the power of suppliers, the threat, of substitute products, and the intensity of ri valry between f irms already in the industr y. In, Porter’s framework, the stronger each of these forces, the more dif ficult it will be for incumbent firms in an industry to make profits. A strong force thus constitutes a threat, w hereas a, weak force often gi ves managers the oppor tunity to increase sales, raise prices, and mak e, higher prof its. Porter also notes that b y getting their f irm to pursue the right strate gies,, managers can alter the strength of the v arious forces. Thus managers might pursue strategies, that reduce the bargaining power of buyers, thereby decreasing the threat posed by this force., In this section we look at each force in turn., , // THE THREAT OF ENTRY, In general, if an industr y is prof itable new enterprises will enter, output will e xpand, prices, will fall, and industry profits will decline. Managers often strive to reduce the threat of entry, barriers to entry, by pursuing strategies that raise barriers to entry.4 Barriers to entry are factors that make it, Factors that make it costly, costly for potential competitors to enter an industr y and compete with f irms already in the, for potential competitors to, industry. High entry barriers protect incumbent f irms from new competition even when they, enter an industry and, are making good prof its; they reduce the threat associated with a potential increase in the, compete with firms already, number of competitors in a market., in the industry., Economies of scale, which are the cost reductions associated with a large output, represent an impor tant bar rier to entr y. When incumbent f irms enjoy signif icant economies of, scale, they may have a cost adv antage over new entrants that lack sales v olume. Another, economies of scale, important barrier to entry is the brand loyalty enjoyed by incumbents. Brand loyalty is the, Cost reductions associated, preference of consumers for the products of established companies. Other things being equal,, with large output., the higher the brand loyalty enjoyed by incumbents, the harder it is to enter an industr y and, the fewer competitors there will be. In the market for cola, for example, Pepsi and Coke enjoy, substantial brand loyalty. It would be expensive for another company to enter the cola market, brand loyalty, and try to break down the brand loyalty enjoyed by these enterprises. By pursuing strategies, The preference of, that enable their f irms to reap economies of scale and brand lo yalty, managers in incumbent, consumers for the products, enterprises can limit new entry., of established companies., For an example of an industry where incumbents are protected from competition b y scale, and brand-based entr y bar riers, consider the small package e xpress delivery market in the, ■ Entry barriers in the, United States. Since the late 1980s this mark et has been dominated by two firms, FedEx and, express delivery market., UPS, which together accounted for o ver 80 percent of the mark et in the earl y 2000s. Both, FedEx and UPS ha ve spent hea vily on adv ertising to build, their brands, which has deterred entry. Furthermore, success, in this mark et requires substantial capital e xpenditures, amounting to billions of dollars to purchase a nationwide, network of aircraft, delivery trucks, tracking systems, sorting, facilities, and drop-of f locations. F edEx and UPS ha ve, achieved the shipment v olumes required to co ver the f ixed, costs associated with such a netw ork and enjo y substantial, economies of scale. As a result, from the earl y 1980s until, 2003 there was no new entry into this market: entry barriers, kept competitors locked out., In 2003 this changed when German-owned DHL entered, the industr y by purchasing Airborne Express, a str uggling, enterprise in the mark et with a share of less than 7 percent., DHL’s entry, however, illustrates how hard it is to gain share, in this industry. The company spent $1.02 billion to acquire, Not Much Bang for the Buck DHL has spent over $2, the assets of Airborne Express; committed itself to spending, billion trying to gain share from FedEx and UPS in the U.S., another $1.2 billion to e xpand Airborne’s capacity; and, market for small package delivery, but it has little to show for, launched a nationwide adv ertising campaign, w hich cost, it. The entry barriers into the U.S. market are very high., another $150 million, in an attempt to erode the brand loyalty, © AP Photo/Roberto Pfeil., enjoyed by FedEx and UPS. Due to heavy spending DHL lost, , hiL30123_ch02_026-053.indd 30, , 10/25/06 2:26:51 PM

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The External and Internal Environments \\ CHAPTER 2, , 31, , $638 million in the United States in 2004 and another $380 million in 2005. What did DHL, get for its mone y? Not much. In 2005 DHL ’s share of the U .S. market stood at 7 percent,, barely more than the share enjo yed by Airborne Express before DHL acquired the outf it. It, would seem that the costs of entering the mark et are indeed high. DHL is f inding it difficult, and expensive to overcome the brand loyalty enjoyed by UPS and FedEx and to achieve the, volumes necessary for economies of scale.5, , // BARGAINING POWER OF BUYERS, The next competitive force is the bargaining power of buyers. An industry’s buyers may be the, individual customers who ultimately consume its products (its end users) or the intermediaries, that distribute the industr y’s products to end users, such as retailers and w holesalers. For, example, although deter gents made b y Procter & Gamb le and Unile ver are ultimatel y, purchased by individual consumers, the principal buyers of detergents from P&G and Unilever, are supermarket chains and discount stores, which then resell the products to consumers. The, bargaining power of buyers is the ability of buy ers to bargain down prices charged by, firms in the industr y or to raise the f irms’ costs b y demanding better product quality and, service. By lowering prices and demanding better service, powerful buyers can squeeze profits, out of an industr y. Thus powerful buyers should be vie wed as a threat. Alternatively, when, buyers are in a w eak bargaining position, f irms in an industr y may have the oppor tunity to, raise prices and increase the level of industry profits., Buyers are most powerful when one or more of the following conditions holds: (1) they are, few in number and purchase large quantities, (2) they can choose between equivalent products, from many different firms, and (3) they can switch easily between the offerings of different, firms (their switching costs are low). Consider the power that Wal-Mart has over manufacturers, of detergents. Wal-Mart is the largest retailer in the world, accounting for some 8 percent of, U.S. retail sales, so it buys in huge quantities. Its v olume purchases gi ve it considerab le, leverage over producers like Procter & Gamble and Unilever: Wal-Mart can demand that they, lower prices in retur n for access to shelf space. Moreo ver, Wal-Mart can easil y adjust the, amount of shelf space it de votes to detergents from P&G and Unilever, and it uses this f act,, along with the threat of devoting more shelf space to its own brands, as a bargaining tactic to, get f irms lik e P&G and Unile ver to lo wer their prices. Thus Wal-Mart has considerab le, bargaining power over firms in the detergent industry. It purchases in g reat quantities, it can, choose between many products, and it can switch easily between different offerings., Buyers are in a weak position when (1) they are plentiful and purchase in smallquantities,, (2) the y ha ve little choice, and (3) the y cannot s witch easil y betw een the of ferings of, different firms. For an example of buyers who are in a weak position, consider the buyers of, operating systems for personal computers. Most such buy ers purchase in small amounts, relative to the size of the mark et, so they lack the leverage that comes from volume. More, than 90 percent of the w orld’s personal computers use Microsoft’ s Windows operating, system; the onl y other viab le choice is Apple’s operating system. Thus buyers have little, choice. Moreover, if people use Microsoft’s Windows operating system and have libraries of, related software applications, it is expensive to switch to another computer operating system, because in addition to purchasing the operating system itself, the y would have to purchase, new software applications. 6 In other words, the switching costs facing buyers are high and, their bargaining power is low., As the Microsoft e xample illustrates, high s witching costs can signif icantly reduce the, bargaining power of buyers. Switching costs arise when it costs a buyer time, energy, and, money to switch from a product of fered by one enter prise to that of fered by another. When, switching costs are high, buy ers can be locked in to the product of ferings of a f irm, even if, other enter prises offer better products. 7 Managers often tr y to gain bar gaining power over, buyers by trying to increase the switching costs they must bear to adopt a rival product. To the, extent that the y are successful, this enhances the ability of the f irm to raise prices. F or, example, wireless telephone providers try to induce customers to sign multiy ear contracts in, return for ne w telephones—a strate gy that increases s witching costs. As a result, wireless, , hiL30123_ch02_026-053.indd 31, , bargaining power of, buyers, Ability of buyers to bargain, down prices charged by, firms in the industry or to, raise the costs of firms in, the industry by demanding, better product quality and, service., , ■ Buying, , power at Wal-Mart., , ■ Switching, , costs and, , Microsoft., , switching costs, The time, energy, and, money required to switch, from the products offered, by one enterprise to those, offered by another., , 10/25/06 2:26:52 PM

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32, , PART 1 // Managers and the Environment, , firms have been able to charge higher prices than would otherwise have been the case. On the, other hand, anything that lowers switching costs should be vie wed as a threat. In 2003 just, such a threat emerged in the wireless telephone industr y when the government allowed customers to take their phone numbers with them when they switched from one carrier to another., Prior to this legislation, the inconvenience associated with changing telephone numbers when, customers changed carriers constituted a powerful switching cost., bargaining power of, suppliers, Ability of suppliers to, bargain up prices charged, by firms in the industry or, to raise the costs of firms, in the industry by supplying, lower-quality products and, service., , ■ Intel’s, , bargaining power., , // BARGAINING POWER OF SUPPLIERS, Suppliers provide inputs to the firm. These inputs may be raw materials, partly finished products, or services. Suppliers include the employees of a f irm, who supply their skills and time, in return for pay. Whether suppliers represent an oppor tunity or threat to a f irm depends on, the extent of their control over inputs the f irm needs to function. 8 In the extreme case, where, there is only a single supplier of an impor tant input, that supplier has substantial bar gaining, power over the f irm and can use this po wer to raise input prices and increase costs. Such a, situation constitutes a threat. Managers tr y to reduce this threat b y f inding alter native, suppliers. A good example of this situation has occur red in the personal computer industr y,, where chip maker Intel has long been the dominant supplier of microprocessors to personal, computer makers. This has given Intel substantial bar gaining power over PC manufacturers, and enabled Intel to charge higher prices. Managers at PC firms have responded by encouraging Intel’s sole competitor, AMD, to increase its suppl y of microprocessors. This effort has, met with limited success. Intel’s brand loyalty among consumers is high, and their preference, for computers with Intel microprocessors has limited the ability of PC f irms to develop this, alternative supply source., Suppliers represent an oppor tunity when incumbent f irms have bargaining power over, them and can reduce the prices the y pay for inputs. As noted earlier , Wal-Mart has such, enormous bargaining power that it has been able to drive down the prices it pays suppliers for, goods and service, which increases the profitability of Wal-Mart. The bargaining power of an, enterprise over its suppliers is greater if one or more of the following conditions holds: (1) the, firm purchases in large quantities, (2) it can choose between multiple suppliers, (3) the costs, of switching between suppliers is low, and (4) the firm is not dependent on any single supplier, for important inputs., , // THE THREAT OF SUBSTITUTES, substitute products, The goods or services of, different businesses or, industries that can satisfy, similar customer needs., , hiL30123_ch02_026-053.indd 32, , Another competitive force in Porter’s model is the threat of substitute products the, : goods, or services of different businesses or industries that can satisfy similar customer needs. F or, example, firms in the coffee industry compete indirectly with those in the tea and cola drink, industries because all three ser ve customer needs for nonalcoholic caf feinated drinks. The, existence of close substitutes is a strong competiti ve threat because this limits the prices that, companies in one industry can charge for their products, and thus industry profitability. If the, price of coffee rises too much relati ve to that of tea or cola, cof fee drinkers may switch to, those substitutes., If an industry’s products have few close substitutes, so that substitutes are a weak competitive force, then other things being equal, f irms in the industr y have the opportunity to raise, prices and earn additional prof its. For example, there is no close substitute for microprocessors, which lets companies like Intel and AMD charge higher prices., Substitutes based on ne w technologies can be a par ticularly potent threat. Consider, what happened to the typewriter industry after the spread of personal computers and word, processing software during the 1980s. F rom the 1870s through the 1980s the type writer, industry enjoyed signif icant g rowth with f irms lik e Smith Corona, IBM, and Oli vetti, deriving substantial revenues from this mark et. By 1996 the industr y was dead. The last, great typewriter manufacturer, Smith Corona, went bankrupt that year and closed its doors, for good. It w as killed b y the rise of the substitute: personal computers with w ord, processing software., , 10/25/06 2:26:52 PM

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The External and Internal Environments \\ CHAPTER 2, , 33, , // THE INTENSITY OF RIVALRY, Last in Porter’s model, but by no means least, is the intensity of ri valry between firms in an, industry. Intense rivalry between incumbents, such as we currently see in the airline industry,, is a threat that reduces the profits of established enterprises. Conversely, anything that reduces, the intensity of ri valry between incumbent f irms, allowing them to raise prices and mak e, greater prof its, can be seen as an oppor tunity. A number of dif ferent factors determine the, intensity of rivalry in an industr y: the nature of the product, demand and suppl y conditions,, the cost structure of firms, and the competitive structure of the industry., The Nature of the Product Some products can be thought of as commodities or as being, commoditylike. A commodity product is one that is dif ficult to differentiate from those, produced by rivals. Pure commodities include raw materials, such as oil, natural gas, and coal,, along with many agricultural products—like wheat, corn, beef, and pork. In such cases ri val, firms’ products are close substitutes for each other , if not e xactly the same thing. Thus it, might be difficult for a consumer to distinguish between the gasoline sold by different service, stations, the w heat produced b y different f armers, and the gold from dif ferent mines. An, inability to dif ferentiate a product from those produced b y competitors can result in, competition defaulting to the lowest common denominator: price! An inability to compete on, attributes other than price tends to be a threat, because this can lead to a do wnward price, spiral and lower profits, particularly if demand conditions are weak., Managers try to deal with this threat b y finding ways to differentiate their products. This, has been a surprisingly successful strategy in some industries where the products might seem, difficult to dif ferentiate. Take the w ater industr y: In man y w ays w ater is the ultimate, commodity, yet clever marketing coupled with a little bit of natural carbonation and a slice of, French cunning has enabled Perrier to successfully differentiate its carbonated bottled water, from that produced by other enterprises., Some products that are not pure commodities, such as airline tra vel, are commoditylike, because many firms provide products that are almost identical and thus are close substitutes, for each other. Most airline passengers view, the service of competing airlines as similar, and thus choose betw een them on the basis, of price. Managers in the airline industr y, have pursued all sor ts of tactics to tr y to, differentiate their product of ferings—from, frequent fl yer pro grams to in-flight, entertainment systems—but with only, limited success. Those of ferings are often, quickly imitated b y competitors, in w hich, case competition again defaults to price., Demand and Supply Conditions If, overall, customer demand for a product or ser vice is, growing, the task environment can be viewed, as more f avorable. F irms will ha ve the, opportunity to expand sales and raise prices,, both of which may lead to higher prof its. Of, course the con verse also holds: Stagnant or, falling demand is a threat that leads to lo wer, profits. Thus falling demand for airline travel, due to an economic slo wdown and the, terrorist attacks of September 11th, 2001,, resulted in net prof its in the U .S. airline, industry of $2.49 billion in 2000 turning into, a net loss of $11.3 billion in 2002., , hiL30123_ch02_026-053.indd 33, , commodity product, A product that is difficult, to differentiate from those, produced by rivals., , Not a Commodity! By clever marketing,, Perrier has been able to differentiate its, product offering—naturally carbonated, sparkling water—to create a powerful brand, for which it can charge a premium price., Courtesy of Nestlé Waters North America, Inc., , 10/25/06 2:26:53 PM

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34, , ■ Demand, , PART 1 // Managers and the Environment, , for Boeing planes., , ■ Excess, , capacity in the, market for bandwidth., , barriers to exit, Factors that stop firms, from reducing capacity, even when demand is, weak and excess capacity, exists., , hiL30123_ch02_026-053.indd 34, , Demand trends in an industr y are determined by several factors. Among the more important are economic g rowth and rising income le vels. For example, as noted earlier , Boeing, predicts that demand for air tra vel will g row by 4.8 percent y early between 2005 and 2025., This is primarily because Boeing believes that the world economy will grow at 2.9 percent per, year over this period; income levels will rise accordingly, and as people get richer they tend to, fly more. This is good news for Boeing, which expects robust demand for commercial aircraft, over the next 20 years, with nearly 26,000 jets valued at over $2 trillion being sold. 9 It could, also be good ne ws for the beleaguered airline industr y if g rowing demand translates into, higher prices and greater profits., In addition to demand, supply conditions are also impor tant to consider. Specif ically, a, major deter minant of the intensity of ri valry in an industr y is the amount of producti ve, capacity (supply) relative to demand. If demand for the goods or services produced by firms, in an industr y exceeds capacity (suppl y) in the industr y—if a situation of excess demand, exists—prices will be bid up by consumers and rivalry will be reduced. Conversely, if supply, exceeds demand—if a situation of excess capacity exists—firms will compete vigorously for, enough sales volume to efficiently utilize their capacity, rivalry will be intense, and prices, and prof its will trend lo wer. Excess demand thus represents an oppor tunity and e xcess, capacity a threat., Between 2004 and 2006 the w orld oil market was experiencing excess demand. Demand, had expanded faster than predicted, driven partly by surging demand from the rapidly industrializing nation of China. There was insufficient readily available supply in the world to meet, this demand. So oil prices increased from around $20 a bar rel in 2003 to over $70 a barrel in, April 2006. This was a great environment for oil producers, who saw their profits surge., The market for high-speed Internet bandwidth is a good example of what can occur when, capacity exceeds demand (when there is a situation of e xcess capacity). Between 1996 and, 2001 a number of enter prises, including WorldCom, Global Crossing, XO Communications,, and 360 Networks, made multi-billion-dollar investments in fiber optic cable to carry Internet, data. These investments were made in the belief that demand for Inter net bandwidth w as, growing by 1,000 percent a year. This turned out not to be the case (it w as actually growing, by 100 percent per year), and by 2002 it was apparent that there was far too much fiber optic, cable in the g round given demand conditions (supply exceeded demand). Indeed, more than, 90 percent of all f iber optic cables were “dark”—they were transmitting no data. This excess, capacity resulted in plunging prices and triggered a wave of corporate bankruptcies. All of the, companies just mentioned went bankrupt because they could not generate sufficient revenues, to service the debt they had taken on to build their fiber optic networks., Most industries go through periods of both e xcess demand and excess capacity. A critical, thing for managers to understand is how long the excess is likely to persist because that helps, define the scale and longevity of the associated opportunity or threat. In other words, managers, need to understand how fast the market in which their organization competes adjusts and how, quickly demand and supply will be brought back into balance., The speed of the adjustment process is par tly determined by barriers to entry and barriers, to exit. We have already discussed barriers to entry. Barriers to exit the, , opposite of barriers, to entry, are factors that stop f irms from reducing capacity e ven when demand is weak and, excess capacity exists.10 Barriers to exit include (1) the f ixed costs of closing down capacity,, such as the f inancial charges that must be taken to shut down a plant and lay off employees;, (2) an unwillingness to reduce capacity due to a belief, which may be misplaced, that demand, will soon rebound; and (3) go vernment regulations, such as Chapter 11 bankr uptcy rules in, the United States, that allow insolvent enterprises to reorganize their debt and keep operating, under the protection of a bankruptcy court., F, igure 2.3 summarizes the possibilities here. If excess demand exists and barriers to entry, are high, the entry barriers will lock potential rivals out of the market, the intensity of rivalry, within the industry will remain low, and the period of plenty will persist for some time. Such, a situation represents a signif icant opportunity for the f irm. Conversely, if e xcess demand, exists but entry barriers are low, new enterprises are likely to enter the industr y, attracted by, the high prices and profits of incumbents; supply will expand and prices fall until supply and, , 11/9/06 7:37:59 PM

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The External and Internal Environments \\ CHAPTER 2, , 35, , F I G U R E 2 .3, High barriers to entry, , Excess demand, , Excess supply, (capacity), , Low barriers to entry, , Excess demand will, persist, , Excess demand will, not persist, , Significant opportunity, , Transitory opportunity, , High barriers to exit, , Low barriers to exit, , Excess capacity will, persist, , Excess capacity will, not persist, , Significant threat, , Transitory threat, , demand are brought into balance. Thus the oppor tunity associated with e xcess demand in, such a situation is transitory., If excess supply (capacity) exists but barriers to exit are low, it is likely that supply will be, quickly reduced until it is in line with demand , and the intense ri valry will be relatively shortlived. However, if excess capacity exists and barriers to exit are high, this represents a significant, threat that ma y persist for some time, with unfor tunate consequences for enter prises in the, industry. This has long been the case in the steel industry. Demand for steel in the United States, has been declining since the 1960s as other materials, including composites, plastics, and, aluminum, have replaced steel in many product applications. Excess capacity be gan to emerge, in the 1970s and has been a persistent feature of the industr y ever since, with as much as 40, percent of U.S. steel capacity standing idle at an y time. Although many steel enter prises went, bankrupt, Chapter 11 regulations allowed these companies to keep operating until they emerged, from bankruptcy protection. As a result, the e xcess capacity, did not go away fast. Not until the late 1990s and earl y 2000s, did many of the old steel companies finally shut down. Because, of these f actors, the steel industr y has been characterized b y, intense ri valry, low prices, and lo w or ne gative prof its for, years. Thus the combination of e xcess capacity and high e xit, barriers constituted a significant and persistent threat., The Cost Structure of Firms Fixed costs are those that, must be borne before a f irm makes a single sale. For illustration, before they can offer service, cable TV companies have, to lay cable in the g round; this is a f ixed cost. Similarl y, to, offer air express service a company like FedEx has to invest in, planes, package sor ting facilities, and delivery trucks. These, are fixed costs that require signif icant capital investments. In, industries where the fixed costs of production are high, if sales, volume is lo w, f irms cannot cover their f ixed costs and will, not be profitable. This creates an incentive for firms to cut their, prices and increase promotion spending to raise sales v olume,, thereby covering f ixed costs. In situations w here demand is, not growing fast enough and too many companies are cutting, prices and raising promotion spending, the result can beintense, competition and lower profits.11 Thus high f ixed costs should, be viewed as a threat, par ticularly when combined with weak, demand conditions or excess capacity., , hiL30123_ch02_026-053.indd 35, , Adjustment Processes, , ■ Exit, , barriers in the steel, industry., , fixed costs, The costs that must be, borne before the firm, makes a single sale., , Fixed Costs! These workers are laying fiber optic cables, in the ground. A communication company has to lay tens of, thousands of miles of such cable before it can offer highspeed Internet service—a process that can cost hundreds of, millions if not billions of dollars., © Getty Images., , 10/25/06 2:26:54 PM

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36, , ■ Reducing, , PART 1 // Managers and the Environment, , fixed costs at, , Cisco., , competitive, structure, The number and size, distribution of incumbent, firms in an industry., fragmented industry, An industry with many, small or medium-sized, companies., consolidated, industry, An industry dominated by, a few large companies., , ■ Blockbuster, , Video:, Consolidating a fragmentary, industry., , hiL30123_ch02_026-053.indd 36, , Managers often look for w ays to reduce the threat associated with high f ixed costs. One, strategy involves trying to push off high fixed costs onto another organization. Cisco Systems,, the world’s largest producer of routers (the computer switches at the heart of the Internet that, direct traffic), has signif icantly reduced its f ixed costs by outsourcing much of the manuf acturing of its routers to independent contract manufacturers. Cisco concentrates on the design,, marketing, sales, and suppor t functions of the business, all of w hich have low f ixed costs., Another strategy involves developing new methods of production that have lower fixed costs., In the automobile industr y, for e xample, Toyota has pioneered the de velopment of ne w, flexible production technologies that have much lower f ixed costs than the traditional mass, production methods used in the industry. This has reduced the threat associated with having a, high fixed cost structure and weak demand conditions.12, Competitive Structure The competitive structure of an industry is the number and size, distribution of incumbent f irms. Industr y str uctures v ary, and dif ferent str uctures ha ve, different implications for the intensity of rivalry. A fragmented industry consists of many, small or medium-sized companies, none of which is in a position to determine industry price., A consolidated industry is dominated b y a fe w large companies (an oligopol y) or in, extreme cases by just one company (a monopoly); here companies often are in a position to, determine industr y prices. Examples of fragmented industries include ag riculture, dr y, cleaning, and radio broadcasting. Consolidated industries include the aerospace, soft drink,, and the small package express industries., Fragmented industries are characterized b y low entry barriers and commodity products, that are hard to differentiate. The combination of these traits tends to result in boom and bust, cycles as industr y prof its rise and f all. Low entry barriers imply that whenever demand is, strong and prof its are high, ne w entrants will flood the mark et, hoping to prof it from the, boom. The explosion in the number of video stores, health clubs, and sun tanning parlors, during the 1980s and 1990s exemplifies this situation. Often the flood of new entrants into a, booming fragmented industry creates excess capacity, so f irms cut prices to use their spare, capacity. The difficulty firms face when trying to differentiate their products from those of, competitors can exacerbate this tendency. The result is a price war, which depresses industry, profits, forces some companies out of business, and deters potential ne w entrants. F or, example, after a decade of expansion and booming profits, many health clubs are now finding, that they have to offer large discounts to hold their members. In general, the more commoditylike an industry’s product is, the more vicious will be the price w ar. This bust part of the, cycle continues until o verall industry capacity is brought into line with demand , at w hich, point prices may stabilize again., In general, a fragmented industry structure constitutes a threat rather than an opportunity., Most booms are relati vely shor t-lived because of the ease of ne w entr y; the y will be, followed by intense price competition and bankr uptcies. Because it is often dif ficult to, differentiate products in these industries, the best strategy for managers is to try to minimize, costs so their enter prises will be prof itable in a boom and sur vive any subsequent bust., Alternatively, managers might try to adopt strategies that change the underlying structure of, fragmented industries and lead to a consolidated industr y structure in w hich the le vel of, industry prof itability is increased. For example, at one time the video rental industr y was, very fragmented and characterized b y many small independent video rental stores. In the, 1990s, however, managers at two firms, Blockbuster and Hollywood Video, pursued strategies that consolidated the industry. They built national brands though aggressive marketing,, gained a dif ferential advantage over their competitors b y offering a wide a vailability of, popular videos in large stores, and as they grew were able to use their bargaining power to, drive down the costs the y paid f ilm studios for videos. In other w ords, by their choice of, strategies, managers at Blockbuster and Holl ywood Video transfor med the industr y, structure, making it more favorable., In consolidated industries firms are interdependent because one firm’s competitive actions, or moves (with re gard to price, quality , and so on) directl y affect the mark et share of its, , 10/25/06 2:26:55 PM

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The External and Internal Environments \\ CHAPTER 2, , 37, , rivals and thus their prof itability. When one f irm makes a mo ve, this generall y forces a, response from its ri vals. The consequence of such interdependence can be a dangerous, competitive spiral. Rivalry increases as firms attempt to undercut each other’s prices or offer, customers more value in their products, pushing industr y prof its down in the process. The, fare w ars that ha ve periodicall y created ha voc in the airline industr y pro vide a good, illustration of this process. Similarl y, in the automobile industr y if General Motors of fers, discounts to try to sell more cars (zero rate f inancing and cash-back rebates, for e xample),, this will hurt the sales of Ford, which then has to respond in kind or lose market share., Competitive interdependence in consolidated industries is thus a threat. Managers often, seek to reduce this threat b y pursuing strate gies to dif ferentiate their products from those, offered by rivals, thereby making demand less vulnerable to price cuts by rivals. In the automobile industry firms try to differentiate their offerings by styling and quality. This has worked for, Toyota, whose reputation for superior quality has insulated the f irm from price competition;, but it has not w orked for Ford and GM, w hose products are seen b y consumers as roughl y, equivalent to each other., , // A SIXTH FORCE: COMPLEMENTORS, Although Porter’s model is based on five forces, many observers believe that a six force is also, complementors, important: complementors.13 Complementors are firms that provide goods or services that, are complementary to the product produced b y enter prises in the industr y. For example, a, Firms providing goods or, complementary product for video game consoles such as the Son y PS2 and Microsoft Xbox, services that are, are the games themselves. Complementors to Sony and Microsoft include independent f irms, complementary to the, that produce video g ames such as Electronic Arts and Activision. Complementors can be, product produced by, important drivers of demand conditions in some industries.14 Demand for video game consoles, enterprises in the industry., depends on a good suppl y of games from independent f irms. Similarl y, demand for the, SoundDock speaker system produced b y Bose (a set of po werful high-quality speakers that, can play music from an Apple iPod) depends on the installed base of iPods. As more iPods are, sold, demand increases for the speaker system produced by Bose., As suggested by these examples, in industries w here complements are impor tant, strong, complementors that make products consumers demand represent a substantial opportunity for, a f irm to increase its o wn revenues. Conversely, weak complementor product of ferings can, constitute a signif icant threat to a f irm. In the earl y 2000s, for e xample, Sega introduced a, ■ Complementors for, powerful video g ame console, the Dreamcast, ahead of both Son y’s PS2 system and, Microsoft’s Xbo x. But demand for the Dreamcast w as w eak because there w ere fe w Microsoft and Sony., compelling games to play on the machine, and in the end Se ga was forced to withdra w its, console from the market., , // SYNTHESIS, F, igure 2.4 summarizes the various elements we have discussed so far. When analyzing the task, environment using P orter’s f ive forces model (or six forces if complementors are included),, remember that the forces interact with each other, and some forces may be more important than, others depending on the industr y setting. Managers need to look at the big picture w hen trying, to understand the competitive forces that determine the nature of rivalry in their industry., For example, the task environment confronting a firm may be particularly challenging if its, industry is characterized b y commoditylike products, po werful buyers with lo w switching, costs who can bargain down prices, powerful suppliers who can raise input costs (or stop them, from being reduced), high f ixed costs, weak demand conditions, e xcess capacity, and easy, new entr y. These were the conditions pre vailing in the airline industr y between 2001 and, 2005, and the results were awful for many firms in this industry. Conversely, if an industry is, characterized b y dif ferentiated product of ferings, relati vely w eak buy ers w ho f ace high, switching costs, an absence of powerful suppliers and substitutes, low fixed costs, high entry, barriers, few rivals, and steady demand growth, it will be favorable for incumbent enterprises., Microsoft, of course, f aces just such an en vironment in the mark et for computer operating, , hiL30123_ch02_026-053.indd 37, , 10/25/06 2:26:55 PM

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38, , PART 1 // Managers and the Environment, , • Number of suppliers, • Choice, • Switching costs, , Threat of entry, , • Entry barriers, • Scale, • Brand, , Power of, suppliers, , Power of, buyers, Intensity of, rivalry, , • Demand and supply conditions, • Competitive structure, • Fixed costs, • Nature of product, • Exit barriers, , Substitutes, , • Availability, • Price, • Switching costs, , FIG UR E 2 .4, , ■ FedEx, , reduces buyer, , power., , • Number of buyers, • Choice, • Switching costs, , Complements, , • Availability, • Price, , Forces in the Task Environment, systems and of fice productivity software (such as Microsoft Of fice). Not sur prisingly, the, firm’s performance has been very strong., The power of this approach lies not only in the identification of opportunities and threats, in the task environment, but also in the help it gi ves managers when thinking through the, various strategies they might pursue to tak e advantage of oppor tunities, and to counter, threats, to better attain the goals of their enter prise. For example, an industr y analysis by, managers at FedEx during the early 1990s concluded that buyers were powerful due to low, switching costs and their perception that the offerings of FedEx and UPS were similar. The, same analysis revealed growing demand from cor porate customers who wanted FedEx to, take over their logistics operations, shipping components between different manufacturing, locations and finished goods to retailers. The managers at FedEx saw this as an opportunity, to pursue a dif ferent strategy that would add value to their product of fering and increase, switching costs. Specifically, FedEx managers realized that they could use their network to, offer logistics ser vices to customers, and that once customers had inte grated their o wn, operations with those of F edEx, it w ould be more dif ficult for them to s witch—thereby, reducing their tendency to periodically use the threat of s witching as a de vice for getting, volume discounts. This strategy has been successful for both F edEx and for UPS allowing, both firms to increase revenues and profits., , // The General Environment, The general en vironment is the lar ger environment within w hich the task en vironment is, embedded. It includes political and legal forces, macroeconomic forces, demographic forces,, sociocultural forces, technological forces, and inter national forces. Elements in the general, environment impact the or ganization through the medium of the task en vironment. That is,, , hiL30123_ch02_026-053.indd 38, , 10/25/06 11:31:27 PM

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The External and Internal Environments \\ CHAPTER 2, , 39, , the general environment helps shape the task environment, thus determining the magnitude of, the opportunities and threats confronting the organization. The general environment is remote, and less easy to shape than the task environment, but it is no less important., , // POLITICAL AND LEGAL FORCES, Political and legal forces are the result of changes in la ws and re gulations. Political, processes shape a society’ s laws, which constrain the acti vities of or ganizations and thus, create both oppor tunities and threats. 15 For example, throughout much of the industrialized, world during the last 20 years there has been a strong trend toward deregulation of industries, and the pri vatization of or ganizations once o wned b y the state. In the United States, deregulation of the airline industr y in 1979 allo wed 29 ne w airlines to enter the industr y, between 1979 and 1993. The increase in passenger carrying capacity after deregulation led to, excess capacity on many routes, intense competition, and fare wars., The interplay between political and legal forces and industry competitive forces is a twoway process in w hich the government sets regulations that influence competiti ve structure,, and firms in an industr y often seek to influence the re gulations that governments enact. For, example, in 2002 the United States Steel Industr y Association w as a prime mo ver in, persuading President Bush to impose a 30 percent tarif f on imports of foreign steel into the, United States. The purpose of the tarif f was to protect American steelmakers from foreign, competitors, thereby reducing the intensity of rivalry in the U.S. steel market., Industry-specific regulators are an impor tant and often overlooked aspect of the general, environment of many firms. Industry-specific regulators are government agencies with, responsibility for for mulating, interpreting, and implementing r ules specif ic to a par ticular, industry. These rules shape competition in an industr y; thus government regulators can have, a profound impact on the intensity of competition in a firm’s task environment and on the opportunities and threats confronting its managers. Some important industry-specific regulators, include the Federal Drug Administration (which has to approve all new drugs for marketing),, the Federal Communications Commission (which licenses firms to offer communication services), and the Federal Aviation Authority (which regulates the airline industry)., For an e xample of the influence e xerted b y industr y re gulators, consider the F ederal, Communications Commission (FCC), w hich licenses companies to deli ver communication, services. In 1997 the FCC created a huge oppor tunity when it ag reed to allow f irms to offer, satellite radio service. The FCC set up an auction, and the tw o highest bidders in the auction,, Sirius and XM Radio, were granted exclusive licenses to offer satellite radio in the United States, until 2012. By 2005 over 5 million people were subscribing to satellite radio services, and demand, was growing rapidly. Although those licenses will probably be renewed, the FCC could transform, this opportunity into a threat for XM Radio and Sirius if it decides to of fer additional licenses in, the future, thereby increasing the number of satellite radio providers and competitive intensity in, the market. Note that this decision to license tw o satellite radio operators has been a threat to, established terrestrial radio stations, which face new competition from satellite radio firms., Managers try to influence industry-specific regulators, lobbying both them and the politicians who oversee the regulators to get them to introduce legislation that is in the interests of, the f irm. When the FCC w as considering w hether to license spectr um to satellite radio, providers, for e xample, established radio companies, w ho correctly saw satellite radio as a, threat to their business, lobbied the FCC, arguing that it would be a mistake to allow satellite, radio because that w ould lead to the demise of sociall y v aluable local radio ser vices.16, Fortunately for satellite radio firms, these efforts were not successful., , // MACROECONOMIC FORCES, Macroeconomic forces affect the general health and well-being of a national or the regional, economy, which in turn affect the prof itability of f irms within that economy. Four important, factors in the macroeconomic environment are the growth rate of the economy, interest rates,, currency exchange rates, and inflation (or deflation) rates. Economic growth, because it leads, , hiL30123_ch02_026-053.indd 39, , political and legal, forces, Industry changes resulting, from changes in laws and, regulations., , industry-specific, regulators, Government agencies with, responsibility for, formulating, interpreting,, and implementing rules, specific to a particular, industry., , ■ Government, , regulator,, Sirius, and XM Radio., , macroeconomic, forces, Forces that affect the, general health and wellbeing of a national or the, regional economy, which in, turn affect the profitability, of firms within that, economy., , 10/25/06 2:26:56 PM

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40, , PART 1 // Managers and the Environment, , to an expansion in customer expenditures, tends to produce, a general easing of competiti ve pressures within an, industry. This lets f irms expand their operations and ear n, higher prof its. Because economic decline (a recession), leads to a reduction in customer e xpenditures, it increases, competitive pressures. Economic decline frequently causes, price w ars in mature industries w hose products are, commoditylike and where buyers are powerful., The level of interest rates can deter mine demand for a, firm’s products. Interest rates are impor tant w henever, customers routinely borrow money to finance their purchase, of products. The most ob vious e xample is the housing, market, w here mor tgage rates directl y af fect demand., Interest rates also af fect the sale of autos, appliances, and, capital equipment, to give just a few examples. For firms in, Interest-Sensitive Product Demand for housing is, such industries, rising interest rates are a threat and f alling, influenced by the level of interest rates of mortgage loans., rates an opportunity., Interest rates are influenced by the policy of the Federal, Currency exc hange r ates def ine the v alue of dif ferent, Reserve, which adjusts interest rates on government debt in, national, cur rencies ag ainst each other . Mo vement in, response to economic conditions. When the economy is, currency, exchange rates has a direct impact on the demand, weak, the Federal Reserve lowers interest rates to stimulate, for, a, f, irm’s, products in the global mark etplace. Between, demand, and vice versa., 2002 and 2004 the dollar fell in v alue against the euro, the, © The McGraw-Hill Companies, Inc./John Flournoy, photographer, currency used b y many members of the European Union., The result was to make U.S. products cheaper in Europe. In, general, a low or declining dollar reduces the threat from, foreign competitors while creating opportunities for increased foreign sales. Conversely, a rising, demographic forces, dollar can be a threat because it makes U.S. products more expensive, which can hurt sales., Outcomes of changes in, Price inflation can destabilize the econom y, producing slower economic g rowth, higher, the characteristics of a, interest, rates, and v olatile cur rency movements. If inflation k eeps increasing, in vestment, population, such as age,, planning, becomes hazardous. The key characteristic of inflation is that it makes the future less, gender, ethnic origin, race,, predictable., In an inflationary environment it may be impossible to predict with any accuracy, sexual orientation, and, the, real, value, of returns that can be earned from a project f ive years hence. Such uncertainty, social class., makes f irms less willing to in vest. In tur n, low investment depresses economic activity and, ultimately pushes the econom y into a slump. Thus high, inflation is a threat to organizations., , // DEMOGRAPHIC FORCES, , The Shape of Things to Come Demographic trends strongly, suggest that the population of the United States will get older, over the next few decades, driving demand for goods and, services that cater to older people., © Keith Brofsky/Getty Images., , hiL30123_ch02_026-053.indd 40, , Demographic forces are outcomes of changes in the, characteristics of a population, such as age, gender, ethnic, origin, race, sexual orientation, and social class. Lik e the, other forces in the general en vironment, demo graphic, forces present managers with oppor tunities and threats, and can ha ve major implications for an or ganization., Changes in the age distribution of a population represent, an example of an important demographic force. Currently, most industrialized nations are experiencing the aging of, their populations as a consequence of f alling bir th and, death rates and the aging of the baby boom generation. In, Germany the percentage of the population o ver age 65 is, expected to rise from 15.4 percent in 1990 to 20.7 percent, in 2010. Comparab le f igures for Canada are 11.4 and, 14.4 percent; for Japan, 11.7 and 19.5 percent; and for the, United States, 12.6 and 13.5 percent.17, , 11/9/06 7:38:00 PM

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The External and Internal Environments \\ CHAPTER 2, , The aging of the population is increasing oppor tunities for f irms that cater to older, people; the home health care and recreation industries are seeing an ups wing in demand, for their services. As the baby boom generation from the late 1940s to the early 1960s has, aged, it has created a host of opportunities and threats. During the 1980s many baby boomers were getting mar ried and creating a sur ge in demand for the appliances nor mally, bought for first households. Companies such as Whirlpool Corporation and General Electric capitalized on the resulting demand for w ashing machines, dishwashers, dryers, and, the like. In the 1990s man y of these same bab y boomers were starting to save for retirement, creating an inflow of money into mutual funds and a boom in the mutual fund industry. In the next 20 years many of these same baby boomers will retire, increasing demand, for retirement communities., , 41, , sociocultural forces, The way in which changing, social mores and values, affect an industry., , // SOCIOCULTURAL FORCES, Sociocultural forces refer to the way in which changing social mores and v alues affect, an industry. Like the other forces discussed here, social change creates oppor tunities and, threats. One major social mo vement of recent decades has been a trend to ward g reater, health consciousness. Its impact has been immense. Firms that recognized the opportunities, early have often reaped signif icant gains. PepsiCo was able to gain mark et share from its, rival Coca-Cola by being the f irst to introduce diet cola and fr uit-based soft drinks. At the, same time the health trend has created a threat for man y industries. The tobacco industry,, for example, is in decline as a direct result of g reater customer a wareness of the health, implicationsof smoking., , // TECHNOLOGICAL FORCES, Over the last centur y the pace of technolo gical change has accelerated. 18 This has, unleashed a process that has been called a “perennial g ale of creative destruction.”19, Technological change can mak e estab lished products obsolete o vernight and, simultaneously create a host of new product possibilities. Thus technological change, is both creative and destructive—both an opportunity and a threat., One of the most important impacts of technological change is that it can affect the, height of bar riers to entr y and therefore radicall y reshape industr y str ucture. The, pervasive Internet has changed the competiti ve structure of many industries. It has, lowered entry barriers and reduced customer switching costs, increasing the intensity, of rivalry in many industries and lowering both prices and profits.20 For example, the, Internet has lowered barriers to entr y into the ne ws industry. Providers of f inancial, news no w ha ve to compete for adv ertising dollars and customer attention with, new Internet-based media or ganizations that sprang up during the 1990s such as, TheStreet.com, the Motle y Fool, and Yahoo’s f inancial section. The increase in rivalry has given advertisers more choices, enabling them to bargain down the prices, they pay to media companies. Similarl y, in the automobile industr y, the ability of, customers to comparison-shop for cars online and purchase cars online from a number of distributors such as Auto Nation has increased customers’ ability to f ind the, best values. Customers’ increased bargaining power enables them to put do wnward, pressure on car prices and squeeze profits out of the automobile industry., , ■ TheStreet.com:, , Beneficiary, of technological change., , The Mad Man of Wall, Street In 1997 the iconoclastic, Jim Cramer founded TheStreet., com, an online financial news, site to compete with established, print media such as The Wall, Street Journal and Investors, Business Daily. Online sites like, TheStreet.com have increased, rivalry in the market for financial, information and commentary,, making it harder for established, news organizations to capture, advertising dollars., Courtesy of TheStreet.com, Inc., , // INTERNATIONAL FORCES, The last half century has witnessed enormous changes in the world economic system., We review these changes in detail in the ne xt chapter w hen we discuss the global, environment. For now the impor tant points to note are that bar riers to inter national, trade and in vestment ha ve tumb led, and an increasing number of countries are, , hiL30123_ch02_026-053.indd 41, , 10/25/06 2:26:58 PM

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42, , PART 1 // Managers and the Environment, , enjoying sustained economic growth. Economic growth in places like Brazil, China, and India, is creating lar ge new markets for goods and ser vices, giving enter prises an oppor tunity to, profit by entering these nations. F alling barriers to inter national trade and in vestment have, also made it much easier to enter foreign nations. F or example, 20 years ago it w as almost, impossible for a Western company to set up operations in China. Today Western and Japanese, companies are investing over $50 billion a year in China. By the same token, however, falling, barriers to inter national trade and in vestment have made it easier for foreign enter prises to, enter the domestic markets of many firms (by lowering barriers to entry), thereby increasing, the intensity of competition and lo wering prof itability. Because of these changes, man y, formerly isolated domestic markets have now become part of a much larger, more competitive, global marketplace, creating myriad threats and opportunities for firms. We will return to this, topic in detail in the next chapter., , // Dynamic Changes in the External Environment, It should be clear from the discussion so f ar that the e xternal environment confronting, managers is not stable. Indeed, the opposite is the nor m. Elements of the general and task, environments are always changing. Changes in the general en vironment, such as those in, regulations, macroeconomic trends, demo graphics, social mores, or technolo gy, impact, the nature of competition in a f irm’s task environment. For example, new technology and, deregulation can lo wer bar riers to entr y into an industr y and increase the intensity of, competition. Similarl y, strong economic g rowth and f alling interest rates can lead to, greater customer demand in the task en vironment, whereas an economic recession and, climbing interest rates may result in a contraction in demand., Even when the general environment is relatively stable, changes in the task en vironment, can still occur . By their o wn actions f irms can change the nature of competition in their, industries. Price cutting b y one f irm can spark a price w ar; introduction of a ne w product, might spur greater demand growth; bankruptcy of marginal players in the industry can reduce, capacity and create a more favorable competitive environment; and so on., , // INCREMENTAL VERSUS DISCONTINUOUS CHANGE, incremental change, Changes that do not alter, the basic nature of, competition in the task, environment., discontinuous, change, Change that fundamentally, transforms the nature of, competition in the task, environment., ■ Discontinuous, , change in, the music industry., , hiL30123_ch02_026-053.indd 42, , Managers must address two types of external environmental change: incremental change and, discontinuous change. Incremental change refers to changes that do not alter the basic, nature of competition in the task en vironment. Most task environments are characterized by, ongoing incremental change. Demand might accelerate or decelerate in response to changes, in the macroeconom y; competition ma y be more or less intense depending on the balance, between demand and capacity; the entry of a new competitor might increase competition; and, the bankruptcy of a competitor might reduce competiti ve pressures. Such changes, although, not trivial, do not fundamentally alter the nature of competition., A discontinuous change is one that fundamentall y transforms the nature of competition in the task environment. Discontinuous changes are normally triggered by discrete events,, such as the emergence of a powerful new technology that changes the basis of competition, or, substantial changes in the regulations governing an industry. Discontinuous changes are often, characterized by the emer gence of ne w competitors and , in man y cases, b y the decline of, long-established enterprises that cannot adapt to the ne w environment (a primary reason for, such failure to adapt is organization inertia, which we consider in Chapter 18)., The g rowth of the Inter net, for e xample, when coupled with the de velopment of small, portable music players such as Apple’s iPod, may now be ushering in a period of discontinuous, change in the music industr y. Increasingly music is being do wnloaded over the Inter net, as, opposed to being purchased at retail stores.This is hurting music retailers. Illegal downloading, over the Inter net has depressed the sales of music labels. The rise of le gal sales through, services such as Apple’s iTunes may also be a mixed blessing for music companies: Customers, can purchase individual songs and no longer have to purchase the dud “f iller tracks” that are, , 11/9/06 7:38:01 PM

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The External and Internal Environments \\ CHAPTER 2, , 43, , included on many CDs. In the long run these developments may lead to a lower sales base for, music publishing companies and a decline in the number of music retailers with ph ysical, stores. This is definitely not business as usual for music companies!And that is the essence of, discontinuous change—it represents a sharp break from business as usual., Most task environments seem to go through long periods of relative stability, when changes, are incremental in nature, punctuated b y shor t periods of discontinuous change w hen the, nature of competition is revolutionized, often by the arrival of new technology or a significant, change in government regulations. This process is referred to as punctuated equilibrium.21, The computer industry provides a classic example. During the 1960s and 1970s the industr y, was dominated by manufacturers of large computers such as IBM. In the mid-1980s personal, computer technology revolutionized the industry. IBM lost its market dominance, and several, new competitors, most notably Microsoft and Intel, grew with the new technology and seized, industry leadership. For a period during the late 1980s and early 1990s the industry once again, became stable. Then in the mid-1990s the Internet ushered in another period of revolutionary, change. Although Microsoft and Intel survived with their dominance intact, several enterprises, took adv antage of this period to substantiall y g row their businesses. Most notab ly, Dell, harnessed the power of the Internet to manage both its customer interface and its supply chain,, driving down its costs in the process and gaining significant revenues at the expense of other, computer manufacturers. The industry has been relati vely stable since 2000, and change is, once more incremental., Incremental change is something that managers must learn to handle because all industries, are characterized b y this. Coping with discontinuous change is f ar more prob lematic and, requires actions of an entirely different order. We discuss managing change and innovation in, detail in Chapter 18., , punctuated, equilibrium:, A view of industry, evolution asserting that, long periods of equilibrium, are punctuated by periods, of rapid change when, industry structure is, revolutionized by, innovation., , ■ Punctuated, , equilibrium in, the computer industry., , // ENVIRONMENTAL UNCERTAINTY, To complicate the manager’s life, not only is the external environment constantly changing, but, the nature of change is frequently difficult to predict. The world is characterized by significant, uncertainty, which in this conte xt means an inability to predict with accurac y the nature,, magnitude, timing, and direction of change in the en vironment. Managers typicall y seek to, reduce the amount of environmental uncertainty they face by collecting more information and, by trying to exert some control over the environment.22, Collecting Information By collecting information about different aspects of the environment, they face, managers hope to reduce uncertainty, increase their knowledge, and thus make better, decisions. However, although uncertainty can be reduced by collecting more information, it can, never be eliminated altogether. The world is an inherently uncertain and unpredictable place., The best that can be hoped for is to reduce the uncertainty to some manageable level., Collecting infor mation can in volve a number of tactics. Market research can impro ve, managers’ knowledge about customer needs and preferences, enab ling them to better predict, future demand trends. Boeing’ s mark et research g roup, for e xample, routinel y talks to, customers about their o wn plans as a w ay of tr ying to gauge future customer demand for, commercial aircraft, thereb y reducing the uncer tainty associated with demand projections., Competitive intelligence can be gathered to better understand w hat competitors are doing., Thus Boeing carefully tracks the f inancial performance, investments, and strategic decisions, of its global ri val Airbus to better understand w hat Airbus is planning and to predict ho w, Airbus will react to Boeing strate gic initiatives, thereby reducing the uncer tainty associated, with such initiati ves. Managers might also meet with industr y-specific regulators to better, anticipate what they might do in the future. Again consider Boeing: Managers at the company, may talk with the F ederal Aviation Authority (FAA) to predict ho w FAA regulations might, affect aircraft design. In a f amous example, when the company was building the Boeing 777, (the first wide-bodied long-haul jet to have only two engines), Boeing’s managers consulted, regularly with the FAA to make sure the agency would certify the aircraft for long-distance, flights over the world’s oceans (until the 777, onl y aircraft with four engines had been thus, , hiL30123_ch02_026-053.indd 43, , uncertainty, An inability to predict with, accuracy the nature,, magnitude, timing, and, direction of change in the, environment., , ■ Boeing:, , Collecting, infromation to reduce, uncertainty., , 10/25/06 2:26:58 PM

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44, , PART 1 // Managers and the Environment, , certified). In other w ords, b y consulting with the F AA,, Boeing’s managers reduced the uncer tainty associated with, this aspect of the task environment., Exerting Control In addition to collecting infor mation,, managers try to reduce the en vironmental uncertainty they, face by increasing their ability to exert control over it.23 Various strategies can be used to do this. F or example, facing, uncertainty about the future trajector y of technolo gy in an, industry, incumbent enterprises often acquire or partner with, smaller enter prises that are de veloping ne w technolo gy,, thereby tr ying to e xercise some control o ver the de velopment of that technolo gy. Cisco Systems, the w orld’s largest, manufacturer of Inter net routers, is f amous for doing this., Cisco has a long history of acquiring smaller enterprises that, Multiple Acquirer Cisco Systems, the maker of Internet, are de veloping technolo gy that might possib ly supersede, routers, has reduced the technological uncertainty it faces in, Cisco’s o wn technolo gy. If that technolo gy subsequentl y, its environment by acquiring smaller enterprises that are, turns out to be an impro vement, Cisco is often the f irst to, developing new router technology., incorporate it. By making such acquisitions Cisco reduces, © Getty Images., the uncertainty associated with technological change., More generally, f irms use a v ariety of means to control, their environments. They may acquire, merge with, or collaborate with competitors, thereb y, reducing the uncer tainty associated with competiti ve rivalry. For example, the earl y 1990s, saw considerable uncertainty over which technology would be used in D VDs. Rather than, compete with each other b y de veloping dif ferent and incompatib le v ariations of D VD, technology, leading consumer electronics f irms formed an industry association known as the, DVD Forum. Through the DVD Forum they established a common standard., ■ Cisco Systems: Making, Similarly, to reduce uncertainty firms may acquire distributors, key suppliers, or important, acquisitions to control, complementors to increase their control o ver them. To make sure there w ould be sufficient, technology., compelling games to accompany its Xbox video game console (that is, to reduce the uncer tainty associated with the supply of games) in 2000 Microsoft acquired an important complementor, Bungie Studios. At the time Bungie w as working on a science f iction game, Halo ., After the acquisition Halo was developed exclusively for the Xbox, and the popularity of this, game (and its successor, Halo 2) helped drive demand for the Xbox against its rival, the Sony, PS2. Firms also enter cooperative ventures with distributors, suppliers, or complementors to, exert similar control over the environment., , // The Internal Environment, In addition to the external environment, managers also face the internal environments of their, own organizations. As noted in the chapter introduction, the internal environment includes the, organization of the firm (its structure, culture, controls, and incentives), its employees (human, capital), and its resources (tangib le and intangible assets). Each of these elements can be a, strength, enabling managers to attain the goals of the enter prise, or a weakness that makes it, more difficult for managers to w ork productively toward attaining enter prise goals. When, managers analyze the internal environment of their f irm, they often do so b y identifying its, strengths and weaknesses. This inward focus complements the identification of opportunities, and threats in the external environment. Taking such an inventory (a SWOT analysis) can help, managers develop strategy., , // INTERNAL ORGANIZATION, The internal organization of a f irm can create an environment that is easy or difficult to work, in. It might be an enlightened meritocracy that offers a host of opportunities for advancement,, rewards skilled and creati ve managers, and fosters high producti vity; or it might be an iner t, , hiL30123_ch02_026-053.indd 44, , 10/25/06 2:26:59 PM

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The External and Internal Environments \\ CHAPTER 2, , bureaucracy that punishes those w ho advocate change, rewards only those who promote the, status quo, and inhibits the attainment of producti vity. The inter nal environment can be a, liberating place that lets a manager reach his or her full potential, or it can be stifling. It can be, a place w here it is easy to do good things or w here it is hard to do an ything. It can also be, changed by the actions of managers. Managers can transform their firms from dull bureaucracies, into progressive meritocracies. Unfortunately the opposite can happen too: Bad managers have, taken over good organizations and left them in worse shape than they found them in!24, It is common to think of the internal organization of a firm in terms of its organizational, culture—the basic patter n of v alues and assumptions shared b y emplo yees within an, organization.25 As important as organizational culture is, the organization comprises far more, than culture. It is also determined by the structure of the organization, its control systems, its, incentives, and the kind of people who work there. Collectively we refer to structure, controls,, incentives, and culture as aspects of the organization architecture of a f irm. We discuss the, basic elements of or ganization architecture in detail in Chapters 8 through 11. F or now,, however, remember that each of these elements is critical in deter mining the kind of place in, which a manager works., Culture is important because the shared values and assumptions of an or ganization influence what a manager can and cannot do, as well as what is encouraged or discouraged by the, organization. Str ucture def ines who has responsibility for w hat in an or ganization, where, power and influence are concentrated in an organization, and thus whose support is critical for, getting things done. Controls and incenti ves tell the manager w hat kind of beha vior the, organization expects, what is being tracked, and what will be rewarded. If a manager is going, to get things done in an or ganization, he or she must f igure out how the organization works,, how decisions get made, and w hat to do to e xert influence. To be successful, and to handle, external environmental challenges, the manager must understand the inter nal organization in, which he or she is based., Although we discuss internal organization in more detail later in the book, tw o points are, of note now. First, the internal organization of an enter prise can be a strength or a w eakness., An internal organization that encourages and rewards high productivity and enables managers, to respond rapidl y to e xternal oppor tunities and threats can be considered a strength., Conversely, an internal organization that inhibits productivity and is characterized by political, infighting and inertia forces can be considered a weakness., Second, just as managers can pursue strate gies to tak e advantage of oppor tunities and, counter threats in the external environment, they can also pursue strategies to build on organizational strengths and counter w eaknesses. For example, when Jack Welch became CEO of, General Electric in 1981, a position he held until 2001, he quickl y realized that the inter nal, organization of GE was a weakness. Among other things, he thought it w as too centralized,, bureaucratic, and hierarchical, with f ar too man y layers of management (on average there, were 11). His strategy for the organization was to delayer (reducing the number of management layers to as few as four), decentralize responsibility for operating and strategic decisions, to self-contained business di visions, and create positi ve incentives for managers to pursue, strategies that boosted productivity and profit growth. Over time this change in internal organization had the desired effect, and what had been a weakness became a strength., , 45, , organizational, culture, The basic pattern of values, and assumptions shared by, employees within an, organization., , ■ Organizational, , weaknesses, , at GE., , // EMPLOYEES (HUMAN CAPITAL), The employees of an enterprise can be a source of sustained competitive advantage, or they, can represent a weakness. Employees constitute what economists call the human capital, of an organization, by which they mean the knowledge, skills, and capabilities embedded in, individuals. Human capital is a crucial source of productivity gains and economic growth.26, Stanford Business School Professor Jef fery Pfeffer has ar gued that people are the most, important source of sustainable competitive advantage.27 Hire the right people, train them, well, create an inter nal organization that allows them to full y express their potential, and, reward them appropriatel y by putting the right incenti ves in place, and the f irm will be, rewarded by superior perfor mance. By the same tok en, if employees lack the kno wledge,, , hiL30123_ch02_026-053.indd 45, , human capital, The knowledge, skills, and, capabilities embedded in, individuals., , 10/25/06 2:26:59 PM

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46, , ■ Building, , PART 1 // Managers and the Environment, , human capital at, , Microsoft., , resource-based view, A view that resources of, an enterprise can be a, source of sustainable, competitive advantage., resources, Assets that managers have, to work with in their quest, to improve the, performance of an, enterprise., tangible resources, Physical assets, such as, land, buildings, equipment,, inventory, and money., intangible resources, Nonphysical assets that, are the creation of, managers and other, employees, such as brand, names, the reputation of, the company, processes, within the firm for, performing work and, making decisions, and the, intellectual property of the, company, including that, protected through patents,, copyrights, and, trademarks., ■ Aramco’s, , valuable, , resources., , hiL30123_ch02_026-053.indd 46, , skills, capabilities, and moti vation to w ork producti vely and pursue oppor tunities for, improving perfor mance, Pfeffer’s arguments suggest that this can constitute a source of, competitive disadvantage., The strategy of Microsoft illustrates the role of people in building a successful enter prise., Microsoft has always tried to hire the best and the brightest, to re ward them for high performance through incenti ve-based pay (stock options and g rants), and to gi ve them plenty of, opportunities for expressing their potential. Over the years this strategy made people a unique, strength for Microsoft. This produced signif icant gains, enabling the company to make and, effectively market a range of software products that became industr y standards (specif ically, Windows and Office). In recent years, however, it has become more difficult for Microsoft to, execute this strategy. Today many of the best and brightest are going to w ork for competitors, such as Goo gle, w hich the y percei ve as a more vibrant enter prise. Moreo ver, man y of, Microsoft’s original employees became very wealthy during the 1990s and retired earl y. This, drained some of the f irm’s human capital. As a result, it is no longer clear that people represent a unique strength for the company. In fact, relative to competitors, Microsoft’s employees, could become a weakness if the company does not take steps to correct the gradual erosion of, its human capital., In some cases the employees of an organization can indeed be a source of w eakness. For, example, as we saw in the introduction to the chapter , the ability of managers at some U .S., airlines, such as United, to implement strategies addressing tough competitive conditions in, the task environment has been hampered by the fact that many of the people within the organization belong to unions that have resisted the proposed changes. It has been easier for managers at other airlines, such as SW Airlines and Jet Blue, to introduce flexible work practices, that boost productivity and reduce costs, partly because their workforces are not unionized., We further discuss strategies for managing people and upgrading human capital later in, this book. F or now remember that people can be a distincti ve strength or a w eakness, relative to competitors; managers can exert influence over the human capital of the organization through human resource practices and b y putting the right inter nal organization, architecture in place., , // RESOURCES, An important line of work in academic literature known as the resource-based view of the, firm argues that the resources of an enter prise can be a source of sustainab le competitive, advantage.28 The resources of a firm are the assets that managers have to work with in their, quest to improve the performance of the enterprise. Tangible resources are physical assets,, such as land, buildings, equipment, inventory, and money. Intangible resources are nonphysical assets that are the creation of managers and other emplo yees, such as brand names,, the reputation of the compan y, processes within the f irm for perfor ming work and making, decisions, and the intellectual proper ty of the compan y, including that protected through, patents, copyrights, and trademarks., The resource-based view argues that a resource can constitute a unique strength if it meets, the following conditions (see Figure 2.5). First, the firm must own the resource in question; if, it does not, the resource o wner will capture the benef its. Second, the resource must be, valuable, increasing the performance of the firm relative to that attained by competitors either, by lowering costs or by differentiating the product offering and helping the firm to raise prices and sell more. Third, the resource must be rare: Competing enterprises lack similar quality, resources. Fourth, the resource must be inimitable: It is difficult for competitors to imitate or, replicate it. Fifth, the resource must be nonsubstitutable: Competitors cannot use a dif ferent, resource that is easy to acquire to achieve the same effect., For a simple e xample, consider Aramco, the state-o wned Saudi oil compan y. Aramco, owns a valuable resource: the sole right to pump oil out of the giant Saudi Ghawar field, the, largest ever discovered. The resource is v aluable because the cost of e xtracting oil from, , 11/9/06 7:38:01 PM

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The External and Internal Environments \\ CHAPTER 2, , 47, , Valuable, , Uniquely, strong, resource, , Owned by, the firm, , Inimitable, , FIG U RE 2 .5, , Rare, , Nonsubstitutable, , Uniquely Strong Resources, , Ghawar, at around $10 a bar rel, is far below the price of oil (w hich in early 2006 stood at, $70 a barrel). The resource is rare because very few oil fields are as big as Ghawar, and the, cost of oil extraction at Ghawar has long been among the lowest in the world. The resource, is inimitable because other oil companies cannot simpl y copy the Ghawar—there is only, one Ghawar. The resource is nonsubstitutable because there is no other way of producing oil, that is substitutable for production at Ghawar. Thus ownership of the right to pump oil out, of Ghawar represents a unique strength of Aramco.29, As another example, consider the Coca-Cola trademark. An intangible asset, the trademark is the e xclusive proper ty of the Coca-Cola Compan y, its o wner. It is a v aluable, resource because it signif ies the Coca-Cola brand and all that implies in the minds of consumers. Most notably, the trademark allows Coca-Cola to differentiate its cola from that of, other companies. The trademark is a rare resource because it is intellectual proper ty that is, exclusively owned by Coca-Cola; it is inimitab le because trademark la w prohibits other, enterprises from using a lookalike trademark. One can also argue that the trademark is nonsubstitutable because there is no commonl y available substitute for the Coca-Cola trademark—except perhaps the Pepsi-Cola trademark, which was built at great expense by PepsiCo. In sum, the Coca-Cola trademark seems to constitute a unique strength of Coca-Cola., It is a resource that managers can w ork with to impro ve the f irm’s performance. Indeed,, when managers noticed that growth in demand for cola in the United States was starting to, mature, they decided to use the Coca-Cola trademark to help sell other be verages such as, bottled water, which is sold under the Dasani brand name but also spor ts the Coca-Cola, trademark on every bottle., More generall y, resources that are unique strengths for a f, irm— uniquely str ong, resources—can take on all sorts of forms. The process that 3M uses to generate new products may be a uniquely strong resource, given the history and success of that compan y in, doing just that. Similarl y, the production systems of leading manuf acturing companies, such as Toyota and Dell Computer may be based on uniquely strong resources. Some would, also say that internal organization and human capital, two aspects of the inter nal environment we have already considered, may in the right conditions be considered uniquel y, strong resources.30, , hiL30123_ch02_026-053.indd 47, , ■ Coca-Cola’s, , valuable, , resource., , 11/9/06 7:38:02 PM

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48, , PART 1 // Managers and the Environment, , A Unique Strength The Coca-Cola trademark is a valuable resource, owned by the firm, that is, rare, inimitable, and nonsubstitutable. Coca-Cola has invested heavily in promoting and protecting, this trademark., © Getty Images., , The resource-based view of the firm suggests three things. First, when reviewing a firm’s, assets for strengths and weaknesses, managers should evaluate the firm’s tangible and intangible resources with respect to the f ive characteristics discussed here: o wnership, value,, rareness, inimitability, and nonsubstitutability. Such resources can be a source of unique, strength. Second, managers should be a ware that they need to protect such resources and, make sure they continue to be a source of strength in the future. For example, to protect the, value of the Coca-Cola trademark, Coca-Cola invests in brand promotions, makes sure that, its product quality is good (ultimatel y the trademark is a symbol of product quality), and, uses its legal staff to sue enter prises that make unauthorized use of the trademark. Third,, managers can create resources that constitute unique strengths if the y make the right kinds, of investments over time. The Coca-Cola trademark, for e xample, was initially not that, valuable. It became so o ver time onl y as managers at Coca-Cola built the brand through, marketing, promotions, and product e xtensions and used the le gal system to stop others, from copying the trademark., , I N CO N C LU S IO N, , W H Y D O E S IT MATTER?, , An organization does not exist in a vacuum; as we have seen, it is embedded in a task, (industry) environment, and that environment is embedded in a wider general environment. Developments in the general environment can shape the task environment, and, the task environment determines the ability of an organization to attain its goals. The, task environment can present opportunities that if exploited make it easier for the, , hiL30123_ch02_026-053.indd 48, , 11/9/06 7:38:03 PM

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The External and Internal Environments \\ CHAPTER 2, , 49, , organization to attain its goals; it can also give rise to threats that make attaining goals, more problematic. Managers need an intimate understanding of the environment that, confronts their firm. They need this to craft actions and strategies to take advantage of, opportunities and counter threats. Without a detailed understanding of the environment, confronting their organization and how that environment might change over time,, managers are unlikely to be effective., Managers also need to understand that the external environment is not just something they passively respond to; it is something they can influence and shape through, their actions. In a dramatic example, David Margolese, the former CEO of Sirius Radio,, lobbied the Federal Communications Commission for several years, finally persuading, the FCC to grant licenses allowing companies to offer satellite radio service in the, United States. Today two satellite radio providers, XM Radio and Sirius, are growing, rapidly and presenting traditional radio broadcasters with a significant competitive, challenge. Through his actions Margolese significantly altered the task environment, confronting radio broadcasters. This is what the best managers do: They see the, external environment not as it is, but as it might be, and they push their firms to take, actions that dramatically change that environment., To manage effectively, to address emerging opportunities and threats, and to, proactively shape the external environment in ways that benefit their firm, managers, must be able to get things done within their enterprise. To do this they must understand, the internal environment confronting them, particularly its strengths and weaknesses., They need to review the internal organization of their enterprise, as well as its human, capital and resources, and ask themselves what can be done to improve these factors,, eradicating weaknesses and building on strengths, so they have better assets to work, with as they attempt to exploit external environmental opportunities., , MANAGEMENT CHALLENGES, 1., , 2., , 3., , 4., 5., , 6., , Identify an industry in which the task environment facing firms is hostile and makes, it difficult for firms to make good profits. Explain how the task environment is, hostile., Identify an industry in which the task environment facing firms is favorable and makes, it relatively easy for firms to make good profits. Explain how this task environment is, favorable., Over the last 20 years the telecommunications industry in the United States has been, radically transformed., a. What has driven these changes?, b. How has the nature of competition in the industry changed?, c. What are the implications of these changes for firms in the industry?, d. How have managers at these firms tried to deal with the changing industry?, How will the aging of the baby boom generation change the task environment in the, health services industry? Who will benefit from these changes? Why?, What are the barriers to entry into the soft drink industry in the United States? What are, the implications of these entry barriers for incumbent companies such as Coca-Cola and, PepsiCo?, What are the strengths and weaknesses of Microsoft? What are its strengths based on?, What can the company do to upgrade its resources so that more are sources of strength?, , hiL30123_ch02_026-053.indd 49, , 10/25/06 2:27:02 PM

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50, , PART 1 // Managers and the Environment, , MANAGEMENT PORTFOLIO, FOR THE ORGANIZATION YOU HAVE CHOSEN TO FOLLOW:, 1., 2., 3., 4., , CLOSING CASE, , Describe the nature of the task environment the firm is facing. What are the opportunities here, and what are the threats?, Has the task environment been influenced by trends in the general environment over the, last decade? If so, what are these trends and how have they changed things?, What are the sources of uncertainty in the task environment confronting the firm? What, strategies have managers at the firm adopted to try and cope with this uncertainty?, What are the strengths of the organization? What are the weaknesses?, , THE PHARMACEUTICAL INDUSTRY, , Managers in pharmaceutical firms face a dynamic and challenging task en vironment that creates both oppor tunities, and threats. Demand for phar maceuticals is strong and has, been growing steadily for decades. Between 1990 and 2005, there was a 12.5 percent annual increase in spending on, prescription drugs in the United States. This strong growth, was dri ven b y f avorable demo graphics. As people g row, older they tend to consume more prescription medicines, and, the population in most adv anced nations has been g rowing, older as the post–World War II baby boom generation ages., Moreover, successful ne w prescription dr ugs can be, extraordinarily profitable. Consider Lipitor, the cholesterollowering drug sold by Pfizer. Introduced in 1997, b y 2005, this drug generated a staggering $12 billion in annual sales, for Pf izer. The costs of manuf acturing, packaging, and, distributing Lipitor amounted to onl y about 10 percent of, revenues, or around $1.2 billion. Pfizer spent close to $400, million on advertising and promoting Lipitor and perhaps, as much again on maintaining a sales force to sell the, product. That still lea ves Pf izer with a g ross prof it from, Lipitor of perhaps $10 billion., Lipitor is highly profitable because the drug is protected, from direct competition by a 20-year patent. This temporary, monopoly allows Pf izer to char ge a high price. Once the, patent expires, other f irms will be able to produce generic, versions of Lipitor, and the price will f all—typically by 80, percent within a year—but that is some time away., Competing firms can produce drugs that are similar (but, not identical) to a patent-protected drug. Drug firms patent, a specific molecule, and competing firms can patent similar,, but not identical, molecules that ha ve a similar phar macological effect. Thus Lipitor does ha ve competitors in the, market for cholesterol-lowering drugs—such as Zocor, sold, , hiL30123_ch02_026-053.indd 50, , by Merck, and Crestor , sold b y AstraZeneca. But these, competing drugs are also patent protected. Moreover, due to, Federal Drug Administration regulations and requirements, for demonstrating that a drug is safe and effective, the costs, and risks associated with de veloping a ne w dr ug and, bringing it to mark et are v ery high. Out of e very 5,000, compounds tested in the laborator y b y a dr ug compan y,, only f ive enter clinical trials, and onl y one of these will, ultimately mak e it to the mark et. On a verage, estimates, suggest that it costs some $800 million and takes anywhere, from 10 to 15 years to bring a new drug to market. Once on, the market, only 3 out of 10 dr ugs ever recoup their R&D, and mark eting costs and tur n a prof it. Thus the high, profitability of the phar maceutical industr y rests on a, handful of blockbuster drugs. To produce a b lockbuster, a, drug compan y must spend g reat amounts of mone y on, research, most of which fails to produce a product. Pf izer,, for example, spent over $7.4 billion on R&D in 2005 alone,, equivalent to 14.6 percent of its total revenues., In addition to R&D spending, the incumbent firms in the, pharmaceutical industry spend much money on advertising, and sales promotion. Although the $400 million a year that, Pfizer spends promoting Lipitor is small relati ve to the, drug’s revenues, it is a large amount for a new competitor to, match, making market entry difficult unless the competitor, has a significantly better product., There are also some big opportunities on the horizon for, firms in the industr y. Ne w scientif ic breakthroughs in, genomics portend that within the next decade pharmaceutical, firms might be able to bring new drugs to market that treat, some of the most intractable medical conditions, including, Alzheimer’s, P arkinson’s disease, cancer , hear t disease,, stroke, and HIV., , 10/25/06 2:27:02 PM

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The External and Internal Environments \\ CHAPTER 2, , On the other hand, managers in the industry face serious, challenges. Many patent-protected medicines are scheduled, to come off patent in the next decade, and to maintain profitability, phar maceutical f irms must f ind ne w dr ugs to, replace them. In addition, as spending on health care rises,, seniors are complaining about the high costs of prescription, medicines, and politicians are looking for ways to limit this., One possibility is some for m of price controls on prescription dr ugs. Phar maceutical price controls are already in, effect in most de veloped nations, and although the y have, not yet been introduced in the United States, that could happen. Another possibility is to make it easy for U.S. residents, to purchase phar maceuticals from foreign nations w here, prices are lower., A further challenge is associated with the growth of large, health care providers, who have millions of subscribers and, are starting to use their power to reduce the drug prices their, subscribers pay. In some cases they are refusing to provide, insurance coverage for high-priced phar maceuticals when, lower-priced generic alternatives are available.31, , 51, , CASE DISCUSSION QUESTIONS, 1. What are the bar riers to entr y into the phar maceutical, industry? To what extent do you think these entry barriers, protect established pharmaceutical companies from new, competitors?, 2. The phar maceutical industr y has long been one of the, most prof itable in the United States. Why do you think, this is the case?, 3. What forces in the general en vironment influence the, nature of competition in the task en vironment f acing, pharmaceutical firms?, 4. Are there reasons for belie ving that the prof itability of, the industr y might come under threat o ver the ne xt, decade? What do y ou think managers in the industr y, should do to counter this threat?, , ENDNOTES, 1. Sources: “Flying on Empty,” The Economist, May 22, 2005, p. 73; “Turbulent, Skies: Low-Cost Airlines,” The Economist, July 10, 2004, pp. 68–72; “Silver, Linings, Darkening Clouds,” The Economist, March 27, 2004, pp. 90–92; W., Zellner and M. Arndt, “Big Airlines: Not Much Runway Left,” BusinessWeek,, July 5, 2004, p. 50; Economic data from the Air Transport Association at, www.airtransport.org., 2. Boeing Commercial Airplane Group, Cur rent Market Forecast, 2005. Available, at www.boeing.com/commercial/cmo/pdf., 3 . M.E. Porter, Competitive Str ategy (Ne w York: F ree Press, 1980). Also see, J. Pfeffer and G.R. Salancik, The External Control of Organizations (New York:, Harper & Row, 1978)., 4 . J.E. Bain, Barriers to Ne w Competition (Cambridge, MA: Har vard University, Press, 1956). For a review of the moder n literature about bar riers to entr y, see, R.J. Gilbert, “Mobility Bar riers and the Value of Incumbency,” in Handbook of, Industrial Organization, vol. 1, ed. R. Schmalensee and R.D . Willig (Amsterdam: Nor th-Holland, 1989). Also see R.P . McAfee, H.M. Mialon, and, M.A.Williams, “What Is a Bar rier to Entr y?” American Economic Re view 94, (May 2004), pp. 461–68., , 13. A.S. Grove, Only the Paranoid Survive (New York: Doubleday, 1996)., 14. F or details and fur ther references, see C.W .L. Hill, “Estab lishing a Standard:, Competitive Strategy and Technology Standards in Winner Take All Industries,”, Academy of Management Executive 11 (1997), pp. 7–25; and Shapiro andVarian,, Information Rules., 15. F or a detailed discussion of the impor tance of the str ucture of la w as a f actor, explaining economic change and g rowth, see D.C. North, Institutions, Institutional Change, and Economic Performance (Cambridge: Cambridge University, Press, 1990)., 16. B . McLean, “Satellite Killed the Radio Star ,” Fortune, Januar y 22, 2001,, pp. 94–99., 17. Economist, The Economist Book of Vital World Statistics (New York: Random, House, 2000)., 18. See M. Gor t and J. Klepper, “Time Paths in the Dif fusion of Product Inno vations,” Economic Journal, September 1982, pp. 630–53. Looking at the histor y, of 46 products, Gort and Klepper found that the length of time before other companies entered the markets created by a few inventive companies declined from, an average of 14.4 y ears for products introduced before 1930 to 4.9 y ears for, those introduced after 1949., , 5. Sources: J. Ewing and D . Foust, “DHL’s American Adventure,” BusinessWeek,, November 29, 2004, pp. 126–67; “Shares at a Cost, ” Traffic World, April 11,, 2005, pp. 1–2; R. Brooks, “DHL Plans to Spend $1.2 Billion in Challenge of, FedEx and UPS,” The Wall Street Journal, June 25, 2004, p. B2., , 19. The phrase was originally coined by J. Schumpeter in Capitalism, Socialism, and, Democracy (London: Macmillan, 1950), p. 68., , 6. For details see C. Shapiro and H.R. Varian, Information Rules: A Strategic Guide, to the Network Economy (Boston: Harvard Business School Press, 1999)., , 20. M.E. Porter, “Strategy and the Internet,” Harvard Business Review, March 2001,, pp. 62–79., , 7. A detailed discussion of switching costs and being locked in can be found in C., Shapiro and H.R. Varian, Information Rules: A Strategic Guide to the Netw ork, Economy., , 21. The term punctuated equilibrium is bor rowed from evolutionary biology. For a, detailed explanation of the concept, see M.L. Tushman, W.H. Newman, and E., Romanelli, “Con vergence and Uphea val: Managing the Unsteady P ace of, Organizational Evolution,” California Management Review 29, no. 11 (1985),, pp. 29–44; C.J .G. Gersick, “Re volutionary Change Theories: A Multile vel, Exploration of the Punctuated Equilibrium Paradigm,” Academy of Management, Review 16 (1991), pp. 10–36; R. Adner and D.A. Levinthal, “The Emergence of, Emerging Technologies,” Calif ornia Mana gement Re view 45 (F all 2002),, pp. 50–65; F.T. Rothaermel and C.W.L. Hill, “Technological Discontinuities and, Complementary Assets: A Longitudinal Study of Industr y and F irm P erformance,” Organization Science 16 (2005), pp. 52–70., , 8. Pfeffer and Salancik, The External Control of Organizations., 9. Boeing Commercial Airplane Group, Current Market Forecast, 2005., 10. For a re view, see F. Karakaya, “Market Exit and Bar riers to Exit: Theory and, Practice,” Psychology and Marketing 17 (2000), pp. 651–68., 11. M. Busse, “Firm Financial Condition and Airline Price Wars,” Rand Journal of, Economics 33 (2002), pp. 298–318., 12. J.P. Womack, D.T. Jones, and D. Roos, The Machine That Changed the World; J., Palmer, “Can Anyone Stop Toyota?” Barron’s, September 13, 2004, pp. 25–29., , hiL30123_ch02_026-053.indd 51, , 22. J .D. Thompson, Organizations in Action (New York: McGraw-Hill, 1967)., , 10/25/06 2:27:03 PM

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52, , PART 1 // Managers and the Environment, , 23. The classic summar y of such strate gies is gi ven in Pfef fer and Salancik, The, External Control of Organizations., 24. J.P. Kotter and J.L. Heskett, Corporate Culture and Performance (New York: Free, Press, 1992)., 25. A. Williams, P. Dobson, and M. Walters, Changing Culture: New Organizational, Approaches (London: Institute of P ersonnel Management, 1989); E.H. Schein,, “What Is Culture?” in Reframing Organizational Culture, ed. P.J. Frost et al., (Newbury Park, CA: Sage, 1991), pp. 243–53., 26. G.S. Becker, Human Capital, 2nd ed. (Chicago: Uni versity of Chicago Press,, 1993)., 27. J . Pfeffer, Competitive Advantage through People (Cambridge, MA: Har vard, Business School Press, 1994)., 28. The material in this section relies on the resource-based vie w of the company. For, summaries of this perspective, see J.B. Barney, “Company Resources and Sustained, Competitive Advantage,” Journal of Management 17 (1991), pp. 99–120; J.T. Mahoney and J.R. Pandian, “The Resource-Based View within the Con versation of, Strategic Management,” Strategic Management Journal 13 (1992), pp. 363–380; R., , hiL30123_ch02_026-053.indd 52, , Amit and P.J.H. Schoemaker, “Strategic Assets and Organizational Rent,” Strategic, Management Journal 14 (1993), pp. 33–46; M.A. P eteraf, “The Cor nerstones of, Competitive Advantage: A Resource-Based View,” Strategic Management Journal, 14 (1993), pp. 179–91; B. Wernerfelt, “A Resource-Based View of the Company,”, Strategic Management Journal 15 (1994), pp. 171–80; and K.M. Eisenhardt and, J.A. Martin, “Dynamic Capabilities: What Are They?” Strategic Management Journal 21 (2000), pp. 1105–21., 29. P aul Roberts, The End of Oil (Boston: Houghton Mifflin, 2004)., 30. This seems to be the position adv ocated by Jay Barney, one of the founders of, this approach. See J.B. Barney, “Company Resources and Sustained Competitive, Advantage,” Journal of Management 17 (1991), pp. 99–120., 31. Source: Staff reporter, “Pharm Exec 50,” Pharmaceutical Executive, May 2004,, pp. 61–68; J .A. DiMasi, R.W . Hansen, and H.G. Grabo wski, “The Price of, Innovation: Ne w Estimates of Dr ug De velopment Costs,” Journal of Health, Economics22 (March 2003), pp. 151–70; Staf f reporter, “Where the Money Is:, The Dr ug Industr y,” The Economist , April 26, 2003, pp. 64–65; Value Line, Investment Survey, The Drug Industry, April 22, 2005., , 10/25/06 2:27:03 PM

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3, LEARNING OBJECTIVES, , GLOBALIZATION, THE MANAGER, , AND, , After Reading This Chapter You Should Be Able to:, 1, , Explain what globalization is., , 2, , Describe the processes driving globalization., , 3, , Identify the implications of globalization for business enterprises., , 4, , Discuss different constraints limiting the pace of globalization., , 5, , Outline the benefits of going global for a business firm., , 6, , Discuss some of the challenges of managing in a global enterprise., , / / / / / / / / / / / / / / /, , The Process of Globalization, The Spread of Market-Based, Systems, Falling Barriers to Trade and, Investment, Tumbling Communication and, Transportation Costs, Implications of Globalization, The Globalization of Production, The Globalization of Markets, Technology: The Great, Facilitator, Constraints on Globalization, Protectionist Countertrends, National Differences in, Consumer Behavior, National Differences in, Business Systems, Differences in Social Culture, , hiL30123_ch03_054-079.indd 54, , The Benefits of Going Global, Expanding the Market, Realizing Scale Economies, Realizing Location Economies, Global Learning, Management Challenges in, the Global Enterprise, Global Standardization or Local, Customization, Entry Mode, Locating Activities, Managing People in the, Multinational Firm, In Conclusion: Why Does It, Matter?, Management Challenges, Management Portfolio, Closing Case: Planet Starbucks, , 10/26/06 4:52:02 PM

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India Calling!—This, call center in India, deals with customer, service inquiries for, American, companies. Until the, advent of global, communications, networks, it was, impossible to, outsource such, service activities., © Sherwin/Crasto/, Reuters/Corbis, , / / / / / / / / / / / / / / / / / / / / /, , O, , utsourcing manufacturing activities to foreign producers is nothing new. American companies have, been doing this for decades. But until recently few service firms outsourced work to third parties overseas., Thanks to modern communications technologies, that is, now changing. Consider individual tax returns in the, United States. Until the beginning of this decade, all, individual U.S. tax returns were compiled in the United, States by U.S.–trained accountants. Then some small, accounting firms started to experiment with outsourcing to India the “grunt work” involved in preparing tax, returns. In 2003 some 25,000 tax returns were compiled, in India; in 2004 the figure was 100,000; and in 2005, , hiL30123_ch03_054-079.indd 55, , the number exceeded 250,000. Although still just a tiny, fraction of the 130 million individual U.S. tax returns, compiled each year, industry experts expect the numbers to grow rapidly. The reasons are simple: (1) There, are not enough trained accountants in the United States, to handle the flood of work that occurs every tax season; (2) foreign accountants are cheaper—the average, accountant in India earns just a fraction of a U.S. counterpart’s salary; and (3) because India is on the other, side of the world from the United States, Indian accountants can compile returns while their American, partners are asleep, cutting preparation time in half,, which translates into better customer service.1, , 11/9/06 7:38:58 PM

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56, , PART 1 // Managers and the Environment, , Outsourcing tax return preparation to foreign producers is one e xample of a fundamental, transformation occurring in the world economy. We have been moving rapidly away from a, world in which national economies were relatively self-contained entities, isolated from each, other by barriers to cross-border trade and investment; by distance, time zones, and language;, and by national differences in government regulation, culture, and business systems. And we, have been mo ving toward a w orld in w hich bar riers to trade and in vestment are tumb ling;, perceived distance is shrinking due to adv ances in transpor tation and telecommunications, technology; material culture is starting to look similar the world over; and national economies, are merging into an integrated and interdependent global economic system—a process commonly referred to as globalization., Globalization is pushing deeper into national economies. F or example, service activities, used to be perfor med when the ser vice was delivered. However, moder n communications, technologies such as the Inter net have allowed firms to outsource to foreign producers man y, service activities that don’t require face-to-face contact. Not only are tax retur ns being outsourced; so are credit card applications, mor tgage loan processing, software debugging, and, the diagnosis of MRI scans. Lik e manufacturing f irms before them, ser vice f irms are now, shifting productive activities to different locations around the globe w here they can be per formed most efficiently, creating a globally dispersed production system., This new world is challenging and exciting for managers. Globalization is radically altering the environment confronting managers, giving rise to opportunities and threats that did not, exist two decades ago and creating ne w uncertainties that are much harder to reduce or control. In this chapter we look first at the process of globalization. Then we discuss what globalization means for managers., , // The Process of Globalization, globalization, The process whereby, national economies and, business systems are, becoming deeply, interlinked with each other., , Globalization is the process w hereby national economies and b usiness systems are becoming deeply interlinked with each other. The world is moving away from relatively independent national economies toward a single global system. The process of globalization,, however, has markedly accelerated since the 1980s. There are three main reasons for this:, the spread of market-based economic systems, the decline of barriers to international trade, and foreign direct investment, and falling costs of communication and transportation.2, , // THE SPREAD OF MARKET-BASED SYSTEMS, market economy, An economy in which businesses are privately owned, and prices are set by the, interaction of supply and, demand., socialist economy, An economy in which businesses are owned by the, state and prices are set by, state planners., , hiL30123_ch03_054-079.indd 56, , In a market economy, such as that of the United States, most b usinesses are pri vately, owned (as opposed to being o wned by the state); prices are set b y the interaction of supply, and demand; and go vernment regulation is limited to ensuring that competition betw een, individual enterprises is free and fair and that the system does not produce outcomes judged, to be unacceptable by society (poor working conditions, false advertising, harmful industrial, pollution).3, Until recently only a minority of countries operated with market-based systems. As little as, 25 years ago much of the w orld’s population li ved in socialist economies. There most, businesses were owned by the state; private producers were excluded from certain industrial, and commercial activities; prices were set by the state; and state planners decided w hat was, produced where, in what quantity, and by whom. China, Russia, and most of Easter n Europe, operated with tightly controlled socialist economies. In addition, the economies of many other, nations, from India and Brazil to Britain and Sw eden, had signif icant socialist elements in, some sectors. In Britain, for e xample, 30 years ago state-owned enterprises dominated many, sectors of the economy, including steelmaking, shipbuilding, coal mining, transportation, and, telecommunications services., By their nature, socialist economies are antithetical to globalization. They inhibit rather, than encourage cross-border trade and in vestment. Foreign businesses are e xcluded from, , 10/26/06 4:52:10 PM

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Globalization and the Manager \\ CHAPTER 3, , 57, , many sectors of the economy, if not the entire, economy, and state-o wned enter prises often, focus inward on their o wn economy. In the, 1970s, for example, Britain’s telecommunications industr y w as monopolized b y British, Telecom, which focused e xclusively on providing telecommunications ser vices to the, British economy. No other telecommunications companies were allowed to compete in, Britain, and British Telecom had no overseas, ventures., Socialist economies trace their roots to, Marxist-inspired political movements, which, advocate that the “commanding heights” of, an economy should be controlled by the state, and managed in the pub lic interest. 4 By the, 1970s it was apparent that this ideolo gy had, failed to deliver on its promise to improve the, lot of w orking people. Indeed , the opposite, seemed to be the case, with socialist economies lagging market economies in economic, growth rates and li ving standards. Consequently, b y the earl y 1980s a pronounced, More Than the Wall Came Down. The, move was under w ay in man y nations from, demolition of the Berlin Wall, a powerful, socialism to ward mark et-based economics., symbol of Soviet domination in Eastern, The mo vement star ted in Britain, spread, Europe, signaled the end of Communism, throughout the social democratic states of, there. The collapse of Communism was, Western Europe, and follo wing the collapse, quickly followed by the introduction of, of Communism in Easter n Europe and the, market-based economic systems in many, former So viet Union, spread into Easter n, formerly Communist and socialist nations., Europe and Russia by the early 1990s. By the, mid-1990s mark et-based systems w ere, © AP Photo/Lionel Cironneau, spreading worldwide. Large countries such, as India and Brazil had embraced mark etbased economic refor ms, and e ven several nominally Communist nations, including most, notably China, mo ved rapidly toward mark et based systems. 5 By 2005, according to an, annual survey conducted by the Heritage Foundation, market-based economic systems were, more widespread than at any time in modern history.6, The shift toward market-based systems has four main elements: pri vatization of stateowned enter prises, dismember ment of for mer state-owned monopolies, dere gulation of, markets (including abandonment of price controls and la ws restricting in vestment b y, foreign enterprises), and establishment of a le gal system that suppor ts private enterprise, and protects property rights. For example, in Brazil the state-o wned telecommunications, monopoly was privatized and split into 12 separate companies that could compete with, each other; the government also allowed foreign telecommunications companies to enter, the Brazilian market., In sum, the worldwide shift toward market-based economic systems has supported globalization. Market economies are more open to foreign investment and international trade than, the socialist alter native. Moreover, the transfor mation of economies such as China’ s and, India’s to more open systems has created a plethora of opportunities and threats for Western, businesses. Outsourcing of manufacturing and service activities to these nations has accelerated, as have investments in these nations. China in particular has become an engine of global, economic growth, a major market for many imports (particularly commodities such as oil),, and a source of substantial exports., , hiL30123_ch03_054-079.indd 57, , 11/9/06 7:39:00 PM

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58, , PART 1 // Managers and the Environment, , // FALLING BARRIERS TO TRADE AND INVESTMENT, international trade, The sale of a good or, service across borders., foreign direct, investment, Investments by a company, based in one nation in, business activities in, another nation., tariffs, A tax on imports., quotas, A limit on the number of, items of a good that can be, imported from a foreign, nation., , regional trade, agreements, Agreements to remove, barriers to trade between, nations within a, geographic region., , A key tenet of market-based economic systems is the belief that removing barriers to international trade and foreign direct investment is in the best interests of all nations that par ticipate, in a global economic system. 7 International trade occurs whenever a good or ser vice is, sold across national borders. When Boeing sells planes to Japan Airlines, international trade, has occurred. Foreign direct investment refers to investments by a company based in one, nation in business activities in another nation. When Ford builds a car factory in Russia, as it, did in 2003, foreign direct in vestment has occur red. The global shift to ward market-based, systems has been accompanied b y a decline in bar riers to inter national trade and foreign, direct investment, a surge in such trade and investment, and an increase in the economic interdependence between nations., Trade barriers take two main for ms: the application of tarif fs to impor ts from a foreign, country and quotas. Tariffs are taxes on imports, which raise their prices and make them less, attractive. Quotas are limits on the number of items of a good that can be impor ted from a, foreign nation. In 1947 nineteen de veloped nations signed a treaty kno wn as the General, Agreement on Tariffs and Trade (or GATT), which committed the signatories to a progressive, reduction in trade barriers on manufactured goods. In 1995 the GATT was superseded by the, World Trade Organization (WTO)., Over 120 nations are now members of the WTO, including all significant trading nations. As, a result of efforts by the GATT and WTO, tariff rates have tumbled and most quotas on imports, of manufactured goods into developed nations have been abolished. Between 1950 and 2002 the, average tariff rate on manufactured goods imported into the United States fell from 14 percent, to 4 percent; in Ger many tariffs fell from 26 percent to 4 percent; and in Britain the y dropped, from 24 percent to 4 percent.8 The WTO is now pushing forward with negotiations to reduce or, remove tariffs on trade in agricultural products and a wide range of services. Although progress, has been slow, agreement may be reached by the end of this decade., In addition to global agreements brokered by the WTO, there has been a shar p increase in, regional trade agreements to remo ve bar riers to trade and foreign direct in vestment, between adjacent nations. The most notab le of these has been the European Union (EU),, which now has 25 member nations. The EU has progressively removed barriers to trade, investment, and labor flows between member nations, creating a continental economy similar in, scale and scope to that of the United States. The Nor th American Free Trade Agreement, (NAFTA) between the United States, Canada, and Mexico is another significant regional trade, agreement. Established in 1994, b y 2004 NAFTA had removed tariffs on 99 percent of the, goods traded between the three countries., Although both the WTO and various regional groupings have made progress in removing, barriers to foreign direct investment (FDI), so far much of the reduction in barriers to FDI has, come from bilateral ag reements. As of 2004 there w ere 2,392 such treaties in the w orld, involving more than 160 countries—a 12-fold increase from the 181 treaties that e xisted in, 1980.9 According to the United Nations, some 93 percent of the 2,156 changes made w orldwide between 1991 and 2004 in the laws governing foreign direct investment created a more, favorable environment for FDI.10, , // TUMBLING COMMUNICATION AND, TRANSPORTATION COSTS, The lowering of barriers to international trade and FDI made globalization a theoretical possibility; technological change has made it a tangib le reality. Over the past 30 y ears, global, communications have been re volutionized by developments in satellite, optical f iber, and, wireless technologies, as well as the Internet. The costs of global communications are plummeting, which lowers the costs of coordinating and controlling a global organization. Between, 1930 and 1990 the cost of a three-minute phone call between New York and London fell from, $244.65 to $3.32. 11 By 1998 it had plunged to just 36 cents for consumers, and much lo wer, , hiL30123_ch03_054-079.indd 58, , 10/26/06 4:52:11 PM

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Globalization and the Manager \\ CHAPTER 3, , 59, , rates were available for businesses. 12 Indeed, over the Inter net the cost of an inter national, phone call is rapidly plummeting toward just a few cents per minute., The rapid growth of the World Wide Web is the latest e xpression of this development. In, 1990 fewer than 1 million users were connected to the Internet. By 1995 the f igure had risen, to 50 million. By 2007 the Internet may have more than 1.47 billion users, or about 25 percent, of the world’s population. 13 The World Wide Web has developed into the infor mation backbone of the global economy. Web-based transactions hit $657 billion in 2000 (up from nothing, in 1994) and reached some $6.8 trillion in 2004.14, Included in the e xpanding volume of Web-based traffic is a g rowing percentage of crossborder trade. Viewed globally, the Web is emerging as an equalizer. It rolls back some constraints, of location, scale, and time zones.15 The Web makes it much easier for buyers and sellers to find, each other, wherever they may be located and w hatever their size. The Web allows both small, and large businesses to expand their global presence at a lower cost than ever before., In addition to de velopments in communication technolo gy, several major innovations in, transportation technology have occurred since the 1950s. The most important are probably the, development of commercial jet aircraft and superfreighters and the introduction of containerization, which simplifies transshipment from one mode of transport to another. The advent of, commercial jet travel, by reducing the time needed to get from one location to another , has, effectively shrunk the globe. In terms of travel time, New York is now closer to Tokyo than it, was to Philadelphia in the colonial days., Containerization has revolutionized the transportation business, signif icantly lowering the, costs of shipping goods over long distances. Before the advent of containerization in the 1970s, and 1980s, moving goods from one mode of transpor t to another was labor-intensive, lengthy,, and costly. It could take days and several hundred workers to unload a ship and reload its goods, onto trucks and trains. With containerization the w hole process can be e xecuted by a handful of w orkers in a couple of, days. Since 1980 the world’s containership fleet has more than, quadrupled, reflecting in par t the growing volume of international trade and in par t the switch to this mode of transpor tation. As a result of the ef ficiency gains associated with containerization, transportation costs have plummeted, making it, much more economical to ship goods around the globe and, thereby helping to drive globalization. Between 1920 and 1990, the a verage ocean freight and por t char ges per ton of, U.S. e xport and impor t car go fell from $95 to $29 (in, 1990 dollars). 16 The cost of shipping freight per ton–mile on, railroads in the United States fell from 3.04 cents in 1985 to, 2.3 cents in 2000, lar gely as a result of ef ficiency gains from, the widespread use of containers. 17 An increased share of carTwenty-First Century Camel The development of, go now travels by air. Between 1955 and 1999 a verage air, containerships has reduced the costs of shipping goods, transportation revenue per ton–kilometer fell b y more than, across oceans by two-thirds, helping to drive the, 80 percent. 18 Reflecting the f alling cost of airfreight, b y the, globalization of production., early 2000s air shipments accounted for 28 percent of the, © Getty Images/Steve Allen, value of U.S. trade, up from 7 percent in 1965.19, , // Implications of Globalization, The implications of the trends w e have just discussed are profound. F irst, these trends ha ve, resulted in a massive surge in the volume of international trade and foreign direct investment., According to data from the World Trade Organization, from 1970 to 2004 the volume of world, merchandise trade expanded almost 26-fold, outstripping world production, which grew about, 7.5 times in real terms. (World merchandise trade includes trade in manuf actured goods, agricultural goods, and mining products, but not services. World production and trade are measured, in real, or inflation-adjusted , dollars.) As suggested b y Figure 3.1 , due to f alling barriers to, international trade, the growth in world trade seems to have accelerated since the early 1980s., , hiL30123_ch03_054-079.indd 59, , 10/26/06 4:52:11 PM

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60, , PART 1 // Managers and the Environment, , FIG UR E 3 .1, 3,100, , Volume of World Trade, and World Production,, 1950–2004, Index 1950 = 100, , 2,600, 2,100, 1,600, 1,100, 600, , 19, 50, 19, 54, 19, 58, 19, 62, 19, 66, 19, 70, 19, 74, 19, 78, 19, 82, 19, 86, 19, 90, 19, 94, 19, 98, 20, 02, 20, 04, , 100, , Total merchandise exports, T, , World production, , Foreign direct investment (FDI) has increased even more dramatically. The average yearly, outflow of FDI increased from $25 billion in 1975 to a record $1.3 trillion in 2000 before af lling back to around $900 billion in 2005. 20 Despite the slowdown in 2001–2005, the flow of, FDI not onl y accelerated over the past quar ter century, but also accelerated f aster than the, growth in w orld trade. Betw een 1992 and 2005 the total flo w of FDI from all countries, increased by about 420 percent, while world trade doubled and world output grew by 35 percent.21 Because of the strong FDI flo w, by 2004 companies had some $9 trillion in foreign, assets. In total, at least 70,000 parent companies had 690,000 subsidiaries in foreign mark ets, that collectively employed some 54 million people abroad and generated value accounting for, about one-tenth of global GDP. The foreign affiliates of multinationals had an estimated $19, trillion in global sales—nearly twice as high as the v alue of global exports of goods and service combined, which stood at $11 trillion.22, These are dramatic f igures, but what do the y mean for indi vidual enter prises and their, managers? They suggest f irst that the globalization of production is w ell under way; second,, that the globalization of markets is also starting to occur; and third, that advances in technology are facilitating these trends. The result is an environment facing today’s managers that is, dramatically different from the one their predecessors faced a generation ago., , // THE GLOBALIZATION OF PRODUCTION, globalization of, production, Sourcing goods and, services from locations, around the globe to take, advantage of national, differences in the cost and, quality of factors of, production., ■ Boeing: Outsourcing production to foreign producers., , hiL30123_ch03_054-079.indd 60, , The globalization of production refers to the sourcing of goods and ser vices from locations around the globe to take advantage of national differences in the cost and quality of f actors of production (such as labor, energy, land, and capital). By doing this, firms hope to lower, their overall cost structure and improve the quality or functionality of their products, allo wing, them to compete more effectively. We have already considered one example of this trend: the, outsourcing of U.S. tax return preparation to India. Consider also the Boeing Compan y’s 777, jet airliner. Eight Japanese suppliers make parts for the fuselage, doors, and wings; a supplier, in Singapore makes the doors for the nose landing gear; three suppliers in Ital y manufacture, wing flaps; and so on.23 In total, some 30 percent of the 777, by value, is built by foreign companies. For its next jet airliner, the 787, Boeing is pushing this trend even further, with some 65, percent of the total value of the aircraft scheduled to be outsourced to foreign companies, 35, percent of which will go to three major Japanese companies.24, , 10/26/06 6:10:25 PM

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Globalization and the Manager \\ CHAPTER 3, , 61, , Part of Boeing’s rationale for outsourcing so much production to, foreign suppliers is that these suppliers are the best in the w orld at, their particular activities. A global w eb of suppliers yields a better, final product, which enhances Boeing’s chances of winning a greater, share of total orders for aircraft than its global rival, Airbus Industrie., Boeing also outsources some production to foreign countries to increase the chance that it will win signif icant orders from airlines, based in that country., Although historically signif icant outsourcing has been primaril y, confined to manuf acturing enter prises such as Boeing, increasingl y, companies are taking advantage of modern communications technology, and particularly the Internet, to outsource service activities to lowcost producers in other nations. For example, the Internet has allowed, hospitals to outsource some radiolo gy work to India, w here images, from MRI scans and the lik e are read at night w hile U.S. physicians, Built by Boeing—in Japan, Singapore, Italy,, sleep; the results are ready for them in the mor ning. Similarly, in DeBritain… Some 65 percent of Boeing’s new jet,, cember 2003 IBM announced that it w ould move the w ork of some, the 787, will be built by foreign suppliers. Japanese, 4,300 software engineers from the United States to India and China, suppliers will build 35 percent of the 787. Final, (software production is counted as a service activity).25 Many software, assembly will take place in the United States. The, companies now use Indian engineers to maintain softw are designed in, 787 is an example of a truly global product., the United States. Due to the time difference, Indian engineers can run, © Boeing Management Company. All rights reserved., debugging tests on software written in the United States when U.S. engineers sleep, transmitting the corrected code back to the United States, over secure Internet connections so it is ready for U.S. engineers to work on the following day. ■ Reading MRI scans in, ., Dispersing business activities in this way can compress the time and lower the costs required to India., develop new software programs. Other companies from computer makers to banks are outsourc- ■ Outsourcing by IBM., ing customer service functions, such as customer call centers, to developing nations where labor, is cheaper., , // THE GLOBALIZATION OF MARKETS, The globalization of markets refers to the mer ging of historically distinct and separate, national markets into one huge global marketplace. Falling barriers to international trade have, made it easier to sell internationally. It has been argued for some time that the tastes and preferences of consumers in different nations are beginning to converge, thereby helping to create, a global market.26 Consumer products such as Citig roup credit cards, Coca-Cola soft drinks,, Sony PlayStation video games, McDonald’s hamburgers, and Starbucks coffee are frequently, cited as examples of this trend. Firms such as Citigroup, Coca-Cola, McDonald’s, Starbucks,, and Sony are more than just beneficiaries of this trend; they have also facilitated it. By offering, the same basic products worldwide, they help create a global market., In many global markets the same firms frequently confront each other as competitors in, nation after nation. Coca-Cola’s rivalry with PepsiCo is a global one, as are the ri valries, between Ford and Toyota; Boeing and Airbus; Cater pillar and K omatsu in ear thmoving, equipment; and Sony, Nintendo, and Microsoft in video games. If one f irm moves into a, nation that is not cur rently served by its rivals, those rivals are sure to follo w to prevent, their competitor from gaining an advantage.27 As firms follow each other around the world,, they bring with them many of the assets that served them well in other national markets—, including their products, operating strate gies, marketing strategies, and brand names—, creating some homogeneity across markets. Thus greater uniformity replaces diversity., , globalization of, markets, The merging of historically, distinct and separate, national markets into one, huge global marketplace., , // TECHNOLOGY: THE GREAT FACILITATOR, As we have seen, due to technological innovations the real costs of information processing and, communication have fallen dramatically. These developments allow managers to create and, then manage a globall y dispersed production system, fur ther facilitating the globalization of, , hiL30123_ch03_054-079.indd 61, , 10/26/06 4:52:13 PM

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62, , PART 1 // Managers and the Environment, , ■ Dell Computer: Using the, Internet to control global, production., , production. A worldwide communication network has become essential for many international, businesses. For example, Dell uses the Internet to coordinate and control its globally dispersed, production system to such an e xtent that it holds onl y two days’ worth of inventory at its assembly locations. Dell’s Internet-based system records orders for computer equipment as the y, are submitted by customers via the compan y’s Web site, and then immediatel y transmits the, resulting orders for components to various suppliers around the world, which have a real-time, view of Dell’s order flow and can adjust their production schedules accordingly. Given the low, cost of airfreight, Dell can use air transportation to speed up the delivery of critical components, to meet unanticipated demand shifts without dela ying the shipment of f inal products to consumers. Dell also has used moder n communication technolo gy to outsource its customer, service operations to India. When U.S. customers call Dell with a ser vice inquiry, they are, routed to Bangalore in India, where English-speaking service personnel handle the call., The Internet has been a major force f acilitating international trade in services. The Web, allows hospitals in Chicago to send MRI scans to India for analysis, tax accountants in San, Francisco to outsource routine tax preparation work to the Philippines, and software testers, in India to debug code written by developers in Redmond, Washington, the headquarters of, Microsoft. We are probably still in the early stages of this development. Before long almost, any work processes that can be digitized will be,, and in theor y this will allo w that work to be per formed wherever in the w orld it is most ef ficient, and effective to do so., In addition to the globalization of production,, technological innovations have also facilitated the, globalization of mark ets. Low-cost global communication networks such as the World Wide Web, are helping to create electronic global mark etplaces. Ine xpensive transpor tation has made it, more economical to ship products around the, world, thereby helping to create global mark ets., For example, due to the tumb ling costs of shipping goods by air, roses grown in Ecuador can be, cut and sold in Ne w York 24 hours later w hile, they are still fresh. This has created an industry in, Ecuador that did not e xist 20 y ears ago and that, now supplies a global mark et for roses. Global, communication netw orks and global media are, creating a worldwide culture. U.S. television networks such as CNN, MTV, and HBO are now reThe Day before Valentine’s An, ceived in man y countries, and Holl ywood f ilms, Ecuadoran worker packs roses prior, are shown the world over. In any society the meto shipping them to the United, dia are primar y conveyors of culture; as global, States. Within 24 hours these, media de velop, w e can e xpect the e volution of, flowers, grown in ideal conditions in, something akin to a global culture. A logical rethe highlands of Ecuador, will be sold, sult of this e volution is the emer gence of global, in U.S. stores. On Febuary 13 Ecuador, markets for consumer products. The first signs of, ships twice its normal volume of, this are already apparent. It is now as easy to find, roses, some 30,000 boxes, to, a McDonald’s restaurant in Tokyo as it is in Ne w, international buyers., York, to buy an iPod in either Rio or Berlin, and to, © AP Photo/Dolores Ochoa, buy Gap jeans in both Paris and San Francisco., , // Constraints on Globalization, Despite the historic nature of the trends we have just reviewed, we must be careful not to overemphasize their impor tance. Globalization is not ine vitable. Powerful countervailing forces, are constraining the pace at w hich production and mark ets are becoming global. These, , hiL30123_ch03_054-079.indd 62, , 11/16/06 3:14:51 PM

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Globalization and the Manager \\ CHAPTER 3, , 63, , constraints limit the ability of managers to disperse production acti vities to locations in the, world where they can be performed at the lowest cost, as well as managers’ ability to treat the, entire world as a single homogeneous marketplace., , // PROTECTIONIST COUNTERTRENDS, The worldwide march to ward market-based economic systems with fe w or no bar riers to, cross-border trade and investment is not guaranteed to continue. Histor y is full of re versals, away from progressive trends. The first bloom of modern global trade in the late 1800s and, early 1900s was brought to an end by protectionist policies in major trading nations during the, 1920s and 1930s, w hich led to a slump in inter national trade and helped usher in the Great, Depression., This could happen again. Many politicians and media commentators have argued that inter national trade destroys jobs, and that outsourcing production to foreign nations is akin to, exporting jobs and hollowing out the American economy (the, CNN commentator Lou Dobbs frequentl y voices such concerns). They also suggest that globalization is promoting a, “race to the bottom, ” with w age rates being driven down in, developed nations., Supporters of free trade reject these arguments. They point, out that the gains from inter national trade far exceed its costs, and that inter national trade promotes economic g rowth and, raises living standards. 28 For example, although free trade in, textiles means that American textile workers in South Carolina, might lose their jobs as production mo ves to other nations, where production costs are lower, the result will be lower prices, for clothes, increasing the disposab le income of American, consumers. Thus as a result of free trade in textiles Americans, can purchase more clothes and purchase more of other goods, and services. The consequence is greater economic growth in, America, which helps to create additional jobs that offset those, lost as a result of free trade in te xtiles. Moreover, free trade, opens foreign markets, allowing American businesses to sell, more overseas, w hich fur ther stimulates economic g rowth., Thus e ven though jobs are lost in lo w-technology, labor intensive industries such as textiles, the American economy as, a whole can reap substantial benef its if free trade allows U.S., firms to sell more commercial jet aircraft, softw are, pharmaceuticals, computers, and the like in other nations. This is not, just a theoretical ar gument; economic evidence suggests that, international trade promotes economic g rowth for all nations, that participate in a free trade system.29 The problem, as econThe Modern Mercantilist Lou Dobbs has used his, omists often point out, is one of pub lic relations: The gains, position as a CNN host to promote his views of international, from international trade are widely distributed, but the pain is, trade. Dobbs has no objection to American businesses, concentrated in a few sectors where people lose their jobs, and, profiting from selling overseas, but he doesn’t like the idea, focusing on the pain makes for better news copy., that foreigners can profit from selling to Americans. This, Despite the substantial theor y and evidence in suppor t of, viewpoint harks back to a discredited 19th-century economic, free trade, some politicians would like to engineer a retur n to, philosophy known as mercantilism, which saw international, the days of high barriers to cross-border trade and investment,, trade as a zero-sum game in which the goal was to, which would inhibit the process of globalization. Indeed, there, accumulate as much wealth from foreigners as possible, is still substantial protectionism in the world economy. Recent, while not letting those same foreigners compete in your, WTO talks to lower barriers to cross-border trade in ag riculmarkets., ture, for e xample, have been stalled b y the unwillingness of, © Courtesy of Warner Books. Used with permission., several developed nations, including the United States, Japan,, , hiL30123_ch03_054-079.indd 63, , 10/26/06 4:52:16 PM

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64, , PART 1 // Managers and the Environment, , and particularly the European Union, to remo ve tariffs and quotas that cur rently protect their, agricultural sectors from foreign competition. The rise of China as a major export power is also, straining the world trading system, much as the rise of Japan did in the 1980s, and is leading to, renewed calls for protectionism against “unf air” competition. If some of the adv ances of the, last 50 years are turned back and bar riers to cross-border trade and investment are raised, national markets will once more be segmented from each other, and the globalization of production and markets will stall. Such a scenario seems unlikely at present but is not impossible., , // NATIONAL DIFFERENCES IN, CONSUMER BEHAVIOR, It is impor tant not to overstate the globalization of mark ets. Although many goods and ser vices are sold globall y—from Boeing jets and Nokia cell phones to Starb ucks coffee and, McDonald’s hamburgers—there are still often substantial dif ferences between the tastes and, preferences of consumers in different nations. Many enterprises have discovered (at their cost), that foreign consumers differ from domestic consumers, and that accounting for these dif ferences requires them to customize goods and ser vices to better match local demand. In other, words, truly global markets may be some way off., For example, the American automobile market is very different from the European mark et., Driving in Europe you see few of the large SUVs so beloved by Americans. There are two good, reasons for this: Gas prices are much higher in Europe, so fuel economy is valued over vehicle, size and power, and smaller roads and parking spots in Europe’s historic cities and towns makes a, smaller car more practical. Thus even though automobile f irms such as Toyota and Ford might, like to design cars they can sell the same way worldwide to realize substantial scale economies,, reality requires that cars and their marketing be tailored to different regions., Even in a young industry such as the cell phone business, important national differences in, consumer usage patter ns can be obser ved. Americans, for e xample, tend to think of cell, phones primarily as devices for talking, not as de vices that, can also send e-mail and bro wse the Web. Consequentl y,, when selling to U .S. consumers, cell phone manuf acturers, focus more on slim good looks and less on adv anced functions and features. This contrasts with Asia and Europe,, where text messaging and Web browsing functions have been, much more widely embraced. A cultural issue seems to be at, work here. People in Europe and Asia often have more time, to browse the Web on their phones because they spend more, time commuting on trains, whereas Americans tend to spend, more time in cars, where their hands are occupied.30, , European Drivers Only The Toyota Yaris was designed, specifically for the European market. This small, fuelefficient car is perfect for Europe’s high fuel costs and, crowded cities., , // NATIONAL DIFFERENCES IN, BUSINESS SYSTEMS, , There are still major differences between nations in business, systems, legal systems, infrastr ucture, and o verall level of, economic development, and this w orks against treating the, world as a single global mark etplace. In the pharmaceutical, © Courtesy of Toyota Motor Sales, USA, Inc., industry, for example, Americans are used to seeing adv ertisements for drugs on television; but in many nations direct, advertising of drugs to consumers is prohibited by law (the belief being that such advertising, interferes with the doctor–patient relationship). Thus pharmaceutical companies have to use, different marketing strategies in different countries. Moreover, in many nations pharmaceuticals are still subject to government price controls, so firms charge different prices in different nations (prices tend to be higher if they are not controlled by the government). Competition can also v ary from nation to nation. Due to dif ferences in patent la w, for example,, , hiL30123_ch03_054-079.indd 64, , 10/26/06 4:52:18 PM

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Globalization and the Manager \\ CHAPTER 3, , 65, , Amgen’s best-selling dr ug Epogen will be subject to competition in Europe much sooner, than in the United States., Distribution channels may vary signif icantly from nation to nation, and this can require, different approaches. Whereas Coca-Cola cans are distributed by trucks in much of the world,, in parts of rural China they are distributed on the backs of motorc ycles, and in Nepal on the, backs of yaks or human porters., Differences in income levels also have a major impact. In the West Unilever sells shampoo, and soap in the larger bottles we are used to seeing in our super markets; but in poor nations, such as India and much of Africa, it sells the same products in much smaller containers, because local consumers cannot afford to purchase the larger ones., Many similar examples can illustrate the same basic point: Business systems, le gal systems, infrastructure, and income le vels differ from nation to nation. Handling these dif ferences requires adaptation, and the process of adaptation (customizing the product of fering,, marketing message, sales strategy, pricing, and distribution system) runs counter to viewing, the world as a single homogeneous global marketplace., , // DIFFERENCES IN SOCIAL CULTURE, Finally, it is important to realize that differences in social culture across nations are often profound. As such, they make it harder for f irms to view the world market as homogeneous and, more difficult to manage operations in dif ferent countries. By social culture we mean the, system of values and norms that are held in common b y people living in a society.31 Values, (discussed in Chapter 1) are abstract ideas about what a group believes to be good, right, and, desirable; they are shared assumptions about how things ought to be.32 Norms are the social, rules and guidelines that prescribe appropriate behavior in particular situations., To pick a vivid example of cultural differences and why they matter, consider the differences between the cultures of Saudi Arabia and the United States. Saudi vie ws diverge from, those of man y Americans about the role of w omen in society, the consumption of alcohol, (which is illegal in Saudi Arabia), the nature of time, and the connection between religion and, the state. Saudi culture is strongl y influenced by a strict inter pretation of Islam and b y the, traditions of the nomadic Bedouin society that ga ve bir th to moder n Saudi Arabia. These, antecedents of Saudi culture support restrictions on the role of women in society and the prohibition against alcohol. It w ould represent a lack of cultural sensiti vity, therefore, for an, American firm to send a woman to run its subsidiary in Saudi Arabia, particularly if that subsidiary were staffed by local Saudi employees. Similarly, offering alcohol might offend a visiting Saudi businessman., Moreover, Americans need to understand ho w cultural values influence the w ay a Saudi, does business. Reflecting the traditions of Bedouin society, Saudis will often conduct business, only after trust has been established—a process that might require man y face-to-face meetings. Saudis may resent being r ushed into a b usiness decision, prefer ring to let discussions, proceed in a more relaxed fashion—something that Westerners with their attachment to precise rather than approximate time might find taxing. Business meetings may be long because, many Saudis maintain an “open of fice” and will inter rupt a meeting to conduct other b usiness. This can be traced back to the Bedouin tradition in which all tribal members have a right, to visit and petition their leaders without a prior appointment. In addition, gi ven the cultural, importance attached to status, Saudi executives will not react well if a foreign company sends, a junior executive to transact business.33, More generally, managers need to be sensiti ve to cultural dif ferences across nations,, and they need to understand ho w cultural differences can require adaptation not onl y of, marketing and sales strate gy, but also of basic management practices. Not e verybody, thinks and acts lik e Americans, and the American way of conducting b usiness does not, always succeed in a foreign land. Ev en in countries that seem much more similar to the, United States than Saudi Arabia, deep-seated cultural dif ferences affect how business is, conducted. For example, anthropologist Edward T. Hall has described how Americans, who, tend to be informal, react strongly to being corrected or reprimanded in public.34 This can, , hiL30123_ch03_054-079.indd 65, , social culture, The system of values and, norms that are held in, common by people living in, a society., norms, Social rules and guidelines, that prescribe appropriate, behavior in particular, situations., ■ Saudi Arabia and the, United States: Cultural, differences., , 10/26/06 4:52:20 PM

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66, , PART 1 // Managers and the Environment, , Cruising the Mall in Riyadh Saudi women have access to the physical trappings of the, modern world—fast food, shopping malls, cell phones—but have to wear traditional dress when, outside the home, which covers them from head to foot., © AFP/Getty Images, , cause problems in Ger many, where a cultural tendenc y toward cor recting strangers can, shock and offend most Americans. For their par t, Germans can be sur prised by the tendency of Americans to call everyone by f irst name. This is uncomfortable enough among, executives of the same rank; but it can be seen as insulting when a young, junior American, executive addresses an older, more senior Ger man manager by f irst name without having, been invited to do so. Hall concludes that it can tak e a long time to get on a f irst-name, basis with a Ger man; if you rush the process you will be perceived as overly friendly and, rude, and that may not be good for business., Another common cultural difference concerns attitudes about personal space, which is the, comfortable amount of distance between you and someone you are talking with. In the United, States the customary distance apart adopted by parties in a business discussion is five to eight, feet. In Latin America it is three to f ive feet. Consequently many North Americans unconsciously feel that Latin Americans are invading their personal space and can be seen backing, away from them during a conversation. Indeed, the American may feel that the Latin American, is being aggressive and pushy. In turn, the Latin American may interpret such backing away as, aloofness. The result can be a re grettable lack of rappor t between two businesspeople from, different cultures., , // The Benefits of Going Global, multinational, enterprise (MNE), A business that has, productive activities in two, or more countries., , hiL30123_ch03_054-079.indd 66, , As globalization pro gresses, an increasing number of b usinesses are e xpanding across, national borders, becoming multinational enter prises in the process. A multinational, enterprise (MNE) is any business that has productive activities in two or more countries., There are four main reasons why the managers of many enterprises, both large and small,, seek to expand their operations across national borders: Doing so lets a f irm expand the, market for its products, realize scale and location economies, and benef it from global, learning., , 10/26/06 4:52:20 PM

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Globalization and the Manager \\ CHAPTER 3, , 67, , // EXPANDING THE MARKET, International expansion enlarges the market a firm can address, enabling it to increase its sales, and profits faster. The growth of Starbucks, for example, owes much to the rapid international, expansion of the company. Starbucks opened its f irst international store in 1996, when it was, operating some 700 stores in the United States. By 2005 the company had over 3,200 locations, in 34 countries outside the United States (plus 7,000 more in the United States). In just a, decade Starbucks grew from a midsized national compan y to a world entity with a powerful, world brand. Going forw ard, Starbucks sees continued inter national expansion as a major, engine of g rowth. The company’s aim is to mak e Starbucks as ubiquitous inter nationally as, other great American consumer brands, such as McDonald’s and Coca-Cola., More generally, many enterprises develop a core skill at home and then tr y to ear n greater, returns from that competenc y by applying it to foreign mark ets where indigenous competitors, lack the same skills. Thus McDonald’s developed a core competenc y in managing f ast-food, franchise operations in the United States, and then ear ned greater returns from that competency, by entering foreign markets that lacked American-style fast-food restaurants. Similarly, Procter &, Gamble established core competencies in the de velopment and mass mark eting of household, consumer products, including shampoos, detergents, and diapers, and it has earned greater returns, from those competencies b y applying them to foreign mark ets that lacked enterprises with the, same skill set. In shor t, when the managers at a f irm have built a valuable competency or skill,, going global is often the best way to maximize the return on their investment in that skill., , ■ Starbucks: Global, expansion., , // REALIZING SCALE ECONOMIES, The larger sales base associated with ser ving a global market can allow enterprises to attain, economies of scale, lower their costs, and boost their prof its. In the automobile industr y, for, example, an efficiently scaled factory is one designed to produce about 200,000 units a y ear., Automobile f irms would prefer to produce a single model from each f actory because this, eliminates the costs associated with s witching production from one model to another . If, domestic demand for a par ticular model is only 100,000 units a year, the inability to attain a, 200,000-unit output will drive up average unit costs. However, by serving international markets and exporting some production, the f irm may be able to push production v olume up to, 200,000 units a year, thereby reaping greater scale economies., More generally, by serving domestic and international markets a firm may be able to utilize, its production facilities more intensively. For example, if Intel sold microprocessors onl y in, the United States, it might be ab le to k eep its f actories open for onl y one shift, f ive days a, week. By ser ving inter national markets from the same f actories, Intel can r un three shifts, seven days a week for lower costs and greater profitability., , // REALIZING LOCATION ECONOMIES, Different locations around the world are more or less suitab le for performing different business activities. For example, China is a good location for making textiles due to the combination of low labor costs (textile manufacturing is labor-intensive) and good infrastructure. The, United States is not as good for making te xtiles due to relati ve high labor costs; so te xtile, manufacturing has been migrating out of the United States for the last 20 years. On the other, hand, New York, Paris, and Rome are all good locations for f ashion design due to the high, concentration of successful design f irms and design schools and the ab undant supply of, skilled designers. Similarly, the United States is a good place for de veloping new software, products because of its many skilled software programmers and the high rate of innovation in, the U.S. computer industry. By the same token, Bangalore is a g reat location for performing, software testing and deb ugging due to a high suppl y of softw are engineers, relati vely low, wage rates, the widespread use of English, and the f act that Bangalore is 12 time zones away, from the American West Coast, where many software firms are concentrated. Thus software, , hiL30123_ch03_054-079.indd 67, , 10/26/06 4:52:22 PM

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68, , location economies, The economies that arise, from performing a business, activity in the optimal, locations for that activity., , IBM and location, economies., ■, , PART 1 // Managers and the Environment, , code written during the da y on the West Coast can be tested and debugged b y engineers at, night in Bangalore and sent back to pro grammers in America in the mor ning. As a result of, these factors, Bangalore is home to India’s rapidly developing software industry and its two, largest high-technology firms: Wipro and Infosys., Location economies arise from exploiting such differences; they are the economies that, arise from performing a business activity in the optimal location for that activity, wherever in, the world that might be (transpor tation costs and trade bar riers permitting). Locating a business activity in the optimal location can have one of two effects. It can lower the costs of performing that activity, and it can enable the f irm to add value to its f inal product offering and, thus better differentiate its offering from that of competitors. The task facing managers in a, global economy is to look at the various activities of a firm and decide where in the world they, should be located to realize location economies., For illustration, consider IBM’s ThinkPad X31 laptop computer (this b usiness was acquired by China’s Lenovo in 2005). 35 The ThinkPad was designed in the United States b y, IBM engineers because IBM belie ved that the United States w as the best location in the, world to do the basic design work. The case, keyboard, and hard drive were made in Thailand;, the display screen and memor y were made in South K orea; the b uilt-in wireless card w as, made in Mala ysia; and the microprocessor w as manufactured in the United States. These, components were manufactured in the optimal locations gi ven managers’ assessment of the, relative costs of perfor ming each acti vity at dif ferent locations. These components w ere, shipped to an IBM operation in Me xico, where the product w as assembled before being, shipped to the United States for f inal sale. IBM assembled the ThinkPad in Mexico because, IBM’s managers calculated that due to low labor costs, the costs of assembly could be minimized there. The marketing and sales strate gy for Nor th America was developed by IBM, personnel in the United States, primarily because IBM believed that due to their knowledge, of the local market, U.S. personnel would add more value to the product through their mar keting efforts than personnel based elsewhere., In theory, a firm that realizes location economies by dispersing each of its different activities to the optimal location should ha ve a competitive advantage over a f irm that bases all of, its value creation activities at a single location. It should be able to better differentiate its products and k eep its cost str ucture lower than its single-location competitor . In a w orld where, competitive pressures are increasing, such a strategy may become imperative for survival., , // GLOBAL LEARNING, , ■ Global learning at, McDonald’s., , hiL30123_ch03_054-079.indd 68, , Implicit in our discussion so far is the idea that valuable skills are developed first at home and, then transfer red to foreign operations. Thus Wal-Mart developed its retailing skills in the, United States before transferring them to foreign locations. However, for more mature multinationals that have already established a network of subsidiary operations in foreign markets,, the development of valuable skills can just as well occur in foreign subsidiaries. 36 Skills can, be created anywhere within a multinational’s global network of operations, wherever people, have the opportunity and incentive to try new ways of doing things. The creation of skills that, help lower the costs of production, enhance perceived value, and support higher product pricing is not the monopoly of the corporate center., Leveraging the skills created within subsidiaries and applying them to other operations, within a firm’s global network may create value. For example, McDonald’s increasingly is finding that its foreign franchisees are a source of v aluable new ideas. F acing slow g rowth in, France, its local franchisees have begun to experiment not only with the menu but also with the, layout and theme of restaurants. Gone are the ubiquitous golden arches, as well as many of the, utilitarian chairs and tab les and other plastic features of the f ast-food giant. Many McDonald’s, restaurants in France now have hardwood floors, e xposed brick walls, and even armchairs., Half of the 930 or so outlets in F rance have been upgraded to a level that would make them, unrecognizable to an American. The menu, too, has been changed to include premier sandwiches, such as a chicken on focaccia bread, priced some 30 percent higher than the a verage, hamburger. In F rance the strate gy seems to be w orking. Following the changes, increases, , 10/26/06 4:52:22 PM

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Globalization and the Manager \\ CHAPTER 3, , in same-store sales rose from 1 percent annuall y to 3.4 per cent. Impressed with the impact, McDonald’ s e xecutives, are now considering adopting similar changes at other, McDonald’s restaurants in mark ets where same-store sales, growth is sluggish, including the United States.37, For the managers of a multinational enter prise, this phenomenon creates impor tant new challenges. F irst, they must, have enough humility to reco gnize that v aluable skills and, competencies can arise an ywhere within the f irm’s global, network—not just at the cor porate center. Second, they must, establish an incentive system that encourages local employees, to acquire new skills, which is not as easy as it sounds. Creating new skills involves a degree of risk: Not all new skills add, value. For every valuable idea created by a McDonald’s subsidiary in a foreign countr y, there ma y be se veral failures. The, management of the multinational f irm must install incentives, that encourage emplo yees to tak e the necessar y risks. The, company must reward people for successes and not sanction, them unnecessarily for taking risks that did not pan out. Third,, managers must have a process for identifying w hen valuable, new skills have been created in a subsidiary. Finally, they need, to act as f acilitators, helping to transfer v aluable skills within, the firm., , 69, , You’re Not in Kansas Anymore The interior of this, McDonald’s restaurant in France is different from many of, those found in the United States. The French operation, changed the layout of its restaurants and the menu to better, meet the needs of its consumers and to evolve with the, changing times. The effects have been dramatic. The French, operation is now one of the best performing of all, McDonald’s subsidiaries., © Used with permission from McDonald’s Corporation, , // Management Challenges in the Global, Enterprise, We have just seen that there are clear advantages to going global, and an increasing number of, firms are doing just that. However, managing a global enterprise represents a significant challenge. When a firm goes global, it encounters a whole set of decisions that managers in purely domestic enterprises do not face. These decision include (1) whether to treat the world as a, single market or customize the f irm’s products to reflect dif ferences across nations; (2) the, best mode for entering a foreign market; (3) where to locate different business activities; and, (4) how best to manage subsidiaries. Here we look at each issue in turn., , // GLOBAL STANDARDIZATION OR, LOCAL CUSTOMIZATION, One of the most important decisions managers face is whether to treat the world as a single market or customize products for different nations. When a firm treats the world market as a single, entity, selling the same basic product around the globe, we say that it is pursuing a global standardization strategy.38 Alternatively, when an enterprise varies some aspect of its products, or marketing messages to tak e country or re gional differences into account, w e say that it is, pursuing a local customization strategy. The global standardization strategy enables a firm, to realize substantial scale economies b y mass-producing a standardized output and using the, same marketing strategy worldwide. However, such a strategy ignores local differences in consumer tastes and preferences, local business systems and culture, and so on. If such differences, are profound, the f irm may do better with a local customization strate gy, even though that may, mean fewer scale economies and higher costs. Choosing between these strategic postures is not, easy, and firms often seek a balance between standardization and customization., For an example of balance between global standardization and local customization, consider MTV Networks. MTV has been expanding outside its North American base since 1987, when it opened MTV Europe. Despite its domestic success, MTV’s global expansion got off, to a w eak start. In 1987 it piped a single feed across Europe composed almost entirel y of, , hiL30123_ch03_054-079.indd 69, , global, standardization, strategy, Treating the world market, as a single entity, selling, the same basic product, around the globe., local customization, strategy, Varying some aspect of, product offerings or, marketing messages to, take country or regional, differences into account., , 10/26/06 4:52:23 PM

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70, , MTV: Responding to local, demands., ■, , PART 1 // Managers and the Environment, , American programming with English-speaking veejays. Naively, the network’s U.S. managers, thought Europeans w ould flock to the American pro gramming. But although vie wers in, Europe shared a common interest in a handful of global superstars, their tastes tur ned out to, be surprisingly local. What was popular in Ger many might not be popular in Great Britain., Many staples of the American music scene left Europeans cold. MTV suf fered as a result., Soon local copycat stations were springing up in Europe to focus on the music scene in individual countries. They took viewers and advertisers away from MTV. As explained by Tom, Freston, chairman of MTV Netw orks, “We were going for the most shallo w layer of w hat, united viewers and brought them together. It didn’t go over too well.”, In 1995 MTV changed its strate gy and of fered regional feeds in Europe (there are no w, eight). The network adopted the same localization strategy elsewhere in the world. For example, in Asia it has an English–Hindi channel for India, separate feeds for China and Taiwan, a, Japanese feed for Japan, and so on. All the feeds have the same familiar frenetic look and feel, of MTV in the United States, but much of the programming is now local. In Italy MTV Kitchen, combines cooking with a music countdo wn. Erotica airs in Brazil and features a panel of, youngsters discussing sex. The Indian channel produces 21 homegrown shows hosted by local, veejays who speak “Hinglish,” a city-bred breed of Hindi and English. Hit shows include MTV, Cricket in Control, appropriate for a land where cricket is a national obsession; MTV Housefull, which hones in on Hindi f ilm stars (India has the biggest f ilm industry outside Hollywood); and MTV Bakra, modeled after Candid Camera. The localization push has reaped big, benefits for MTV, capturing viewers back from local imitators39, , // ENTRY MODE, exporting, Producing a good at home,, and then shipping it to, another country., , There are f ive main modes for entering a foreign mark et: exporting, licensing, franchising,, entering a joint venture with a local enter prise, and setting up a w holly owned subsidiary.40, Exporting involves producing a good at home and then shipping it to another countr y., Licensing involves an enterprise licensing a foreign firm to produce its product in a country, or region in retur n for ro yalty fees on an y sales that the licensee mak es. Franchising is, , licensing, Licensing a foreign firm to, produce its product in a, country or region in return, for royalty fees on any, sales that the licensee, makes., franchising, Licensing the right to offer, a service in a particular, format., , Indian Rap Sukhbir and Josh perform live in Mumbai at the MTV India “Immies” awards. The, Immies are MTV India’s annual music awards, analogous to the Grammies in the United States., © Courtesy of MTV-Asia. Used with permission., , hiL30123_ch03_054-079.indd 70, , 10/26/06 4:52:23 PM

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Globalization and the Manager \\ CHAPTER 3, , similar to licensing, but here what is licensed to the foreign enterprise is not the right to produce a physical good, but the right to of fer a ser vice in a par ticular format. Franchising is, popular among f ast-food enter prises (like McDonald’s and KFC) as w ell as inter national, hotel chains. Joint ventures are agreements between a f irm and its foreign par tner to establish a new enterprise, the joint venture, in which they each take an equity stake. Wholly, owned subsidiaries are foreign subsidiaries that are 100 percent owned by the firm., The choice between these different entry modes is complex, and a full discussion is beyond, the scope of this book. A few brief points can be made, ho wever. First, exporting is a good, strategy when the firm can mass-produce at a single location, thereby realizing economies of, scale and lowering its costs. In this re gard, exporting is consistent with a global standardization strategy. But many f irms have found advantages to producing in local mark ets. Basing, production in a countr y or re gion can f acilitate local customization (because products are, designed and built closer to where customers are), and it may be more politically acceptable, to produce locall y. For e xample, Toyota has set up production f acilities in all its major, markets—Japan, Nor th America, and Europe. These f acilities produce products that are, customized to local requirements. Thus Toyota’s European operation mak es small cars, designed for European customers and not sold in the United States. Similarly, Toyota products, sold in America, such as the Toyota Tundra truck, are not made or sold in Europe. Toyota also, established production facilities in America and Europe to reduce the threat that high levels of, exports from Japan might result in the imposition of trade barriers., Second, licensing is not often used , primarily because it gi ves the f irm little ongoing, involvement in a foreign mark et beyond the cur rent licensing contract. In addition, man y, firms are reluctant to license products that incor porate valuable technology because they, fear that ultimatel y the licensee might de velop its own version of the technolo gy and no, longer need to license from the f irm. To forestall this possibility, many f irms enter using, other modes., Third, joint ventures are favored when a local par tner can bring valuable expertise to the, partnership, such as local mark et knowledge. In addition, in some countries a joint v enture, may be more acceptable to the government than a wholly owned subsidiary. This was certainly, the case in China for a while, and many early Western entrants into the Chinese market began, with joint v entures. The prob lem with joint v entures, ho wever, is that disputes betw een, partners over strategy and investments can lead to their failure., Fourth, although w holly owned subsidiaries in volve the highest up-front cost (the f irm, must bear all costs of opening a foreign mark et), this entr y mode gives the f irm maximum, control over the future direction of the subsidiary. Moreover, the firm captures all profits from, the venture, as opposed to having to share them with a joint v enture partner or taking only a, share of them in the form of royalty payments from a licensee. Thus many managers prefer to, enter foreign mark ets through a w holly o wned joint v enture. Ev en w hen a product is, manufactured elsewhere and exported to a country, they might still establish a wholly owned, subsidiary to market, sell, and distribute the product in that country., , 71, , joint venture, An agreement between a, firm and a partner to, establish a new enterprise, in which they each take an, equity stake., wholly owned, subsidiary, A foreign subsidiary that, is fully owned by a firm., , ■, , Toyota’s entering strategy., , // LOCATING ACTIVITIES, Another key decision is w here to locate the v arious activities of the enter prise. As we have, seen, there are advantages to dispersing the activities of an enterprise to locations around the, globe where they can be perfor med most efficiently. Making the right choice in volves two, steps. First, managers have to break the operations of the firm into discrete steps or activities—, such as product design, purchasing, production, mark eting, sales, service and customer care,, and so on. Second, each activity has to be located in the best place gi ven a consideration of, factors such as country differences in labor costs and infrastructure, transportation costs, tariff, barriers, likely currency exchange rates, and strategic orientation. Managers need to evaluate, the cost of performing an activity at a given location and how much value can be added to a, product at a certain location—which is not easy., Moreover, the attractiveness of key locations changes over time. Ten years ago, for example, few American software f irms outsourced softw are testing and deb ugging activities to, , hiL30123_ch03_054-079.indd 71, , 10/26/06 4:52:25 PM

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72, , PART 1 // Managers and the Environment, , Indian companies. Now such a move is commonplace. Similarly, as discussed in the introduction, only in the last few years have American accounting firms started to outsource the work, associated with compiling indi vidual tax retur ns to accountants located in India. The, attractiveness of locations v aries over time as local economies adv ance (or decline), labor, costs change, infrastructure is added, and exchange rates shift. For example, if the value of the, Chinese currency rises against the U.S. dollar, over time China will become less attractive as, a location for performing labor-intensive activities (such as textile manufacturing), and manufacturing will migrate to other parts of the globe., , // MANAGING PEOPLE IN THE MULTINATIONAL FIRM, , expatriates, Home country executives, sent to a foreign post., , geocentric staffing, A staffing policy that seeks, the best people for key, jobs throughout the, organization, regardless of, nationality., ethnocentric staffing, A staffing policy in which, all key management, positions are staffed by, home country nationals., polycentric staffing, A staffing policy in which, key management positions, in a subsidiary are staffed, by host country nationals., , hiL30123_ch03_054-079.indd 72, , Managing people in a multinational f irm represents one of the most dif ficult tasks f acing, managers. Consider the mature multinational enter prise with acti vities in se veral different, nations. Managers ha ve to decide ho w best to staf f foreign operations—and specif ically, whether senior managers should be nationals of the foreign (or host) country where operations, are based or come from the home countr y of the enter prise. If a f irm uses home countr y, personnel or expatriates as they are commonly known, it must prepare them for the foreign, posts and make sure that their eventual return to the home country is well managed. Research, evidence suggests that this is not easy. Between 16 and 40 percent of all American employees, sent abroad to developed nations return from their assignments early, and almost 70 percent of, employees sent to developing nations return home early.41 The inability of a spouse to adjust,, the inability of the manager to adjust, or other f amily problems are major reasons for the, failure of expatriates to succeed in foreign posts. One study found that 60 percent ofexpatriate, failures occur due to these three reasons.42 Another study found that the most common reason, for assignment failure is lack of partner (spouse) satisfaction, which was listed by 27 percent, of respondents.43, The inability of e xpatriate managers to adjust to foreign posts seems to be caused b y a, lack of cultural skills on the part of the managers being transferred. According to one human, resources management consulting f irm, this is because the e xpatriate selection process at, many firms is fundamentally flawed. “Expatriate assignments rarely fail because the person, cannot accommodate to the technical demands of the job. Typically, the expatriate selections, are made by line managers based on technical competence. They fail because of family and, personal issues and lack of cultural skills that ha ven’t been part of the selection process.”44, Expatriate failure such as this is e xpensive for the f irm, but it can be reduced through the, implementation of proper policies for selecting, training, managing, and repatriating, expatriates.45, In addition, managers have to decide how to vary the compensation structure from nation, to nation to reflect dif ferent local nor ms. They also ha ve to think hard about ho w cultural, differences will impact management practices in a nation. What works in a f irm’s home, country may not in a foreign nation. For illustration, one researcher reported the case of a U.S., manager who introduced participative decision making while working in an Indian subsidiary.46, The manager subsequently received a negative evaluation from host country managers because, in India strong social stratif ication means managers are seen as e xperts who should not have, to ask subordinates for help. The local emplo yees apparently viewed the U .S. manager’s, attempt at par ticipatory management as an indication that he w as incompetent and did not, know his job., Managers also have to decide what staffing and management development programs to put, in place to make the best use of their human capital. Nowadays many multinational firms are, gravitating toward a geocentric staffing policy, that seeks the best people for k ey jobs, throughout the or ganization, re gardless of nationality .47 This can be compared to an, ethnocentric staffing policy, in which all key management positions are staffed by home, country nationals, and a polycentric staffing policy, where key management positions in a, subsidiary are staffed by host country nationals., , 10/26/06 4:52:26 PM

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Globalization and the Manager \\ CHAPTER 3, , 73, , An ethnocentric approach relies on expatriate managers to r un foreign operations. This, may ensure a common or ganization culture, but an ethnocentric approach limits adv ancement opportunities for host country nationals. This can lead to resentment, lower productivity, and increased tur nover among that g roup. Resentment can be g reater still if, as often, occurs, expatriate managers are paid signif icantly more than home countr y nationals. An, ethnocentric policy can also lead to cultural myopia—a failure to understand that host country cultural differences require different approaches to marketing and management. Moreover, the adaptation of e xpatriate managers can tak e a long time, during w hich they may, make major mistakes. For example, expatriate managers may fail to appreciate how product, attributes, distribution strate gy, communication strate gy, and pricing strate gy should be, adapted to host country conditions. The result may be costly blunders. They may also make, decisions that are unethical because the y do not understand the culture in w hich they are, managing.48 In one highly publicized case in the United States, Mitsubishi Motors was sued, by the federal Equal Emplo yment Oppor tunity Commission for tolerating e xtensive and, systematic sexual harassment in a plant in Illinois. The plant’s top managers, all Japanese, expatriates, denied the charges. The Japanese managers may have failed to realize that behavior that would be viewed as acceptable in Japan was not acceptable in the United States.49, Finally, as we have seen, many expatriate managers return home early, which is expensive ■ Mitsubishi Motors: The, costs of ethnocentric staffing., for the firm., In many respects a polycentric approach is a response to the shor tcomings of an ethnocentric approach. One advantage of adopting a polycentric approach is that the f irm is less, likely to suffer from cultural myopia. Host country managers are unlikely to make the mistakes arising from cultural misunderstandings to w hich expatriate managers are vulnerable., A second advantage is that a polycentric approach may be less expensive to implement, reducing the costs of value creation, given how costly expatriate managers can be to maintain., However, a polycentric approach also has its dra wbacks. Host countr y nationals have, limited opportunities to gain experience outside their own countries and thus cannot progress beyond senior positions in their o wn subsidiaries. As in the case of an ethnocentric, policy, this ma y cause resentment. P erhaps the major dra wback with a pol ycentric approach, however, is the gap that can form between host country and parent country managers. Language bar riers, national loyalties, and a range of, cultural differences may isolate the corporate headquarters, staff from the v arious foreign subsidiaries. The lack of, management transfers from home to host countries, and, vice versa, can exacerbate this isolation and lead to a lack, of integration between corporate headquarters and foreign, subsidiaries., A geocentric staffing policy is thought to overcome the, limitations of both ethnocentric and polycentric approaches., Under a geocentric policy, not only do managers move from, home country to host nation; the y also move between host, nations and from host nation to the home nation, w here, they may ultimately take on senior management positions., Managers have to decide how best to select, train, develop,, and compensate a cohor t of qualif ied managers, ir respecThe Geocentric CEO Born and raised in India, Indra, tive of their national origin. Such a policy lets a firm make, Nooyi (left) became president and chief financial officer of, the best use of its human resources, promoting the best, PepsiCo in 2001 at the age of 45 and CEO in 2006. Prior to, people to key jobs throughout the or ganization, regardless, joining Pepsi, Nooyi held senior management positions at, of nationality. In addition, the multinational composition of, Asea Brown Boveri, a European engineering company, and, the management team that results from geocentric staf fing, Motorola. Her rise to the top rank of management at a major, tends to reduce cultural myopia and to enhance adaptation, U.S. corporation was made possible by the geocentric, to local conditions. F or all of these reasons, man y of the, staffing policies of all these companies., leading multinationals in America have adopted a geocen© AP Photo/John Keating, tric approach., , hiL30123_ch03_054-079.indd 73, , 11/9/06 7:39:01 PM

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74, , PART 1 // Managers and the, Environment, Environment, , IN CONCLUSION, , WHY DOES IT MATTER?, , Managers must understand the nature of the global environment because ongoing, changes in that environment are creating a plethora of opportunities, threats, and, challenges. As we have seen, the world is moving rapidly toward a global integrated, economic system characterized by the emergence of global markets and the development of global production systems. Although countervailing forces are putting a brake, on the pace of globalization, and a reemergence of protectionism certainly could halt the, march toward globalization, for now at least the trajectory is well established. If present, trends continue, 25 years from now far more countries will have joined the ranks of, developed nations. Brazil, China, and India will have established themselves as, economic superpowers on a par with the United States, Japan, and the European, Union. Barriers to cross-border trade and investment will be lower than they are today., Material culture will be increasingly homogeneous across developed nations, and, markets will be more global., In this global world managers will increasingly take advantage of opportunities to, expand the business of their enterprise into foreign nations, to lower costs by realizing, economies of scale from global volume and locating different business activities where, they can be performed most efficiently, and to enhance competitiveness by transferring valuable skills within the globally dispersed network of the firm’s operations. At, the same time they will face threats from new foreign competitors. In the 1970s and, 1980s, Western businesses faced competitive threats from emerging Japanese, enterprises. In the next 20 years Chinese, Indian, and Russian enterprises may well, emerge as major players in the global economy, entering the markets of Western, businesses and presenting Western firms with new competitive challenges. Indeed,, this is already starting to occur. In 2005 China’s Lenova acquires IBM’s PC operations,, signaling the company’s intention to become a major player in the global computer, industry. Similarly, Infosys and Wipro of India have become key competitors in the, global market for information technology service, and Lukoil of Russia now operates, 1,200 gas stations in the United States. The message in these developments is clear:, The world is changing! Even if an enterprise does not do business across national, borders, it may still be affected by the entry of new foreign competitors into its, domestic marketplace., Finally, globalization matters because in a global enterprise (and in the future far, more firms will be global enterprises) managers have to grapple with a host of issues, that do not occur in purely domestic enterprises, only a few of which we have discussed here. As we have seen, managers in a global enterprise have to decide on, entry mode; strategic posture; where to locate different business activities; what to, outsource to foreign producers; and how best to staff, compensate, motivate, train,, develop, and manage the human capital of their organization. There are also substantive issues associated with deciding the timing of entry into different markets, managing currency exchange rates, adjusting marketing and sales strategy to accommodate, country differences, managing globally dispersed supply chains, dealing with different, accounting and tax rules, and so on. Taken together, these factors make managing the, global enterprise a complex and challenging task, but one that is also exciting for the, skilled manager., , hiL30123_ch03_054-079.indd 74, , 10/26/06 4:52:27 PM

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Globalization and the Manager \\ CHAPTER 3, , 75, , MANAGEMENT CHALLENGES, 1., 2., , 3., 4., , 5., , 6., , How are the processes of globalization affecting the nature of competition in the textile, industry? Who are the winners in this process? Who are the losers in this process?, How might the process of globalization ultimately affect the nature of competition in the, health services industry? Who will be the winners in this process? Who will be the, losers in this process?, If the world pulls back from lowering barriers to cross-border trade and investment, and, instead raises them, what do you think will happen to the American economy?, What are the implications of continuing globalization for a computer manufacturer, based in a developed nation? What are the opportunities and challenges associated with, globalization?, What are the implications of globalization for the hiring and promotion strategy of a, firm headquartered in a major developed nation that has significant international, operations?, How do you think the rise of anti-Americanism might affect the international prospects, of a firm like Microsoft? What, if anything, can Microsoft do to counter the adverse, affects of anti-Americanism?, , MANAGEMENT PORTFOLIO, FOR THE ORGANIZATION YOU HAVE CHOSEN TO FOLLOW:, 1., , 2., 3., , 4., , Outline how the processes of globalization have impacted your firm and might affect it, in the future. What challenges is globalization creating? What opportunities are emerging as a result of globalization?, Is your firm active outside its home market? How much of its business comes from, foreign sales?, What is the largest foreign market of your firm? How does it do business in that market, (through wholly owned subsidiaries, joint ventures, exporting)? Why do you think, managers at the firm chose that entry mode?, In what ways has your firm benefited from going global?, , CLOSING CASE, , P L A N E T S TA R B U C K S, , Thirty years ago Starbucks was a single store in Seattle’s Pike, Place Market selling premium roasted cof fee. Today it is a, global roaster and retailer of cof fee with o ver 8,400 stores,, more than 2,000 of w hich are found in 31 countries outside, the United States. Starb ucks Cor poration embark ed on its, current course in the 1980s w hen the company’s director of, marketing, Howard Schultz, came back from a trip to Ital y, enchanted with the Italian cof feehouse experience. Schultz,, , who later became CEO, persuaded the compan y’s owners to, experiment with the coffeehouse format—and the Starbucks, experience was born. The basic strategy was to sell the company’s own premium roasted coffee, along with freshly brewed, espresso-style coffee beverages, a variety of pastries, cof fee, accessories, teas, and other products, in a tastefull y designed, coffeehouse setting. The company also stressed providing superior customer service. Reasoning that motivated employees, 75, , hiL30123_ch03_054-079.indd 75, , 10/26/06 4:52:27 PM

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76, , PART 1 // Managers and the Environment, , provide the best customer ser vice, Starbucks’ executives deIn Asia Starbucks’ most common strategy was to license, voted a lot of attention to emplo yee hiring and training proits format to a local operator in retur n for initial licensing, grams and progressive compensation policies that ga ve even, fees and ro yalties on store re venues. Starb ucks also sold, part-time employees stock option grants and medical benefits., coffee and related products to the local licensees, w ho then, The formula met with spectacular success in the United States,, resold them to customers. As in Japan, Starb ucks insisted, where Starbucks went from obscurity to one of the best-known, on an intensive employee training program and strict specibrands in the country in a decade., fications regarding the format and layout of the store. HowIn 1995, with almost 700 stores across the United States,, ever, Starbucks became disenchanted with some of the, Starbucks began exploring foreign opportunities. Its first tarstraight licensing ar rangements and converted several into, get mark et was Japan. Although Starbucks had resisted a, joint venture arrangements or wholly owned subsidiaries. In, franchising strategy in Nor th America, where its stores are, Thailand, for example, Starbucks initially entered a licenscompany owned, Starbucks initially decided to license its foring agreement with Coffee Partners, a local Thai company., mat in Japan. However, the company also realized that a pure, Under the terms of the licensing agreement, Coffee Partners, licensing ag reement would not gi ve Starbucks the control, was required to open at least 20 Starbucks cof fee stores in, needed to ensure that the Japanese licensees closely followed, Thailand within five years. However, Coffee Partners found, Starbucks’ successful formula. So the company established a, it difficult to raise funds from Thai banks to f inance this, joint venture with a local retailer, Sazaby Inc. Each company, expansion. In July 2000 Starbucks acquired Coffee Partners, held a 50 percent stak e in the v enture, Starbucks Coffee of, for about $12 million. Its goal w as to gain tighter control, Japan. Starbucks initially invested $10 million in this venture,, over the expansion strategy in Thailand. A similar developits first foreign direct investment. The Starbucks format was, ment occur red in South K orea, where Starbucks initiall y, then licensed to the venture, which was assigned responsibillicensed its format to ESCO Korea Ltd. in 1999. Although, ity for growing Starbucks’ presence in Japan., ESCO soon had 10 successful stores open, Starb ucks felt, To mak e sure the Japanese operations replicated the, that ESCO w ould not be ab le to achie ve the compan y’s, Starbucks e xperience in Nor th America, Starbucks, aggressive growth targets, so in December 2000 it converted, transferred some emplo yees to the Japanese operation., the licensing ar rangement into a joint v enture with ShinThe licensing ag reement required, segae, the parent company of ESCO., all Japanese store managers and, The joint venture enabled Starbucks, employees to attend training, to exercise greater control over the, classes similar to those gi ven to, growth strategy in South Korea and, U.S. employees. The agreement also, to help fund that operation w hile, required that stores adhere to the, gaining the benefits of a local operdesign parameters established in the, ating par tner. By October 2000, United States. In 2001 the compan y, Starbucks had invested some $52, introduced a stock option plan for, million in foreign joint ventures., all Japanese emplo yees, making it, By the end of 2002, with more, the first company in Japan to do so., than 1,200 stores in 27 countries, Skeptics doubted that Starbucks, outside Nor th America, Starbucks, would be able to replicate its Nor th, was initiating aggressive expansion, American success o verseas; b ut by, plans into mainland Europe. The, 2005 Starbucks had almost 550 stores, company’s plans called for opening, in Japan, and it plans to continue, stores in six European countries, inopening them at a brisk pace., cluding the coffee cultures of France, After getting its feet wet in Japan,, and Italy. As its f irst entry point on, the compan y be gan an agg ressive, the European mainland (Starb ucks, foreign investment program. In 1998, had 150 stores in Great Britain),, it purchased Seattle Coffee, a British, Starbucks chose Switzerland. Drawcoffee chain with 60 retail stores, for, ing on its e xperience in Asia, the, Konnichiwa Japan was the first, $84 million. An American couple,, company entered a joint v enture, foreign market for Starbucks, and it, originally from Seattle, had star ted, with a Swiss company, Bon Appetit, remains one of the largest. Starbucks, Seattle Coffee with the intention of, Group, Switzerland’s lar gest food, now has around 550 stores in the, establishing a Starb ucks-like chain, service company. Bon Appetit was, country, where it has become part of, in Britain. In the late 1990s Star to hold a majority stak e in the venthe local scene., bucks opened stores in Taiwan, Chiture, and Starb ucks would license, na, Singapore, Thailand, New Zeaits for mat to the Swiss compan y, © AP Photo/Shizuo Kambayashi, land, South Korea, and Malaysia., using an agreement similar to those, , hiL30123_ch03_054-079.indd 76, , 10/26/06 6:18:52 PM

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Globalization and the Manager \\ CHAPTER 3, , it had used successfull y in Asia. This was followed by a, joint venture in Ger many with KarstadtQuelle, one of the, country’s largest retailers. Under that ag reement Starbucks, held 18 percent of the equity in the v enture, and Karstadt, held the remainder. In early 2005, with more than 2,000 international stores, Starbucks announced that it belie ved, there was the potential for up to 15,000 stores outside the, United States.50, CASE DISCUSSION QUESTIONS, 1. What are the benef its to Starb ucks from e xpanding, internationally?, 2. Why do y ou think Starb ucks has been so successful, internationally?, , 77, , 3. Initially Starbucks expanded internationally by licensing, its for mat to foreign operators. It soon became, disenchanted with this strategy. Why?, 4. Why do you think Starbucks has now elected to expand, internationally primarily through local joint v entures to, which it licenses its for mat, as opposed to a pure, licensingstrategy?, 5. What are the adv antages of a joint v enture entry mode, for Starb ucks o ver entering through w holly o wned, subsidiaries? On occasion, though, Starbucks has chosen, a wholly owned subsidiary to control its foreign e xpansion (such as in Britain and Thailand). Why?, , ENDNOTES, 1. E.D. Cook et al., “Outsourcing Tax Returns Raises Legal and Ethical Concerns,”, Practical Tax Strategies, vol. 75 (August 2005), pp. 68–74; J .F. Reeves, “CPAs, and Foreign Outsourcing,” The Practical Accountant, June 2004, p. 23; R.A., Davis, “Outsourcing Sparks Retur ns,” Accounting Technology, vol. 21 (January, 2005), pp. 37–43., 2. For details, see T.L. Friedman, The World Is Flat (New York: Farra, Straus and, Giroux, 2005); R.B. Reich, The Work of Nations (New York: A.A. Knopf, 1991);, and J.A. Frankel, Globalization of the Economy (National Bureau of Economic, Research: Working Paper no. 7858, 2000)., 3. For a detailed but accessible description, see M. Friedman and R. Friedman, Free, to Choose (London: Penguin Books, 1980)., 4. For a classic summary of the tenets of Marxism details, see A. Giddens, Capitalism and Modern Social Theory (Cambridge: Cambridge University Press, 1971)., 5. S. Fisher, R. Sahay, and C.A. Vegh, “Stabilization and the Growth in Transition, Economies: The Early Experience,” Journal of Economic Perspectives 10 (Spring, 1996), pp. 45–66., 6.Heritage Foundation, 2005 Index of Economic Freedom, www.heritage.org., 7. For details, see Chapters 5 and 7 in C.W.L. Hill, International Business, 6th ed., (New York: McGraw-Hill, 2007)., 8.World Trade Organization, 2004 Annual Report (Geneva: WTO, 2005)., .9 United Nations, World Investment Report 2005 (New York & Gene va: United, Nations,2005)., 10.United Nations, World Investment Report 2005 ., 11.Frankel, Globalization of the Economy., 12.. J.G. Fernald and V. Greenf ield, “The F all and Rise of the Global Econom y,”, Chicago Fed Letters, April 2001, pp. 1–4., ., 13., Data compiled from various sources and listed by CyberAtlas at http://cyberatlas., internet.com/big_picture/., , 14.www.forrester.com/ER/Press/ForrFind/0,1768,0,00.html., 15. For a counterargument, see “Geography and the Net: Putting It in Its Place,” The, Economist, August 11, 2001, pp. 18–20., 16.Frankel, Globalization of the Economy., 17. Data from Bureau of Transportation Statistics, 2001., 18. Fernald and Greenfield, “The Fall and Rise of the Global Economy.”, 19.Data located at http://www .bts.gov/publications/us_international_trade_and_, freight_transportation_trends/2003/index.html., 20.United Nations, World Investment Report 2005; United Nations Conference on, Trade and Development, “Data Show That Foreign Direct Investment Climbed, Sharply in 2005,” UNCTAD press release, January 23, 2006., , hiL30123_ch03_054-079.indd 77, , 21.World Trade Organization, International Trade Statistics 2005 (Geneva: WTO,, 2005); United Nations, World Investment Report 2005; United Nations Conference on Trade and De velopment, “Data Sho w That Foreign Direct In vestment, Climbed Sharply in 2005.”, 22.United Nations, World Investment Report 2005., 23.I. Metthee, “Playing a Lar ge Part,” Seattle Post-Intelligencer, April 9, 1994,, p.13., 24. D. Pritchard, “Are Federal Tax Laws and State Subsidies for Boeing 7E7 Selling, America Short?” Aviation Week, April 12, 2004, pp. 74–75., 25. W.M. Bulkeley, “IBM to Export Highly Paid Jobs to India,” The Wall Street Journal, December 15, 2003, pp. B1, B3., 26. T. Levitt, “The Globalization of Markets,” Harvard Business Review, May–June, 1983, pp. 92–102., 27.See F.T. Knickerbocker, Oligopolistic Reaction and Multinational Enterprise, (Boston: Har vard Business School Press, 1973); and R.E. Ca ves, “Japanese, Investment in the U .S.: Lessons for the Economic Analysis of F oreign Investment,” The World Economy 16 (1993), pp. 279–300., 28.See J. Bhagwati, In Def ense of Globalization (New York: Oxford Uni versity, Press, 2004)., 29. A large body of evidence supports the proposition that free trade stimulates economic growth. See J.D. Sachs and A. Warner, “Economic Reform and the Process, of Global Integration,” Brookings Papers on Economic Activity, 1995, pp. 1–96;, J.A. Frankel and D. Romer, “Does Trade Cause Growth?” American Economic, Review 89, no. 3 (June 1999), pp. 379–99; and D . Dollar and A. Kraay, “Trade,, Growth, and P overty,” Working P aper, De velopment Research Group, World, Bank, June 2001. Also, for an accessible discussion of the relationship between, free trade and economic g rowth, see T. Taylor, “The Truth about Globalization,”, Public Interest, Spring 2002, pp. 24–44., 30. K. Belson, “In U.S., Cell Phone Users Are Often All Talk,” The New York Times ,, December 13, 2004, pp. C1, C4., 31.J.Z. Namenwirth and R.B. Weber, Dynamics of Culture (Boston: Allen & Unwin,, 1987), p. 8., 32.R. Mead, International Mana gement: Cr oss Cultur al Dimensions (Oxford:, Blackwell Business, 1994), p. 7., 33. G. Rice, “Doing Business in Saudi Arabia,” Thunderbird International Business, Review, January–February 2004, pp. 59–84., 34. E.T. Hall and M.R. Hall, Understanding Cultural Differences (Yarmouth, ME:, Intercultural Press, 1990)., 35.D. Barboza, “An Unknown Giant Fle xes Its Muscles, ” The Ne w York Times ,, December 4, 2004, pp. B1, B3., , 10/26/06 4:52:31 PM

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78, , PART 1 // Managers and the, Environment, Environment, , NOTES, 36. See J. Birkinshaw and N. Hood, “Multinational Subsidiary Evolution: Capability, and Char ter Change in F oreign Owned Subsidiar y Companies;” Academy of, Management Review 23 (October 1998), pp. 773–95; A.K. Gupta and V.J. Govindarajan, “Knowledge Flows within Multinational Cor porations,” Strategic Management Journal 21 (2000), pp. 473–96; V.J. Govindarajan and A.K. Gupta, The, Quest for Global Dominance (San Francisco: Jossey-Bass, 2001); T.S. Frost, J.M., Birkinshaw, and P.C. Ensign, “Centers of Excellence in Multinational Cor porations,” Strategic Management Journal 23 (2002), pp. 997–1018; and U. Andersson, M. Forsgren, and U. Holm, “The Strate gic Impact of Exter nal Networks,”, Strategic Management Journal 23 (2002), pp. 979–96., , 41. Shay and Bruce, “Expatriate Managers.” Also see J.S. Black and H. Gregersen,, “The Right Way to Manage Expatriates,” Harvard Business Review, March–, April 1999, pp. 52–63; Y. Baruch and Y. Altman, “Expatriation and Repatriation in MNCs—A Taxonomy,” Human Resour ce Mana gement 41 (2002),, pp. 239–59; Cornell Hotel and Restaurant Administration Quarterly, 38 (1997), pp. 30–35., 42. C.M. Solomon, “Success Abroad Depends upon More Than Job Skills,” Personnel Journal, April 1994, pp. 51–58., 43.C.M. Solomon, “Unhappy Trails,” Workforce, August 2000, pp. 36–41., , 37.S. Leung, “Armchairs, TVs, and Espresso: Is It McDonald’ s?” The Wall Street, Journal, August 30, 2002, pp. A1, A6., , 44. Solomon, “Success Abroad Depends upon More Than Job Skills.”, , 38.C.K. Prahalad and Y.L. Doz, The Multinational Mission: Balancing Local, Demands and Global Vision (New York: Free Press, 1987). Also see J. Birkinshaw, A. Morrison, and J. Hulland, “Structural and Competitive Determinants, of a Global Inte gration Strategy,” Strategic Management Journal 16 (1995),, pp. 637–55., , 46. G. Oddou and M. Mendenhall, “Expatriate Performance Appraisal: Problems and, Solutions,” in International Human Resource Management, ed. G. Mendenhall, and M. Oddou (Boston: PWS-Kent, 1991)., , 39. Sources: M. Gunther, “MTV’s Passage to India,” Fortune, August 9, 2004, pp., 117–22; B. Pulley and A. Tanzer, “Sumner’s Gemstone,” Forbes, February 21,, 2000, pp. 107–11; K. Hoffman, “Youth TV’s Old Hand Prepares for the Digital, Challenge,” Financial Times, February 18, 2000, p. 8; presentation b y Sumner, M. Redstone, chair man and CEO , Viacom Inc., deli vered to Salomon Smith, Barney 11th Annual Global Entertainment Media, Telecommunications Conference, Scottsdale, AZ, January 8, 2001. Archived at www.viacom.com.Viacom, 10K Statement, 2003., 40. C.W.L. Hill, P. Hwang, and W.C. Kim, “An Eclectic Theory of the Choice of International Entry Mode,” Strategic Management Journal 11 (1990), pp. 117–28;, C.W.L. Hill and W.C. Kim, “Searching for a Dynamic Theory of the Multinational Enterprise: A Transaction Cost Model,” Strategic Management Journal 9, (Special Issue on Strategy Content, 1988), pp. 93–104., , 45. For details, see Chapter 18 in Hill, International Business ., , 47. S.J. Kobrin, “Geocentric Mindset and Multinational Strate gy,” Journal of International Business Studies 25 (1994), pp. 493–511., 48.M. Banai and L.M. Sama, “Ethical Dilemma in MNCs’ International Staffing, Policies,” Journal of Business Ethics, June 2000, pp. 221–35., 49.Reitman and Schuman, “Men’s Club: Japanese and K orean Companies Rarel y, Look Outside for People to Run Their Overseas Operations;” Wall Street Journal,, September 26, 1996, p. R17., 50.Sources: Starbucks 10K, v arious years; C. McLean, “Starb ucks Set to In vade, Coffee-Loving Continent,” The Seattle Times, October 4, 2000, p. E1; J. Ordonez,, “Starbucks to Start Major Expansion in Overseas Market,” The Wall Street Journal, October 27, 2000, p. B10; S. Homes and D . Bennett, “Planet Starbucks, ”, BusinessWeek, September 9, 2002, pp. 99–110; “Starbucks Outlines International, Growth Strategy,” Business Wire, October 14, 2004., , 78, , hiL30123_ch03_054-079.indd 78, , 10/26/06 4:52:31 PM

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Globalization and the Manager \\ CHAPTER 3, , 79, , NOTES, , hiL30123_ch03_054-079.indd 79, , 10/26/06 4:52:32 PM

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4, LEARNING OBJECTIVES, , STAKEHOLDERS, ETHICS,, CORPORATE SOCIAL RESPONSIBILITY, AND, , After Reading This Chapter You Should Be Able to :, 1, , Identify stakeholders in an organization., , 2, , Describe the most common types of ethical issues managers confront., , 3, , Explain how managers can incorporate ethical factors into their decision making., , 4, , Outline the main arguments for and against corporate social responsibility., , 5, , Explain what managers can do to behave in a socially responsible manner., , / / / / / / / / / / / / / / /, , Stakeholders and, Stakeholder Management, Stakeholders and the, Organization, Taking Stakeholders into, Account, Business Ethics, Ethical Issues in Management, The Roots of Unethical, Behavior, Philosophical Approaches to, Ethics, , hiL30123_ch04_080_103.indd 80, , Behaving Ethically, Social Responsibility, Arguments for Social, Responsibility, The Friedman Doctrine, In Conclusion: Why Does It, Matter?, Management Challenges, Management Portfolio, Closing Case: Working, Conditions at Wal-Mart, , 10/27/06 8:08:11 AM

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Stakeholders, Ethics, and Corporate Social Responsibility \\ CHAPTER 4, , 81, , Protestors Buy, Sneakers Too, Nike’s use of “sweatshop, labor” in Southeast Asia, led to a wave of protests, against the company in, the United States. Not, only did this hurt Nike’s, reputation, but it also, adversely affected, demand for the, company’s products., Today the company is a, leader in incorporating, ethical issues into its, strategic decision, making., © AP Photo/Tina Fineberg., , / / / / / / / / / / / / / / / / / / / / /, , I, , n their quest to boost profitability, during the 1990s, managers at Nike contracted out the production of, sports shoes to producers in the developing world. Unfortunately for Nike, the working conditions at several, of these producers were very poor, and the company, was subsequently attacked for using “sweatshop labor.” Typical of the allegations were those detailed in, the CBS news program 48 Hours. The report told of, young women at a Vietnamese subcontractor who, worked six days a week, in poor working conditions, with toxic materials, for only 20 cents an hour. The re-, , hiL30123_ch04_080_103.indd 81, hiL30123_ch04_080_103.indd 81, , port also stated that a living wage in Vietnam was at, least $3 a day, an income that could not be achieved, without working substantial overtime. Nike was not, breaking any laws, nor were its subcontractors; but this, report and others like it raised questions about the ethics of using “sweatshop labor.” It may have been legal,, helping the company increase its profitability. But was, it ethical to use subcontractors who by Western standards exploited their workforce? Nike’s critics thought, not, and the company found itself the focus of a wave, of demonstrations and consumer boycotts.1, , 11/9/06 7:41:10 PM, 11/9/06 7:41:10 PM

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82, , PART 1 // Managers and the Environment, , The Nike story illustrates what should be a cardinal principle of business: The quest to maximize profitability should be constrained not just by the law but also by ethical obligations. It, is often argued that the goal of managers in business enterprises should be to take actions that, maximize long-term shareholder v alue and that the best w ay to do this is to maximize the, long-term prof itability of the enter prise. However, in this chapter w e argue that managers, must also behave in an ethical and socially responsible manner when pursuing this goal. They, must do so because it is the right thing to do—and also because doing so can help an organization maintain and enhance its reputation with k ey constituencies or stakeholders, whose support is necessary for the survival of the enterprise. By using “sweatshop labor” Nike damaged, its reputation and alienated some members of a k ey stakeholder group—its customers, who, chose to purchase sneakers from other suppliers. To repair the company’s reputation and rebuild support among customers, managers at Nike formulated a code of conduct that requires, suppliers to adhere to certain labor standards. The company has also hired independent auditors to regularly monitor suppliers to mak e sure they comply with the code. F rom being the, target of v ociferous criticism, Nik e has become a case study in ho w to incor porate ethical, issues into management decisions., We open this chapter with a discussion of stakeholders and stakeholder management. Next, we turn our attention to a discussion of b usiness ethics, and we assert that behaving ethically, can help an organization maintain the support of key stakeholders. The chapter closes with a, discussion of corporate social responsibility, which is the notion that managers should take the, social consequences of economic actions into account when making decisions., , // Stakeholders and Stakeholder Management, A stakeholder is an individual, institution, or community that has a stak e in the operations, of an or ganization and in ho w it does b usiness.2 Stakeholders include those w ho regularly, transact directly with the or ganization, most notab ly employees, customers, suppliers, distributors, shareholders, and creditors. Stakeholders also include institutions that are more remote but still ha ve a stak e in ho w the or ganization operates and does b usiness, including, government, local communities, and the general public (see Figure 4.1)., , lic, , G, , Employees, , Cus, , ers, rs, , dito, , Stakeholders in the, outer circle, do not transact, with the firm on a, regular basis but, still have a stake, in how it operates., , Cre, , s, , tor, , tom, , The, firm, , ibu, istr, , nt, me, ern, ov, , Stakeholders in the, inner circle transact, with the firm on a, regular basis and, have an important, stake in how it, operates., , Gen, era, lp, ub, , stakeholder, An individual, institution,, or community that has a, stake in the operations of, an organization and in how, it does business., , D, , Sup, , plie, , rs, , Shareholders, , Lo, , cal c, s, o m m u n iti e, , FIG UR E 4 .1, Stakeholders, , hiL30123_ch04_080_103.indd 82, , 10/27/06 8:08:37 AM

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Stakeholders, Ethics, and Corporate Social Responsibility \\ CHAPTER 4, , 83, , // STAKEHOLDERS AND THE ORGANIZATION, All stakeholders are in an exchange relationship with an organization. Each stakeholder group, supplies the organization with important resources (or contributions), and in e xchange each, expects its interests to be satisfied (by inducements).3 Employees provide labor and skills and, expect commensurate income, job satisf action, job security, and good w orking conditions., Customers provide revenues and want reliable products that represent value for money. Suppliers provide inputs to the or ganization and seek prompt pa yment and dependable buyers., Distributors help sell an or ganization’s output, and in retur n they seek f avorable payment, terms and products that will sell w ell. Shareholders provide a cor poration with risk capital., They are also its legal owners. In exchange they expect management to maximize the retur n, on their investment in the corporation. Creditors such as bondholders provide the organization, with capital in the form of debt, and they expect to be repaid on time with interest., Governments provide an organization with rules and regulations that govern business practice and maintain f air competition. In exchange they want businesses to adhere to r ules and, regulations and pay their taxes on time. Local communities provide organizations with local, infrastructure and want businesses that are responsible citizens. The general public provides, organizations with national infrastr ucture and seeks some assurance that the quality of life, will be improved as a result of the organization’s existence., , // TAKING STAKEHOLDERS INTO ACCOUNT, Managers need to take the various claims of stakeholders into account when making decisions., If they do not, stakeholders may withdraw their support. Shareholders may sell their shares,, bondholders demand higher interest payments on new bonds, employees leave their jobs, and, customers buy elsewhere. Suppliers may seek more dependable buyers, and distributors may, favor the products of other enter prises. Unions, as the representati ves of emplo yees, may, engage in disr uptive labor disputes. Government may take civil or criminal action against a, firm and its top of ficers, imposing f ines and in some cases jail ter ms. Communities ma y, oppose a firm’s attempts to locate its f acilities in their area, and the general pub lic may form, pressure groups, demanding action against businesses that impair the quality of life. Any of, these reactions can have a damaging impact on an enter prise. In other words, catering to the, claims of different stakeholder groups is good business strategy and will help the organization, to survive and prosper in the long run.4, Unfortunately managers cannot always satisfy the claims of all stak eholders. The goals of, different groups may conflict. In practice few organizations have the resources to simultaneously satisfy all stak eholder claims. 5 For example, employee claims for higher w ages can, conflict with consumer demands for reasonab le prices and shareholder demands for higher, returns. Often managers must choose between the competing claims of different stakeholders., To do so, the y must identify the most impor tant stakeholders and gi ve highest priority to, pursuing actions that satisfy their needs. Stakeholder impact analysis can provide such identification. Typically stakeholder impact analysis follows the steps illustrated in Figure 4.2.6, Such an analysis enables managers to identify the stakeholders most critical to the survival, of their organization, making sure that the satisfaction of their needs is paramount. Most businesses that have gone through this process quickl y come to the conclusion that three stak eholder groups must be satisfied above all others if a firm is to survive and prosper: customers,, employees, and shareholders. 7 If customers defect, f inancial perfor mance will decline. If, skilled employees leave the organization for work elsewhere, the human capital that the f irm, can draw upon will decline, producti vity will f all, costs will increase, and f inancial performance will again f all. And if shareholders sell their shares, the stock price of the f irm will, decline, its cost of capital will rise, and the firm will find it difficult to raise fresh capital from, investors., In general, if managers can satisfy the claims of the customers and emplo yees of the, firm, financial performance will be strong, the share price will rise, and this will satisfy the, claims of shareholders.8 In other words, in the long run satisfying the claims of shareholders, , hiL30123_ch04_080_103.indd 83, , 10/27/06 8:08:45 AM

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84, , PART 1 // Managers and the Environment, , FIG UR E 4 .2, Evaluating Stakeholder, Claims, , ■ Monsanto: The cost of, ignoring stakeholders., , hiL30123_ch04_080_103.indd 84, , Identify, stakeholders, , Identify, stakeholder, interests and, concerns, , Identify, claims, stakeholders, place on the, organization, , Take actions,, T, starting with those, that address the, claims of the, most important, stakeholders, , Identify, actions to satisfy, claims of, various, stakeholders, , Weight, stakeholders by, their importance, to the firm, , requires managers to first pay close attention to their customers and employees. If customers are satisf ied, they will continue to purchase from the f irm and sales will be strong. If, employees are satisf ied, they will work hard, productivity will increase, costs will f all, and, financial performance will improve. Enterprises like Southwest Airlines and Starbucks have, made a virtue out of satisfying the demands of their customers and creating a good environment for their employees. It is not surprising that both enterprises have been rewarded with, robust f inancial perfor mance and a strong stock price, thereb y satisfying the claims of, shareholders., Although it is important to focus on the claims of customers, employees, and shareholders,, managers must be careful not to ignore the claims of other stak eholder groups. Monsanto,, for example, spent billions of dollars to develop genetically modified crops that were resistant to common pests. Monsanto’ s belief w as that these products w ould benef it farmers,, Monsanto’s customers, who could spend less money on chemical insecticides. The company, also thought that the resulting prof its would benef it shareholders through appreciation in, the company’s stock price, as well as employees, who would have more secure employment., However, Monsanto failed to anticipate the adverse reaction from another important stakeholder group: the general public. Monsanto’s introduction of genetically modified crops has, met stiff resistance from the general pub lic in both Europe and Latin America. The public, has several concerns. One is that geneticall y modif ied food might constitute a health risk, and cause cancer. A second is that in the long r un, Monsanto’s insect-resistant crops might, make matters worse because over time insects will e volve resistance to the “natural pesticides” engineered into Monsanto’s plants, rendering the plants vulnerable to a new generation of “superbugs.” A third concern, termed “genetic pollution,” is the possibility that the, DNA inserted into Monsanto’s plants might jump across species into plants it w as never, intended for, there producing a pesticide harmful to insects that do not damage crops. Public concern led to action by pressure groups such as Friends of the Ear th and Greenpeace., These pressure g roups successfully lobbied governments in Europe and Latin America to, prohibit the sale of certain genetically modified foods, which hurt Monsanto’s shareholders, and employees., Critics argue that Monsanto hurt itself by initially dismissing public concerns. Managers,, claiming that protestors ignored scientif ic evidence, stated that geneticall y modif ied seeds, had benef icial effects on agricultural productivity and would lead to lower food prices. The, general public in Europe and par ts of Latin America perceived Monsanto’s approach, which, seemed reasonable to the f irm’s managers, as ar rogant and insensitive. Monsanto may have, , 10/27/06 8:08:46 AM

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Stakeholders, Ethics, and Corporate Social Responsibility \\ CHAPTER 4, , helped its case if it had f irst invested in a, carefully crafted public education campaign, designed to infor m both the pub lic and government officials that geneticall y modif ied, food poses no health risks, and that concer ns, regarding superb ugs and genetic pollution, are vastly exaggerated. The reality is that the, scientific evidence is on Monsanto’s side; but, by ignoring public perceptions and failing to, anticipate the hostile reaction from an important stakeholder group, Monsanto hurt rather, than helped its case.9, Another prob lem arises w hen managers, make the mistak e of putting the claims of, shareholders in front of all other claims. It is, true that a b usiness corporation should tr y to, maximize the retur n associated with holding, its stock; b ut it is also tr ue that if managers, focus obsessively on that goal, the y may take, actions that not onl y run counter to the inter ests of other important stakeholder groups, but, No Frankenfood Here, Please These, also are not in the best long-ter m interests of, Greenpeace activists in Sweden were part, shareholders themselves. Most notably, in an, of a wide European movement to stop, attempt to boost the stock price, managers may, Monsanto from selling genetically modified, cut investments in employees, productive asseeds in Europe. Because it initially, sets, and technology that are essential for the, dismissed protests from powerful interest, health of the cor poration. The increased cash, groups that opposed the introduction of, flow may boost the short-term performance of, genetically modified food, Monsanto found, the firm; however, in the long r un the lack of, it harder to introduce its seeds in Europe., investment in employees, production facilities,, © Greenpeace, and new technology can lead to a decline in, performance that leaves all worse off., For example, when Al Dunlap joined the troub led small appliance mak er Sunbeam,, shareholders expected great things. In his previous job as CEO of Scott Paper, Dunlap had, engineered a tough turnaround. Within three months of joining Sunbeam, Dunlap had fired, many senior managers and announced plans to cut the w orkforce in half and close 18 of, the company’s 26 f actories. At the same time he claimed that his cost-cutting strate gy, would soon boost profits and revenues, richly rewarding stockholders. The stock price did, surge from $18 when Dunlap was first hired to $53 a share over the next 18 months as the, cost-cutting strategy initially boosted the bottom line. Then Sunbeam’s performance began, to falter. It soon became clear that Dunlap had so gutted Sunbeam’ s workforce, facilities,, and product development pipeline that the company lacked the capability to meet his ambitious growth goals. Worse still, Dunlap had apparently been urging his managers to engage in ethically dubious practices to hit f inancial performance goals and keep the stock, price up. One of these practices, kno wn as “bill and hold ,” involved Sunbeam selling its, products to retailers at a lar ge discount to nor mal prices, and then holding them in w arehouses for deli very later. In ef fect the compan y had been inflating its f inancial performance by shifting sales from the future to the cur rent period. When this practice w as, discovered, the board of directors f ired Dunlap. It w as too late for Sunbeam, ho wever,, which never did recover from Dunlap’s tenure and ultimately went bankrupt.10, In sum, by trying to boost the shor t-term share price, Dunlap damaged Sunbeam and did, considerable har m to all stak eholder g roups, including shareholders. The lesson in the, Monsanto and Sunbeam e xamples is that managers must pa y attention to all stak eholder, groups, balancing their claims and taking actions that are in the best long-term interests of key, stakeholders—employees, customers, and shareholders—while being careful not to alienate, , hiL30123_ch04_080_103.indd 85, , 85, , ■ Al Dunlap: The king of, destructive downsizing at, Sunbeam., , 10/26/06 5:27:17 PM

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86, , PART 1 // Managers and the Environment, , other k ey stak eholders, such as the general pub lic. As we will see in the ne xt section, if, managers have a strong ethical foundation, they are far less likely to take actions that damage, stakeholder interests., , // Business Ethics, business ethics, Accepted principles of right, or wrong governing the, conduct of businesspeople., ethical dilemmas, Situations in which there is, no agreement over exact, accepted principles of right, and wrong., , The term ethics refers to accepted principles of right or wrong that go vern the conduct of a, person, the members of a profession, or the actions of an organization. Business ethics are, the accepted principles of right or wrong go verning the conduct of b usinesspeople. Ethical, decisions are those that are in accordance with those accepted principles of right and wrong,, whereas an unethical decision is one that violates accepted principles. This is not as straightforward as it sounds. Managers ma y face ethical dilemmas ,w, hich are situations where, there is no ag reement over exactly what the accepted principles of right and wrong are, or, where none of the available alternatives seems ethically acceptable., In our society many accepted principles of right and wrong are not onl y universally recognized but also codified into law. In the business arena there are laws governing product liability, (tort laws), contracts and breaches of contract (contract law), the protection of intellectual property (intellectual property law), competitive behavior (antitrust law), and the selling of securities (securities law). Not only is it unethical to break these la ws—but it is ille gal. However,, many actions, although legal, do not seem to be ethical. As we saw in the introduction, Nike’s, use of “sweatshop labor” in developing nations was not illegal, but many considered it unethical. Behaving ethically, in other words, goes beyond staying within the bounds of the law., , // ETHICAL ISSUES IN MANAGEMENT, The ethical issues managers confront co ver a wide range of topics; b ut most arise due to a, potential conflict between the goals of the organization, or those of individual managers, and, the fundamental rights of impor tant stakeholders. Stakeholders have basic rights that should, be respected, and it is unethical to violate those rights. Shareholders ha ve the right to timely, and accurate information about their investments (in accounting statements). Customers have, the right to be full y informed about the products and ser vices they purchase, including how, those products might har m them or others, and it is unethical to restrict their access to such, information. Employees have the right to safe w orking conditions, to f air compensation for, the work they perform, and to be treated in a just manner by managers. Suppliers and distributors have the right to expect contracts to be respected, and a firm should not take advantage of, a power disparity to opportunistically rewrite contracts. Competitors have the right to expect, that a f irm will abide b y the r ules of competition and not violate the basic principles of, antitrust laws. Communities and the general public, including their political representatives in, government, have the right to expect that a firm will not violate the basic expectations society, places on enter prises—for example, by dumping to xic pollutants into the en vironment or, overcharging for work performed on government contracts., Those who take the stakeholder view of business ethics often assert that it is in the enlightened self-interest of managers to behave in an ethical manner that recognizes and respects the, fundamental rights of stakeholders, because doing so will ensure the support of stakeholders,, which ultimately benef its the f irm and its managers. 11 Others go be yond this instr umental, approach to ethics to argue that in many cases acting ethically is simply the right thing to do., They argue that businesses need to reco gnize their moral responsibility to gi ve something, back to the society that made their success possible., Unethical behavior tends to arise when managers decide to put the attainment of their own, personal goals, or the goals of the or ganization, above the fundamental rights of one or more, stakeholder groups. The most common examples of such behavior involve self-dealing, information manipulation, anticompetiti ve behavior, opportunistic exploitation of suppliers and, distributors, the maintenance of substandard working conditions, environmental degradation,, and corruption., , hiL30123_ch04_080_103.indd 86, , 10/27/06 8:08:50 AM

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Stakeholders, Ethics, and Corporate Social Responsibility \\ CHAPTER 4, , Self-Dealing Self-dealing occurs w hen managers f ind a, way to feather their o wn nests with cor porate funds. Classic, examples of this behavior include (1) senior managers who treat, corporate funds as their own personal treasury, raiding them to, support a la vish lifestyle; (2) senior managers w ho use their, control over the compensation committee of the board of directors to award themselves multi-million-dollar pay increases or, stock option grants that are out of propor tion with their contribution to the cor poration; and (3) instances w here individual, managers award business contracts not to the most ef ficient, supplier but to the one that pro vides the lar gest kickback. In, these cases managers are not acting in the best interests of their, shareholders and are instead consuming funds that should legitimately go to shareholders. Some of this beha vior is illegal;, some is technically legal but unethical because it violates the, basic right of shareholders to a fair return on their investment., For an example of self-dealing, consider the for mer CEO, of Tyco International, Dennis Kozlowski. Kozlowski treated, Tyco as his personal treasur y, drawing on company funds to, purchase a $30 million Manhattan apar tment and a w orldclass art collection. Kozlowski even used company funds to, help pay for a lavish $2.2 million birthday party for his wife, in Italy! Kozlowski ultimately was charged with securities, fraud, found guilty of looting Tyco of $97 million, and w as, sentenced to jail term of 81–3 to 25 years.12, , The Fall of the Self-Dealing CEO Dennis Kozlowski, the, former CEO of Tyco International, was sentenced to a, minimum of 8–31 years in jail after being convicted of looting, Tyco of nearly $100 million., © AP Photo, Ed Bailey., , Information Manipulation Information manipulation occurswhen managers use their, control over cor porate data to distort or hide infor mation to enhance their own f inancial, situations or the competitive position of the f irm. Many of the accounting scandals that swept, through American companies in the early 2000s involved cases of infor mation manipulation., For example, the now-bankrupt energy trading firm Enron hid significant debt from shareholders in off–balance sheet partnerships. This practice misled investors about the level of risk Enron had assumed and supported a much higher stock price than was justified. Not surprisingly,, this higher stock price enabled managers to exercise stock option grants for considerable personal gain (a case of information manipulation to support self-dealing). When the scale of hidden debts was finally revealed, Enron quickly collapsed into bankruptcy, resulting in losses of, over $100 billion for shareholders. Infor mation manipulation is unethical because it violates, the right of investors to accurate and timely information., Information manipulation can also tak e place with nonf inancial data. This occurred when, managers at tobacco companies suppressed inter nal research that link ed smoking to health, problems, violating the right of consumers to accurate information about the dangers of smoking. When evidence of this came to light, lawyers brought class action suits against the tobacco, companies, claiming they had intentionally caused harm to smokers. In 1999 the tobacco companies settled a lawsuit brought by several states, which sought to recover health care costs associated with tobacco-related illnesses; the total payout to the states was $260 billion!, Anticompetitive Behavior Anticompetitive behavior includes a range of actions aimed, at harming actual or potential competitors, most often by using monopoly power to enhance the, prospects of the firm. For example, in the 1990s the Justice Department claimed that Microsoft, used its monopoly in operating systems to force PC makers to bundle Microsoft’s Web browser,, Internet Explorer, with Windows and to display Internet Explorer prominently on the computer, desktop. Microsoft reportedly told PC makers that it would not supply them with Windows unless they did this. Because the PC makers had to have Windows to sell their machines, this was, a powerful threat. The alleged aim of the action, which is an example of tie-in sales (illegal under, antitrust laws), was to drive a competing browser maker, Netscape, out of business. The courts, , hiL30123_ch04_080_103.indd 87, , 87, , ■, , Self-dealing at Tyco., , ■ Information manipulation, at Tyco., , self-dealing, Situations in which, managers find a way to, feather their own nests, with corporate funds., information, manipulation, Situations in which, managers use their control, over corporate data to, distort or hide information, to enhance their own, financial situations or the, competitive position of, the firm., anticompetitive, behavior, Behavior aimed at harming, actual or potential, competitors, most often by, using monopoly power., , 10/27/06 1:46:49 PM

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88, , PART 1 // Managers and the Environment, , ■ Microsoft: Anticompetitive, behavior., , ruled that Microsoft was indeed abusing its monopoly power in this case, and in a 2001 consent, decree the company agreed to stop the practice., Putting the le gal issues aside, action such as that alle gedly under taken by managers at, Microsoft is unethical in at least three w ays. First, it violates the rights of end consumers b y, unfairly limiting their choice; second, it violates the rights of do wnstream participants in the, industry value chain, in this case PC makers, by forcing them to incorporate a particular product in their design; and third, it violates the rights of competitors to free and fair competition., , opportunistic, exploitation, Unilaterally rewriting the, terms of a contract with, suppliers, distributors, or, complement providers in a, way that is more favorable, to a firm, often using its, power to force the revision, through., , ■, , Boeing opportunism., , substandard, working conditions, Tolerating unsafe working, conditions or paying, employees below-market, rates to reduce costs of, production., , ■ Ohio Art company: Using, sweatshops., , environmental, degradation, Taking actions that directly, or indirectly result in, pollution or other forms of, environmental harm., , hiL30123_ch04_080_103.indd 88, hiL30123_ch04_080_103.indd 88, , Opportunistic Exploitation Opportunistic exploitation of other players in the value chain in, which the f irm is embedded is another e xample of unethical beha vior. Opportunistic, exploitation of this kind typically occurs when the managers of a f irm seek to unilaterally, rewrite the terms of a contract with suppliers, distributors, or complement providers in a way, that is more favorable to the f irm, often using the f irm’s power to force the revision through., For example, in the late 1990s Boeing entered a $2 billion contract with Titanium Metals, Corp. to buy certain amounts of titanium annually for 10 years. In 2000, after Titanium Metals, Corp. had already spent $100 million to expand its production capacity to fulfill the contract,, Boeing demanded that the contract be rene gotiated, asking for lo wer prices and an end to, minimum purchase agreements. As a major purchaser of titanium, managers at Boeing probably thought they had the power to push this contract revision through, and the investment by, Titanium Metals meant that f irm would be unlik ely to w alk away from the deal. Titanium, Metals Corp. promptly sued Boeing for breach of contract. The dispute was settled out of, court, and under a re vised agreement Boeing ag reed to pay monetary damages to Titanium, Metals (reported to be in the $60 million range) and entered an amended contract to purchase, titanium.13 Irrespective of the legality of this action, it seems unethical because it violated the, rights of a supplier to be dealt with in a fair and open way., Substandard Working Conditions Substandard working conditions arise when, managers tolerate unsafe working conditions or pay employees below-market rates to reduce, costs of production. The most extreme examples of such behavior occur when a f irm establishes operations in countries that lack the w orkplace regulations found in developed nations, such as the United States. The example of Nike, given earlier, falls into this category. In another recent example, the Ohio Art company ran into an ethical storm when newspaper reports, alleged that it had moved production of its popular Etch a Sketch toy from Ohio to a supplier, in Shenzhen province, where employees, mostly teenagers, worked long hours for 24 cents per, hour, below the legal minimum wage of 33 cents an hour there. Moreover, production reportedly started at 7:30 a.m. and continued until 10 p.m., with breaks onl y for lunch and dinner., Saturdays and Sundays were treated as normal workdays. This translated into a workweek of, seven 12-hour days, or 84 hours a week, well above the standard 40-hour week set by authorities in Shenzhen. Such working conditions clearly violated the rights of employees in China as, specified by local re gulations (which were poorly enforced). Is it ethical for the Ohio Art, company to use such a supplier? Many would say not.14, Environmental Degradation Environmental degradation occurs when managers take, actions that directly or indirectly result in pollution or other for ms of environmental harm., Environmental degradation can violate the rights of local communities and the general public, to clean air and water; land that is free from pollution b y toxic chemicals or excessive deforestation that causes land erosion and floods; and so on., The issue of pollution takes on added importance because some parts of the environment, are a public good that no one o wns but anyone can despoil. No one o wns the atmosphere or, the oceans, but polluting them, no matter w here the pollution originates, har ms all.15 The atmosphere and oceans can be viewed as a global commons from w hich everyone benefits but, for which no one is specif ically responsible. In such cases a phenomenon known as the tragedy of the commons becomes applicable. The tragedy of the commons occurs when a resource, held in common by all, but owned by no one, is overused by individuals, resulting in its degradation. The phenomenon w as f irst named b y Gar rett Hardin in describing a par ticular, , 11/9/06 7:41:17 PM, 11/9/06 7:41:17 PM

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Stakeholders, Ethics, and Corporate Social Responsibility \\ CHAPTER 4, , 89, , problem in 16th-century England. Large open areas called commons were free for all to use as, pasture. The poor put out livestock on these commons to supplement their meager incomes. It, was advantageous for each f amily to put out more and more li vestock, but the consequence, was far more livestock than the commons could handle. The result was overgrazing and degradation of the commons to the point where they could no longer support livestock.16, In the modern world corporations contribute to the global tragedy of the commons by moving production to locations in developing nations where environmental regulations are lacking, or less strict than they are at home. There the firms are freer to pump pollutants into the atmosphere or dump them in oceans or ri vers, thereby harming these valuable global commons., Although such action may be legal, is it ethical? Again, if seems to violate basic societal notions of ethics and clearly harms important stakeholder groups, including the general public, and local communities., Corruption Corruption can arise in a business conte xt when managers pay bribes to gain, access to lucrative business contracts. A recent example of corruption concerns the allegation, that the Texas-based energy company Halliburton participated in a consortium that made $180, million in illegal payments to government officials (that is, bribes) to secure a $4.9 billion, contract to build a liquef ied natural gas plant in Nigeria. 17 Corruption is clearly unethical: It, violates several rights, including the right of competitors to a level playing field when bidding, for contracts and, when government officials are involved, the right of citizens to e xpect that, government officials will act in the best interest of the local community or nation, and not in, response to corrupt payments that feather their own nests., Corruption is widespread in much of the w orld. According to Transparency International,, an independent nonprof it organization dedicated to e xposing and f ighting corruption, businesses and individuals worldwide spend some $400 billion a year on bribes related to government procurement contracts alone! 18 Transparency International has also measured the level, of corruption among public officials in different countries.19 As can be seen in Figure 4.3, the, , There Goes the Global, Commons It may be, legal to shift production, to countries where, environmental controls, are much laxer than in, the United States, but is, it ethical to do so? Most, think not., © Digital Vision/PunchStock, , ■ Halliburton: Allegations of, corruption., , Finland, New Zealand, United Kingdom, United States, France, Malaysia, Italy, Brazil, China, India, Zimbabwe, Russia, Indonesia, , F I G U R E 4 .3, , Nigeria, , Rankings of Corruption, by Country: 2005, , Bangladesh, 0, , 2, , 4, , 6, , 8, , Corruption index (10=clean; 0=totally corrupt), , hiL30123_ch04_080_103.indd 89, hiL30123_ch04_080_103.indd 89, , 10, , Source: Based on source data, from Transparency, International’s Corruption, Preceptions Index (2005),, www. transparency.org., , 11/9/06 7:41:18 PM, 11/9/06 7:41:18 PM

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90, , PART 1 // Managers and the Environment, , organization rated countries such as F inland and New Zealand as very clean, whereas countries such as Russia, India, Indonesia, and Zimbabwe were seen as corrupt. Bangladesh ranked, last out of all 146 countries in the survey; Finland ranked first., , // THE ROOTS OF UNETHICAL BEHAVIOR, Why do some managers beha ve unethically? What motivates them to engage in actions that, violate accepted principles of right and wrong, trample on the rights of stakeholder groups, or, simply break the law? There is no simple ans wer to this question, but a fe w generalizations, can be made (see Figure 4.4).20 First, business ethics are not divorced from personal ethics. As, individuals we are taught that it is wrong and unethical to lie and cheat and that it is right to, behave with integrity and honor and to stand up for what we believe to be right and true. The, personal ethical code that guides our behavior comes from a number of sources, including our, parents, schools, religion, and the media. Our personal ethical code e xerts a profound influence on ho w we behave as businesspeople. An individual with a strong sense of personal, ethics is less likely to behave in an unethical manner in a b usiness setting—and in particular, is less likely to engage in self-dealing and more likely to behave with integrity., Second, many studies of unethical b usiness behavior have concluded that businesspeople, sometimes do not realize they are behaving unethically, primarily because they simply fail to, ask the relevant question: Is this decision or action ethical?21 Instead they apply a straightforward business calculus to what they perceive as a business decision, for getting that the decision may also have an important ethical dimension. The fault here lies in processes that do not, incorporate ethical considerations into business decision making. This may have been the case, at Nike when managers originally decided to subcontract w ork to b usinesses in developing, nations that had poor working conditions. Those decisions were probably made on the basis of, good economic logic. Subcontractors may have been chosen on the basis of business variables, such as cost, delivery, and product quality, and the key managers simply failed to ask how the, subcontractors treated their workers. If they thought about the question at all, the y probably, reasoned that it was the subcontractors’ concern, not theirs., Unfortunately the climate in some b usinesses does not encourage people to think through, the ethical consequences of b usiness decisions. This brings us to the third cause of unethical, behavior in businesses: an organizational culture that deemphasizes business ethics, reducing, all decisions to purely economic factors. Author Robert Bryce has explained how the organizational culture at now-bankrupt energy company Enron was built on values that emphasized, , Employees, with poor, personal, ethics, , Immoral, leadership, , Unethical, behavior, , Unethical, organization, culture, , FIG UR E 4 .4, , Failure to, consider, ethical, issues, , Unrealistic, performance, goals, , Roots of Unethical, Behavior, , hiL30123_ch04_080_103.indd 90, , 10/27/06 8:09:00 AM

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Stakeholders, Ethics, and Corporate Social Responsibility \\ CHAPTER 4, , greed and deception.22 According to Bryce, the tone, was set by top managers who engaged in self-dealing, to enrich themselves and their own families. Bryce, tells ho w for mer Enron CEO K enneth La y made, sure his o wn f amily benef ited handsomely from, Enron (which is an example of self-dealing). Much, of Enron’s corporate travel business was handled by, a travel agency partly owned by Lay’s sister. When, an internal auditor recommended that the compan y, could do better b y using another tra vel agency, he, was fired. In 1997 Enron acquired a company owned, by Kenneth Lay’s son, Mark Lay, which was trying, to establish a business trading paper and pulp products. At the time Mark Lay and another company he, controlled were targets of a federal criminal investigation of bankr uptcy fraud and embezzlement. As, part of the deal, Enron hired Mark Lay as an executive with a three-year contract that guaranteed him at, least $1 million in pay over that period, plus options, to purchase about 20,000 shares of Enron. Br yce, also details how Lay’s grown daughter used an Enron, We’re the Smartest Guys in the, jet to transpor t her king-sized bed to F rance. With, Room Kenneth Lay and Jeff, Kenneth Lay as an example, it is perhaps not sur Skilling (pictured here) used to think, prising that self-dealing soon became endemic at, of themselves as the smartest guys, Enron. Another notable example was CFO Andrew, in the room. The company they built,, Fastow, who set up the of f–balance sheet par tnerEnron, was one of the most admired, ships that not only hid Enron’s true financial condienterprises of the late 1990s—until, tion from investors, but also paid tens of millions of, it was revealed that the company’s, dollars directly to Fastow (Fastow was subsequently, success was built upon systematic, indicted by the go vernment for criminal fraud and, and massive accounting fraud., went to jail)., © AFP/Getty Images., A fourth cause of unethical behavior has already, been hinted at. This is pressure from top management to meet performance goals that are unrealistic and can be attained onl y by cutting corners or acting in an unethical manner. Again, Bryce discusses how this may have occurred at, Enron. Lay’s successor as CEO, Jeff Skilling, put a perfor mance evaluation system in place, that weeded out 15 percent of “under performers” every six months. This created a pressurecooker culture with a myopic focus on short-term performance. Some executives and energy, traders responded to that pressure b y falsifying their perfor mance (such as b y inflating the, value of trades) to make it look as if they were performing better than was actually the case., The lesson from the Enron debacle is that an or ganizational culture can appear to le gitimize behavior that society would judge as unethical, par ticularly when this culture is mixed, with a focus on unrealistic performance goals, such as maximizing short-term economic performance no matter w hat the costs. In such circumstances there is a high probability that, managers may violate their own personal ethics and engage in behavior that is unethical. By, the same token, an organizational culture can do just the opposite and reinforce the need for, ethical behavior. At Hewlett-Packard, for example, Bill Hewlett and David Packard, the company’s founders, propagated a set of values known as the HP Way. These values, which shape, the way business is conducted both within and b y the corporation, have an important ethical, component. Among other things, they stress the need for confidence in and respect for people,, open communication, and concern for the individual employee., The Enron and Hewlett-Packard examples suggest a fifth root cause of unethical behavior:, leadership. Leaders help to establish the culture of an or ganization, and they set an example, that others follow. Other employees in a business often tak e their cue from business leaders;, and if those leaders do not beha ve in an ethical manner , other emplo yees may see this as, , hiL30123_ch04_080_103.indd 91, hiL30123_ch04_080_103.indd 91, , 91, , ■, , Enron: Culture and ethics., , ■ Hewlett-Packard and, ethics., , 11/9/06 7:41:20 PM, 11/9/06 7:41:20 PM

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92, , PART 1 // Managers and the Environment, , justification for their own unethical behavior. It is not what leaders say that matters, but what, they do. Enron, for example, had a code of ethics that Kenneth Lay himself often referred to;, but Lay’s own actions to enrich family members spoke louder than any words., , // PHILOSOPHICAL APPROACHES TO ETHICS, Soon we will discuss what steps managers can take to make sure that they and their coworkers, act in an ethical manner. Before doing this, however, let’s take a closer look at the philosophical underpinnings of business ethics. These theories have a practical pur pose: They provide, guidance that can help managers navigate their way through difficult ethical issues and make, better decisions., , utilitarian approach, The view that the moral, worth of actions or, practices is determined by, their consequences., , rights theories, The view that human, beings have fundamental, rights and privileges., , hiL30123_ch04_080_103.indd 92, , Utilitarian The utilitarian approach to b usiness ethics w as de veloped in the 18th and, 19th centuries. Although it has been superseded by more modern approaches, it is also part of, the tradition upon w hich newer approaches ha ve been constr ucted. Thus it is impor tant to, review this approach., The utilitarian approach to ethics holds that the moral w orth of actions or practices is, determined by their consequences. 23 An action is judged to be desirab le if it leads to the best, possible balance of good over bad consequences. Utilitarianism is committed to the maximization of good and the minimization of har m. Utilitarianism reco gnizes that actions ha ve, multiple consequences, some of w hich are good in a social sense, and some of w hich are, harmful. As a philosoph y for b usiness ethics, it focuses attention on the need to carefull y, weigh all social benef its and costs of a b usiness action and to pursue onl y actions that have, more benefits than costs. The best decisions, from a utilitarian perspective, are those that produce the greatest good for the greatest number of people., Many businesses have adopted specific tools, such as cost–benefit analysis and risk assessment, that are rooted in utilitarian philosophy. Managers often weigh the benefits and costs of, a course of action before deciding w hether to pursue it. An oil company considering drilling, in Alaska must weigh the economic benef its of increased oil production and the creation of, jobs against the costs of environmental degradation in a fragile ecosystem., Utilitarian philosophy has some serious drawbacks. One problem is measuring the benefits,, costs, and risks of a course of action. In the case of an oil compan y considering drilling in, Alaska, how does one measure the potential harm to the fragile ecosystem of the region?, The second problem with utilitarianism is that the philosophy does not consider justice., The action that produces the g reatest good for the g reatest number of people ma y result, in the unjust treatment of a minority . Such action cannot be ethical because it is unjust., For example, suppose that in the interests of k eeping down health insurance costs, the, government decides to screen people for the HIV vir us and den y insurance coverage to, those who are HIV positive. By reducing health costs, such action might producesignificant, benefits for many people; but the action is unjust because it discriminates unfairly against, a minority., Rights Theories Developed in the 20th century, rights theories recognize that human, beings have fundamental rights and privileges. Rights establish a minimum level of morally, acceptable behavior. One well-known definition of a fundamental right constr ues it as something that takes precedence over or “tr umps” a collective good. Thus we might say that the, right to free speech is a fundamental right that takes precedence over all but the most compelling collective goals; it o verrides, for e xample, the interest of the state in ci vil harmony or, moral consensus.24 Moral theorists argue that fundamental human rights form the basis for the, moral compass managers should navigate by when making decisions that have an ethical component. In a business setting, stakeholder theory provides a useful way for managers to frame, any discussion of rights. As noted earlier , stak eholders ha ve basic rights that should be, respected, and it is unethical to violate those rights., Along with rights come obligations. Because we have the right to free speech, we are also, obligated to make sure we respect the free speech of others. Within the framework of a theory, , 10/27/06 8:09:03 AM

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Stakeholders, Ethics, and Corporate Social Responsibility \\ CHAPTER 4, , of rights, certain people or institutions are obligated to provide benefits or services that secure, the rights of others. Such ob ligations also f all upon more than one class of moral agent (a, moral agent is any person or institution that is capable of moral action, such as a government, or corporation)., For example, in the late 1980s, to escape the high costs of toxic waste disposal in the West,, several f irms shipped their w aste in bulk to African nations, w here it w as disposed of at a, much lower cost. In 1987 f ive European ships unloaded to xic waste containing dangerous, poisons in Nigeria. Workers wearing thongs and shor ts unloaded the bar rels for $2.50 a day, and placed them in a dirt lot in a residential area. They were not told about the contents of the, barrels.25 Who bears the obligation for protecting the rights of workers and residents to safety, in a case like this? According to right theorists, the obligation rests not on the shoulders of one, moral agent, but on the shoulders of all moral agents whose actions might harm or contribute, to the harm of the workers and residents. Thus it was the obligation not just of the Nigerian, government, but also of the multinational firms that shipped the toxic waste, to make sure that, it did no harm to residents and workers. In this case both the government and the multinationals apparently failed to reco gnize their basic ob ligation to protect the fundamental human, rights of others., Justice Theories Justice theories focus on attaining a just distrib ution of economic, goods and services. A just distribution is one that is considered fair and equitable. One of the, most influential justice theories was developed by the philosopher John Rawls.26 Rawls asserts, that all economic goods and ser vices should be distrib uted equally except when an unequal, distribution would work to e veryone’s advantage. According to Ra wls, valid principles of, justice are those to which all people would agree if they could freely and impartially consider, the situation. Impar tiality is guaranteed b y a conceptual de vice that Rawls calls the veil of, ignorance. Under the veil of ignorance, everyone is imagined to be ignorant of all his or her, particular characteristics (such as race, se x, intelligence, nationality, family background, and, special talents). Ra wls then asks w hat system people w ould design under such a v eil of, ignorance. Rawls’s answer is that under these conditions, people would unanimously agree on, two fundamental principles of justice., The first principle is that each person should be per mitted the maximum amount of basic, liberty compatible with similar liberty for others. Roughly speaking, Rawls takes these to be, political liber ty (such as the right to v ote), freedom of speech and assemb ly, liber ty of, conscience and freedom of thought, the freedom and right to hold personal property, and freedom from arbitrary arrest and seizure. The second principle is that once equal basic liberty is, ensured, inequality in basic social goods—such as income and w ealth distrib ution and, opportunities—is to be allowed only if it benef its everyone. Rawls accepts that inequalities, can be just so long as the system that produces inequalities is to the adv antage of everyone., More precisely, he formulates what he calls the difference principle, which says that inequalities are justified if they benefit the position of the least advantaged person. So the wide variations in income and w ealth that w e see in the United States can be considered just if the, market-based system that produces this unequal distribution also benefits the least advantaged, members of society. One can argue that a well-regulated market-based economy, by promoting economic growth, benefits the least advantaged members of society. In principle, at least,, the inequalities inherent in such systems are therefore just., In the context of business ethics, Rawls’s theory creates an interesting perspective. Managers could ask themselv es whether the policies the y adopt w ould be considered just under, Rawls’s veil of ignorance. Is it just, for e xample, to pay foreign workers less than workers in, the f irm’s home countr y? Rawls’s theory might suggest that it is, so long as the inequality, benefits the least adv antaged members of the global society . Alternatively, it is dif ficult to, imagine that managers operating under a v eil of ignorance would design a system in w hich, employees are paid subsistence w ages to work long hours in s weatshop conditions and are, exposed to toxic materials. Such working conditions are clearly unjust in Rawls’s framework,, and therefore it is unethical to adopt them. Similarly, operating under a veil of ignorance, most, people w ould probab ly design a system that impar ts protection from en vironmental, , hiL30123_ch04_080_103.indd 93, , 93, , ■ Violating rights: Dumping, toxic waste in Nigeria., , justice theories, Theories that focus on, attaining a just distribution, of economic goods and, services., , 10/27/06 8:09:04 AM

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94, , PART 1 // Managers and the Environment, , degradation, preserves a free and fair playing field for competition, and prohibits self-dealing., Thus in a real sense Ra wls’s veil of ignorance is a conceptual tool that contrib utes toward a, moral compass that managers can use to navigate through difficult ethical dilemmas and make, decisions that are ethically robust., , // BEHAVING ETHICALLY, What is the best way for managers to make sure ethical considerations are taken into account, when decisions are made? In many cases there is no easy answer to this question: Many of the, most vexing ethical problems arise because they contain real dilemmas and no ob vious right, course of action. Nevertheless, managers can and should do many things to ensure that basic, ethical principles are adhered to and that ethical issues are routinel y inserted into b usiness, decisions., Here we focus on seven things that a b usiness and its managers can do to mak e sure that, ethical issues are considered in business decisions (see Figure 4.5):, 1. Favor hiring and promoting people with a well-grounded sense of personal ethics., 2. Build an organizational culture that places a high value on ethical behavior., 3. Make sure that leaders within the business not only articulate the rhetoric of ethical, behavior, but also act in a manner that is consistent with that rhetoric., 4. Put decision-making processes in place that require people to consider the ethical, dimensions of business decisions., 5. Develop strong governance processes., 6. Appoint ethics officers., 7. Act with moral courage., , Hire and, promote, ethical, individuals, , Establish, an ethics, office, , Ethical, behavior, , Promote, an ethical, organization, culture, , FIG UR E 4 .5, , Have, leaders, promote, ethical, behavior, , Consider, ethical aspects, of business, decisions, , Develop, strong, governance, processes, , Promote, moral, courage, , Building a Positive, Ethical Climate, , hiL30123_ch04_080_103.indd 94, , 10/27/06 8:09:05 AM

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Stakeholders, Ethics, and Corporate Social Responsibility \\ CHAPTER 4, , 95, , Hiring and Promotion It seems obvious that b usinesses should strive to hire people w ho, have a strong sense of personal ethics and w ould not engage in unethical or ille gal behavior., Similarly, you would rightly expect a business to not promote people, and perhaps fire people,, whose behavior does not match generall y accepted ethical standards. But w hen you think, about it, doing so is dif ficult. How do you know that someone has a poor sense of personal, ethics? In our society we have an incentive to hide a lack of personal ethics from public view., Once people realize that you are unethical, they will no longer trust you., Is there anything businesses can do to make sure they do not hire people who subsequently, turn out to have poor personal ethics? Businesses can give potential employees psychological, tests to tr y to discer n their ethical predisposition, and the y can check potential emplo yees’, references. And people who have displayed poor ethics should not be promoted in a company, where the organization culture places a high value on the need for ethical behavior, and where, leaders act accordingly., Not only should businesses strive to identify and hire people with a strong sense of per sonal ethics, but it is also in the interests of prospective employees to find out as much as they, can about the ethical climate in an or ganization. After all, nobody should w ant to work at a, firm like Enron., Organizational Culture and Leadership To foster ethical beha vior, businesses need to, build an organizational culture that places a high v alue on ethical behavior. Three things are, particularly important in building an organizational culture that emphasizes ethical behavior., First, businesses must e xplicitly ar ticulate values that place a strong emphasis on ethical, behavior. Man y companies no w do this b y drafting a code of ethics, w hich is a for mal, statement of the ethical priorities a b usiness adheres to. Others ha ve incor porated ethical, statements into documents that articulate the values or mission of the business. For example,, the food and consumer products giant Unilever has a code of ethics that includes the following, points: “We will not use any form of forced, compulsory, or child labor” and “No emplo yee, may offer, give, or receive any gift or payment that is, or may be construed as being, a bribe., Any demand for, or offer of, a bribe must be rejected immediatel y and reported to management.”27 Unilever’s principles send a clear message about appropriate ethics to managers and, employees within the organization., Having articulated values in a code of ethics or some other document, it is impor tant that, business leaders give life and meaning to those words by repeatedly emphasizing their importance and then acting on them. This means using e very relevant oppor tunity to stress the, importance of business ethics and making sure that k ey business decisions not onl y make, good economic sense b ut also are ethical. Man y companies have gone a step fur ther, hiring, independent firms to audit the company and make sure employees are behaving in a manner, consistent with their ethical code. After its experience in the 1990s, for e xample, Nike hired, independent auditors to make sure subcontractors used by the company live up to Nike’s code, of conduct., Finally, building an or ganizational culture that places a high v alue on ethical beha vior, requires incentive and reward systems, including promotion systems, that reward people who, engage in ethical behavior and sanction those who do not. At General Electric, for example,, former CEO Jack Welch has described how he reviewed the performance of managers, dividing them into several different groups. These included overperformers who displayed the right, values, who were singled out for adv ancement and bonuses, and o verperformers who displayed the wrong values, who were let go. Welch’s point was that he was not willing to tolerate, leaders within the company who did not act in accordance with the central values of the company, even if they were in all other respects skilled managers.28, , ■, , Unilever’s code of ethics., , Decision-Making Processes In addition to establishing the right kind of ethical culture in, an organization, businesspeople must be able to think through the ethical implications of decisions in a systematic w ay. To do this they need a moral compass, w hich both rights theories, , hiL30123_ch04_080_103.indd 95, , 10/27/06 8:09:06 AM

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96, , PART 1 // Managers and the Environment, , and Rawls’s theory of justice help to provide. Beyond these theories, some ethics experts have, proposed a straightforw ard practical guide—an ethical algorithm—to deter mine whether a, decision is ethical. 29 A decision is acceptab le on ethical g rounds if a businessperson can, answer yes to each of these questions:, 1. Does my decision fall within the accepted values or standards that typically apply in the, organizational environment (as articulated in a code of ethics or some other corporate, statement)?, 2. Am I willing to see the decision communicated to all stakeholders affected by it—for, example, by having it reported in newspapers or on television?, 3. Would the people with whom I have a significant personal relationship, such as family, members, friends, or even managers in other businesses, approve of the decision?, , ■ Ethics officers at United, Technologies., , Ethics Officers To ensure that a business beha ves in an ethical manner, a number of f irms, now have ethics officers. These are individuals who make sure that all employees are trained, to be ethically aware, that ethical considerations enter the business decision-making process,, and that the company’s code of ethics is adhered to. Ethics of ficers may also be responsible, for auditing decisions to make sure they are consistent with this code. In many businesses an, ethics of ficer acts as an inter nal ombudsperson—handling conf idential inquiries from, employees, investigating complaints from employees or others, reporting findings, and making recommendations for change., United Technologies, a lar ge aerospace compan y with w orldwide revenues of o ver $28, billion, has had a formal code of ethics since 1990. 30 There are now some 160 ethics officers, within United Technologies who are responsib le for making sure the code is adhered to., United Technologies also established an ombudsperson program in 1986 that lets employees, inquire anonymously about ethics issues. The program has received some 56,000 inquiries, since 1986, and 8,000 cases have been handled by an ombudsperson., , Strong Corporate Governance Strong corporate governance procedures are needed to, ensure that managers adhere to ethical norms, and in particular to make sure senior managers do not engage in self-dealing or information manipulation. The key to strong corporate, governance procedures is an independent board of directors that is willing to hold top managers into account for, self-dealing and is ab le to question infor mation provided, by managers. If companies lik e Tyco, WorldCom, and Enron had strong boards of directors, is it unlik ely that they, would have been subsequently racked by accounting scandals, and top managers w ould not have been able to view, the funds of these cor porations as their own personal treasuries., There are f ive foundations of strong go vernance. The, first is a board of directors that is composed of a majority, of outside directors who have no management responsibilities in the f irm, who are willing and able to hold top managers accountable, and who do not have business ties with, important insiders. The outside directors should be individuals of high integrity whose reputation is based on their, ability to act independentl y. The second foundation element is a board of directors in which the positions of CEO, Enforcing Ethics: Sarbanes–Oxley President Bush, and chair person are held b y separate indi viduals, and the, signs into law the Sarbanes–Oxley Act. By tightening, chairperson is an outside director . When the CEO also, corporate governance, the Sarbanes–Oxley law is designed, chairs the board of directors, he or she can control the, to make it more difficult for managers to engage in selfagenda, thereby furthering a personal agenda (w hich may, dealing and information manipulation., include self-dealing) or limiting criticism of current corpo© AP Photo/Doug Mills., rate policies. The third foundation element is a compensation, , hiL30123_ch04_080_103.indd 96, hiL30123_ch04_080_103.indd 96, , 11/9/06 7:41:21 PM, 11/9/06 7:41:21 PM

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Stakeholders, Ethics, and Corporate Social Responsibility \\ CHAPTER 4, , 97, , committee of the board of directors that is composed entirel y of outside directors. The, compensation committee sets the le vel of pa y for top managers, including stock option, grants and the like. If the compensation committee is independent of managers, the scope, for self-dealing is reduced. F ourth, the audit committee of the board , which reviews the, financial statements of the firm, should also be composed of outsiders, thereby encouraging vigorous independent questioning of the firm’s financial statements. Finally, the board, should use outside auditors who are truly independent and do not have a conflict of interest. This was not the case in man y recent accounting scandals, where the outside auditors, were also consultants to the cor poration and therefore w ere less likely to ask hard questions of management for fear that doing so would jeopardize lucrative consulting contracts., In the United States the 2002 Sarbanes–Oxle y Act signif icantly strengthened cor porate, governance by legally requiring that accounting f irms that audit a corporation do not also, provide consulting ser vices to the enter prise, and b y requiring that CEOs af firm that a, firm’s financial accounts represent a true and accurate picture of a corporation., Moral Courage It is important to recognize that on occasion managers may need significant, moral courage. This enables managers to walk away from a decision that is profitable but unethical. Moral courage gives an employee the strength to say no to a superior that tells her or, him to pursue actions that are unethical. And moral courage gives employees the integrity to, blow the whistle on persistent unethical behavior in a company. Moral courage does not come, easily—there are w ell-known cases in w hich individuals have lost their jobs because the y, blew the whistle on corporate behaviors they thought unethical, telling the media about w hat, was occurring.31, Companies can strengthen emplo yees’ moral courage b y committing themselv es to not, take retribution against employees who exercise moral courage, say no to superiors, or otherwise complain about unethical actions. F or example, consider the follo wing extract from, Unilever’s code of ethics:, , ■ Unilever: Giving permission, to exercise moral courage., , Any breaches of the Code must be reported in accordance with the procedures specified by the, Joint Secretaries. The Board of Unilever will not criticize management for any loss of business, resulting from adherence to these principles and other mandatory policies and instructions. The, Board of Unilever expects employees to bring to their attention, or to that of senior management,, any breach or suspected breach of these principles. Provision has been made for employees to be, able to report in confidence, and no employee will suffer as a consequence, of doing so.32, , This statement gives “permission” to employees to exercise moral courage. Companies can, also set up ethics hotlines, which allow employees to anonymously register complaints with a, corporate ethics officer., Summary All of the steps discussed here can help ensure that w hen managers mak e, business decisions, they are fully cognizant of the ethical implications and do not violate, basic ethical precepts. But we must remember that not all ethical dilemmas have a clean and, obvious solution; that is w hy they are dilemmas. At the end of the da y, there are clearl y, things that managers should not do and things they should do; but there are also actions that, present true dilemmas. In these cases a premium is placed on the ability of managers to, make sense out of complex messy situations and make balanced decisions that are as just as, possible., , // Social Responsibility, In addition to recognizing stakeholders and their claims, acting legally, and behaving ethically,, many believe that businesses should also act in a sociall y responsible manner. For a business, firm, social responsibility is a sense of obligation on the part of managers to build certain, social criteria into their decision making. The concept implies that w hen managers within a, business evaluate decisions, there should be a presumption in f avor of adopting courses of, , hiL30123_ch04_080_103.indd 97, , social responsibility, A sense of obligation on, the part of managers to, build certain social criteria, into their decision making., , 10/27/06 8:09:12 AM

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98, , PART 1 // Managers and the Environment, , action that enhance the welfare of society at large. The goals selected are often quite specific:, to enhance the welfare of communities in which a business is based, improve the environment,, or raise the education level of employees., , // ARGUMENTS FOR SOCIAL RESPONSIBILITY, In its purest form, social responsibility can be supported for its own sake simply because it, is the right way for a business to behave. Advocates of this approach assert that businesses,, and particularly large successful b usinesses, need to gi ve something back to the society, that has made their success possib le. More pragmatic are arguments that socially responsible behavior is in a f irm’s self-interest and can lead to better f inancial performance.33, Economic actions have social consequences af fecting a company’s outside stak eholders., Therefore, to retain the support of these stakeholders, the company must take those social, consequences into account when formulating strategies. Otherwise it may generate ill will, and opposition. For example, if a community percei ves a company as having an adverse, impact on the local en vironment, it ma y b lock the compan y’s attempts to b uild ne w, facilities in the area., The pragmatic approach, you might realize, is an extension of the stakeholder management, approach that we discussed earlier in the chapter. In contrast, the purer approach emphasizing, the social responsibility of successful b usinesses goes be yond a pragmatic stak eholder, management approach to advocate that businesses should take actions to enhance the welfare, of society that exceed what is necessary to maintain the support of key external stakeholders., For example, a business with a strong sense of social responsibility ma y invest in the community where it is located beyond the level necessary to maintain community support., BP, one of the world’s largest oil companies, is a good example of a business that has taken, the notion of social responsibility to hear t in recent years.34 BP was the f irst oil company to, , Tastes Better without the Salt In communities near the Algerian operations of BP, the, company has built four desalination plants to bring pure drinking water to local inhabitants. This, is just one of the social investments undertaken by BP, one of the world’s largest oil companies., Courtesy of BP photographer Barry Halton., , hiL30123_ch04_080_103.indd 98, , 10/27/06 8:09:12 AM

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Stakeholders, Ethics, and Corporate Social Responsibility \\ CHAPTER 4, , accept that greenhouse gas emissions may be changing the w orld’s climate in unpredictable, and potentially harmful ways. BP embraced a goal of doing no har m to the environment—a, difficult goal for an oil company because its products are a primary source of greenhouse gas, emissions. Since the late 1990s BP has invested in the development of technologies designed, to reduce emissions of g reenhouse gases from oil-b urning electric plants and from automobiles. In 1998 BP set a target of reducing the greenhouse gas emissions from its own operations, by 10 percent from a 1990 baseline le vel by 2010. The company actually met this tar get in, 2001, nine years ahead of schedule. Moreover, savings associated with greater fuel efficiency, and reductions in the amount of gas flared or vented from its facilities achieved this reduction, without raising costs., BP has also embraced its responsibility to the communities in w hich it does business and, has invested in tr ying to impro ve the quality of life in those communities. In Algeria, for, example, where BP is the largest foreign oil enter prise, the company has a social investment, program that, among other things, has invested in facilities to improve the quality of the local, water supply. In the deser t community of In Salah, w here groundwater supplies of drinking, water were contaminated with salt, BP has b uilt four desalination plants so that all of the, town’s 27,000 inhabitants can ha ve access to 20 liters of pure w ater a day for drinking and, cooking. Nor is this an isolated case; wherever BP does business, the company has established, social investment programs both because the company believes that this is the right thing to do, and because it is in BP’s long-term interests to take actions that enhance its reputation. If BP, is seen as a good corporate citizen in the communities where it does business, this will probably make it easier for BP to e xpand its operations in those communities in the future or to, enter other communities., , 99, , ■, , BP: Social responsibility., , // THE FRIEDMAN DOCTRINE, Some people argue that a business firm has no obligation to pursue social goals. Nobel laureate Milton Friedman, for one, insists that social responsibility considerations should not enter, the business decision process:35, There is one and only one social responsibility of business—to use its resources and engage in, activities designed to increase its profits so long as it stays within the rules of the game, which, is to say that it engages in open and free competition without deception or fraud.36, , Friedman explicitly rejects the idea that b usinesses should undertake social expenditures beyond those mandated by law and required for the efficient running of a business. For example,, he suggests that improving working conditions beyond the level required by the law and necessary to maximize employee productivity will reduce profits and is therefore not appropriate., His belief is that a f irm should maximize its prof its because that is how to maximize the returns that accrue to the owners of the f irm, its shareholders. If shareholders wish to use the, proceeds to make social investments, that is their right according to F riedman; but managers, of the firm should not make that decision for them., Although Friedman’s position is well stated, he would probably not object to social expenditures by businesses that have positive spillover effects for the firm. For example, BP clearly, derives economic benefits from the positive publicity and goodwill that result from its social, investments. Beyond this, it can be ar gued that socially responsible behavior by businesses, can change society for the better , and that all benef it from such action. F or example, in the, 1980s many large, successful American businesses withdrew their investments in South Africa, to protest the white apartheid regime that denied political representation to people of African, and Asian descent, who happened to be the v ast majority of people li ving in South Africa., This action precipitated an economic crisis in SouthAfrica, which was a contributing factor in, the ultimate collapse of apartheid and its replacement by a democratic government. What this, example illustrates is that corporations can be an instrument for social change and progress—, and given this, man y people belie ve that businesses should tak e social considerations into, account when choosing their actions., , hiL30123_ch04_080_103.indd 99, , 10/27/06 1:56:29 PM

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100, , PART 1 // Managers and the Environment, , I N CO N C LU S IO N, , W H Y D O E S IT MATTER?, , Why should managers care about stakeholders, ethics, and social responsibility? If, managers ignore the claims that stakeholders place on an organization, those stakeholders will withdraw their support, and the performance of the organization will falter., In other words, it is in managers’ self-interest to take stakeholder claims into account., There are several reasons why managers should adhere to high ethical standards., First, by doing so they can enhance their own personal reputations, which will be, valuable for them in the long run. Second, considering the ethical aspects of business, decisions is a good way of making sure that the rights of different stakeholder groups, are respected. And third, behaving ethically is simply the right and moral thing to do., Ethical behavior should be valued for its own sake. People who behave in an ethical, manner have greater self-respect, and that goes a long way toward ensuring, psychological security., Finally, managers should consider issues of social responsibility when they make, business decisions because all economic decisions also have social consequences that, impact stakeholders. Making socially responsible investments is thus another way of, recognizing stakeholder claims and improving stakeholder relations, which benefit the, firm. Moreover, as with ethical behavior, managers should take social factors into, account when making business decisions because this is the right thing to do. Large, corporations in particular have gained a great deal from the societies in which they do, business, and it is incumbent upon them to repay those societies with social investments that improve human well-being., , MANAGEMENT CHALLENGES, 1., 2., 3., , 4., , 5., , What makes someone a stakeholder?, Should managers address stakeholder concerns by going beyond the steps required by, the law?, You are the manager of a firm that outsources work to a subcontractor in India. On a site, visit you discover that the subcontractor employs children between 12 and 16 years old, to work long hours for low pay., a. Are you morally responsible for this situation?, b. What action should you take?, c. What if you are told that those children are breadwinners for their families, and, without the work they might be forced to resort to begging, theft, or prostitution?, Would that change your position? Would you do anything different to resolve the, situation?, In 2003 it was revealed that Frank Quattrone, once a star investment banker at Credit, Suisse First Boston, had been allocating shares in upcoming initial public offerings, (IPOs) of technology companies to “movers and shakers” in Silicon Valley, known as, the “friends of Frank,” in return for the understanding that they would push future IPOs, to his unit at Credit Suisse (Quattrone and Credit Suisse earned huge fees from IPO, deals).37 The shares were difficult to obtain and typically appreciated significantly, immediately following the IPO. Is this behavior ethical?, In 2004 Boeing’s CFO, Mike Sears, offered a government official, Darleen Druyun, a, lucrative job at Boeing while Druyun was still involved in evaluating whether Boeing, , 100, , hiL30123_ch04_080_103.indd 100, , 10/27/06 8:09:14 AM

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Stakeholders, Ethics, and Corporate Social Responsibility \\ CHAPTER 4, , 101, , should be awarded a $17 billion contract to build tankers for the Air Force. Boeing won, the contract against strong competition from Airbus, and Druyun was subsequently, hired by Boeing. Do you think the job offer may have had an impact on the Air Force, decision? If you were a member of Boeing’s board, would you approve of Sears’s action?, If you disapproved, what action would you take?, , MANAGEMENT PORTFOLIO, FOR THE ORGANIZATION YOU HAVE CHOSEN TO FOLLOW:, 1., 2., 3., , 4., , Is it satisfying the claims of key stakeholders, including employees, customers, shareholders, and the general public? If so, how? If not, why not?, How would you characterize the ethical climate of the organization you have chosen to, follow? What evidence is there to support your conclusion?, Find out if the organization has been the focus of any adverse ethical issues in recent, years (look at historic news reports). If it has, try to determine whether this was due to, the isolated actions of rogue managers or to more systemic, organizationwide problems., Does the organization undertake social investments that go beyond its narrow economic, self-interest? If so, what kind of investments has it made? Whom do these investments, benefit? Do you approve of these investments?, , CLOSING CASE, , W O R K I N G C O N D I T I O N S AT W A L - M A R T, , When Sam Walton founded Wal-Mart, one of his core v alues was that if you treated employees with respect, tied their, compensation to the performance of the enter prise, trusted, them with impor tant infor mation and decisions, and provided ample oppor tunities for adv ancement, the y would, repay the company with dedication and hard work. For years, the formula seemed to work. Employees were called “associates” to reflect their status within the compan y; even the, lowest-paid hourly employee was eligible to par ticipate in, profit-sharing schemes and could use profit-sharing bonuses, to purchase compan y stock at a discount from its mark et, value; and the compan y made a vir tue of promoting from, within (tw o-thirds of managers at Wal-Mart star ted as, hourly emplo yees). At the same time Walton and his, successors always demanded lo yalty and hard w ork from, employees—managers, for example, were expected to move, to a new store on very short notice—and base pay for hourly, workers was low. Still, as long as the upside was there, little, grumbling was heard from employees., In the last 10 y ears, however, the relationship betw een, the compan y and its emplo yees has been strained b y a, succession of la wsuits claiming that Wal-Mart pressures, hourly employees to work overtime without compensating, them, systematicall y discriminates ag ainst w omen, and, , hiL30123_ch04_080_103.indd 101, hiL30123_ch04_080_103.indd 101, , knowingly uses contractors w ho hire undocumented, immigrant workers to clean its stores, paying them less than, minimumwage., For example, a class action lawsuit in Washington State, claims that Wal-Mart routinel y (1) pressured hourl y, employees not to repor t all their time w orked, (2) failed to, keep tr ue time records, sometimes sha ving hours from, employee logs, (3) failed to give employees full rest or meal, breaks, (4) threatened to f ire or demote emplo yees w ho, would not work off the clock, and (5) required w orkers to, attend unpaid meetings and computer training. Moreo ver,, the suit claims that Wal-Mart has a strict “no o vertime”, policy, punishing employees who work more than 40 hours, a week, but that the compan y also gi ves employees more, work than can be completed in a 40-hour w, eek. The, Washington suit is one of more than 30 actions that ha ve, been filed around the nation in recent years., With re gard to discrimination against w omen, complaints date back to 1996 w hen an assistant manager in a, California store, Stephanie Odle, came across the W2 of a, male assistant manager who worked in the same store. The, W2 sho wed that he w as paid $10,000 more than Odle., When she asked her boss to e xplain the disparity, she was, told that her co worker had “a wife and kids to suppor t.”, , 11/9/06 7:41:23 PM, 11/9/06 7:41:23 PM

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102, , PART 1 // Managers and the Environment, , When Odle, w ho is a single mother , protested, she w as, asked to submit a personal household budget. She was then, granted a $2,080 raise. Subsequentl y Odle was f ired; she, claims this action w as tak en in retrib ution for her complaint. In 1998 she f iled a discrimination suit against the, company. Others began to f ile suits around the same time,, and by 2004 the cases had e volved into a class action suit, that covered 1.6 million current and former female employees at Wal-Mart. The suit claims that Wal-Mart did not pay, female employees the same w ages as their male counter parts and did not provide them with equal opportunities for, promotion., In the case of both undocumented overtime and discrimination, Wal-Mart admits to no wrongdoing. The company, says that with 1.4 million emplo yees, some prob lems are, bound to arise; b ut it claims that there is no systematic,, companywide effort to get hourly employees to work without pay or to discriminate against women. Indeed, the company claims that this could not be the case because hiring, and promotion decisions are made at the store level., Critics charge that although the compan y may have no, policies that promote undocumented o vertime or discrimination, the hard-dri ving cost containment culture of the, company has created an en vironment w here abuses can, , thrive. Store managers are e xpected to meet challenging, performance goals, and in an ef fort to do so the y may be, tempted to pressure subordinates to w ork additional hours, without pay. Similarly, company policy requiring managers, to move between stores at shor t notice unf airly discriminates against women, who often lack the fle xibility to uproot their families and move them to another state at shor t, notice.38, CASE DISCUSSION QUESTIONS, 1. Do you think that the values and practices that Wal-Mart, founder Sam Walton ar ticulated recognized the claims, that employees, as stakeholders, have on the firm?, 2. What might have changed in the ethical climate of WalMart in recent years to contribute to the lawsuits by disgruntled employees?, 3. Do you think Wal-Mart has an ethical prob lem? Is the, company right to claim that with 1.4 million employees,, some problems are bound to arise?, 4. If you were r unning Wal-Mart, what steps w ould you, take to address any potential ethical issues, par ticularly, with regard to employees?, , Z, , ENDNOTES, 1.“Boycott Nike,” CBS News 48 Hours, October 17, 1996; D . Jones, “Critics Tie, Sweatshop Sneak ers to ‘ Air Jordan, ’” USA Today, June 6, 1996, p. 1B; S., Greenhouse, “Nike Shoe Plant in Vietnam Is Called Unsafe for Workers,” New, York Times, November 8, 1997., .2 E. Freeman, Strategic Management: A Stakeholder Approach (Boston: Pitman, Press, 1984)., 3.C.W.L. Hill and T.M. Jones, “Stakeholder–Agency Theory,” Journal of Management Studies 29 (1992), pp. 131–54; J.G. March and H.A. Simon, Organizations, (New York: Wiley, 1958)., 4. S.L. Ber man, A.C. Wicks, S. K otha, and T.M. Jones, “Does Stak eholder, Orientation Matter?” Academy of Management Journal 42 (1999), pp. 488–506;, J. Post and L. Preston, Redefining the Corpor ation: Stakeholder Mana gement, and Organization Wealth (Palo Alto, CA: Stanford University Press, 2002)., 5.Hill and Jones, “Stakeholder–Agency Theory.”, 6. I.C. Macmillan and P .E. Jones, Strategy F ormulation: P ower and P olitics, (St. Paul, MN: West, 1986)., 7. J.P. Kotter and J.L. Heskett, Corporate Culture and Performance (New York: Free, Press, 1992)., .8 Freeman, Strategic Management: A Stakeholder Approach; E. F reeman, “The, Stakeholder Approach Revisited,” Zeitschrift fur Wirtschafts 5 (2004),, pp. 228–42; Hill and Jones, “Stak eholder–Agency Theory”; Post and Preston,, Redefining the Corpor ation: Stakeholder Mana gement and Or ganization, Wealth., 9. Sources: C.W.L. Hill, “Monsanto: Building a Life Sciences Company,” in C.W.L., Hill and G.R. Jones, Strategic Management: An Integrated Approach (Boston:, Houghton Mifflin, 2001); A. Barrett, “Rocky Ground for Monsanto?” BusinessWeek, June 12, 2000, pp. 72–76; J. Rifkin, “Perils of Unnatural Science,” Financial Times, June 20, 1998, p. 9; J. Forster and G. Smith, “A Genetically Modified, Comeback,” BusinessWeek, December 24, 2001, pp. 60–61., 10.Sources: J. Byr ne, “How Al Dunlap Self-Destr ucted,” BusinessWeek, July 6,, 1998, p. 58; G. DeGeor ge, “Al Dunlap Revs Up His Chainsaw,” BusinessWeek,, , hiL30123_ch04_080_103.indd 102, , November 25, 1996, p. 37; Staf f reporter, “Exit Bad Guy,” The Economist, June, 20, 1998, p. 70; E. P ollock and M. Brannigan, “Mix ed Grill: The Sunbeam, Shuffle,” The Wall Street Journal, August 19, 1998, p. A1., 11.Freeman, Strategic Management: A Stakeholder Approach; Freeman, “The, Stakeholder Approach Revisited.”, 12.“Money Well Spent: Cor porate P arties,” The Economist, November 1, 2003,, p. 79; M. Maremont, “Tyco Figures Will Be Jailed for at Least 7 Years,” The Wall, Street Journal, September 20, 2005, p. C1., 13. Anonymous, “Timet, Boeing Settle Lawsuit,” Metal Center News 41 (June 2001),, pp. 38–39., 14. J. Kahn, “Ruse in Toyland: Chinese Workers’ Hidden Woe,” The New York Times,, December 7, 2003, pp. A1, A8., 15.P. Singer, One World: The Ethics of Globalization (New Haven, CT: Yale University Press, 2002)., 16. G. Hardin, “The Tragedy of the Commons,” Science 162, no. 1, pp. 243–48., 17. See N. King, “Halliburton Tells the Pentagon Workers Took Iraq Deal Kickbacks,”, The Wall Street Journal, January 23, 2004, p. A1; Anonymous, “Whistleblowers, Say Company Routinely Overcharged,” Reuters, February 12, 2004; and R. Gold, and J.R. Wilke, “Data Sought in Hallibur ton Inquiry,” The Wall Street Journal,, February 5, 2004, p. A6., 18.Transparency International, Global Corruption Report 2005, www.transparency., org, 2005., 19. www.transparency.org ., 20. S.W. Gellerman, “Why Good Managers Make Bad Ethical Choices,” in Ethics in, Practice: Managing the Moral Corporation, ed. K.R. Andrews (Harvard Business, School Press, 1989)., 21.D. Messick and M.H. Bazer man, “Ethical Leadership and the Psycholo gy of, Decision Making,” Sloan Management Review 37 (Winter 1996), pp. 9–20., 22.R. Bryce, Pipe Dreams: Greed, Ego, and the Death of Enron (New York: Public, Affairs, 2002)., , 10/27/06 8:09:15 AM

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Stakeholders, Ethics, and Corporate Social Responsibility \\ CHAPTER 4, , 23.See T.L. Beauchamp and N .E. Bowie, Ethical Theory and Business, 7th ed., (Upper Saddle River, NJ: Pearson Prentice-Hall, 2001), pp. 17–23., 24.T. Donaldson. The Ethics of International Business (Oxford: Oxford University, Press, 1989)., 25.Donaldson, The Ethics of International Business., , 103, , 32.Unilever Web site: http://www.unilever.com/company/ourprinciples/., 33. S.A. Waddock and S.B. Graves, “The Cor porate Social Performance–Financial, Performance Link,” Strategic Management Journal 8 (1997), pp. 303–19., 34. Details can be found on BP’s Web site at www.BP.com., , 26.J. Rawls, A Theory of Justice, rev. ed. (Boston: Belknap Press, 1999; original, edition1971)., , 35. M. Friedman, “The Social Responsibility of Business Is to Increase Profits,” New, York Times Magazine, September 13, 1970. Reprinted in Beauchamp and Bowie,, Ethical Theory and Business., , 27.Unilever Web site: http://www.unilever.com/company/ourprinciples/., , 36. Friedman, “The Social Responsibility of Business Is to Increase Profits.”, , 28. J. Bower and J. Dial, Jack Welch: General Electrics Revolutionary (Harvard Business School Case # 9-394-065, April 1994)., , 37.L. Himelstein, S. Hamm, and P . Bur rows, “Inside F rank Quattrone’s Mone y, Machine,” BusinessWeek, October 13, 2003, pp. 104—9., , 29.For example, see R.E. F reeman and D . Gilber t, Corporate Strategy and the, Search for Ethics (Englewood Cliffs, NJ: Prentice-Hall, 1988); T. Jones, “Ethical, Decision Making b y Individuals in Or ganizations,” Academy of Mana gement, Review 16 (1991), pp. 366–95; and J .R. Rest, Moral Development: Advances in, Research and Theory (New York: Praeger, 1986)., , 38. Sources: S. Holt, “Wal-Mart Workers’ Suit Wins Class Action Status,” The Seattle Times, October 9, 2004, pp. E1, E4; C. Daniels, “W omen v. Wal-Mart,”, Fortune, July 21, 2003, pp. 79–82; C.R. Gentr y, “Off the Clock,” Chain Store, Age, February 2003, pp. 33–36; M. Grimm, “W a-Mart Uber Alles,” American, Demographic, October 2003, pp. 38–42., , 30.United Technologies Web site: http://www.utc.com/profile/ethics/index.htm ., 31.C. Grant, “Whistle Blo wers: Saints of Secular Culture, ” Journal of Business, Ethics,September 2002, pp. 391–400., , hiL30123_ch04_080_103.indd 103, , 10/27/06 8:09:16 AM

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5, , // PART 2, Strategizing, , LEARNING OBJECTIVES, , PLANNING, DECISION MAKING, AND, , After Reading This Chapter You Should Be Able to:, 1, , Describe the different levels of planning in an organization., , 2, , Explain the difference between strategic, tactical, operating, and unit plans., , 3, , Outline the value of single-use plans, standing plans, and contingency plans., , 4, , Describe the main components of a typical strategic planning system., , 5, , Identify the main pitfalls that managers encounter when engaged in formal planning processes,, and describe what can be done to limit those pitfalls., , 6, , Discuss the major reasons for poor decisions, and describe what managers can do to make better, decisions., , Planning within, Organizations, Levels of Planning, Planning Horizons, Single-Use Plans and Standing, Plans, Contingency Planning, Strategic Planning: A Closer, Look, Setting the Context: Mission,, Vision, Values, and Goals, External and Internal Analysis, SWOT Analysis: Formulating, Strategies, Action Plans, Implementation, Review and Adjustments, The Benefits and Pitfalls of, Planning, , hiL30123_ch05_104-131.indd 104, , / / / / / / / / / / / / / / /, , The Pitfalls of Planning, Improving Planning, Decision Making, The Rational Decision-Making, Model, Bounded Rationality and, Satisficing, Decision-Making Heuristics, and Cognitive Biases, Prospect Theory, Groupthink, Improving Decision Making, In Conclusion: Why Does It, Matter?, Management Challenges, Management Portfolio, Closing Case: Boom and, Bust in Telecommunications, , 10/28/06 3:56:22 PM

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Planning and Decision Making \\ CHAPTER 5, , 105, , Growth Is Back!, Intel’s CEO Paul, Otellini talks to, developers about his, strategic plan for, reigniting the, company’s growth, rate. The plan calls, for Intel to make, “platforms” of, several chips to go, into different types of, computers., Courtesy of Intel., , / / / / / / / / / / / / / / / / / / / / /, , or 20 years Intel grew by making microprocessors,, the chips that are the brains of personal computers. By the early 2000s this strategy was no longer delivering the growth Intel wanted. There were two reasons for this: The growth rate in the personal computer, industry had slowed down, and Intel’s main rival, AMD,, was matching Intel’s microprocessors on features and, taking a larger market share. So the company’s CEO,, Paul Otellini, drafted a new strategic plan. This plan, called for the company to build “platforms” of multiple, chips that will work together to perform specific functions for computer users. There will be a platform for, , F, , hiL30123_ch05_104-131.indd 105, , corporate computers, for home computers, for laptop, computers, and for computers designed for use in the, health services industry. Each platform will focus on, providing utility to a specific customer set. Thus the, platform for home computers will combine a microprocessor with chips and software for a wireless base station (for home networking), chips for showing digital, movies, and chips for three-dimensional graphics processing (for computer games). The hope is that these, platforms will allow Intel to capture more of the value, going into every computer sold—and that should increase the company’s growth rate.1, , 10/28/06 3:56:28 PM

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106, , PART 2 // Strategizing, , FIG UR E 5 .1, Main Steps of Planning, , Choose, goals, , planning, A process whereby, managers select goals,, choose actions (strategies), to attain those goals,, allocate responsibility for, implementing actions to, specific individuals or, units, measure the success, of actions by comparing, actual results against the, goals, and revise plans, accordingly., , ■, , Planning at Intel., , Identify, actions, , Allocate, responsibility, , Review, performance, , Make, adjustments, , As the Intel stor y illustrates, planning is a primar y function of management. Planning is a, process whereby managers select goals, choose actions (strate gies) to attain those goals,, allocate responsibility for implementing actions to specif ic individuals or units, measure the, success of actions by comparing actual results against the goals, and revise plans accordingly, (see Figure 5.1 ). In other w ords, it is a str uctured process for making impor tant decisions., A plan can provide direction for an or ganization. It tells everybody what the organization is, trying to do, what its priorities are, where it is going, and how it is going to get there. It is a, process for marshalling resources and deciding w ho should do w hat—for allocating roles,, responsibilities, and mone y. It is also a control mechanism: By comparing actual results, against the plan, managers can deter mine whether the organization is attaining its goals and, make adjustments if required., For example, as par t of his plan, Otellini decided to reor ganize Intel into four mark etfocused divisions, allocating specif ic roles, responsibilities, and resources to each di vision., One division will develop a platform for corporate computers, another for home computers,, another for laptop computers, and a four th for computers targeted at health ser vices. Going, forward, Otellini can compare the performance of each division against its specific goals and, make necessary adjustments. If the top manager of the laptop computer di vision brilliantly, executes the plan, he or she may receive a big performance bonus and become a leading candidate to replace Otellini when he retires. If the home computer division stumbles in its efforts, to develop a platfor m, Otellini ma y allocate more engineering resources to the unit w hile, simultaneously altering the senior management of the unit. In this w ay the plan becomes a, control mechanism for managing the business., In this chapter we look closely at the nature of planning and its benef its as a process for, making strategic decisions and controlling the or ganization. We will discover that planning, has limitations. Not everything can be planned for. The world has a way of rendering even the, best plans obsolete. Things happen that cannot be easil y predicted, and good ideas about, strategy can emer ge without planning. Moreo ver, planning processes are f ar from perfect., Many spectacular strategic failures have been based on supposedly comprehensive planning., Often these mistak es are due to a f ailure by managers to ef fectively use the infor mation at, their disposal. In other words, poor decision making is a major reason for planning b lunders., Thus in this chapter w e also look at the nature of managerial decision making. We identify, common errors in decision making, and we discuss how managers can avoid these. We begin, by looking more closely at the nature of planning within organizations and at the components, of a typical plan., , // Planning within Organizations, The plans managers for mulate within an organization can be differentiated by the levels in, the organization to which the plans apply (strategic or operational plans), the time horizon of, the plans (short-term or long-term), the number of times the plans are used (standing plans, versus single-use plans), and the contingent nature of the plans. We consider each of these, dimensions in turn., , hiL30123_ch05_104-131.indd 106, , 10/28/06 3:56:31 PM

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Planning and Decision Making \\ CHAPTER 5, , 107, , // LEVELS OF PLANNING, Planning is performed at multiple levels within an organization. Planning starts at the top of, an organization with a strategic plan, which outlines the major goals of the or ganization, and the organizationwide strategies for attaining those goals. In complex organizations, such, as a large diversified corporation with multiple business units, there may be three layers of, strategic planning. Planning at the corporate level focuses on corporate-level strategy; plans, made at the business level focus on business-level strategy; and planning done at the operating level focuses on operational strate gy. Corporate-level strategy is concerned with, deciding which industries a f irm should compete in and ho w the f irm should enter or e xit, industries. Business-level strategy is concerned with deciding how the firm should compete in the industries in w hich it has elected to par ticipate. Operating strategy is concerned with the actions that should be tak en at the le vel of indi vidual functions, such as, production, logistic, R&D, and sales, to support business-level strategy. (We look in detail at, corporate, business, and operating strategies in subsequent chapters.) Normally an operating, plan is embedded within a business-level strategic plan, and in turn that is embedded within, the corporate-level strategic plan., For illustration consider 3M, which is a large diversified company with over 5,000 different products, ranging from Post-it notes and Scotch tape to LCD display screens and surgical, dressings. It is organized into more than 40 different business units that collectively generate, over $20 billion in sales. Within a firm of this scale and scope, strategic planning takes place, at multiple le vels. At the cor porate level, the CEO and his or her direct repor ts set overall, goals for the organization, choose corporate-level strategies that span the entire organization,, and allocate responsibility for implementing those strategies. Recently 3M has operated with, a goal of increasing profits by 12–14 percent per year. The plan for attaining that goal includes, a number of strategies, such as requiring all business units to implement programs to improve, their productivity, making strategic acquisitions to strengthen the competitive position of 3M,, and focusing R&D dollars on product de velopment projects that are lik ely to produce big, breakthroughs and result in substantial sales revenues and profits.2, At the business level, such as 3M’s office supplies division, which makes Post-it notes and, Scotch tape among other products, the business-level strategic plan details the specific actions, that will be tak en by this unit to attain the goals of the b usiness and establish a competitive, advantage. These might include, for example, developing new products, exiting product lines, that are not performing well, and taking actions to rationalize its supply chain., Embedded within b usiness-level strategic plans are operating plans which, ,, specify the, goals for individual functions, the actions they will take to attain these goals, and who is responsible for those actions. Within 3M’s medical division there may be an operating plan to develop a, new product—let’s say sterile surgical drapes coated with a substance that acts as an antibiotic., The plan may contain goals relating to development time and costs and assign responsibility to a, team drawn from research and development, marketing, and manufacturing to develop the drapes, and launch the product. In the same division, manufacturing personnel might develop an operating plan for reducing in ventory costs. The plan will have a goal—perhaps to reduce inventory, costs by 20 percent—and assign responsibility to specific individuals to attain that goal. Similarly,, human resource personnel might develop an operating plan for hiring a sales force to sell a ne w, product the division has developed; information systems personnel might develop an operating, plan for using the Internet and e-business software to coordinate the supply chain of the division;, marketing personnel might develop an operating plan for promoting the products of the division, to consumers to enhance the 3M brand and grow revenues and profits., Planning might not stop here; embedded within operating plans might be unit plans,, which are plans for departments within functions, work teams, or even individuals. Within the, manufacturing function in 3M’s office supplies division, for example, a quality assurance department could draw up its own unit plan for improving quality in the division’s manufacturing process. Similarl y, within the R&D function of the same di vision several teams of researchers may be focusing on the development of different technologies; each team will draw, up its own unit plan that specifies goals, actions, responsibilities, and resource requirements., , hiL30123_ch05_104-131.indd 107, , strategic plan, A plan that outlines the, major goals of an, organization and the, organizationwide, strategies for attaining, those goals., corporate-level, strategy, Strategy concerned with, deciding which industries a, firm should compete in and, how the firm should enter, or exit industries., business-level, strategy, Strategy concerned with, deciding how a firm should, compete in the industries, in which it has elected to, participate., operating strategy, Strategy concerned with, the actions that should be, taken at the level of, individual functions, such, as production, logistic,, R&D, and sales, to support, business-level strategy., operating plans, Plans that specify goals,, actions, and responsibility, for individual functions., ■, , Planning at 3M., , unit plans, Plans for departments, within functions, work, teams, or individuals., , 10/28/06 3:56:32 PM

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108, , PART 2 // Strategizing, , FIG UR E 5 .2, Levels of Planning, Sets the context for, , Business-level strategic plan, (heads of businesses), , Operating plans (heads of functions), , Shaped by input from, , Corporate-level, strategic plan (CEO), , Unit plans (heads of departments, teams, individuals), , In sum, unit plans are embedded within operating plans, operating plans are embedded, within business-level strategic plans, and business-level strategic plans are embedded within, corporate-level strategic plans (see Figure 5.2 ). Embedded means that higher-level plans set, the context for lower-level plans. Thus at 3M the cor porate-level plan calls for producti vity, improvement programs to be rolled out across 3M; the plan of a b usiness division outlines, how that is being done within that division; the plan of a function describes how productivity, is being improved within the function; and the plan of a depar tment says how that is being, done within the department. At the same time, higher-level plans are not formulated in a vacuum; they are formulated after consultation with lower-level managers. When the CEO at 3M, decides how to allocate development funds to projects within 3M, he or she does so only after, consulting extensively with the managers responsible for those projects and the b usiness and, functional levels. Similarly, business-level managers decide which productivity improvement, projects to pursue within their di visions only after consultation with functional and depar tment managers., , // PLANNING HORIZONS, planning horizon, How far out a plan is, meant to apply., , tactical plans, The actions managers, adopt over the short to, medium term to deal with, a specific opportunity or, threat that has emerged., ■, , ICOS: Tactical planning., , hiL30123_ch05_104-131.indd 108, , Theplanning horizon refers to how far out a plan is meant to appl y. Most strategic plans,, whether at the business or corporate level, are multiyear plans. They are meant to stay in place, for several years (a three- to five-year horizon is typical). If successful, Paul Otellini’s plan for, Intel, which we discussed earlier, will drive strategy at the company for years to come. Indeed,, it would be dangerous to change strate gic plans frequentl y: This would confuse impor tant, stakeholders such as employees, suppliers, customers, and investors about the direction of the, organization, and they might lose confidence in top management., There is an exception to the generalization that strategic plans are long-term plans. Organizations sometimes adopt short-term plans to address specif ic and transitory opportunities or, threats. Such short-term plans are known as tactical plans, which are plans for pursuing transitory competitive tactics. Tactical plans outline the actions managers must adopt o ver the, short to medium ter m to cope with a specif ic oppor tunity or threat that has emer ged. For, example, when Lilly-ICOS, a pharmaceutical company, launched its new drug Cialis for erectile dysfunction in 2004, the f irm found it dif ficult to gain share against the mark et leader,, Viagra, even though Cialis worked for up to 36 hours, compared to just 4 hours forViagra. So, in mid-2004 managers at Lilly-ICOS came up with a tactical plan to get men to try Cialis. The, plan was to roll out a pro gram known as the Cialis Promise. Under this pro gram, men with, erectile dysfunction could receive a voucher for a free trial. If they liked Cialis, they could get, , 10/28/06 3:56:33 PM

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Planning and Decision Making \\ CHAPTER 5, , 109, , a second trial for no charge. If they were not satisfied with Cialis,, ICOS committed itself to pa y for a competing erectile dysfunction drug (such as Viagra). The idea behind this tactic was to get, men to switch from Viagra to Cialis. It seems to ha ve worked—, the market share of Cialis doubled to 25 percent in a year., Operating and unit plans tend to ha ve shorter time horizons, than strategic plans. Whereas an organization might function with, the same basic strate gic plan for y ears, operating and unit plans, might change re gularly as the tasks outlined in them are completed and managers tur n their attention to the ne xt task. F or, example, it may take only six months to implement and complete, a productivity improvement program identified in an operating or, unit plan at 3M, so next year that program will not be in the plan,, although it may be replaced by another one. Moreover, operating, and unit plans often drive the annual budgeting process at organiBeating Viagra—The Cialis Promise To take, zations, so they have to be revisited annually., market share from Viagra, ICOS adopted the Cialis, In sum, strategic plans normally have a three- to five-year time, Promise program. This tactical plan seems to have, horizon, although an or ganization could in theor y pursue the, worked—Cialis doubled its market share to 25 percent, same strategy for much longer . Tactical plans typicall y have a, in a year, largely at the expense of Viagra., short-term horizon (often less than a year) and are adopted to deal, © Sonda Dawes/ The Image Works., with emerging and transitory opportunities and threats. Operating, and unit plans tend to have short to medium time horizons (one to, three years) because they address specif ic tasks that have a welldefined beginning and end. But there are exceptions to these generalizations. An organization, might be forced to change its strate gic plan after a y ear if it clearl y is not w orking, and an, operating plan may be in place for more than five years if its specific tasks take that long., , // SINGLE-USE PLANS AND, STANDING PLANS, In addition to level and time horizon, plans can be, differentiated by their frequency of use. Some plans, are single-use plans: They address unique events, that do not reoccur—they are plans for attaining a, one-time goal. F or e xample, in 2002 the Boeing, Corporation decided to mo ve its cor porate headquarters from Seattle, w here they had been since, the company was founded, to Chicago. The decision involved the relocation of 330 employees, primarily senior managers and their support staff, and, Boeing had to create a single-use plan to e xecute, this move as quickl y and seamlessl y as possib le., Once the mo ve was completed, however, the plan, was obviously no longer needed. Other cases of, single-use plans include plans for converting office, files from paper to digital for mat, plans for establishing an or ganizationwide intranet, or plans for, rebranding an or ganization and rolling out a ne w, corporate name and logo., In, contrast, standing plans are used to handle, events that reoccur frequentl y. The idea behind, standing plans is to sa ve managers time b y giving, them a playbook to which they can refer when a certain type of e vent occurs. Standing plans relie ve, , hiL30123_ch05_104-131.indd 109, , single-use plans, Plans that address unique, events that do not reoccur., , ■, , Yet Another Starbucks Store, Starbucks has been able to open, stores at a rapid rate because it has, a standing plan that outlines the, steps required to identify a suitable, location and open a store., © The McGraw-Hill Companies, Inc. /Jill, Braaten, photographer., , Boeing: Single-use plans., , standing plans, Plans used to handle, events that reoccur, frequently., , 10/28/06 3:56:33 PM

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110, , PART 2 // Strategizing, , ■ Starbucks: Single-use, plans., , managers from having to reinvent wheels. One reason why Starbucks has been able to grow, from just 17 stores in 1987 to almost 9,000 stores by 2005 is that managers developed a standing plan that outlines the steps required to f ind the best store locations, ensure that the stores, have the same look and feel as other Starbucks stores, and open stores quickl y. But standing, plans like these are not rigid. Intelligent managers reco gnize that no plan is perfect, and the y, use their cumulative experience to fine-tune standing plans, improving them over time., , // CONTINGENCY PLANNING, , contingency plans, Plans formulated to, address specific possible, future events that might, have a significant impact, on the organization., crisis management, plan, Plan formulated, specifically to deal with, possible future crises., ■ Cantor Fitzgerald: Crisis, planning., , hiL30123_ch05_104-131.indd 110, hiL30123_ch05_104-131.indd 110, , Many organizations are based in environments characterized by considerable uncertainty and, the possibility that cer tain events might require a rapid response or an o verall change of, strategy. To anticipate such e vents, managers might for mulate contingenc y plans., Contingency plans are plans for mulated to address specif ic possible future e vents that, might have a significant impact on the organization. There are two types of contingency plans:, crisis management plans and scenario plans., Crisis Management Planning A crisis is a discrete event that can have a severe negative, impact on an organization or its stakeholders. A crisis management plan is a plan formulated specifically to deal with possible future crises. 3 In the wake of the September 11,, 2001, ter rorist attacks on the United States—an ob vious crisis if e ver there w as one—a, number of government organizations drew up crisis management plans that detailed ho w, they would respond to specif ic terrorist incidents, including the deliberate release of biological pathogens (such as smallpox or anthrax) or chemicals (such as sarin gas). One of the, companies experiencing the largest loss of life on September 11 was the bond trading company Cantor Fitzgerald, which occupied the top floors of one of the destro yed twin towers., Nearly 700 of its 1,000 U.S. employees died that day. Yet the company was able to resume, business almost immediately because after the 1993 bombing of the World Trade Center,, the company had formulated a crisis management plan that included backup computer systems in New Jersey.4, Crises take many different forms—from terrorist attacks and industrial disasters, such as, the gas leak from a Union Carbide plant in Bhopal, India, that killed almost 4,000 people to, natural disasters like the December 26, 2004, tsunami that devastated parts of Southeast Asia, and left 180,000 people dead. Drafting a plan to ef fectively manage a crisis in volves three, main steps: prevention, preparation, and containment.5, The best way of dealing with a crisis is to prevent it from happening in the f irst place if, possible. In the wake of the September 11, 2001, attacks the U.S. government took a number, of steps to pre vent future ter rorist attacks, including creating the Depar tment of Homeland, Security and implementing new regulations for screening passengers and baggage at airports., Another prevention tactic is to build positive relationships with key stakeholders, such as customers, suppliers, investors, and communities. These relationships can act as an early warning, system, providing managers with information about an impending crisis. In some cases quick, action can avert an impending crisis or limit its impact., Not all crises can be prevented. Nobody could have predicted or stopped the December 26,, 2004, tsunami. So managers need to plan for such e vents. This is the preparation stage of a, crisis management plan. Preparation requires an or ganization to designate a crisis management team and a spokesperson that will cope with crises that arise. Preparation also requires a, detailed plan of the steps that will be taken to deal with the crisis, to coordinate crisis management efforts, to manage its aftermath, and to communicate important information to affected, people and organizations., Mt. Rainier, the heavily glaciated volcano in Washington State, is a place of staggering, beauty; but it is also one of the most dangerous v olcanoes in the w orld. An eruption, an, earthquake, or simple weakening of rock caused by erosion could trigger a massi ve mudslide known as a lahar that could sweep a wave of debris 100 feet high at 50 miles an hour, down valleys where 100,000 people live. To limit the effects of such a crisis, managers at, the U.S. Geological Survey and Washington State government agencies have prepared a, , 11/9/06 7:44:08 PM, 11/9/06 7:44:08 PM

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Planning and Decision Making \\ CHAPTER 5, , 111, , Beautiful—and Very Dangerous Mt. Rainer looms over surrounding communities. To deal, with the impact of a potential lahar, Washington State has a crisis management plan in place., © Ken Straiton/Corbis., , detailed plan that includes a crisis management team, a per manent lahar detection system, and emergency communication systems, plans for rapid e vacuation of towns in the path of, a lahar, regular evacuation training for schools, establishment of shelters for the displaced,, and procedures for search and rescue. Although a lahar cannot be prevented, these preparations are designed to limit the loss of human life associated with such a cataclysmic event., Finally, there is the containment stage of crisis management. Containment is concer ned, with the steps that need to be taken after a crisis has occurred to limit its effects; these actions, need to be part of the overall crisis management plan. Containment involves (1) rapid response, to limit the immediate effects of the crisis; (2) communication because the tr uth will emerge, anyway, and plenty of evidence suggests it is better to face reality immediately rather than try, to deny that a crisis is occurring; (3) meeting the needs of those affected by the crisis; and (4), returning to business as rapidly as possible. The classic example of successful containment of, a crisis is the response of Tylenol maker Johnson & Johnson to a crisis that arose w hen four, people died after taking cyanide-laced Tylenol capsules. Even though the capsules were tampered with after the Tylenol had left the factory, the company immediately recalled all Tylenol, and stopped making the product until it had redesigned the product packaging to minimize the, risk of future tampering. This quick action cost Johnson & Johnson some sales, b ut it enhanced the company’s reputation and quickly rebuilt consumer confidence in the safety of the, product., Scenario Planning Scenario planning is based on the realization that the future is inher ently unpredictable and that an or ganization should plan for a range of possib le futures., Scenario planning involves formulating plans that are based on “what if ” scenarios. In the, typical scenario planning exercise, some scenarios are optimistic and some pessimistic.Teams, of managers are asked to develop specific strategies to cope with each scenario. A set of indicators is chosen as “signposts” to track trends and identify the probability that an y particular, scenario is coming to pass. The idea is to get managers to understand the dynamic and complex nature of their en vironment, to think through prob lems in a strate gic f ashion, and to, generate a range of strate gic options that might be pursued under dif ferent circumstances. 6, , hiL30123_ch05_104-131.indd 111, , scenario planning, Plans that are based on, “what if” scenarios about, the future., , 10/28/06 3:56:35 PM

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112, , PART 2 // Strategizing, , FIG UR E 5 .3, Scenario Planning, Identify different, possible futures, (scenarios), , Formulate, plans to deal, with those, futures, , Switch strategy if, tracking of signposts, shows alternative, scenarios becoming, more likely, , ■ Royal Dutch Shell: Crisis, planning., , Invest in one, plan but …, , Hedge your bets, by preparing for, other scenarios, and ..., , The scenario approach to planning has spread rapidl y among large companies. One sur vey, found that over 50 percent of Fortune 500 companies use some for m of scenario planning, methods.7, The oil company Royal Dutch Shell has perhaps done more than most to pioneer the concept of scenario planning, and its e xperience demonstrates the power of the approach. 8 Shell, has been using scenario planning since the 1980s. Today the firm uses two main scenarios to, refine its strategic planning. The scenarios relate to future demand for oil. One (“Dynamics as, Usual”) sees a gradual shift from carbon fuels such as oil and natural gas to renewable energy., The second scenario (“The Spirit of the Coming Age”) looks at the possibility that a technological revolution will lead to a rapid shift to ne w energy sources. 9 Shell is making in vestments that will ensure the prof itability of the company in either scenario, and it is carefull y, tracking technological and market trends., The great virtue of the scenario approach to planning is that it can push managers to think, creatively, to anticipate what they might have to do in different situations, and to learn that the, world is a complex and unpredictable place that places a premium on flexibility. As a result of, scenario planning, organizations might pursue one dominant strate gy related to the scenario, that is judged to be most likely while making some investments that will pay off if other scenarios occur (see Figure 5.3 ). Thus the cur rent strategy of Shell is based on the assumption, that the world will only gradually shift away from carbon-based fuels; but the company is also, hedging its bets by investing in new energy technologies and mapping out a strategy to pursue, should its second scenario come to pass., , // Strategic Planning: A Closer Look, As noted earlier, most plans within an organization are embedded within the overall strategic, plan of the enterprise. Strategic plans form the context within which operating and unit plans, are formulated. Because strategic planning is such an important activity, here we examine the, steps involved in for mulating and implementing a strate gic plan and ho w that plan dri ves, operating and unit plans. Figure 5.4 char ts what can be vie wed as an archetypal strate gic, planningprocess.10, The process starts with a statement of the mission, vision, values, and goals of an organization. Then it moves on to an anal ysis of the e xternal operating environment and the, internal environment of the organization. As noted in Chapter 2, the aim here is to identify, , hiL30123_ch05_104-131.indd 112, hiL30123_ch05_104-131.indd 112, , 11/9/06 7:44:09 PM, 11/9/06 7:44:09 PM

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Planning and Decision Making \\ CHAPTER 5, , 113, , F I G U R E 5 .4, Feedback, , Mission, vision,, values, and goals, , External, analysis, (opportunities and, threats), , SWOT analysis:, formulate strategies, , Draft action plans, , Review progress, against plan, , The Strategic Planning, Process, , Internal, analysis, (strengths and, weaknesses), , Assign subgoals,, roles, responsibilities,, timelines,, and budgets, , Implement, , the strengths and weaknesses of the organization and the oppor tunities and threats in the, external en vironment. Ne xt, in a process kno wn as SWOT anal ysis, managers choose, strategies. The aim is to select strate gies that are consistent with the vision, v alues, and, goals of the or ganization and that e xploit environmental oppor tunities, counter threats,, build on or ganizational strengths, and cor rect weaknesses. Then managers draft action, plans. Action plans specify with precision how strategies will be put into ef fect; they, include subgoals, responsibilities, timelines, and budgets. Action plans are drafted at the, business level, operating level, and unit level within functions. In other words, each strategic, operating, and unit plan should have a component that is an action plan. Once action, plans have been drafted and ag reed on, they are implemented. The process does not stop, here, ho wever; planning is also a control mechanism. Thus managers compare actual, performance against the plan, and through a feedback process make necessary adjustments, to goals and strategies. Planning, in other words, is an iterative process in which plans are, adjusted over time in response to ne w information. Next we take a closer look at each of, these elements., , action plans, Plans that specify with, precision how strategies, will be put into effect., , // SETTING THE CONTEXT: MISSION, VISION,, VALUES, AND GOALS, The mission, vision, values, and goals of an or ganization are the star ting points of strate gic, planning. They set the context for the rest of the process and for the operating and unit plans, that are embedded within a strategic plan., Mission The, mission of an organization describes its purpose. For example, the mission of, Kodak is to provide “customers with the solutions they need to capture, store, process, output,, and communicate images—anywhere, anytime.”11 This mission focuses on the customer needs, that Kodak is trying to satisfy (the need for imaging) as opposed to the products the company, currently produces (f ilm and cameras). K odak’s mission statement is a customer-oriented, mission statement, not a product-oriented one., There is general ag reement that a good mission statement focuses on the customer, needs an organization is satisfying rather than the goods or ser vices it is producing. 12 A, product-oriented mission statement, w hich focuses on the attrib utes of the products, , hiL30123_ch05_104-131.indd 113, , mission, The purpose of an, organization., ■, , Kodak: Mission statement., , 10/28/06 3:56:38 PM

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114, , PART 2 // Strategizing, , Mission Fulfilled Kodak’s mission helped to take the, company into digitized imaging., © Used with permission of Eastman Kodak Company., , delivered to customers and not on the customer needs the, products are satisfying, is inherently dangerous. It ignores, the fact that there may be more than one w ay of satisfying, a particular set of customer needs, and that over time new, products, w hich do a better job of satisfying needs, can, emerge. By focusing on customer needs, a customer oriented mission statement can help an organization anticipate changes in its environment and adopt new products to, satisfy those needs., For example, for the better part of a hundred years Kodak, sold silver halide f ilm and cameras using that f ilm to satisfy, customer needs for capturing and storing images. Ho wever,, in the earl y 1990s another technolo gy emerged that could, satisfy those same needs—digital imaging. Kodak’s customeroriented mission statement focused management attention on, this ne w technolo gy, and the compan y made strate gic, investments in digital imaging that have enabled it to become, a major pro vider of digital cameras and imaging softw are., Kodak’s mission helped it to adopt a new product technology, that better served customer needs., , vision, A desired future state., , Vision Thevision of an organization articulates a desired future state; it describes, often in, bold, evocative, and succinct ter ms, what the management of an or ganization would like to, achieve. The vision of Ford is “to become the world’s leading consumer company for automotive products and ser vices.” This vision is challenging: Judged b y size Ford is cur rently the, world’s number three company behind General Motors and Toyota. Attaining this vision will, be a stretch for F ord—but that is the point. Good vision statements are meant to stretch a, company by articulating some ambitious but attainable future state that will help to ener gize, and motivate employees at all le vels in the or ganization and unite them in a common pur pose.13 A good vision can help employees make sense out of the or ganization’s strategy. The, vision tells them what the strategy is meant to achieve., A good vision can also generate strate gies b y communicating to emplo yees w hat the, ultimate goal of a strategy should be and motivating them to search for and for mulate strategies that help to attain that goal. F or example, at General Electric under the leadership of its, legendary former CEO, Jack Welch, the vision was simple yet clear: GE was to be number one, or number two in every major business in which it competed. Welch did not tell the managers, heading GE’s various divisions what strategies they should pursue—that was left up to them;, rather, by articulating a clear and compelling vision Welch helped set the context for strategy, formulation at the business le vel. He in ef fect told his managers, “Whate ver strategies you, pursue, they should enable your business unit to become number one or two in your market.”, , values, The philosophical priorities to w hich managers, are committed., , Values Thevalues of an organization state the philosophical priorities to which managers, are committed. Values outline how managers and emplo yees should conduct themselv es,, how they should do business, and w hat kind of enter prise they should build to help the or ganization attain its mission and vision. Given that they help shape behavior within an organization, values can help to deter mine an organization’s culture, which as you might recall, from Chapter 2 refers to the basic patter n of shared v alues and assumptions adopted b y, employees within an organization. The culture of a business organization can be an important source of competiti ve advantage, and because v alues shape this, the y are e xtremely, important.14 (We discuss the issue of or ganizational culture in depth in Chapter 10.) F or, example, Nucor Steel is one of the most prof itable steel firms in the world. Its competitive, advantage is based in par t on the extremely high productivity of its workforce, which, the, company maintains, is a direct result of its cultural values that influence how employees are, treated at Nucor:, , ■, , Nucor Steel: Values., , hiL30123_ch05_104-131.indd 114, hiL30123_ch05_104-131.indd 114, , 11/9/06 7:44:09 PM, 11/9/06 7:44:09 PM

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Planning and Decision Making \\ CHAPTER 5, , 115, , • “Management is obligated to manage Nucor in such a way that employees will, have the opportunity to earn according to their productivity.”, • “Employees should be able to feel confident that if they do their jobs properly,, they will have a job tomorrow.”, • “Employees have the right to be treated fairly and must believe that they will be.”, • “Employees must have an avenue of appeal when they believe they are being, treated unfairly.”15, , Nucor’s values emphasizing pay for performance, job security, and fair treatment for employees help create an e galitarian culture within the compan y that leads to high emplo yee, productivity. In turn this has given Nucor one of the lowest cost structures in the steel industry,, which helps explain the company’s profitability in a very price-competitive business., Goals After the mission, vision, and key values of the organization have been stated, the final, step in setting the context for strategic planning is to establish organizationwide goals. A goal, is a desired future state that an organization attempts to realize. In this context the purpose of, goals is to specify exactly what must be done so the company can attain its mission and vision., Well-constructed goals have four main characteristics:16, , goal, A desired future state, that an organization, attempts to realize., , 1. They are precise and measurable. Measurable goals give managers a yardstick or, standard against which they can judge their performance., 2. They address important issues. To maintain focus, managers should select a few major, goals to assess the performance of the company. The selected goals should address, crucial issues., 3. They are challenging but realistic. They give all employees an incentive to look for, ways to improve the performance of the organization. If a goal is unrealistic, employees, may give up; but a goal that is too easy may fail to motivate managers and other, employees.17, 4. They specify a time period in which they should be achieved. Time constraints tell, employees that success requires a goal to be attained by a given date. Deadlines can, inject a sense of urgency into goal attainment and act as a motivator. However, not all, goals require time constraints., Well-constructed goals also pro vide a means b y which to assess strate gy effectiveness and, evaluate the performance of managers., Most business organizations establish goals for prof itability and prof it g rowth. Thus a, company might aim for attaining at least a 10 percent retur n on invested capital (a key measure of profitability) and growing profits at 15 percent per year. However, managers must not, make the mistake of overemphasizing current profitability to the detriment of long-term profitability and prof it g rowth.18 The overzealous pursuit of cur rent prof itability to maximize, short-term performance can encourage such misguided managerial actions as cutting e xpenditures judged as nonessential in the shor t run—for instance, expenditures for research and, development, marketing, and ne w capital in vestments. Although cutting cur rent spending, increases current profitability, the resulting underinvestment, lack of innovation, and diminished marketing can jeopardize long-ter m prof itability and g rowth. These expenditures are, vital if a company is to pursue its long-term mission and sustain its competitive advantage and, profitability. But managers may make such decisions because the adv erse effects of a shor tterm orientation may not materialize and become apparent to shareholders for several years or, because they are under extreme pressure to hit short-term profitability goals.19, To guard against such beha vior, managers need to adopt goals w hose attainment will, increase the long-term performance and competitiveness of their enterprise. Long-term goals, emphasize specific targets concerning such things as productivity, product quality, customer, satisfaction, employee satisfaction, and inno vation. The idea here is that if managers tak e, actions that, for example, boost productivity, in the long r un that will lead to lower costs and, , hiL30123_ch05_104-131.indd 115, , 10/28/06 3:56:39 PM

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116, , PART 2 // Strategizing, , higher profitability, even if it requires sacrificing some profits today to support higher investments in productivity-enhancing technologies. To do this, it is often recommended that managers adopt a balanced scorecard of goals that couple traditional financial measures (such as, profitability) with goals linked to customer satisfaction, the efficiency of internal processes,, and innovation. (We discuss the balanced scorecard approach in more detail in Chapter 9.)20, , // EXTERNAL AND INTERNAL ANALYSIS, , ■ Verizon: Environmental, analysis and strategy., , Having set the conte xt for strate gic planning b y def ining the mission, vision, v alues, and, major goals of the or ganization, the next step in the strate gic planning process is to anal yze, the environment of the or ganization. Two distinct environments are look ed at: the e xternal, environment within which the organization operates and the organization’s own internal environment. Managers must analyze the organization’s external environment—including the task, (or industry) environment in which it competes and the general environment—for opportunities and threats. (W e re viewed the e xternal and inter nal en vironments in Chapter 2.), Opportunities arise when competitive or general environmental trends create enhanced potential for the organization to attain its vision and associated goals. For example, deregulation of, the U.S. telecommunications industry in 1996 created an opportunity for phone companies to, merge with each other and of fer an e xpanded range of ser vices (for e xample, before 1996, local phone companies could not of fer long-distance ser vice). In addition, around the same, time two new technologies entered the mainstream: wireless telephon y and high-bandwidth, Internet access via digital subscriber line (DSL) technolo gy. These two changes created, enormous opportunities for phone companies to expand their services. Thus by 2005 Verizon,, which was formed by the merger of two local telephone companies in 2000, was also offering, Internet access via DSL service, long-distance telephone service, and wireless service., Threats arise when competitive or general environmental trends make it more difficult for an, organization to attain its vision and associated goals. This can also be illustrated by considering, the telecommunications industr y in the United States. Despite all the oppor tunities created by, deregulation and technological change, these trends also created distinct threats.The entry of new, enterprises into the wireless market depressed prices and made it difficult to make a profit. Moreover, new technologies have made it possible for cable companies (not traditionally a competitor), to offer phone service and Internet access over TV cables, enabling companies such as Comcast, and Time Warner to emerge as potent competitors to estab lished telephone companies such as, Verizon. The resulting increase in competition has put pressure on prices and profits., Having analyzed the e xternal environment for oppor tunities and threats, managers should, look inside the organization and identify its strengths and w eaknesses. A strength is an activity, the organization is good at and is a potential source of competitive advantage. A weakness is an, activity the organization does not excel at; it may be a source of competiti ve disadvantage. At, Verizon’s wireless business, for example, the quality of its telephone service and the excellence, of its customer service are seen as strengths that have helped the company outperform rivals.21, , // SWOT ANALYSIS: FORMULATING STRATEGIES, Once managers have identified the strengths, weakness, opportunities, and threats that confront, their organization, they use a SWOT analysis to list these and then star t the process of choosing, strategies. The goal at this stage is to formulate strategies at the corporate, business, and operating, levels that build on organization strengths, correct weaknesses, use strengths to exploit opportunities in the environment, and block threats so the organization can execute its mission, realize its, vision, meet or beat its major goals, and do so in a manner that is consistent with its values., The strategies identif ied through a SWOT analysis should be cong ruent with each other., Operating strategies should be consistent with the b usiness-level strategy of the compan y., Moreover, as w e will see in the ne xt chapter , cor porate-level strate gies should suppor t, business-level strategies. Thus as a result of a SWOT analysis, managers should have identified, a set of cor porate, business, and operating strate gies that suppor t each other and enab le the, organization to attain its goals. The trick now is to put those strategies into action!, , hiL30123_ch05_104-131.indd 116, , 10/28/06 3:56:39 PM

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Planning and Decision Making \\ CHAPTER 5, , 117, , // ACTION PLANS, As noted earlier , action plans specify precisel y how cor porate-level, business-le vel, and, operating strategies will be put into ef fect. Action plans should include subgoals, responsibilities, time lines, and financial budgets. Consider again the case of Verizon Wireless. A key, Verizon strategy has been to differentiate its service by superior geographical coverage. To put, this strategy into action, Verizon had to b uild more cell to wers than its competitors (so its, wireless signal would cover a larger geographical area, resulting in fewer dropped calls). An, action item of this strategic plan might therefore have given operations managers in Illinois,, for example, a subgoal of adding 100 cell towers in the state within a year. Responsibility for, hitting this goal might ha ve been assigned to a par ticular individual; let’s call her Allison, Jones, vice president for operations in Illinois. Jones would have been given a budget containing sufficient funds to achie ve this objecti ve. In practice, Verizon would have had similar, action plans for every state where it offered service. Action plans thus turn broad statements, of strategic intent into concrete actions that ha ve to be under taken within a gi ven period., Action plans are where strategic planning gets practical., , ■ Verizon Wireless: Action, plans., , // IMPLEMENTATION, Once action plans have been drawn up and all members of the or ganization know what they, are supposed to do to execute the strategy, it is on to implementation. At the most basic level,, strategy implementation consists of putting action plans into ef fect. At a higher level of, abstraction, however, strategy implementation also requires that the enter prise have the right, kind of organization structure, incentives, control systems, and culture, as w ell as the right, mix of people. Put dif ferently, strategy is implemented b y people, b ut the w ay that people, work is influenced by the internal organization of the enterprise. (We discuss internal organization architecture in depth in Chapter 8.), Again consider Verizon Wireless; making sure that Allison Jones, the VP for operations, in Illinois, performs up to her potential might require Verizon to create positive incentives, for Jones. Thus her annual bonus might be determined in part by how well her unit executes, its action plan. Moreover, to let Jones work quickly and make decisions that are appropriate, for her unit, Verizon might decentralize all rele vant operating decisions concer ning the, building out of cell towers in Illinois to Jones. Jones’s boss, in other words, would leave it, up to her to deter mine a precise schedule for b uilding cell to wers and let her decide, where the towers should be placed. The design of incentive systems and decisions concerning the decentralization of operating responsibilities are both aspects of the or ganization, architecture of Verizon. In this example higher-level managers at Verizon are adjusting the, company’s inter nal organization architecture to create an inter nal environment in w hich, Jones is most likely to meet the goals outlined in her unit’s action plan. More generally, this, is what higher-level managers do: They mak e decisions about the str ucture, incentives,, controls, culture, and people of the organization in an attempt to create an internal environment that best suppor ts lower-level managers and emplo yees in their quest to implement, action plans., , strategy, implementation, Putting action plans into, effect., , // REVIEW AND ADJUSTMENTS, The final step in the strategic planning process is to periodically review actual performance, against the plan and mak e an y needed adjustments. A plan can be vie wed as a control, mechanism. If par ts of an or ganization (or the entire or ganization) do not reach the goals, outlined in the plan, senior managers will star t to ask questions and seek an e xplanation for, the variance between the plan and actual results. Once the y understand why the variance is, occurring, they may take corrective action to reach the plan; the y may decide the plan itself, needs tuning; or in e xtreme situations, they may decide that the plan needs to be scrapped, and a ne w plan for mulated. Thus if the unit headed b y Allison Jones at Verizon does not, , hiL30123_ch05_104-131.indd 117, , 10/28/06 3:56:40 PM

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118, , PART 2 // Strategizing, , attain the goals outlined in the plan, her boss will star t to ask questions. Imagine that after, investigation, Jones’s boss discovers that Jones has been playing a lot of golf and not putting, much time in at w ork. Jones ma y be replaced b y someone w ho has a g reater appetite for, work. Alternatively, Jones ma y have been w orking hard but simpl y lacked the resources, required to execute the plan in the specif ied time. In this case Jones’s boss might tr y to get, her more resources. The point is that plans are li ving documents that can be, and often are,, adjusted as new information arrives., , // The Benefits and Pitfalls of Planning, Having reviewed the nature of planning, w e can no w discuss its benef its and pitf alls. The, benefits are implicit in much of the discussion so far:, 1. Planning gives direction and purpose to an organization; it is a mechanism for deciding, the goals of the organization., 2. Planning is the process by which management allocates scarce resources, including, capital and people, to different activities., 3. Planning drives operating budgets—strategic, operations, and unit plans determine, financial budgets for the coming year., 4. Planning assigns roles and responsibilities to individuals and units within the, organization., 5. Planning enables managers to better control the organization., Thus planning is unambiguousl y a central task of management. Without planning an, organization would be chaotic, drifting lik e a ship without propulsion. Academic research, seems to support this view. A study that analyzed the results of 26 previously published studies, came to the conclusion that on average, strategic planning has a positive impact on company, performance.22 Another study of strategic planning in 656 f irms found that for mal planning, methodologies are par t of a good strate gy for mulation process, e ven in rapidl y changing, environments.23, ■ AOL and Time Warner:, Despite these obvious benefits, however, planning has a bad name in some circles. ManagPlanning Failure., ers often g roan when they are told it is time for another round of strate gic planning. Some, management theorists asser t that the best strate gies arise in, the absence of planning, and that planning can limit creativity, and freedom of action. 24 Moreover, there are some striking, cases of organizations that pursued f ailed strategies despite, having gone through comprehensive planning exercises., For example, in 2000 AOL and Time Warner executed what, was then the largest merger in history, valued at $166 billion., The strate gic plan for the ne w or ganization, AOL–Time, Warner, called for Time Warner to distribute digital versions of, its magazines, such as Fortune, through AOL and for AOL to, benefit from Time Warner’s extensive cable TV operations, offering broadband v ersions of AOL via Time Warner cable., Managers stated that their goal for the merged company was to, increase earnings at 25 percent per year compounded. It didn’t, work. Within three years AOL–Time Warner had taken a massive $60 billion charge against earnings to write down the value of “goodwill” associated with AOL’s assets; AOL’s subscribThe Best Laid Plans Time Warner CEO Gerald Levin, er and revenue growth had stalled; the stock price had f allen, and AOL CEO Steve Case celebrate the completion of the, by over 80 percent; and all of the top managers associated with, largest merger in business history. Within two years their, the merger had resigned. The new CEO, Richard Parsons, in, plan for the new company was in tatters, grounded on the, an admission that the plan had f ailed, stated that the new goal, hard rocks of market realities., was to grow earnings by 8–12 percent per year.25, © Getty Images., , hiL30123_ch05_104-131.indd 118, hiL30123_ch05_104-131.indd 118, , 11/9/06 7:44:10 PM, 11/9/06 7:44:10 PM

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Planning and Decision Making \\ CHAPTER 5, , 119, , F I G U R E 5 .5, Pitfall, , Solution, , Too centralized;, top-down, , Decentralized, planning, , Failure to, question, assumptions, , Scenario planning;, devil’s advocate, , Failure to, implement, , Link to goals;, tie to budgets, , Failure to, anticipate, rivals' actions, , Role-playing, , Countering the Pitfalls, of Planning, , // THE PITFALLS OF PLANNING, Why do plans sometimes fail to produce the desired results? What goes wrong with carefully, made plans such as the postmerger plans for AOL and Time Warner? There are several pitfalls, managers can fall victim to when they are planning (see Figure 5.5)., Too Centralized and Top-Down Some planning systems are too centralized and top-do wn., As a result, planners mak e decisions that do not tak e market realities into account. This can, become a problem when the planners are f ar removed from daily operations—when they lack, the knowledge that comes from a close relationship with the mark et. For example, General, Electric used to be known for its highly centralized strategic planning process. At one time planning was touted as a strength of General Electric. Ho wever, corporate planners often drew up, plans that made no sense to b usiness unit and operating managers. In one f amous example,, corporate planners analyzed demographic data, found out that family size was shrinking, and, told GE’s appliance unit to star t making smaller refrigerators. They did; but the smaller appliances did not sell. The reason w as that e ven though f amily size w as shrinking, houses w ere, getting larger; people had more room for refrigerators, and the y preferred to buy big refrigerators that they could keep fully stocked. The planners got it wrong because the y were removed, from the business and failed to understand and take customer preferences into account.26, Good ideas about business and operations strategy are not the preserve of top management;, they can and often do emer ge from lower down within an organization. Indeed, management, scholars have often declared that good ideas can take root almost anywhere within an organization, even at the lowest levels, and that rather than imposing all strategy from the top, good, planning systems should give lower-level employees an opportunity to suggest, lobby for, and, pursue strategies that might benefit the organization.27, , ■ GE: The problem with, centralized planning., , Failure to Question Assumptions All plans are based on assumptions about the future., Sometimes those assumptions are wrong, e ven when the plans are f irst made. Other times the, assumptions may have initially been reasonable, but unanticipated changes may have invalidated, them. In either case the result is that the plans are no longer v alid, and unless management recognizes this in a timely manner and makes adjustments, the plans will fail to produce the desired, results.28 For example, in the early 1980s oil prices reached record highs of $35 a barrel following supply reductions by the OPEC cartel. Oil ref iners like Exxon then made investment plans, , hiL30123_ch05_104-131.indd 119, , 10/28/06 3:56:41 PM

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120, , Exxon: Problems with, planning., ■, , PART 2 // Strategizing, , based on the assumption that prices would continue to rise, hitting over $50 a barrel by the mid1980s. For Exxon those plans included massive investments in shale oil deposits that would not, be prof itable unless oil prices sta yed over $30 a bar rel. As it tur ned out, the k ey assumption, about oil prices was wrong. By the mid-1980s oil prices had f allen to less than $15 a bar rel as, new supplies came from Alaska and the Nor th Sea; and oil prices sta yed low for the ne xt 15, years, making Exxon’s investment worthless. Ironically this experience so hurt companies like, Exxon that when oil prices climbed again in the earl y 2000s, they initially held off on making, the investments in exploration required to increase suppl y. The assumption that the 1980s oil, boom and bust was about to repeat itself in the early 2000s made them more cautious than they, perhaps should have been., Failure to Implement Plans often fail because they are not put into action. One of the, standard quips about strategic planning is that after a planning exercise has been completed,, the planning books sta y on the shelf, g athering dust, ne ver to be opened again. 29 One, reason plans are not put into action is that it is dif ficult to do so, par ticularly if the plan, calls for a departure from the re gular w ay of doing business or requires a substantial, change in organizational practices. As we will see when we consider organizational change, in Chapter 18, effectively managing change is one of the most difficult tasks that can confront a manager; managers often pull back when facing the turmoil associated with change, efforts, so the planned change does not occur. A few years ago this author acted as a consultant for a strategic planning process at a city-o wned electric utility. The planning process was successful in that the top managers, after extensive consultation with employees,, committed themselves to major strate gic changes in the utility that w ould signif icantly, lower costs and enhance ser vice. However, attempts to enact the plan led to protests from, unionized employees, who objected to the planned reorganization of the utility, fearing that, it might jeopardize their job security . The unions lobbied the city go vernment, and the, mayor, who did not appreciate the negative publicity, replaced the CEO of the utility with, a city bureaucrat who maintained the status quo. The message to managers from that event, was clear: Don’t rock the boat! The strategic plan was never implemented and is now gathering dust on a shelf somewhere., Failure to Anticipate Rivals’ Actions Plans can f ail because managers do not consider, what rivals are doing. The planners proceed as if the organization has no rivals, and they make, investments based on plans without considering ho w the value of those investments will be, affected by rivals’ actions. This was a problem in the case of many dot-com companies in the, late 1990s and earl y 2000s. Following the success of earl y dot-com, enterprises such as AOL, Amazon, Yahoo, and eBa y, hundreds of, companies entered the dot-com arena. Many of these companies had, a business model based on adv ertising revenues. The problem was, that each company assumed that it would capture significant advertising revenues; but with man y other companies chasing the same advertising dollars, there simply was not enough business to go around,, and most of these companies f ailed. Had these enter prises looked at, what their ri vals were doing, the y might ha ve been more cautious, about their investment plans, and the results might not ha ve been so, bad., , // IMPROVING PLANNING, , © Streeter/Cartoon Stock., , hiL30123_ch05_104-131.indd 120, hiL30123_ch05_104-131.indd 120, , Dealing with the pitfalls just discussed requires that managers take, a number of steps (see F igure 5.5 ). To guard against the prob lems, associated with centralized, top-down planning, managers need to, ensure that responsibility for planning is decentralized to the appropriate level and that a broad constituenc y of employees has an, opportunity to par ticipate in the planning process. An impor tant, , 11/9/06 7:44:11 PM, 11/9/06 7:44:11 PM

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Planning and Decision Making \\ CHAPTER 5, , principle of good planning is that those who have primary responsibility for putting a plan, into action should also participate in f ormulating the plan. Thus, for example, manufacturing managers should be involved in a planning process that looks at how manufacturing, processes might be reorganized to drive down unit costs, and mark eting managers should, help formulate a plan that calls for the repositioning of acompany’s product offering in the, marketplace., As for opening up the planning process to a broad constituency of employees, here organizations can and do use a variety of mechanisms. At Google, for example, employees are asked to, spend 20 percent of their time working on something that interests them away from their main, jobs. Companywide, a full 10 percent of emplo yee time at Goo gle is spent dreaming up ne w, projects. Although most of these projects ne ver become products, some do—such as Goo gle, Maps, Google mail, Google Earth, and Google books (a contro versial service that lets users, search inside published books).30 General Electric has a process known as “work out” in which, lower-level managers and other emplo yees spend three da ys at a retreat, without their boss,, formulating ideas to improve the perfor mance of their b usiness unit. They then suggest their, ideas to their boss, w ho has to decide on the spot w hich ideas to pursue. This process has, empowered employees, has made them feel as if the y have a role in deter mining the plans of, their unit, and has produced many ideas that improved performance at General Electric.31, To try to ensure that plans are not based on unrealistic assumptions and to account for, uncertainty about the future, managers can use scenario planning methods. As discussed earlier, scenario planning methods force managers to think about what they would do under different assumptions about the future. One of the g reat advantages of the scenario method is, that it is not based on a single assumption about the future. In addition, managers can use an, independent “devil’s advocate” to question plans and their underlying assumptions, exposing, any flaws or weak assumptions (we discuss this in more detail in the ne xt section).32 Beyond, such approaches, senior managers need the courage to walk away from plans that are no longer working because of unanticipated events and to push the organization in a new direction if, that is called for. One of the classic e xamples of this occur red in 1995 when Microsoft’s Bill, Gates responded to the unanticipated emergence of the World Wide Web based on the Hyper, Text Markup Language (HTML) by abandoning Microsoft’s established strategy for the Internet, which was based on a v ersion of MSN that used proprietar y software. Instead he stated, that Microsoft would incorporate HTML language into all of its products, making them Web, enabled., To make sure plans are implemented , managers need to follo w the steps of the planning, model to their conclusion—drafting action plans, identifying w ho is responsible for putting, the plans into effect, tying budgets to plans, and holding managers accountab le for reaching, goals. The hard truth is that plans will not work unless they are linked to goals that matter and, are tied to operating b udgets. Unfortunately, in many organizations the planning e xercise is, decoupled from the b udget process and from perfor mance reviews, which implies that the, plans have no teeth., Finally, managers need to consider ho w rivals will respond to their plans. One technique, for doing this is to engage in strategic role-playing, where groups within the organization take, on the role of competing enterprises and state how they would counter the plans of the organization. This technique is a standard feature of Microsoft’ s regular strategy conferences. At, those conferences, groups assigned to take the position of Microsoft rivals draft plans to “beat, Microsoft.” The idea is to generate insights into what the strategy of rivals might be and how, they might respond to actions by Microsoft., , 121, , ■ Google: Decentralized, strategy making., , ■ Microsoft: Changing, strategic plans., , // Decision Making, The strategic planning system w e have reviewed in this chapter is an e xample of a rational, decision-making model. In essence, strategic planning is a formal process for making important decisions about strategies, tactics, and operations. More generally, making decisions is a, major component of a manager’s job. Strategic planning systems are a subset of what is often, referred to as the classic rational model of decision making., , hiL30123_ch05_104-131.indd 121, , 10/28/06 3:56:43 PM

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122, , PART 2 // Strategizing, , FIG UR E 5 .6, The Rational DecisionMaking Model, Identify the, problem, , Does not meet, expectations, Meets, expectations, , Identify, decision, criteria, , Weight, criteria, , Generate, alternative, courses of, action, , Evaluate, outcome, , Implement, alternative, , Choose one, alternative, , Continue with course of action, , // THE RATIONAL DECISION-MAKING MODEL, , bounded rationality, Limits in human ability to, formulate complex, problems, to gather and, process the information, necessary for solving those, problems, and thus to, solve those problems in a, rational way., satisfice, Aiming for a satisfactory, level of a particular, performance variable, rather than its theoretical, maximum., , hiL30123_ch05_104-131.indd 122, , The rational decision-making model has a number of discrete steps (see Figure 5.6 ). First,, managers have to identify the problem to be solved by a decision. Problems often arise when, there is a gap betw een the desired state and the cur rent state. For example, if a f irm is not, attaining its goals for profitability and growth, the gap signifies a problem. Second, managers, must identify decision criteria, which are the standards used to guide judgments about which, course of action to pursue. Imagine, for example, that a manager has to decide what model of, car to purchase for a company fleet. The decision criteria might include cost, fuel ef ficiency,, reliability, perfor mance, and styling. Third, managers need to weight the criteria b y their, importance. The weighting should be driven by the overall goals of the organization. Thus for, an organization that is tr ying to reduce costs, a manager choosing cars for a compan y fleet, would probably weight fuel efficiency higher than styling or power. Fourth, managers need to, generate alternative courses of action. In the e xample used here, this would mean specifying, the different models of car that fall into the feasible set. Fifth, managers need to compare the, alternatives against the weighted criteria, and choose one alter native. Sixth, they should implement that choice (for example, issue a purchase order to buy cars). Finally, after a suitable, period they should always evaluate the outcome and decide w hether the choice w as a good, one. If the outcome does not meet e xpectations, this constitutes a prob lem that triggers another round of decision making., , // BOUNDED RATIONALITY AND SATISFICING, The rational decision-making model is reasonab le except for one prob lems: The implicit, assumption that human decision makers are rational is not valid. This point was made forcibly, by Nobel Prize winner Herber t Simon. 33According to Simon, human beings are not rational, calculating machines. Our rationality is bounded b y our own limited cognitive capabilities., Bounded rationality refers to limits in our ability to formulate complex problems, to gather, and process the infor mation necessary for solving those prob lems, and thus to solv e those, problems in a rational w ay.34 Due to the constraints of bounded rationality , we tend not to, optimize, as assumed by the rational decision-making model. Rather we satisfice, aiming for, a satisfactory level of a particular performance variable, rather than its theoretical maximum., , 10/28/06 3:56:43 PM

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Planning and Decision Making \\ CHAPTER 5, , For example, instead of trying to maximize prof its, the theory of bounded rationality argues, that managers will try to attain a satisfactory level of profits., Satisficing (settling for a good enough solution to a prob lem) occurs not only because of, bounded rationality, but also because of the prohibitive costs of collecting all the information, required to identify the optimal solution to a problem—and often because some of the required, information is unavailable. For example, identifying the optimal strategy for gaining market, share from competitors ma y require infor mation about consumer preferences; consumer, responses to changes in k ey product v ariables such as price, quality , and styling; the cost, structure, cur rent and future product of ferings, and strate gy of ri vals; and future demand, conditions. Much of this information is costly to gather (data about consumer preferences and, responses), private (the cost structure and future product offerings of rivals), and unpredictable, (future demand conditions), so managers tend to collect a limited amount of publicly available, information and make satisficing decisions based on that., , // DECISION-MAKING HEURISTICS AND, COGNITIVE BIASES, Cognitive psychologists argue that w hen making decisions, due to bounded rationality w e, tend to fall back on decision heuristics, or simple rules of thumb. Decision heuristics can, be useful, because the y help us mak e sense out of comple x and uncer tain situations. An, example of a decision-making heuristic is the so-called 80–20 rule, which states that 80, 35, percent of the consequences of a phenomenon stem from 20 percent of the causes., A, common formulation of the 80–20 rule states that 80 percent of a firm’s sales are derived from, 20 percent of its products, or that 20 percent of the customers account for 80 percent of sales., Another common for mulation often voiced in software companies is that 20 percent of the, software programmers produce 80 percent of the code. It is also claimed that 20 percent of, criminals produce 80 percent of all crimes, 20 percent of motorists are responsib le for 80, percent of accidents, and so on.36 Managers often use the 80–20 rule to make resource allocation decisions, for example, by focusing sales and service efforts on the 20 percent of customers who are responsible for 80 percent of revenues. Although the 80–20 rule might be verified, through empirical measurement, often it is not. P eople just assume it is tr ue—and there lies, the problem: The rule does not al ways hold. The assumption may be invalid, and decisions, made on the basis of this heuristic might be flawed., Generalizing from this, cognitive psychologists say that as useful as heuristics might be, their, application can cause severe and systematic errors in the decision-making process.37 Cognitive, biases are decision-making er rors that we are all prone to making and that ha ve been repeatedly verified in laboratory settings or controlled experiments with human decision makers. Due, to the operation of these biases, managers with good information may still make bad decisions., A common cognitive bias is kno wn as the prior hypothesis bias, which refers to the, fact that decision mak ers who have strong prior beliefs about the relationship betw een two, variables tend to make decisions on the basis of these beliefs, e ven when presented with evidence that their beliefs are wrong. Moreo ver, they tend to seek and use infor mation that is, consistent with their prior beliefs while ignoring information that contradicts these beliefs. To, put this bias in a strategic context, it suggests that a CEO who thinks a certain strategy makes, sense might continue to pursue that strate gy, despite e vidence that it is inappropriate or, failing., Another well-known cognitive bias, escalating commitment, occurs w hen decision, makers, having already committed signif icant resources to a project, commit e ven more, resources if the y receive feedback that the project is f ailing.38 This may be an ir rational, response; a more logical response might be to abandon the project and mo ve on. Feelings of, personal responsibility for a project, along with a desire to recoup their losses, can induce, decision makers to stick with a project despite evidence that it is failing., A third bias, reasoning by analogy, involves the use of simple analo gies to mak e, sense out of complex problems. The problem with this heuristic is that the analogy may not, , hiL30123_ch05_104-131.indd 123, , 123, , decision heuristics, Simple rules of thumb., 80–20 rule, A heuristic stating that, 80 percent of the, consequences of a, phenomenon stem from, 20 percent of the causes., cognitive biases, Decision-making errors, that we are all prone to, making and that have been, repeatedly verified in, laboratory settings or, controlled experiments, with human decision, makers., prior hypothesis, bias, Decision makers who have, strong prior beliefs about, the relationship between, two variables tend to make, decisions on the basis of, these beliefs, even when, presented with evidence, that their beliefs are wrong., escalating, commitment, Arises when decision, makers, having already, committed significant, resources to a project,, commit even more, resources if they receive, feedback that the project, is failing., reasoning by, analogy, The use of simple, analogies to make sense, out of complex problems., , 10/28/06 3:56:43 PM

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124, , representativeness, Generalizing from a small, sample or even a single, vivid anecdote., , Dot-com boom and, bust., ■, , illusion of control, The tendency to, overestimate one’s ability, to control events., , availability error, Arises from our, predisposition to estimate, the probability of an, outcome based on how, easy the outcome is to, imagine., , PART 2 // Strategizing, , be valid. A fourth bias, representativeness, is rooted in the tendency to generalize from, a small sample or e ven a single vi vid anecdote. This bias violates the statistical la w of, large numbers, which says that it is inappropriate to generalize from a small sample, let, alone from a single case. In many respects the dot-com boom of the late 1990s w as based, on reasoning by analogy and representativeness. Prospective entrepreneurs saw some of, the early dot-com companies such as Amazon and Yahoo! achieve rapid success, at least, judged by some metrics. Reasoning b y analogy from a small sample, the y assumed that, any dot-com could achieve similar success. Man y investors reached similar conclusions., The result was a massive wave of start-ups that jumped onto the Inter net in an attempt to, capitalize on the perceived opportunities. That the vast majority of these companies subsequently went bankrupt is testament to the fact that the analogy was wrong, and the success, of the small sample of earl y entrants w as no guarantee that other dot-coms w ould, succeed., Another cognitive bias, known as the illusion of control, is the tendency to overestimate, one’s ability to control events. General or top managers seem to be par ticularly prone to this, bias: Having risen to the top of an organization, they tend to be overconfident about their ability to succeed. According to Richard Roll, such overconfidence leads to what he has termed, the hubris hypothesis of takeovers.39 Roll asser ts that top managers are typicall y overconfident about their abilities to create value by acquiring another company. So, they end up making poor acquisition decisions, often pa ying far too much for the companies the y acquire., Servicing the debt taken on to finance such an acquisition makes it all but impossible to make, money from the acquisition (the acquisition of Time Warner by AOL, discussed earlier, is a, good example of management hubris)., The availability error is yet another common bias. The availability error arises from our, predisposition to estimate the probability of an outcome based on how easy the outcome is to, imagine. For example, more people seem to fear a plane crash than a car accident, and y et, statistically people are far more likely to be killed in a car on the w ay to the airport than in a, , Time Warner CEO Gerald Levin and AOL CEO Steve Chase after their merger., © Chris Wattie/Reuters/Corbis., , hiL30123_ch05_104-131.indd 124, hiL30123_ch05_104-131.indd 124, , 11/9/06 7:44:11 PM, 11/9/06 7:44:11 PM

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Planning and Decision Making \\ CHAPTER 5, , plane crash. They overweight the probability of a plane crash because the outcome is easier to, imagine and because plane crashes are more vi vid events than car crashes, which affect only, small numbers of people at a time.As a result of the availability error, managers might allocate, resources to a project, with an easil y visualized outcome rather than one that might ha ve a, higher return., Finally, the way a problem or decision is framed can result in the framing bias.40 In a, classic illustration of framing bias, Tversky and Kahneman give the example of what they call, the Asian disease problem.41 They asked participants in an e xperiment to imagine that the, United States is preparing for the outbreak of an unusual disease fromAsia that is expected to, kill 600 people. Two programs to combat the disease ha ve been de veloped. One g roup of, participants was told that the consequences of the programs were as follows:, •, , 125, , framing bias, Bias arising from how a, problem or decision is, framed., , Pro, gram A: 200 people will be saved., , • Program B: There is a one-third probability that 600 people will be saved and a two-thirds, probability that no one will be saved., When the consequences were presented this way, 72 percent of participants preferred program, A. A second group of participants was given the follow choice:, • Program C: 400 people will die., • Program D: There is a one-third probability that no one will die and a two-thirds, probability that 600 people will die., When the consequences w ere presented this w ay, 78 percent of the par ticipants prefer red, program D. However, programs A and C are the same, as are programs B and D! The point, of, course, is that the preferences were shaped by how the problems were framed., The wrong frames can have significant negative implications for a company. A good example, concerns Encyclopedia Britannica, which thought it was in the book business until it found out it, was really in the knowledge and information business, which had gone digital. The company’s, sales reportedly peaked at around $620 million in 1989 and then fell off sharply as CD-ROM and, then Internet-based digital encyclopedias, such as Encarta, took away market share. Today, after a, close brush with bankruptcy, Encyclopedia Britannica survives as a Web-based business, but it, attracts far less traffic than Wikipedia, the dominant online encyclopedia., , ■ Encyclopedia Britannica:, Framing bias., , // PROSPECT THEORY, Prospect theory, which was developed by psychologists Daniel Kahneman and Amos Tversky,, is a widely cited model that gives an example of how the cognitive biases arising from simple, heuristics can influence managerial decision making. 42 Prospect theor y has been used to, explain the obser vation that people seem to mak e decisions that are inconsistent with the, rational model. Prospect theory suggests that individuals assign different subjective values to, losses and gains of equal magnitude that result from a decision (see Figure 5.7). According to, this theory, when evaluating the potential gains and losses associated with a course of action,, people start by establishing a reference point or anchor . The reference point is usuall y the, current situation. Thus if a firm is currently making a return on invested capital of 10 percent,, this might be the reference point for a decision that af fects this measure of prof itability., However, as just noted when we discussed the framing bias, the reference point can be influenced by how a problem or decision is framed. Prospect theory predicts that decision makers, will subjecti vely o verweight the v alue of potential losses and underw eight the v alue of, potential gains relative to their objective, or monetary, value. Put differently, decision makers, are loss averse—they avoid actions that have a potential negative outcome., An interesting implication of prospect theor y is that if decision mak ers have incur red, significant losses in the past, they become distressed (they assign a subjectively high negative, value to those losses); this shifts their reference point, and they tend to make riskier decisions, than would otherwise have been the case. In other w ords, loss averse decision makers try to, recoup losses by taking bigger risks—paradoxically they become risk seekers. This explains a, , hiL30123_ch05_104-131.indd 125, hiL30123_ch05_104-131.indd 125, , 11/9/06 7:44:12 PM, 11/9/06 7:44:12 PM

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126, , PART 2 // Strategizing, , FIG UR E 5 .7, Prospect Theory, Subjective value (⫹), , Gains are, underweighted, , Reference point, , Losses, , Gains, , Losses are, overweighted, , Subjective value(⫺), , well-documented tendency for gamb lers who are losing to place pro gressively riskier bets., Similarly, investors in the stock market who have lost signif icant money have been observed, trying to recoup their losses b y investing in more speculati ve stocks. 43 For a managerial, example, look no fur ther than Enron, the no w-bankrupt energy trading company, where the, response to mounting losses was increasing pursuit of the risky strategy of trying to hide those, losses by shifting them into off–balance sheet entities and engaging in illegal trades to inflate, profits.44 Had the reference point for Enron been more positi ve, it seems unlik ely that the, managers would have taken these risks. Note that prospect theor y also explains the phenomenon of escalating commitment we discussed earlier.45, , // GROUPTHINK, , groupthink, Arises when a group of, decision makers embarks, on a course of action, without questioning, underlying assumptions., , hiL30123_ch05_104-131.indd 126, , Because most decisions are made b y groups, the g roup context within w hich decisions are, made is an important variable in determining whether cognitive biases will adversely affect the, strategic decision-making processes. Psycholo gist Ir vin Janis asser ts that man y g roups are, characterized by a process known as groupthink and as a result make poor strategic decisions.46, Groupthink occurs when a group of decision makers embarks on a course of action without, questioning underlying assumptions. Typically a group coalesces around a person or polic y. It, ignores or filters out information that can be used to question the policy, develops after-the-fact, rationalizations for its decisions, and pushes out of the group members who question the policy., Commitment to mission or goals becomes based on an emotional rather than an objective assessment of the “correct” course of action. The consequence can be poor decisions., It has been said that g roupthink may help to e xplain why organizations often make poor, decisions in spite of sophisticated planning processes. Janis traces many historical fiascoes to, defective policy making b y government leaders w ho received social suppor t from their ingroup of advisers. For example, he suggests that President John F. Kennedy’s inner circle suffered from groupthink when the members of this g roup supported the decision to launch the, Bay of Pigs invasion of Cuba in 1961, even though available information showed that it would, be an unsuccessful venture (which it was). Similarly, Janis argues that the decision to escalate, the commitment of military forces to Vietnam by the Johnson administration and increase the, bombing of North Vietnam, despite the availability of data showing that this probably would, not help win the war, was the result of groupthink. Indeed, when a member of the in-group of, decision makers, Defense Secretary Robert McNamara, started to express doubts about this, , 10/28/06 3:56:46 PM

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Planning and Decision Making \\ CHAPTER 5, , 127, , policy, he was reportedly asked to leave by the president and resigned. However, despite the, emotional appeals of such anecdotes, academic researchers have not found strong evidence in, support of groupthink.47, , // IMPROVING DECISION MAKING, The existence of bounded rationality, cognitive biases, and groupthink raises the issue of how to, bring critical information into the decision mechanism so that the decisions of managers are more, realistic, objective, and based on thorough evaluation of the available data. Scenario planning can, be a useful technique for counteracting co gnitive biases: The approach forces managers to think, through the implications of different assumptions about the future. As such, it can be an antidote, to hubris and the prior hypothesis bias. Two other techniques known to counteract groupthink and, cognitive biases are de vil’s advocacy and dialectic inquir y.48 Devil’s advocacy requires the, generation of both a plan and a critical analysis of the plan. One member of the decision-making, group acts as the devil’s advocate. The purpose of the devil’s advocate is to question assumptions, underlying a decision and to highlight all the reasons that might make the proposal unacceptable., In this way decision makers can be made aware of the possible perils of recommended courses of, action. Dialectic inquiry is more complex: It requires the generation of a plan (a thesis) and a, counterplan (an antithesis) that reflect plausible but conflicting courses of action. 49 Managers, listen to a debate between advocates of the plan and counterplan and then decide which plan will, lead to higher perfor mance. The purpose of the debate is to re veal problems with def initions,, recommended courses of action, and assumptions of both plans. As a result of this exercise, managers can form a new and more encompassing conceptualization of the problem, which becomes, the final plan (a synthesis). Dialectic inquiry can promote thinking strategically., Another technique for countering co gnitive biases championed b y Daniel Kahneman (of, prospect theory fame) is known as the outside view.50 The outside view requires planners to, identify a reference class of analo gous past strate gic initiatives, deter mine whether those, initiatives succeeded or failed, and evaluate the project at hand against those prior initiatives., According to Kahneman, this technique is particularly useful for countering biases such as the, illusion of control (hubris), reasoning by analogy, and representativeness. Thus, for example,, when considering a potential acquisition planners should look at the track record of acquisitions made by other enter prises (the reference class), deter mine if they succeeded or f ailed,, and objectively evaluate the potential acquisition against that reference class. Kahneman, asserts that such a “reality check” against a large sample of prior events tends to constrain the, inherent optimism of planners and produce more realistic assessments and plans., Finally, decision makers are more likely to run into problems of bounded rationality, and, resort to simple decision-making heuristics, when they have too much information to process.51, A solution to this prob lem is to reduce the amount of infor mation that managers ha ve to, process, giving them more time to focus on critical issues, b y delegating routine decisionmaking responsibilities to subordinates. We return to this issue in Chapter 8 when we discuss, internal organization structure., , IN CO N CL U SI ON, , devil’s advocacy, The generation of both a, plan and a critical analysis, of the plan by a devil’s, advocate., dialectic inquiry, The generation of a plan (a, thesis) and a counterplan, (an antithesis) that reflect, plausible but conflicting, courses of action., outside view, Identifying a reference, class of analogous past, strategic initiatives,, determining whether those, initiatives succeeded or, failed, and evaluating a, project at hand against, those prior initiatives., , WH Y DOE S IT M ATT E R ?, , Why should students studying management care about planning and decision making?, Planning is one of the central activities of managers, who devote a lot of time and energy to, formulating and then implementing plans; it is crucial that managers plan well because the, evidence suggests that whereas good planning can improve the performance of an organization, bad planning may be as damaging as no planning at all. Without planning, the, organization can lack purpose, and there may be no agreement about its strategy. Without, planning, different parts of the organization may pull in different directions, there may, be a lack of synchronicity between actions, and different units may pursue inconsistent, , hiL30123_ch05_104-131.indd 127, , 10/28/06 3:56:47 PM

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128, , PART 2 // Strategizing, , strategies. Without planning, resources may be allocated in a haphazard fashion, with no, link between strategy and budgets. Finally, there may be a lack of control in the enterprise: By allowing managers to compare performance against goals, planning becomes a, crucial link in the process of controlling the organization., At the same time it is wise to keep the limitations of planning in mind. Planning does, not guarantee perfect strategy formulation. Good ideas can emerge in the absence of, planning: Much of what organizations do is not planned but rather is a response to, unanticipated circumstances. However, if such responses are something other than a, quick tactical move, they may subsequently be incorporated into the plans of the, enterprise. Thus although Microsoft did not plan for the emergence of a World Wide, Web based on HTML, when it did emerge Microsoft quickly made plans based on that, new reality. So although planning does not have a monopoly on the generation of good, ideas, and plans can be made obsolete by unforeseen events, coordinated action is still, needed to exploit good ideas and respond to unforeseen events., In addition, much of a manager’s work involves making decisions. Planning is nothing, more than a formal process for making decisions. As we have seen, decision makers, suffer from bounded rationality and tend to fall back on simple heuristics when making, complex decisions. In turn, these heuristics can give rise to cognitive biases. Even the, best-designed decision-making systems will fail to produce the desired results if, managers let cognitive biases skew their decisions. Thus managers should use techniques that have been shown to minimize the likelihood that cognitive biases and, groupthink will contaminate the decision-making process. These techniques include, scenario planning, devil’s advocacy, dialectic inquiry, and taking an outside view., , MANAGEMENT CHALLENGES, 1., 2., 3., , 4., 5., , “In high-technology industries, where things are moving quickly, it is impossible to, plan, so don’t bother!” Is this statement reasonable?, What decision-making biases help explain why many acquisitions fail to create value, for the acquiring company? What should managers do to guard against these biases?, What role can a lower-level manager play in his or her company’s strategic planning, process? What might occur if lower-level managers have no input into the strategic, planning process of the organization?, How are planning systems also a control device?, Microsoft describes its mission as follows: “At Microsoft, we work to help people, and businesses throughout the world realize their full potential. This is our mission., Everything we do reflects this mission and the values that make it possible.” Is this a, customer-oriented mission statement? How might this mission influence product, development decisions within Microsoft?, , MANAGEMENT PORTFOLIO, FOR THE ORGANIZATION YOU HAVE CHOSEN TO FOLLOW:, 1., 2., , hiL30123_ch05_104-131.indd 128, , Find out as much as you can about the mission, vision, values, and major goals of the, organization., Evaluate the firm’s mission, vision, values, and goals. What are the positive aspects of, these statements? Is there anything you would criticize?, , 10/28/06 3:56:47 PM

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Planning and Decision Making \\ CHAPTER 5, , 3., 4., , 129, , Do you think the firm is living up to its mission, vision, values, and goals? What, evidence do you have to support your conclusion?, Can you find any evidence that managers at the organization might have made any, significant strategic errors over the last decade? If they have, what role did poor, planning, a lack of planning, or decision-making traps play in these errors?, , CLOSING CASE, , B O O M A N D B U S T I N T E L E C O M M U N I C AT I O N S, , In 1997 Michael O’Dell, the chief scientist at WorldCom,, which owned the lar gest network of “Inter net backbone”, fiber optic cab le in the w orld, stated that data traf fic over, the Internet was doubling every hundred days. This implied, a growth rate of over 1,000 percent a year. O’Dell went on, to say that there was not enough f iber optic capacity to go, around, and that “demand will f ar outstrip suppl y for the, foreseeable future.”, Electrified by this potential oppor tunity, a number of, companies rushed into the b usiness. These f irms included, Level 3 Communications, 360 Networks, Global Crossing,, Qwest Communications, WorldCom, Williams Communications Group, Genuity Inc., and XO Communications. In, all cases the strategic plans were remarkably similar: Raise, lots of capital, b uild massi ve f iber optic netw orks that, straddled the nation (or even the globe), cut prices, and get, ready for the r ush of b usiness. Managers at these companies believed that surging demand would soon catch up with, capacity, resulting in a profit bonanza for those that had the, foresight to build out their networks. It was a gold rush, and, the first into the field would stake the best claims., However, there were dissenting voices. As early as October, 1998 an Inter net researcher at AT&T Labs named Andrew, Odlyzko published a paper that debunked the assumption that, demand for Inter net traffic was growing at 1,000 percent a, year. Odlyzko’s careful anal ysis concluded that g rowth was, much slower—only 100 percent a year! Although still large,, that growth rate was not nearly large enough to f ill the massive flood of fiber optic capacity that was entering the market., Moreover, Odlyzko noted that new technologies were increasing the amount of data that could be sent down existing fibers,, , reducing the need for new fiber. But with investment money, flooding into the market, few paid any attention to him. WorldCom was still using the 1,000 percent f igure as late as September 2000., As it tur ned out, Odl yzko was right. Capacity rapidl y, outstripped demand, and by late 2002 less than 3 percent of, the fiber that had been laid in the ground was actually being, used! While prices slumped , the sur ge in v olume that, managers had bet on did not materialize. Unab le to service, the debt the y had tak en on to build out their netw orks,, company after compan y tumb led into bankr uptcy—, including WorldCom, 360 Networks, XO Communications,, and Global Crossing. Level 3 and Qwest survived, but their, stock prices had f allen by 90 percent, and both companies, were saddled with massive debts.52, CASE DISCUSSION QUESTIONS, 1. Why did the strate gic plans adopted b y companies lik e, Level 3, Global Crossing, and 360 Networks fail?, 2. The managers who ran these companies were smart, successful individuals, as were many of the in vestors who, put money into these b usinesses. How could so man y, smart people have been so wrong?, 3. What specific decision-making biases do you think were, at work in this industr y during the late 1990s and earl y, 2000s?, 4. What could the managers r unning these companies, have done differently that might have led to a different, outcome?, , ENDNOTES, 1. Sources: “Intel’s Right Hand Turn,” The Economist, Ma y 14, 2005, p. 67;, C. Edwards, “Getting Intel Back on the Inside Track,” BusinessWeek, November, 29, 2004, p. 39; C. Edwards, “Shaking Up Intel’s Insides,” BusinessWeek, January 31, 2005, p. 35; B . Snyder Bulik, “Intel’s New Strategy Demands a Ne w, Partner,” Advertising Age, March 14, 2005, pp. 4–5., 2. J. Hallinan, “3M’s Next Chief Plans to Fortify Results with Discipline He Learned, at GE Unit,” The Wall Street Journal, December 6, 2000, p. B17; 3M In vestor, Meeting, September 30, 2003, archi ved at http://www.corporate-ir.net/ireye/ir_, site.zhtml?ticker=MMM&script=2100., , hiL30123_ch05_104-131.indd 129, , 3 . W.T. Coombs, Ongoing Crisis Communication: Planning , Managing, and Responding (Thousand Oaks, CA: Sage Publications, 1999)., 4. J. Greenwald, “September 11th Attacks Show Value of Planning for a Crisis, ”, Business Insurance, January 7, 2002, p. 17., 5 . Coombs. Ongoing Crisis Communication: Planning, Responding., , , Mana ging, and, , 6. H. Courtney, J. Kirkland, and P. Viguerie, “Strategy under Uncertainty,” Harvard, Business Review 75 (November–December 1997), pp. 66–79., , 10/28/06 3:56:47 PM

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130, , PART 2 // Strategizing, , 7. P.J.H. Schoemaker, “Multiple Scenario Development: Its Conceptual and Behavioral Foundation,” Strategic Management Journal 14 (1993), pp. 193–213., , 29. As a consultant, the author has come across this many times., , 8. P. Schoemaker, P.J.H. van der Heijden, and A.J.M. Cornelius, “Integrating Scenarios into Strategic Planning at Royal Dutch Shell,” Planning Review 20, no. 3, (1992), pp. 41–47; I. Wylie, “There Is No Alternative to…” Fast Company, July, 2002, pp. 106–11., , 31. GE’s Two-Decade Transformation: Jack Welch’s Leadership (Harvard Business, School Case 9-399-150, 1999)., , 9. “The Next Big Surprise: Scenario Planning,” The Economist, October 13, 2001,, p. 71., 10. K.R. Andrews, The Concept of Corporate Strategy (Homewood, IL: Dow Jones, Irwin, 1971); H.I. Ansoff, Corporate Strategy (New York: McGraw-Hill, 1965);, C.W. Hofer and D. Schendel, Strategy Formulation: Analytical Concepts (St. Paul,, MN: West, 1978). Also see P.J. Brews and M.R. Hunt, “Lear ning to Plan and, Planning to Learn,” Strategic Management Journal 20 (1999), pp. 889–913; R.W., Grant, “Planning in a Turbulent Environment,” Strategic Management Journal 24, (2003), pp. 491–517., , 30. Q. Hardy, “Google Thinks Small,” Forbes, November 14, 2005, pp. 198–202., , 32. D. Lovallo and D . Kahneman, “Delusions of Success: Ho w Optimism Under mines Executives’ Decisions,” Harvard Business Review 81 (July 2003), pp. 56–, 67; J.S. Hammond, R.L. Keeny, and H. Raif fa, “The Hidden Traps in Decision, Making,” Harvard Business Review 76 (September–October 1998), pp. 25–34., 33. H. Simon, Administrative Behavior (New York: McGraw-Hill, 1957)., 34. G. Gir genzer and R. Selten, Bounded Rationality (Cambridge, MA: MIT, Press, 2001); D. Kahneman, “Maps of Bounded Rationality: Psychology for Behavioral Economics,” American Economic Review 93 (2003), pp. 1449–75. Also, see M.H. Bazer man, Judgment in Mana gerial Decision Making , 6th ed. (Ne w, York: Wiley, 2006)., , 11. http://www .kodak.com/US/en/corp/careers/why/valuesmission.jhtml., , 35. R. Koch, The 80–20 Principle (New York, Doubleday, 1996)., , 12. D .F. Abell, Defining the Business: The Starting P oint of Str ategic Planning, (Englewood Cliffs, NJ: Prentice-Hall, 1980)., , 36. Koch, The 80–20 Principle., , 13. See G. Hamel and C.K. Prahalad , “Strategic Intent,” Harvard Business Review, (May–June 1989), p. 64., 14. J.C. Collins and J .I. Porras, “Building Your Company’s Vision,” Harvard Business Review, September–October 1996, pp. 65–77., 15. http://www.nucor.com/., , 37. The original statement of this phenomenon w as made b y A. Tversky and, D. Kahneman, “Judgment under Uncer tainty: Heuristics and Biases, ” Science, 185 (1974), pp. 1124–31. Also see Lovallo and Kahneman, “Delusions of Success: How Optimism Under mines Executives’ Decisions”; Hammond , Keeny,, and Raiffa, “The Hidden Traps in Decision Making”; and Bazer man, Judgment, in Managerial Decision Making., , 16. M.D . Richards, Setting Strategic Goals and Objectives (St. Paul, MN: West, 1986)., , 38. B.M. Staw, “The Escalation of Commitment to a Course of Action,” Academy of, Management Review 6 (1981), pp. 577–87., , 17. E.A. Locke, G.P. Latham, and M. Erez, “The Deter minants of Goal Commitment,” Academy of Management Review 13 (1988), pp. 23–39., , 39. R. Roll, “The Hubris Hypotheses of Cor porate Takeovers,” Journal of Business, 59 (1986), pp. 197–216., , 18. R.E. Hoskisson, M.A. Hitt, and C.W.L. Hill, “Managerial Incentives and Investment in R&D in Lar ge Multiproduct F irms,” Organization Science 3 (1993),, pp. 325–41., 19. R .H. Hayes and W.J. Abernathy, “Managing Our Way to Economic Decline, ”, Harvard Business Review, July–August 1980, pp. 67–77., 20. R.S. Kaplan and D.P. Norton, The Strategy Focused Organization: How Balanced, Scorecard Companies Thrive in the New Business Environment (Boston: Harvard, Business School Press, 2001)., 21. Sources: A. Latour and C. Nuzum, “V erizon Prof it Soars Fivefold on Wireless, Growth,” The Wall Street Journal, July 28, 2004, p. A3; S. Woolley, “Do You Fear, Me Now?” Forbes, November 10, 2003, pp. 78–80; A.Z. Cuneo, “Call Verizon, Victorious,” Advertising Age, March 5, 2004, pp. 3–5., 22. C.C. Miller and L.B . Cardinal, “Strate gic Planning and F irm Performance: A, Synthesis of More Than Two Decades of Research, ” Academy of Mana gement, Journal 37 (1994), pp. 1649–65. Also see P.R. Rogers, A. Miller, and W.Q. Judge,, “Using Infor mation Processing Theory to Understand Planning/P erformance, Relationships in the Conte xt of Strate gy,” Strategic Management Journal 20, (1999), pp. 567–77., , 40. A. Tversky and D. Kahneman, “The Framing of Decisions and the Psychology of, Choice,” Science 211 (1981), pp. 453–58., 41. Tversky and Kahneman, “The F raming of Decisions and the Psycholo gy of, Choice.”, 42 D. Kahneman and A. Tversky, “Prospect Theory: An Analysis of Decision under, Risk,” Econometrica, 47 (1979), pp. 263–92., 43. M. Myagkov and C.R. Plott, “Exchange Economies and Loss Exposure: Experiments in Exploring Prospect Theory,” American Economic Re view 87 (1997),, pp. 810–29., 44. B. McLean and P . Elkind , The Smartest Guys in the Room, Penguin, 2003)., , (Ne w York:, , 45. G. Whyte, “Escalating Commitment to a Course of Action: A Reinterpretation,”, Academy of Management Review 11 (1986), pp. 311–22., , 23. Brews and Hunt, “Learning to Plan and Planning to Learn.”, , 46. I.L. Janis, Victims of Groupthink, 2nd ed. (Boston: Houghton Mif flin, 1982)., For an alternative view, see S.R. Fuller and R.J. Aldag, “Organizational Tonypandy: Lessons from a Quar ter Centur y of the Groupthink Phenomenon, ”, Organizational Behavior and Human Decision Pr ocesses 73 (1998),, pp. 163–84., , 24. H. Mintzber g, “P atterns in Strate gy F ormulation,” Management Science 24, (1978), pp. 934–48., , 47. Fuller and Aldag, “Organizational Tonypandy: Lessons from a Quar ter Century, of the Groupthink Phenomenon.”, , 25. C.J. Loomis, “ AOL Time Warner’s Ne w Math,” Fortune, F ebruary 4, 2002,, pp. 98–103., , 48. See R.O. Mason, “A Dialectic Approach to Strate gic Planning,” Management, Science 13 (1969), pp. 403–14; R.A. Cosier and J .C. Aplin, “A Critical View of, Dialectic Inquiry in Strategic Planning,” Strategic Management Journal 1 (1980),, pp. 343–56; and I.I. Mintroff and R.O. Mason, “Structuring III—Structured Policy Issues: Further Explorations in a Methodology for Messy Problems,” Strategic Management Journal 1 (1980), pp. 331–42., , 26. GE’s Two-Decade Transformation: Jack Welch’s Leadership (Harvard Business, School Case 9-399-150, 1999)., 27. For details, see R.A. Burgelman, “Intraorganizational Ecology of Strategy Making and Or ganizational Adaptation: Theory and F ield Research,” Organization, Science 2 (1991), pp. 239–62; Mintzber g, “Patterns in Strate gy Formulation”;, S.L. Hart, “An Integrative Framework for Strategy Making Processes,” Academy, of Management Review 17 (1992), pp. 327–51; G. Hamel, “Strate gy as Revolution,” Harvard Business Review 74 (July–August 1996), pp. 69–83; Grant, “Planning in a Turbulent Environment.”, 28. This is the premise of those w ho advocate that comple xity and chaos theor y, should be applied to strategic planning. See S. Brown and K.M. Eisenhardt, “The, Art of Continuous Change: Linking Complexity Theory and Time Based Evolution in Relentlessly Shifting Organizations,” Administrative Science Quarterly 29, (1997), pp. 1–34; and R. Stace y and D. Parker, Chaos, Management, and Economics (London: Institute for Economic Affairs, 1994). See also Cour tney,, Kirkland, and Viguerie, “Strategy under Uncertainty.”, , hiL30123_ch05_104-131.indd 130, , 49. Mason, “A Dialectic Approach,” pp. 403–14., 50. Lovallo and Kahneman, “Delusions of Success: How Optimism Undermines Executives’ Decisions.”, 51. C.W.L. Hill and R.E. Hoskisson, “Strate gy and Str ucture in the Multiproduct, Firm,” Academy of Management Review 12 (1986), pp. 331–41., 52. Sources: Y.J. Dreazn, “Behind the F iber Glut, ” The Wall Str eet J ournal,, September 26, 2002, p. B1; R. Blumenstein, “Ov erbuilt Web: How the Fiber, Barons Plunged the Nation into a Telecom Glut,” The Wall Street Journal, June, 18, 2001, p. A1; D.K. Berman, “Level 3 Finds a Way to Fight Telecom Crash,”, The Wall Street Journal, November 19, 2002, p. C1; Level 3 10K reports, 2002, and 2003., , 10/28/06 3:56:48 PM

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6, LEARNING OBJECTIVES, , STRATEGY, After Reading This Chapter You Should Be Able to:, 1, , Define strategy., , 2, , Explain why the goal of strategy is to attain superior performance., , 3, , Describe what is meant by competitive advantage., , 4, , Explain how business-level strategy can lead to competitive advantage., , 5, , Explain how operations strategy can lead to competitive advantage., , 6, , Explain how corporate-level strategy can lead to competitive advantage., , / / / / / / / / / / / / / / /, , Superior Performance and, Competitive Advantage, Business-Level Strategy, Competitive Theme:, Differentiation or Low Cost?, Segmenting the Market, Choosing Segments to Serve, Segmentation and Strategy, The Low Cost–Differentiation, Frontier, Implementing BusinessLevel Strategy, Configuring the Value Chain, Competitive Advantage and, Strategic Fit, , Corporate-Level Strategy, Focus on a Single Business, Vertical Integration, Diversification, International Expansion, In Conclusion: Why Does It, Matter?, Management Challenges, Management Portfolio, Closing Case: Google’s, Quest for Competitive, Advantage, , Competitive Tactics, Tactical Pricing Decisions, Tactical Product Decisions, , hiL30123_ch06_132-155.indd 132, , 10/30/06 7:38:54 PM

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Strategy \\ CHAPTER 6, , 133, , Pile Them High, and Sell Them, Cheap! Wal-Mart, has succeeded by, selling general, merchandise at a low, price in self-service, stores that have, minimal fixtures and, fittings. The company, also tightly controls, inventory to reduce, inventory holding, costs., Courtesy of Wal-Mart., , / / / / / / / / / / / / / / / / / / / / /, , W, , al-Mart is the largest business enterprise on the, planet. The company has over 5,000 stores, sales, of over $300 billion, and 1.8 million employees. Established, in 1962 by the legendary Sam Walton, Wal-Mart made its, name by selling general merchandise at everyday low, prices. For years Wal-Mart has been more profitable than, competitors such as Target and Kmart. The company, achieved this by pursuing strategies that lowered its, costs, which enabled Wal-Mart to offer low prices and, still make healthy profits.1 To lower costs, Sam Walton’s, stores were self-service rather than full-service operations, which reduced the number of employees and thus, labor costs. The design of the stores was basic, which, further reduced costs. Because the early Wal-Mart stores, were based in small Southern towns, Sam Walton found, it difficult to get suppliers to deliver directly to his stores, inexpensively. So he built the first of many Wal-Mart, distribution centers. Each distribution center supplied, , hiL30123_ch06_132-155.indd 133, , stores within a 300-mile radius. Wal-Mart could now purchase inventory from suppliers in larger lots, storing it at, the distribution centers. In return for larger orders, the, suppliers lowered prices, which further shrank Wal-Mart’s, cost structure., Over the years Walton and his successors also invested, in information systems to track what was being sold in, the stores daily. Wal-Mart was one of the first retailers in, the country to require that all products sold in its stores, have bar codes and was the first to install bar code, scanners in all checkout stands and link the checkout, stands to a centralized computer system. Information, gathered by these systems let Wal-Mart manage its, inventory more efficiently than rivals. As a result, the company carried less inventory, reducing the amount of space, it had to devote to storage and the amount of capital tied, up in inventory sitting in distribution centers or stores, all, of which took further costs out of Wal-Mart’s operations., , 10/30/06 9:10:52 PM

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134, , strategy, An action managers take, to attain a goal of an, organization., ■ Wal-Mart: Low-cost, strategy., , PART 2 // Strategizing, , The story of Wal-Mart illustrates how the strategies of an enter prise can enable it to gain a, competitive advantage over its rivals. In the last chapter w e looked at the planning systems, managers use to select strategies. In this chapter we discuss the different strategies managers, can choose from. A strategy is an action managers tak e to attain a goal of an or ganization., In Wal-Mart’s case the strategies were directed toward lowering costs. Wal-Mart’s emphasis on, low cost is an e xample of what we call a business-level strategy, which is the basic theme a, company emphasizes to compete ef fectively with its rivals. However, many of the strategies, that have enabled Wal-Mart to lower its costs w ere undertaken at the operating le vel of the, company. This brings us to a k ey message of this chapter: Business-level strategy is implemented through operations and organization. For Wal-Mart’s managers deciding to pursue a, low-cost strategy was the easy par t. Putting that strate gy into effect was hard work and required a set of actions at the operating level—essentially operating strategies. As we will see,, executing strategy also requires putting the right organization in place., By the early 1990s Wal-Mart had been so successful at dri ving down costs that it had, become the largest retailer in the United States. But no w Sam Walton’s successor as CEO,, David Glass, faced another problem: Wal-Mart’s growth opportunities in the United States, were limited. What could the company do to continue growing? The answer Glass came up, with was twofold. First, Wal-Mart increased the size of its stores so it could star t selling, groceries in addition to general merchandise. Wal-Mart reasoned that its state-of-the-ar t, distribution and information systems would let the company lower the costs of selling groceries just as it had cut the costs of selling general merchandise. Second, Wal-Mart decided, to start expanding internationally. As a result, by 2005 some 26 percent of Wal-Mart’s sales, came from g roceries, and 17 percent of sales w ere generated from nine countries outside, the United States., Wal-Mart’s diversification into the grocery business and international expansion are both, examples of corporate-level strategy, which is primarily concerned with deciding which businesses and national markets a firm should be competing in. Until the early 1990s Wal-Mart’s, business was general merchandise retailing, and it operated in one national market, the United, States. Since then it has entered the g rocery business and nine additional mark ets, including, Mexico, Germany, and the United Kingdom. Wal-Mart, in short, has pursued the cor poratelevel strategies of diversification and international expansion., In this chapter we discuss both business-level strategy and corporate strategy. We show, what must be done if a f irm is to estab lish a competitive advantage over rivals. We also, discuss how a competiti ve advantage is necessar y for a f irm to attain its perfor mance, goals. We begin by looking at the nature of those perfor mance goals and the concept of, competitive advantage. Then we e xamine the dif ferent strate gic options managers can, choose from., , // Superior Performance and Competitive Advantage, , competitive advantage, Advantage obtained when a, firm outperforms its rivals., , hiL30123_ch06_132-155.indd 134, hiL30123_ch06_132-155.indd 134, , The overriding goal of most or ganizations is superior perfor mance. For the business f irm,, superior performance has a clear meaning: It is the ability to generate high prof itability and, increase profits over time (see Figure 6.1).2 A central task of managers is to pursue strategies, that enable their f irm to attain superior perfor mance, measured b y prof itability and prof it, growth. This is easier said than done! A principal reason is that f irms must compete against, rivals for scarce resources. Wal-Mart’s success is exemplary precisely because it has been able, to outperform rivals such as Kmart and Target over the long haul., In general, a business firm is more likely to attain high profitability and solid profit growth, if it can outperform its rivals in the marketplace—if it can stay ahead in the race for consumer, dollars. When a firm outperforms its rivals, we say that it has a competitive advantage. At, the most basic le vel, competitive advantage comes from tw o sources: (1) the ability of the, firm to lower costs relative to ri vals and (2) the ability to differentiate its product of fering, from that of rivals.3 As we will see shortly, the business-level strategies a firm can pursue are, aimed at lowering costs and better differentiating its products., , 10/30/06 2:39:05 PM, 10/30/06 2:39:05 PM

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Strategy \\ CHAPTER 6, , 135, , F I G U R E 6 .1, Superior Performance, High, profitability, , Superior, performance, requires ..., , Growth in, profits over, time, , If a firm has lower costs than its rivals, other things being equal, it will outperform them. It can, charge the same price as its rivals and be more profitable. Alternatively, it might use its low costs, to charge less, gain mark et share, and increase its prof its faster than rivals. Or it can do some, combination of these two things. Dell Computer, for example, has a competitive advantage over, rivals due to its lower cost structure. It has used this low cost structure to cut prices for personal, computers, gain market share, and increase its prof its faster than rivals. Moreover, due to its low, cost structure, Dell can still make good profits at low price points where its rivals lose money., If a firm has successfully differentiated its products from those of rivals by attributes such, as superior design, quality, reliability, after-sales service, and so on, it should also be ab le to, outperform its rivals. It can charge more than rivals but still register significant sales and earn, high profits. Alternatively, it can charge a similar price as less differentiated rivals but use the, superior appeal of its products to gain market share and increase its prof its faster than rivals., Or it can do some combination of these tw o things. The high-end depar tment store retailer, Nordstrom, for example, has differentiated its product offering from that of rivals by the quality of its merchandise and by its superior in-store customer service. This differentiation has let, Nordstrom charge more than ri vals while capturing more demand and g rowing its prof its, faster than rivals over time., In general, when a f irm has a competitive advantage it derives from one or more distincti ve, competencies. A distinctive competency is a unique strength that ri vals lack (we discussed, the sources of unique strengths in Chapter 2). For example, Dell Computer has a unique strength, in using the Internet to coordinate a globally dispersed supply chain to such an extent that the firm, holds only two days of inventory at its assembly plants. Because inventory is a major source of, costs in the personal computer business, and most of Dell’s rivals operate with as much as 30 days, of inventory on hand, Dell’s distinctive competency in supply chain management helps e xplain, the firm’s low cost structure.4 Nordstrom, in contrast, has a distincti ve competency in customer, service. Nordstrom’s salespeople are the best in the industr y at respectfully helping customers, purchase clothes that make them look good. Because customer service gives Nordstrom a differential advantage, it can charge higher prices than rivals for the same basic merchandise., When a firm outperforms its rivals for a long time, we say that it has a sustainable competitive, advantage. A sustainable competitive advantage arises from a distinctive competency that, rivals cannot easily match or imitate. 5 For example, rivals find it hard to cop y Dell’s distinctive, competency in suppl y chain management. Dell’s strength here is based on the ability to tak e, orders that flow into its Web site from customers and communicate those instantly via the Internet, to its suppliers, wherever in the world they might be located. Rivals like Hewlett-Packard would, like to do the same thing, but they cannot because unlike Dell, which sells directly to consumers, via its Web site, Hewlett-Packard sells mostly through retailers. Thus Hewlett-Packard lacks the, real-time infor mation about sales that Dell has, and thus HP cannot e xecute suppl y chain, , hiL30123_ch06_132-155.indd 135, hiL30123_ch06_132-155.indd 135, , ■, , Dell: Low-cost strategy., , distinctive, competency, A unique strength that, rivals lack., ■ Dell and Nordstrom:, Distinctive competency., , sustainable, competitive, advantage, A distinctive competency, that rivals cannot easily, match or imitate., , 11/9/06 7:45:32 PM, 11/9/06 7:45:32 PM

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136, , barrier to imitation, Factors that make it, difficult for a firm to, imitate the competitive, position of a rival., , Microsoft: Barriers to, imitation., ■, , legacy constraints, Prior investments in a, particular way of doing, business that are difficult, to change and limit a firm’s, ability to imitate a, successful rival., , PART 2 // Strategizing, , management techniques based on access to, such information., A distinctive competency is difficult for, rivals to match or imitate w hen it is protected, from copying by a barrier to imitation. Barriers to imitation include intellectual proper ty, rights (such as patents, trademarks, and cop yrights) and processes that are embedded deep, within a f irm and not easy for ri vals to see or, copy.6 For example, a bar rier to imitation that, makes it difficult for rivals to create products, You Won’t Find This at Wal-Mart, similar to Microsoft Of fice, the compan y’s, A Nordstrom shoe salesperson helps a, suite of productivity programs, is the copyright, customer find the perfect fit. Superior, Microsoft has on the computer code that makes, customer service is one way Nordstrom, up the Of fice programs, which rivals cannot, differentiates itself from rivals. Nordstrom, directly copy without breaking cop yright law., even has “personal shoppers”—dedicated, Similarly, 3M has a distincti ve competency in, salespeople assigned to important customers., innovation that has enab led the compan y to, In contrast, Wal-Mart is a self-service store., generate 30 percent of its sales from differenti© Mark Richards/Photo Edit., ated products introduced within the last f ive, years. Rivals find this competency difficult to, imitate because it is based on processes for generating new product ideas and taking those ideas, from conception through mark et introduction. These processes are embedded deep within the, organization and not easy to observe. There is, in other words, no code book or book of blueprints, a rival can purchase to learn how to operate like 3M., Legacy constraints can also mak e it difficult for rivals to imitate a f irm’s distinctive competency. Legacy constraints arise from prior investments in a particular way of doing business, that are difficult to change and limit a firm’s ability to imitate a successful rival. Hewlett-Packard,, for example, has invested in reaching consumers for personal computers through retail channels., This is a legacy constraint that makes it difficult for Hewlett-Packard to adopt quickly the direct, selling model that Dell uses—that would require HP to walk away from long-established relationships with retailers. If HP were to do that, it would undoubtedly lose significant sales in the short, run as it transitioned its business from selling through retailers to selling direct., In sum, to achieve superior performance, a firm must have a competitive advantage, which, allows a firm to achieve lower costs than rivals and better differentiate its product offering. A, competitive advantage is typically based on one or more distincti ve competencies or unique, strengths that the f irm has relative to rivals (see Figure 6.2). That competitive advantage will, , Low costs, Distinctive, competencies, , Competitive, advantage, , Superior, performance, Product, differentiation, , If protected from copying by, barriers to imitation and, legacy constraints, competitive advantage, will be sustained., , FIG UR E 6 .2, Competitive Advantage, , hiL30123_ch06_132-155.indd 136, hiL30123_ch06_132-155.indd 136, , 11/9/06 7:45:36 PM, 11/9/06 7:45:36 PM

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Strategy \\ CHAPTER 6, , 137, , be more sustainable if it is difficult for rivals to copy or imitate the f irm’s distinctive competencies. Barriers to imitation and legacy constraints are important factors that make it difficult, for rivals to copy a firm’s distinctive competencies., For managers, the key task is to figure out what they must do to build a distinctive competency in one or more acti vities to gain a competiti ve advantage over rivals. Moreover, it is, clearly preferable that competency be difficult for rivals to imitate due to barriers to imitation, and rivals’ legacy constraints. In such circumstances the f irm’s advantage will be more sustainable. Indeed, without bar riers to imitation or le gacy constraints rivals will quickly copy, any new products or processes that managers de velop, and an y competitive advantage that, derives from those products or processes will be transitory., , // Business-Level Strategy, To build a sustainable competitive advantage managers need a good g rasp of business-level, strategy. A firm’s business-level strategy is the basic theme that a company emphasizes to, compete effectively with rivals in an industr y. A firm’s business-level strategy encompasses, three related choices: the competiti ve theme that managers emphasize, ho w to segment the, market within an industry, and which segments to serve., , business-level, strategy, Strategy concerned with, deciding how a firm should, compete in the industries, in which it has elected to, participate., , // COMPETITIVE THEME: DIFFERENTIATION, OR LOW COST?, Basic business-level strategy is concerned with making the choice between low cost and differentiation. We have already noted that these are two distinct ways of gaining a competitive advantage. So basic are these tw o strategic orientations that Michael P orter, who wrote one of the, classic books on competitive strategy, has referred to them as “generic strategies.”7, Low-Cost Strategy A low-cost strategy is concerned with giving consumers value for, money and focusing managerial ener gy and attention on doing e verything possible to lower, the costs of the organization. Wal-Mart, Dell Inc., and Southwest Airlines are all examples of, firms that have pursued a low-cost strategy. All three enterprises focus on offering basic goods, and services at a reasonable price, and they try to produce those goods and ser vices as efficiently as possible. Thus Wal-Mart’s stores have minimal fixtures and fittings, are self-service, rather than full-service, and sell merchandise at a discounted price. Unlike its rivals, Dell does, not invest heavily in R&D to produce leading-edge computers. Rather, it sells good machines, at a discounted price. Similarl y, Southwest Airlines provides its customers with minimal inflight service in an attempt to lower costs and thus support inexpensive ticket prices., The successful pursuit of a low-cost strategy lets a firm charge less than its rivals and still, make profits. Moreover, f irms that char ge lower prices might also be ab le to gain mark et, share—as Dell, Wal-Mart, and Southwest Airlines have all done—which allows them to realize economies of scale (cost advantages derived from a large sales volume) and reap further cost reductions. Thus firms that successfully pursue a low-cost strategy can set up a value, cycle similar to that illustrated in Figure 6.3, which lets them consolidate their cost advantage, over time., , low-cost strategy, Focusing managerial, energy and attention on, doing everything possible, to lower the costs of the, organization., , Differentiation Strategy A differentiation strategy is concerned with increasing the value, of a product offering in the eyes of consumers. A product can be differentiated by superior reliability (it breaks down less often or not at all), better design, superior functions and features, better point-of-sale service, better after-sales service and support, better branding, and so on. Thus a, Rolex watch is differentiated from a Timex watch by superior design, functions, features, and reliability; a Toyota car is differentiated from a General Motors car by superior reliability (new Toyota, cars have fewer defects than new GM cars); Nordstrom differentiates itself from Wal-Mart by the, quality of its products (such as Armani suits), numerous in-store sales personnel that can help, even the most fashion-challenged individual dress well, and a store design that creates a luxurious, shopping atmosphere., , differentiation, strategy, Increasing the value of a, product offering in the, eyes of consumers., , hiL30123_ch06_132-155.indd 137, hiL30123_ch06_132-155.indd 137, , economies of scale, Cost advantages derived, from a large sales volume., , ■, , Nordstrom: Differentiation., , 10/30/06 2:39:07 PM, 10/30/06 2:39:07 PM

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138, , ■, , Starbucks: Differentiation., , PART 2 // Strategizing, , If consumers v alue a dif ferentiated product, offering over that sold b y ri vals, a dif ferentiation, strategy will give the f irm a competitive advantage, so it can capture more consumer demand. F, or, example, Starbucks has successfull y differentiated, its product offering from that of rivals such as Tully’s, by the e xcellent quality of its cof fee-based drinks;, the quick, efficient, and friendly service its baristas, offer customers; the comfortable atmosphere created, by the design of its stores; and its strong brand, image. This differentiation has given Starbucks more, of the market for coffee-based drinks., Having dif ferentiated their product, the issue, facing managers is how best to translate the competitive adv antage that comes from successful, differentiation into sustained high profitability and, profit g rowth. Complicating the issue is the f act, that dif ferentiation often (b ut not al ways) raises, the cost str ucture of the f irm. It costs Starb ucks, quite a lot, for e xample, to purchase, roast, and, Cost Cutters By relentlessly, brew premium cof fee, to train its baristas, and to, taking steps to lower costs Chairman, furnish its stores., Michael Dell and CEO Kevin Rollins, One option managers ha ve is to raise prices to, have made Dell Inc. the most, reflect the differentiated nature of the product ofprofitable enterprise in the personal, fering and cover any increase in costs (see Figure, computer industry. In the early 2000s, 6.4). This is an option that man y pursue. It can by, Dell took advantage of its low-cost, itself enhance prof itability so long as prices inposition to launch a price war and, crease more than costs. For example, the Four Seagain market share from its rivals., sons chain has luxurious hotels. It costs a lot to, © 2006 Dell Inc. All Rights Reserved., provide that luxury, but Four Seasons also charges, high prices for its rooms, and the firm is profitable, as a result., However, greater prof itability and prof it growth can also come from the increased demand associated with successful dif ferentiation, which allows the f irm to use its assets, more efficiently and thereb y simultaneously realize lo wer costs from scale economies., , Lower costs, , Economies, of scale, , FIG UR E 6 .3, , Higher, profitability, and profit, growth, , Lower prices, , Increased, demand, , The Low-Cost Value, Cycle, , hiL30123_ch06_132-155.indd 138, hiL30123_ch06_132-155.indd 138, , 10/30/06 2:39:07 PM, 10/30/06 2:39:07 PM

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Strategy \\ CHAPTER 6, , 139, , Option 1, , F I G U R E 6 .4, Options for Exploiting, Differentiation, , Increase, prices more, than costs, , Higher, profitability, and profit, growth, , Option 2, , Successful, differentiation, , Moderate or, no price, increase, , Increased, demand, , Economies of, scale and, lower costs, , This leads to another option: The successful differentiator can also hold prices constant (or, increase prices only slightly), sell more, and boost prof itability through scale economies, (see Figure 6.4).8 Thus successful differentiation by Starbucks raises the volume of traffic, in each Starbucks store, thereby increasing the productivity of employees in the store (they, are always busy) and the producti vity of the capital in vested in the store itself. So each, store realizes scale economies from greater volume, which lowers the average costs at each, store. Spread that across the 6,000 stores that Starbucks operates, and you have potentially, huge cost savings that translate into higher profitability. Add this to the enhanced demand, that comes from successful differentiation, which in the case of Starbucks enables the firm, not only to sell more from each store b ut also to open more stores, and prof it growth will, also accelerate., , // SEGMENTING THE MARKET, Markets are characterized by different types of consumers. Some are w ealthy, some are not;, some are old, some are young; some are influenced by popular culture, some never watch TV;, some care deeply about status symbols, other do not; some place a high value on luxury, some, on value for money. Markets can be segmented by a variety of factors, common examples being the income, demographics, preferences, and tastes of consumers. Moreover, different enterprises can se gment the same mark et in different ways, and various approaches might be, reasonable. Take the retail market for apparel: Wal-Mart’s clothing department targets lowerincome, v alue-conscious consumers looking for basic clothing; Chico’ s tar gets v alueconscious, middle-income and middle-aged women with an eye for fashion; Abercrombie &, Fitch targets the casual fashion-conscious youth market; Brooks Brothers targets middle- and, upper-income male business executives with a taste for stylish for mal business attire; Eddie, Bauer targets middle- and upper-income consumers who are looking for stylish casual clothing with an outdoor theme; Victoria’s Secret tar gets…well, ne ver mind! These dif ferent, approaches all represent dif ferent ways of se gmenting the mark et—by value preferences,, income, age, tastes, and so on., There is no single best way of segmenting a market; but in terms of attaining a competitive, advantage, some approaches to se gmentation make more sense. At a minimum, a se gment, , hiL30123_ch06_132-155.indd 139, hiL30123_ch06_132-155.indd 139, , 10/30/06 2:39:08 PM, 10/30/06 2:39:08 PM

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140, , ■ Costco: Market, segmentation., , PART 2 // Strategizing, , must have enough demand to be served profitably. There are no apparel retailers, for example,, who target a segment consisting of sedentary old white males who like to dress in the baggy, athletic clothing favored by rap musicians; there are not enough potential consumers in that, segment to make it profitable to serve., Beyond this commonsense notion, there ma y be v alue in se gmenting the mark et in a, unique way that distinguishes the firm from rivals. Costco, the fast-growing discount warehouse store, tar gets relatively affluent value-conscious consumers. We tend to think of, warehouse stores as offering merchandise at a deep discount from normal prices (they are, pursuing a low-cost strategy). Costco indeed does that; but the merchandise the f irm sells, can be high-end, from Polo brand shirts that would normally retail for $70, which Costco, might offer for $40, to $40,000 diamond rings that Costco sells for $25,000.As one Costco, executive told this author, “We can offer Polo shirts at a deep discount and our customer, will recognize the v alue and snap them up, b uying 10 at a time. Wal-Mart could do the, same thing, and their customers wouldn’t recognize the value, and they would not be able, to sell them.”9 Costco attracts a dif ferent type of customer because it has se gmented the, market differently than Wal-Mart. Costco’s product of fering reflects its managers’ decisions about how best to segment the market., Generalizing from the Costco e xample, segmenting the market in a unique but economically viable way can be a good star ting point in the quest to b uild a sustainable competitive, advantage. It is not necessary to segment the market uniquely, however. Toyota has segmented, the automobile mark et con ventionally (according to income and age), b ut it still has a, competitive advantage. When segmenting the market, managers must have a clear idea of the, consumers they are tr ying to ser ve, what the needs of those consumers are, and ho w the, business is going to serve those needs., , // CHOOSING SEGMENTS TO SERVE, , focus strategy, Serving a limited number, of segments., , Having decided ho w to se gment the mark et, managers must decide w hich segments to, serve. Some enterprises focus on a few segments or just one. Others serve a broad range of, segments. In the automobile industr y, Toyota has brands that address the entire mark et:, Scion for budget-constrained, young, entry-level buyers; Toyota for the middle market; and, Lexus for the luxury end of the market. In each of these segments Toyota pursues a differentiation strategy; it tries to differentiate itself from rivals in the segment by the excellent, reliability and high perceived quality of its of ferings. In contrast, Porsche focuses exclusively on the top of the market, targeting wealthy middle-aged male consumers who have a, passion for the speed, power, and engineering excellence associated with its range of sports, cars. Porsche is clearly pursuing a differentiation strategy with regard to these segments,, although it emphasizes a different type of differentiation than Toyota. When managers decide to serve a limited number of segments, or just one segment, we say that they are pursuing a focus strategy. When they decide to serve the entire market, they are pursuing a, broad market strategy., , // SEGMENTATION AND STRATEGY, broad market, strategy, Serving the entire market., , hiL30123_ch06_132-155.indd 140, hiL30123_ch06_132-155.indd 140, , We have suggested that there are three dimensions to business-level strategy: the competitive, theme managers emphasize (low cost or differentiation), the way they choose to segment the, market, and the segments they serve. Taken together, these dimensions allow a variety of different ways to compete in an industr y. Figure 6.5 summarizes tw o of these dimensions—, competitive theme and se gments ser ved. Also included in Figure 6.5 are some illustrati ve, examples chosen from the U.S. retail industry., Broad low-cost and broad differentiation strategies aim to serve many segments in an industry and stri ve for either a lo w-cost or a dif ferentiated position. F ocused low-cost and, focused differentiation strategies focus on one or a few specific segments and strive to attain, a low-cost or differentiation position relative to that segment. However, Figure 6.5 does not, capture the full richness of business-le vel strategy. Various b usinesses may segment the, , 10/30/06 2:39:09 PM, 10/30/06 2:39:09 PM

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Strategy \\ CHAPTER 6, , 141, , F I G U R E 6 .5, , Many, , Broad low cost, Wal-Mart, Kmart, , Broad differentiation, Sears, Macy's, , Focused low cost, Costco, Dollar Tree, , Focused differentiation, Abercrombie & Fitch, Chico's, Eddie Bauer, , Low cost, , Differentiation, , Types of Business-Level, Strategy, , Segments served, , Few, , Competitive theme, , market differently and focus on disparate se gments. Although Costco and Dollar Tree are, both shown as focused lo w-cost b usinesses in the retail industr y, the y compete in v ery, different spaces. All of the merchandise in a Dollar Tree store is priced at a dollar or less., Dollar Tree sells a lot of small household items at deep discounts to low-income consumers., In contrast, as already noted, Costco sells higher-end items at a deep discount to middle- and, high-income value-conscious consumers. Costco customers do not usually enter Dollar Tree, stores and vice versa., , // THE LOW COST–DIFFERENTIATION FRONTIER, So far we have suggested that low-cost positions and differentiated positions are two different, ways of gaining competitive advantage. The enterprise that is striving for the lowest costs does, everything it can to cut costs out of its operations, whereas the enterprise striving for differentiation necessarily has to bear higher costs to achie ve that differentiation. Put simply, a f irm, cannot simultaneously be Wal-Mart and Nordstrom, P orsche and Kia, or Role x and Timex., Managers must choose between these basic ways of attaining competitive advantage., However, presenting the choice betw een differentiation and lo w costs in these ter ms is, something of a simplification. In practice, the strategic issue facing managers is what position, to choose on a continuum that is anchored at one end b y very low costs and at the other by a, very high level of differentiation. To understand this issue, look at Figure 6.6. Its convex curve, illustrates what is kno wn as an efficiency frontier.10 The efficiency frontier sho ws all the, different positions a f irm can adopt with regard to differentiation and low cost assuming that, its internal operations are configured efficiently to support a particular position. (Note that the, horizontal axis in Figure 6.6 is re verse scaled—moving along the axis to the right implies, lower costs.) F or an enter prise to reach the ef ficiency frontier—to ha ve a competiti ve, advantage and achie ve superior perfor mance—it must ha ve unique strengths or distincti ve, competencies that rivals inside the frontier lack and that enable it to operate efficiently., The efficiency frontier has a con vex shape because of diminishing returns: When a f irm, already has significant differentiation built into its product offering, increasing differentiation, by a relatively small amount requires signif icant additional costs. The converse also holds:, When a f irm already has a lo w cost str ucture, it has to gi ve up a lot of dif ferentiation in its, product offering to get additional cost reductions., The ef ficiency frontier sho wn in Figure 6.6 is for the U .S. retail apparel b usiness, (Wal-Mart sells more than apparel, b ut that need not concer n us here). As you can see,, Nordstrom and Wal-Mart are both shown on the frontier, implying that both organizations, have configured their internal operations efficiently. However, they have adopted different, , hiL30123_ch06_132-155.indd 141, hiL30123_ch06_132-155.indd 141, , 10/30/06 2:39:09 PM, 10/30/06 2:39:09 PM

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142, , PART 2 // Strategizing, , FIG UR E 6 .6, High, , Differentiation, , The Efficiency Frontier, in Retail Apparel, , Nordstrom, , Efficiency frontier, , Abercrombie & Fitch, Eddie Bauer, Kmart, , Wal-Mart, , Low, High cost, , Low cost, , strategic positions. Nordstrom has high dif ferentiation and high costs (it is pursuing a, differentiation strategy), whereas Wal-Mart has lo w costs and lo w differentiation (it is, pursuing a low-cost strategy). These are not the onl y viable positions in the industr y. We, have also shown Abercrombie & Fitch on the frontier. Abercrombie & Fitch offers higherquality apparel than Wal-Mart, sold in a more appealing store for mat; but its of fering is, nowhere near as differentiated as that of Nordstrom, and it is positioned between Wal-Mart, and Nordstrom. This midlevel position, offering moderate differentiation at a higher cost, than Wal-Mart, makes sense because there is a lar ge enough se gment of consumers that, demand this kind of offering., Often multiple positions on the low cost–differentiation continuum are viable in the sense, that they have enough demand to suppor t an offering. The strategic task for managers is to, identify a viable position in the industr y and then conf igure the enter prise’s internal operations as efficiently as possible, to enable the f irm to reach the frontier. Not all f irms can do, this. Only firms that can get to the frontier have a competitive advantage., Not all positions on an industry’s efficiency frontier are equally as attractive. At some positions there may not be sufficient demand to support a product offering. At other positions too, many competitors may be going after the same consumers (the competitive space might be too, crowded), and the resulting competition might dri ve prices do wn belo w le vels that are, acceptable., In Figure 6.6 Kmart is shown inside the frontier. Kmart is tr ying to position itself in the, same space as Wal-Mart, but its internal operations are not efficient. Indeed, the company was, operating under bankruptcy protection in the early 2000s (it is now out of bankruptcy). Also, shown in Figure 6.6 is the Redmond, Washington–based clothing retailer Eddie Bauer, which, is owned by Spiegel. Like Kmart, Eddie Bauer is not cur rently run efficiently relative to its, rivals, and its parent company is operating under bankruptcy protection., value innovation, Using innovation to offer, more value at a lower cost, than competitors, ■, , Dell: Value innovation., , hiL30123_ch06_132-155.indd 142, hiL30123_ch06_132-155.indd 142, , Value Innovation The efficiency frontier in an industr y is not static; it is continuall y being, pushed outward by the efforts of managers to improve their firms’ performance.11 The companies that push out the efficiency frontier can offer more value to their customers (through enhanced differentiation) at lo wer cost than their ri vals—a process sometimes refer red to as, value innovation.12 Dell Computer has achie ved value innovation in the personal computer, industry (see Figure 6.7). In the 1980s when other computer firms were selling through retailers, Michael Dell pioneered the practice of selling direct. By the mid-1990s Dell w as selling, over the Internet, and today 85 percent of its home PCs are sold this way. A great advantage of, this strategy for customers is that they can customize their PCs, mixing and matching components to get just w hat they want. Thus by adopting a direct selling b usiness model, Dell, differentiated itself from competitors, offering its customers more value., , 10/30/06 2:39:10 PM, 10/30/06 2:39:10 PM

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Strategy \\ CHAPTER 6, , 143, , F I G U R E 6 .7, PC industry, frontier 1985, , Pushing Out the, Efficiency Frontier, through Value, Innovation, , High, , Differentiation, , PC industry, frontier 2005, Apple, Dell (2005), Compaq, IBM, , Dell offers more, value to consumers,, through differentiation,, at a lower cost than, key rivals., , Dell (1985), Low, High cost, , Low cost, , The direct selling strategy has also had far-reaching implications for Dell’s costs. Because, it sells direct, Dell can build to order. Unlike competitors, it does not have to fill a retail channel with inventory. Moreover, Dell can use the Inter net to feed real-time infor mation about, order flow to its suppliers so they have up-to-the-minute information about demand trends for, the components they produce, along with volume expectations for the upcoming 4–12 weeks., Dell’s suppliers use this information to adjust their own production schedules, manufacturing, just enough components for Dell’s needs and shipping them by the most appropriate mode to, arrive just in time for production. Dell’s ultimate goal is to drive all inventories out of the supply chain apart from those actually in transit between suppliers and Dell, effectively replacing, inventory with information. Although it has not yet achieved this goal, it has driven down inventory to the lo west level in the industr y. Dell has about tw o days of in ventory on hand ,, compared to 20–30 at competitors such as He wlett-Packard and Gate way. This is a major, source of competitive advantage in the computer industry, where component costs account for, 75 percent of revenues and the value of components falls by 1 percent per week due to rapid, obsolescence. Thus by pioneering online selling of PCs, and by using information systems to, coordinate its supply chain, Dell Computer has attained new levels of operational efficiency., In essence, Dell has built new distinctive competencies, and in doing so has pushed out the, efficiency frontier in the personal computer industry. Dell now offers more differentiation (the, ability to customize a PC when placing an order on the Web) at lower cost than its rivals can, offer. In industry after industry this is how competition proceeds: Firms compete by developing superior competencies that enable them to push out the efficiency frontier, stranding rivals, at a competitive disadvantage. It follows that a central strategic task of managers is to look for, ways of improving operating efficiency and enhancing value through differentiation in order, to take the enterprise to a new level of excellence., , // Implementing Business-Level Strategy, We have just seen that reaching the efficiency frontier in an industry, given managers’ choice, of strategic position, requires efficient operations. Moreover, in the long run sustaining a competitive advantage requires managers to continuall y improve operational efficiency, thereby, pushing out the ef ficiency frontier and sta ying ahead of ri vals in a race that has no end. To, grasp this we need to dig a little deeper into the nature of operations and consider how operational excellence can help an enterprise build distinctive competencies and thus lower costs or, better differentiate its product offering. We return to operational strategy in Chapter 7, when, we discuss some of these issues in more depth., , hiL30123_ch06_132-155.indd 143, hiL30123_ch06_132-155.indd 143, , 10/30/06 2:39:10 PM, 10/30/06 2:39:10 PM

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144, , PART 2 // Strategizing, , FIG UR E 6 .8, Internal organization architecture, , The Value Chain, , Support activities, Procurement, , R&D, , Logistics, , Production, , Information systems, , Marketing, and, sales, , Human resources, , Customer, service, , Primary activities, , // CONFIGURING THE VALUE CHAIN, The operations of a f irm can be thought of as a v alue chain composed of a series of distinct, activities including production, marketing and sales, logistics, R&D, human resources, information systems, and the f irm’s infrastructure. We can cate gorize these acti vities, or operations, as primary activities and support activities (see Figure 6.8 ).13 We use the ter m value, chain because each activity adds value to the product offering. These operations are embedded, within the internal organization architecture of a firm, which includes the organization structure, controls, incentives, culture, and people of the enterprise. Organization architecture provides the context within which operations take place., primary activities, Activities having to do, with the design,, creation, and delivery of, the product; its, marketing; and its, support and after-sale, service., , hiL30123_ch06_132-155.indd 144, hiL30123_ch06_132-155.indd 144, , Primary Activities Primary activities have to do with the design, creation, and deli very of, the product; its marketing; and its support and after-sale service. Following normal practice,, in the value chain illustrated in Figure 6.8 the primar y activities are divided into four functions: research and development, production, marketing and sales, and customer service., Research and development (R&D) is concer ned with the design of products and production processes. Although we think of R&D as being associated with the design of ph ysical, products and production processes in manuf acturing enter prises, many ser vice companies, also undertake R&D. Banks compete with each other b y developing new financial products, and new ways of deli vering those products to customers. Online banking and smar t debit, cards are two examples of new product development in the banking industr y. Through superior product design, R&D can increase the functionality of products, which makes them more, attractive to consumers (increasing dif ferentiation). Alternatively, R&D may result in more, efficient production processes, thereby cutting production costs. Either w ay, the R&D function can help create a competitive advantage., Production creates a good or service. For physical products, when we talk about production, we generally mean manufacturing. Thus we can talk about the production of an automobile., For services such as banking or health care, production typicall y occurs when the service is, delivered to the customer (such as w hen a bank originates a loan for a customer). F or a retailer such as Wal-Mart, production includes selecting the merchandise, stocking the store,, and ringing up sales at cash registers. Production can help a firm create competitive advantage, through efficiency or greater differentiation., The marketing and sales functions can help a firm attain a differentiated or low-cost position in several ways. Through brand positioning and adv ertising, marketing can affect consumers’ perceptions of how differentiated a f irm’s product offering is. If consumers ha ve a, favorable impression of a firm’s products, the firm can charge more or expand sales volume., For example, Ford produces a high-v alue version of its F ord Expedition SUV. Sold as the, , 10/30/06 2:39:11 PM, 10/30/06 2:39:11 PM

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Strategy \\ CHAPTER 6, , 145, , Lincoln Navigator and priced around $10,000 higher , the, Navigator has the same body, engine, chassis, and design as, the Expedition. But through skilled adv ertising and marketing, supported by some f airly minor feature changes (such, as more accessories and the addition of a Lincoln-style, engine grille and nameplate), Ford has fostered the perception that the Navigator is a luxur y SUV. This mark eting, strategy has increased the percei ved differentiation of the, Navigator relative to the Expedition, and F ord can charge a, higher price for the car., Marketing and sales can also create v alue by discovering, consumer needs and communicating them back to the R&D, function of the company, which can then design products that, better match those needs. F or e xample, the allocation of, research budgets at Pfizer, the world’s largest pharmaceutical, company, is deter mined by the marketing function’s assessment of the potential market size associated with solving unmet medical needs. Thus Pfizer is currently directing significant funds to R&D ef forts aimed at f inding treatments for, Alzheimer’s disease, principall y because mark eting has, identified the treatment of Alzheimer’s as a major unmet, No Downtime Caterpillar can get spare parts to, medical need., anywhere in the world in 24 hours., The role of a f irm’s ser vice activity is to pro vide afterReprinted Courtesy of Caterpillar Inc., sale service and support. This function can create a perception of superior differentiation in the minds of consumers by, ■ Pfizer: Creating value, solving customer problems and suppor ting customers after, they have purchased the product. Cater pillar, the U.S.-based manufacturer of heavy earth- through R & D., moving equipment, can get spare par ts to any point in the w orld within 24 hours, thereb y, minimizing the amount of downtime its customers have to suffer if their Cater pillar equipment malfunctions. This is an extremely valuable capability in an industr y where downtime, is expensive. It has helped increase the value that customers associate with Caterpillar products and thus the price that Caterpillar can charge., Support Activities The support activities of the v alue chain provide inputs that allo w the, primary activities to occur (see Figure 6.8). In terms of attaining competitive advantage, they, can be as impor tant, if not more impor tant, than the primar y activities of the f irm. The procurement function is responsib le for purchasing inputs to the production process, including, raw materials, partly finished products, and in the case of retailers, items for resale. Procurement can lower costs by getting the best deals and b y leveraging buying power to lower the, price paid for inputs. Procurement can also help increase differentiation by purchasing higherquality inputs. The logistics function controls the transmission of ph ysical materials through, the value chain, from procurement through production and into distribution. The efficiency, with which this is car ried out can signif icantly reduce costs. As noted earlier, logistics is a, major source of Wal-Mart’s competitive advantage., The human resources function can help create competitive advantage in a number of ways., It ensures that the compan y has the right mix of skilled people to perfor m its value creation, activities effectively. Wal-Mart, for example, uses local managers to run Wal-Mart’s stores and, logistics operations in countries outside the United States.The thinking behind this is that local, managers will have a better feel for the tastes and preferences of local customers than e xpatriate managers from the United States. Insofar as this improves the fit between Wal-Mart’s merchandising and local tastes, it should result in higher sales. The human resources function also, ensures that people are adequately trained, motivated, and compensated to perform their value, creation tasks., Information systems are the electronic systems for managing in ventory, tracking sales,, pricing products, selling products, dealing with customer ser vice inquiries, and so on., , hiL30123_ch06_132-155.indd 145, hiL30123_ch06_132-155.indd 145, , support activities, Activities that provide, inputs that allow the, primary activities to occur., , ■ Wal-Mart: Human, resources., , 11/9/06 7:45:36 PM, 11/9/06 7:45:36 PM

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146, , PART 2 // Strategizing, , Information systems, when coupled with the communications features of the Inter net, can, alter the efficiency and effectiveness with which a firm manages other activities in the value, chain. Again, Wal-Mart’s competitive advantage is based lar gely on its pioneering use of, information systems to track store sales. This tracking capability means that Wal-Mart is, almost never caught with too much or too little of a cer tain item. This reduces Wal-Mart’s, need to hold extensive buffer inventory, which reduces inventory costs, and makes sure that, Wal-Mart never has to hold sales to unload excess inventory, keeping prices from having to, be reduced., , Wal-Mart: Organization, structure., ■, , Organization Architecture As already noted, the operations of the firm are embedded within, the internal organization architecture of the enter prise, which includes the organization structure, incentives, control systems, people, and culture of the f irm. In a real sense strate gy is, implemented through or ganization architecture. Because or ganization architecture is so, important to strategy implementation and the attainment of competitive advantage, we discuss, it in depth in Part 3 of this book. For now note that if a firm is to attain competitive advantage,, its organization architecture must support its operations and enable it to successfully implement, its strategy., For example, if a f irm is trying to become a low-cost industry player, it should have an, organization architecture that focuses the attention of everyone within the enterprise on the, need to drive down costs. Thus Wal-Mart operates with a v ery flat organization structure, (there are few layers between the head office and individual stores). Unlike most other large, national retailers, the compan y has no re gional of fices. It sees re gional of fices as an, additional cost, so it has cut them out, preferring to manage the entire U.S. operations from, its headquarters in Arkansas. Wal-Mart also has an organizational culture that emphasizes, the need to contain costs. An important norm at Wal-Mart is that w hen senior managers, travel from headquar ters to visit stores, the y should share hotel rooms and sta y in budget, hotels to save costs. Another norm is that the y should retur n from each trip with enough, ideas to cover the cost of the trip. These norms are designed to emphasize the importance of, controlling costs. In other w ords, the or ganization architecture of Wal-Mart supports the, company’s strategy, which is to drive down costs, and its operations, which again are geared, toward maximizing efficiency., , // COMPETITIVE ADVANTAGE AND STRATEGIC FIT, If a business enter prise is to attain superior perfor mance, its business-level strategy (as captured by its desired strategic position on the efficiency frontier) must make sense given industry conditions (for example, there must be sufficient demand to support that strategic choice)., Operations must be conf igured in a way that supports the strategy, and the internal organization architecture must suppor t the operations and strate gy of the f irm. In other words, as illustrated in Figure 6.9, industry conditions, strategy, operations, and organization must all be, consistent with each other , or fit each other , for competiti ve advantage to be attained and, superior performance to occur. Moreover, the operations and or ganization of the f irm must, give it a distinctive competency in one or more acti vities of the value chain. Without unique, and valuable skills, a firm will not be able to outperform rivals., The issue of strate gic f it is actually more comple x than illustrated in Figure 6.9 . The, firm can influence industr y conditions through its choice of strate gy. For example, by, launching a price war in their industry, a firm’s managers can make the industry conditions, they face more hostile, and that might require a fundamental change of strate gy. Alternatively, through their choice of strategy managers can reduce the intensity of competition in, their industry, making it more favorable. In addition, shifts in market conditions caused by, new technologies, government action such as deregulation, demographics, or social trends, can mean that the strategy of the firm no longer fits the industry. In such circumstances the, firm must change its strategy, operations, and organization to f it the new reality. This can, be an extraordinarily difficult challenge. We discuss the management of change in depth in, Chapter 18., , hiL30123_ch06_132-155.indd 146, hiL30123_ch06_132-155.indd 146, , 10/30/06 2:39:12 PM, 10/30/06 2:39:12 PM

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Strategy \\ CHAPTER 6, , 147, , F I G U R E 6 .9, Strategic Fit, Supports, , Supports, , Operations, strategy, , Internal, organization, architecture, , Businesslevel, strategy, , Fits, , Industry, conditions, , Supports, , // Competitive Tactics, Thecompetitive tactics of an enterprise are actions that managers take to try to outmaneuver rivals in the marketplace.14 Whereas the business-level strategy of an enterprise represents, its basic competiti ve theme and tends to be pursued for a long time, tactics are indi vidual, actions taken to gain advantage over rivals or even to inhibit rivals from emerging in the first, place, thereby making it easier to attain competiti ve advantage. Competitive tactics can be, short-term maneuv ers or longer -term actions, but the y are al ways about gaining a better, market position relative to actual or potential ri vals. Tactics include decisions about pricing, and product offerings. We review some here to give you an idea of what tactics encompass., , competitive tactics, Actions that managers, take to try to outmaneuver, rivals in the market., , // TACTICAL PRICING DECISIONS, Managers can make a number of different tactical pricing decisions. Launching a price war to, gain share from competitors is one e xample of a tactical pricing decision. This is what Dell, Computer did in 2000–2001 when it took advantage of its low cost structure to drive down the, prices of personal computers and gain share from its major ri vals. A variant of this tactic is, price signaling, such as cutting prices when new competitors enter the market to send a signal, to potential rivals that they will have a tough f ight if they wish to gain share. When discount, airlines such as Jet Blue started to expand into profitable routes served by American Airlines,, American responded by slashing prices. Not only did this make it more difficult for Jet Blue, to gain a foothold; it also sent a signal to other discount airlines thatAmerican would not give, up its mark et share easil y. American’s hope, of course, w as that such actions w ould deter, futureentry., Another common tactical pricing decision is razor and r azor blade pricing , so called, because it was pioneered by razor manufacturer Gillette. Gillette’s idea was to price razors low, (at cost) to sell them to consumers, then mak e money from the sale of b lades, which were, priced high. Today Hewlett-Packard uses this tactic in the market for ink jet printers and supplies. HP prices its ink jet printers lo w (some can be purchased for under $100) and mak es, little profit on these sales. However, the company charges a high price for ink car tridges for, the printers (often over $30) and makes high prof it margins on these. The strategy works because once consumers have purchased the ink jet printers they are tied into those products by, high switching costs (the cost of buying a printer from another company) and so are likely to, continue buying HP ink cartridges., , hiL30123_ch06_132-155.indd 147, hiL30123_ch06_132-155.indd 147, , ■ Gillette: Razor and blade, pricing., , 10/30/06 2:39:12 PM, 10/30/06 2:39:12 PM

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148, , PART 2 // Strategizing, , // TACTICAL PRODUCT, DECISIONS, As with pricing, managers can pur sue a wide range of tactical product, decisions to gain an advantage over, rivals. One tactic, known as product, proliferation, has been successfull y, pursued b y the manuf acturers of, laundry deter gent. Walk do wn the, aisle of your local supermarket and, you will see many different laundry, detergent brands. Most of these, brands are produced b y just tw o, f irms, Unile ver and Procter &, Gamble. They produce a wide range, of dif ferent brands to suppl y an y, variant of laundr y deter gent consumers might wish to buy—, Product Proliferation Walk into a supermarket and you will see dozens of, powdered deter gent, liquid deter different varieties of cereal; yet the industry is dominated by just four firms—Kellogg,, gent, colorfast detergent, detergent, General Mills, Post, and Quaker. Each manufacturer has proliferated its brands to, with fabric softener, and so on—and, occupy as much shelf space as it can, thereby shutting out competitors and creating, thus occupy all of the shelf space in, an entry barrier., a supermarket, limiting the opportunities for market entry by new rivals., © McGraw-Hill Companies, Inc./Gary He, photographer., Thus product proliferation is an, entry-deterring tactic; and to the extent that it has been successful, Unilever and Procter &, Gamble can char ge higher prices than w ould otherwise be the case, w hich impro ves, their performance. A similar strate gy has been pursued b y manuf acturers in the cereal, industry., Another common product strate gy is known as bundling. The idea behind a bundling, strategy is to tie together a set of related products and charge a single price for them, which, is marginally lower than the price of each product when sold separately. This can appeal to, consumers, who wish to pay only a single bill and deal with a single pro vider, and it can, raise demand far beyond what could be attained if the f irm sold each item separately. The, cable company Comcast is currently pursuing this strategy. In addition to cable TV, Com■ Comcast: Product bundling., cast now uses its cab le into the home to pro vide high-speed Inter net access via a cab le, modem, video on demand, digital video recording capabilities, and long-distance telephone, service. By bundling these ser vices together Comcast hopes to be ab le to gain mark et, share and revenues from rivals that sell just one of these services., , // Corporate-Level Strategy, corporate-level, strategy, Strategy concerned with, deciding which industries, a firm should compete in, and how the firm should, enter or exit industries., , hiL30123_ch06_132-155.indd 148, hiL30123_ch06_132-155.indd 148, , So f ar w e ha ve been discussing strate gy at the business le vel. No w it is time to consider, corporate-level strategy, which is concer ned with deciding w hat businesses and national, markets an enterprise should participate in. The business options are to focus on a single business;, vertically inte grate into adjacent businesses, for ming a suppl y chain from ra w materials to, consumers; and diversify into other businesses. The national market options are to focus on the, firm’s home mark et or e xpand inter nationally. Cor porate-level strate gy also encompasses, decisions about how to enter ne w businesses and mark ets—whether through acquisitions and, mergers or by establishing new ventures. As always, the goal of management in pursuing these, strategies is to boost the o verall performance of the enter prise measured by prof itability and, profit growth., , 11/9/06 7:45:37 PM, 11/9/06 7:45:37 PM

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Strategy \\ CHAPTER 6, , 149, , // FOCUS ON A SINGLE BUSINESS, Focusing on a single business makes sense if a firm is growing rapidly, consuming all available, capital resources and the time and ener gy of its managers. Almost all enter prises start out, focusing on a single industr y. So long as that b usiness continues to g row, they are often, advised to continue doing so. Expanding into other b usinesses becomes an option w hen the, growth rate in the core business is decelerating, as can occur when the market the firm serves, is saturated and overall industry growth has slowed down., The strategic question managers must answer then is whether to enter new businesses or, simply return the cash generated b y the existing business to shareholders in the for m of, higher dividend payouts. This was the question managers at Microsoft were contemplating, in 2004. The growth rate in the company’s core software business had slowed down due to, maturation of the personal computer mark et, but the company was generating huge cash, flows (by mid-2004 it had some $64 billion in cash). Microsoft’ s managers had to decide, whether to use that cash to fund additional di versification efforts (such as the company’s, move into the video game businesses with Xbo x) or to retur n it to shareholders. Because, they could not f ind enough prof itable opportunities outside their e xisting business, they, chose to retur n over $30 billion to shareholders in a huge special di vidend payout. Basically Microsoft’s managers were saying that they could not see opportunities for profitably, redeploying those funds to other b usinesses, so the y decided to let in vestors enjoy the, fruits of their ownership of the company. Sometimes, however, managers may see opportunities for boosting the overall performance of a firm by vertically integrating into adjacent, activities, di versifying into ne w businesses, or e xpanding inter nationally to enter ne w, markets., ■, , Apple: Vertical integration., , // VERTICAL INTEGRATION, vertical integration, Vertical integration involves moving upstream into b usinesses that supply inputs to the, Moving upstream into, firm’s core business or downstream into businesses that use the outputs of the f irm’s core, businesses that supply, business. An example of upstream v ertical integration would be for Dell Computer to enter, inputs to a firm’s core, the memor y chip b usiness, making the memor y chips that go into its personal computers, business or downstream, (currently Dell purchases these chips from independent suppliers).An example of downstream, into businesses that use, vertical integration is the 2001 decision b y Apple Computer to enter the retail b usiness with, the outputs of the firm’s, its Apple Store. The stores sell Apple products and third-party products, and as of 2006 there, core business., were close to 150 of these stores., Vertical inte gration mak es sense if it impro ves the, competitive position of the f irm’s core business. For this to, be so, vertical inte gration must ena ble the f irm’s cor e, business either to lo wer its costs or to better dif ferentiate, its product offering. Apple’s entry into retailing, for e xample, is designed to provide better point-of-sales ser vice to, customers wishing to purchase an Apple product than can, be had from independent stores. By helping to raise the, overall le vel of differentiation associated with Apple’s, offering, the strate gy is designed to strengthen Apple’s, competitive position., Although vertical integration might look good on paper,, many enter prises that ha ve vertically integrated upstream, have found themselves locked into high-cost businesses that, detract from their competitive advantage. A common probVertical Integration In 2001 Apple decided to start, lem is that in-house suppliers lack a strong incentive to drive, opening its own stores to sell Apple products, including, down costs because the y have a guaranteed b uyer for their, Apple computers and iPods. This is an example of, products—their own f irm. As a result, o ver time in-house, downstream vertical integration., suppliers can become less efficient, making v ertical, AP Photo/Mark Lennihan., integration a liability rather than an asset. General Motors,, , hiL30123_ch06_132-155.indd 149, hiL30123_ch06_132-155.indd 149, , 10/30/06 2:39:14 PM, 10/30/06 2:39:14 PM

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150, , PART 2 // Strategizing, , for example, was until recently highly vertically integrated, making many of the components that go into GM cars. Unfor tunately for GM, high labor costs in its unionized inhouse supply operations raised input costs above those enjoyed by rivals like Toyota, putting GM at a competiti ve disadvantage. In the late 1990s GM rectif ied this situation b y, selling its in-house suppliers, ef fectively deintegrating. This strate gic action ga ve GM, greater freedom to purchase components from independent suppliers that had a lower cost, structure and could offer GM lower prices., , // DIVERSIFICATION, diversification, Entry into new business, areas., related, diversification, Diversification into a, business related to the, existing business activities, of an enterprise by distinct, similarities in one or more, activities in the value, chain., unrelated, diversification, Diversification into a, business not related to the, existing business activities, of an enterprise by distinct, similarities in one or more, activities in the value, chain., ■ General Electric: Unrelated, diversification., , economies of scope, Cost reductions associated, with sharing resources, across businesses., ■ Procter & Gamble, Economies of scope., , hiL30123_ch06_132-155.indd 150, hiL30123_ch06_132-155.indd 150, , The strategy of diversification involves entry into new business areas. Microsoft’s entry, into the video game business with its Xbox offering is an example of diversification, as is, General Electric’s mo ve into netw ork broadcasting with the acquisition of NBC. The, Microsoft case is an example of what is called related diversification: The new business, is related to the existing business activities of the enterprise by distinct similarities in one, or more activities in the value chain. The video game business is a software-based business,, so Microsoft could use its estab lished softw are engineering skills to de velop both an, operating system for the Xbox (which is actually based on Windows) and the video games, themselves. The General Electric case is an example of unrelated diversification: The, new business, NBC, was not related to the e xisting activities of the enter prise by similar, value chain activities.15, As with v ertical inte gration, the k ey to successful di versification is that it should, increase the performance of one or more businesses beyond what could be achieved if each, enterprise were an independent business in its own right.16 If this does not happen, there is, no value to different businesses being part of the same organization., Leveraging Core Competencies One way in w hich diversified enter prises boost the, performance of their constituent units is b y leveraging valuable core competencies and, applying them to a new line of business. Thus Microsoft used its valuable skills in software, engineering to enter the video game business with Xbo x. The aim here is to create a, competitive advantage in the ne w business acti vity by leveraging the competencies that, enabled the original business activity to gain a competitive advantage. A good example of, a f irm that has done this consistentl y for decades is 3M, w hich among other things, leveraged its skills in adhesi ves, originally developed to hold the g rit on sandpaper , to, create new businesses. These new businesses have included masking tape, medical tape,, and the ubiquitous Post-it notes., Economies of Scope Another way of improving performance through diversification is, to realize what are called economies of scope, which are the cost reductions associated, with sharing resources across businesses.17 Firms that can share resources acrossbusinesses, have to invest proportionally less in the shared resource than companies that cannot share., For example, Procter & Gamble makes both disposable diapers and paper towels. Both of, these paper-based products are v alued for their ability to absorb liquid without, disintegrating. Because both products need the same attrib ute—absorbency—Procter &, Gamble can share the R&D costs associated with producing an absorbent paper -based, product across the two businesses. Similarly, because both products are sold to the same, customer set (super markets), P&G can use the same sales force to sell both products. In, contrast, competitors that make just paper towels or just disposable diapers cannot achieve, the same economies and will ha ve to invest more in both R&D and maintaining a sales, force. The net result is that other things being equal, P&G will ha ve lower expenses and, higher profitability than firms that lack the ability to share resources., , 10/30/06 2:39:15 PM, 10/30/06 2:39:15 PM

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Strategy \\ CHAPTER 6, , Superior Internal Governance A f inal way in w hich diversification can improve the, performance of the enter prise is through superior inter nal governance skills. 18 Internal, governance skills are the ability of senior managers to elicit high le vels of perfor mance, from the constituent businesses of a diversified enterprise. Senior managers can do this via, organization architecture that creates incentives for the managers and employees running, the businesses to w ork producti vely; b y selecting highl y skilled managers to r un the, constituent b usinesses; b y coaching those managers, helping them to upg rade their, managerial skills; b y helping them to diagnose prob lems within their b usinesses and, identify ways of improving performance; and by pushing managers to search for w ays to, improve the performance of their units., Jack Welch, the longtime CEO of General Electric, was a master at internal governance., Welch said he spent 70 percent of his time on people issues and that his greatest contribution to General Electric w as f inding and coaching g reat managers and pushing those, managers to impro ve the perfor mance of their units and share best practices across, businesses., , 151, , internal governance, skills, The ability of senior, managers to elicit high, levels of performance, from the constituent, businesses of a, diversified enterprise., , Diversification Failures Although di versification can impro ve the prof itability and, profit growth of an enterprise, the opposite can also be the case. There are many examples, of diversification efforts that f ailed. In some cases these di versification efforts involved, the acquisition of an established business in another industry, as opposed to organic expansion like that of 3M or Microsoft’s entry into the video game business. There are several, problems with such diversification.19 First, there is evidence that acquiring enterprises pay, too much for the companies the y acquire (they overvalue them). Second, acquiring f irms, often let acquired businesses continue to operate as stand-alone enter prises. Managers of, the acquiring f irm tak e no action to transfer core competencies, realize economies of, scope, or impro ve perfor mance through the application of superior go vernance skills., When no steps are taken to improve the performance of the acquired business, it is hardly, surprising that the diversification move fails to improve performance., Finally, even when proactive efforts are made to improve the performance of the newly, acquired business, many unexpected problems can stymie attempts to do this. Often these, problems stem from dif ferences in or ganization architecture and cultures. After an, acquisition, many acquired b usinesses experience high management tur nover, possibly, because their emplo yees do not lik e the acquiring compan y’s w ay of doing things. 20, Evidence suggests that the loss of management talent and e xpertise in the acquired enterprise can materially harm the performance of the acquired unit.21, , // INTERNATIONAL EXPANSION, International e xpansion is the f inal cor porate strate gy we consider here. Inter national, expansion can be a good way to increase the performance of a firm. Historically managers, have tur ned their attention to inter national e xpansion after their b usiness has become, established in its home mark et. More recentl y, however, with the emer gence of global, markets managers are starting to think about international expansion even at an early point, in the de velopment of their enter prise. Nowadays e ven some small enter prises have a, global presence. We reviewed the reasons for expanding internationally in Chapter 3. Here, we note briefly that international expansion can enlarge the market for a f irm’s products,, thereby boosting prof it growth; enable a f irm to realize scale economies from ser ving a, large global market, which can lower unit costs and boost prof itability; enable a f irm to, realize location economies and increase profitability by basing different business activities, where the y can be perfor med most ef ficiently; and boost both prof itability and prof it, growth by transferring skills between different national subsidiaries, a process kno wn as, global learning., , hiL30123_ch06_132-155.indd 151, hiL30123_ch06_132-155.indd 151, , 10/30/06 2:39:15 PM, 10/30/06 2:39:15 PM

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152, , PART 2 // Strategizing, , I N CO N C L U S ION, , WH Y DOE S IT M ATTER?, , All organizations have to compete with rivals to obtain scarce resources and achieve their, performance goals. For sustained high performance, an organization needs a competitive, advantage over its rivals. A competitive advantage does not happen by accident. Gaining, and sustaining a competitive advantage over the long haul requires managers to craft and, then implement strategies that result in a fit between the products of the enterprise and, competitive conditions in the markets in which the enterprise participates. Without the, correct set of strategies at the corporate, business, operating, and organizational levels,, performance will suffer, the enterprise will go into decline, and the job security, career, prospects, and reputations of its managers will suffer. By the same token, successful, careers are enjoyed by managers who establish a reputation for being able to craft and, then effectively implement strategies., Designing and implementing strategy is not the sole preserve of top managers. Although top managers may guide the strategy-making process, the strategies crafted and, implemented by operating managers also play a key role in strategic success. It is crucially, important, therefore, that even the lowest-level managers in an organization have a good, grasp of strategy and understand their role in the process of building and sustaining a, competitive advantage., An interesting example was referred to several times in this chapter: Microsoft’s entry, into the video game business with its Xbox offering. The Xbox was not the result of a, grand strategic vision crafted by Chairman Bill Gates and CEO Steve Balmer; it was the, result of the actions of four engineers and their manager, who developed a prototype of, the Xbox by their own initiative and on their own time, and then successfully lobbied Gates, and Balmer to devote resources to the commercialization of the product. To be able to pull, off this kind of initiative, managers, whatever their level, must be able to articulate what, the strategy should be. They cannot do that unless they understand the basics of strategy, as laid out in this chapter., Even if they are not pushing strategic initiatives, newly hired junior managers can still be, surprised by how rapidly they are drawn into the strategy-making vortex of an enterprise., This is certainly true at Microsoft, where management interns have recounted, sometimes, with a sense of wonder in their eyes at the possibilities, how they found themselves in a, strategy session where their team was trying to articulate and defend the competitive, strategy for its product offering to Bill Gates or Steve Balmer. “What a rush,” one noted as, he recounted the experience; “here I was, not even graduated yet, and I had to answer, this blizzard of questions from Bill Gates, who was just ripping into our plan. Amazingly, at, the end of the session, he told us to go ahead!”22 The ability of this intern to hold his own, in the strategy conversation was due to the fact that he understood what strategy was, about, what was required to gain and sustain competitive advantage, and how to articulate, that. This is a skill that managers must have if they are to be successful., , MANAGEMENT CHALLENGES, 1., 2., , 3., , hiL30123_ch06_132-155.indd 152, , “The only goal of strategy is to maximize the profitability of the enterprise.” Is this, statement correct?, How would you characterize the business-level strategies of the following enterprises in, the airline industry: Jet Blue, Maxjet (www.maxjet.com), and United Airlines? Can you, plot the position that each enterprise aspires to on the efficiency frontier in the industry?, “Success in strategy is 10 percent inspiration and 90 percent perspiration.” In the, context of the material discussed in this chapter, what does this statement mean?, , 10/30/06 7:38:58 PM

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Strategy \\ CHAPTER 6, , 153, , 4., , Visit the Web site of the Boeing Corporation and familiarize yourself with the different, activities of the organization. Then answer the following questions:, a. What is the business-level strategy of Boeing’s commercial jet aircraft business?, b. What tactics is Boeing pursuing to raise entry barriers into the commercial jet, aircraft business?, c. What is the corporate-level strategy of Boeing? How might this strategy help the, company increase the profitability of the entire enterprise?, 5. Compare and contrast Toyota and General Motors. (You might want to visit the Web, sites of both companies and review their financial performance using the data found at, the Yahoo finance site, finance.yahoo.com.) Which company is on the efficiency, frontier in the automobile industry, and which company is inside the frontier? How, important are the following in explaining the differences between the two companies?, a., Business-level strategy., b, . Operating strategy., c., Corporate strategy., d., Competitive tactics., , MANAGEMENT PORTFOLIO, FOR THE ORGANIZATION YOU HAVE CHOSEN TO FOLLOW:, 1., 2., , 3., , What is the business-level strategy of this firm? (For a multibusiness firm, focus on the, largest business unit.), Plot the position to which the firm aspires on the efficiency frontier. Also plot its actual, position if that is different. If you think the firm is positioned inside the frontier, state, why. If you think it is on the frontier, how did it get there?, What is the corporate-level strategy of the firm? In your opinion, does this strategy, create additional value, boosting the profitability of the enterprise, or is it destroying, value and lowering profitability? How did you reach your conclusion?, , CLOSING CASE, , G O O G L E ’ S Q U E S T F O R C O M P E T I T I V E A D VA N TA G E, , In 1996 two computer science PhD students at Stanford University, Sergey Brin and Lar ry Page, were wondering how, they could sor t through the massi ve amount of infor mation, that was starting to appear on the Web to f ind specif ic and, useful information on a topic. Although there were several different technologies, or search engines, available to search the, Web for information, none of them seemed particularly useful, to Brin and P age because they failed to distinguish betw een, useful and trivial Web sites. Brin and Page decided to build a, search engine that not only would examine the words on Web, pages and then inde x them as other search engines did , but, also would look at ho w and w here these w ords were being, used and at the number of other Web sites linked to a page., , hiL30123_ch06_132-155.indd 153, hiL30123_ch06_132-155.indd 153, , The goal was to have the search engine return a list of Web, pages with the most useful appearing at the top., The first version of their search engine, w hich relied on, a proprietary algorithm de veloped by Brin and P age, was, known as BackRub. BackRub soon created a b uzz among, other computer science students at Stanford; b ut it was the, encouragement of a for mer Stanford student, Da vid Filo,, one of the founders of Yahoo!, that persuaded Brin and Page, to start their own company., By December 1998 the beta v ersion of Google’s search, engine had been up and r unning on the Web for months,, answering over 10,000 search queries a day. From that point, on g rowth was exponential. By December 2000 Goo gle’s, , 10/30/06 2:39:16 PM, 10/30/06 2:39:16 PM

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154, , PART PART, 2 // 2Strategizing, // Strategizing, , index included more than 1.3 billion, Web pages, and the compan y was, answering some 60 million search, queries a day. By 2004 the number, of Web pages inde xed b y Goo gle, exceeded 4 billion, and the search, engine w as handling more than, 300 million queries a day. Google’s, technology quickly became per vasive. Soon most major Web portals, were using Goo gle’s search engine, technology, including Yahoo! and, AOL. Estimates suggested that in, 2003 some 75 percent of Inter net, searches were made using Google., What w as most impressi ve about, Google, ho wever, w as that unlike, many other dot-com b usinesses of, the 1990s, Goo gle found a w ay to, make money. In 2003 the compan y, Google Guys From small beginnings in 1996, Sergey Brin and Larry Page have built, made $967 million in revenues and, one of the largest and most profitable online enterprises in the world, Google., $105 million in net prof its. In 2004, Courtesy of Google Inc., revenues surged to $3.19 billion and, net income to $399 million., To make money Google sells to adv ertisers the w ords, Yahoo! replaced Google as the search engine on its site with, that people put in w hen they search for something on the, a proprietary search engine based on Overture’s technology., Web. This means that whoever bids the most for a particular, Microsoft too seems to ha ve its sights set on Goo gle., term, say digital cameras, gets their link put at the top of a, Microsoft is repor tedly working on its o wn search engine, Google-generated list. Google distinguishes between indetechnology, which it plans to inte grate with its softw are,, pendent search results and those that are paid for b y listing, including Microsoft Office and Longhorn, the next version, “sponsored links” on its page. Ho wever, sponsors do not, of the Windows operating system (due for release in 2007)., pay Google unless a user clicks through to them from a, CASE DISCUSSION QUESTIONS, Google-generated link., To determine the price to char ge advertisers for a ter m,, 1. What business-level strategy is Google pursuing?, Google uses an automated bidding process known as a Vick2. What value does Google create for customers and adverery second price auction. Under this bidding methodology,, tisers? How does this v alue translate into superior per winning bidders pay only one cent more than the bidder beformance, measured by profitability and profit growth?, low them. Thus if there are three bids for the ter m “digital, cameras”—say $1 a click, $0.50 a click, and $0.25 a click—, 3. What are the sources of Google’s competitive advantage?, the winner will pay $0.51 a click to Google., How secure are these advantages from imitation by comIn August 2004 Goo gle went public, raising o ver $1.5, petitors? What must Google do to keep the competitors, billion. With no debt and flush with cash, the compan y, at bay?, looked set to build on its lead in the search engine business., 4. Do competitors such as Yahoo! and Microsoft potentially, However, competitors were not sitting on the sidelines. In, have assets and capabilities that give them an advantage, 2003 Yahoo! purchased a ri val search engine compan y,, over Google in the search engine business?23, Overture Services, for some $1.6 billion. In February 2004, , ENDNOTES, 1. Sources: “How Big Can It Gro w?” The Economist, April 17, 2004, pp. 74–78;, “Trial by Checkout,” The Economist, June 26, 2004, pp. 74–76., , 3. M.E. Porter, Competitive Advantage (New York: Free Press, 1985); and M.E., Porter, Competitive Strategy (New York: Free Press, 1980)., , 2. T. Copeland, T. Koller, and J. Murrin, Valuation: Measuring and Managing the, Value of Companies (New York: Wiley, 2000)., , 4. S. Scherreik, “How Efficient Is That Company?” BusinessWeek, December 23,, 2003, pp. 94–95., , hiL30123_ch06_132-155.indd 154, hiL30123_ch06_132-155.indd 154, , 10/30/06 2:39:16 PM, 10/30/06 2:39:16 PM

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Strategy \\ CHAPTER 6, , 5. B. Barney, “Company Resources and Sustained Competitive Advantage,” Journal of Management 17 (1991), pp. 99–120., 6. R. Reed and R.J . DeF illippi, “Causal Ambiguity, Bar riers to Imitation, and, Sustainable Competitive Advantage,” Academy of Management Review 15 (1990),, pp. 88–102., 7. Porter, Competitive Strategy., 8. C.W.L. Hill, “Differentiation versus Low Cost or Differentiation and Low Cost:, A Contingenc y F ramework,” Academy of Mana gement Re view 13 (1988),, pp. 401–12., 9. This was a comment made b y an executive MBA student of Charles Hill, w ho, held a relatively senior position at Costco., 10. M.E. Porter, “What Is Strategy?” Harvard Business Review, February 1, 2000., 11. See W.C. Kim and R. Maugbor gne, Blue Ocean Str ategy (Boston: Har vard, Business School Press, 2005)., 12. Kim and Maugborgne, Blue Ocean Strategy., 13. Porter, Competitive Advantage., 14. Game theory is the tool most often used to think about the dif ferent tactics an, enterprise can pursue. See A.K. Dixit and B.J. Nalebuff, Thinking Strategically, (London: W.W. Norton, 1991). Also see A.M. Brandenburger and B.J. Nalebuff,, “The Right Game: Using Game Theory to Shape Strate gy,” Harvard Business, Review, July–August 1995, pp. 59–71; D.M. Kreps, Game Theory and Economic, Modeling (Oxford: Oxford University Press, 1990)., 15. The distinction betw een dif ferent types of di versification goes back to R.P ., Rumelt, Strategy, Structur e, and Economic P erformance (Cambridge, MA:, Harvard Business School Press, 1974)., , hiL30123_ch06_132-155.indd 155, hiL30123_ch06_132-155.indd 155, , 155, , 16. C.W.L. Hill, “The Role of Headquarters in the Multidivisional Firm,” in Fundamental Issues in Strategy Research, ed. R. Rumelt, D.J. Teece, and D. Schendel, (Cambridge, MA: Harvard Business School Press, 1994), pp. 297–321., 17. D.J. Teece, “Economies of Scope and the Scope of the Enter prise,” Journal of, Economic Behavior and Organization 3 (1980), pp. 223–47. For recent empirical, work on this topic, see C.H. St. John and J .S. Harrison, “Manufacturing-Based, Relatedness, Syner gy, and Coordination, ” Strategic Mana gement Journal 20, (1999), pp. 129–45., 18. See, for example, Jones and Hill, “A Transaction Cost Analysis,” Strategic Management Journal 9, (1988), pp. 159–72; Williamson, Markets and Hierarchies, (New York: Free Press), pp. 132–75; and Hill, “The Role of Headquar ters in the, Multidivisional Firm.”, 19. One of the classic studies w as by D.J. Ravenscraft and F.M. Scherer, Mergers,, Selloffs, and Economic Ef, ficiency (W ashington, DC: Brookings, Institution,1987)., 20. See J.P. Walsh, “Top Management Turnover Following Mergers and Acquisitions,” Strategic Management Journal 9 (1988), pp. 173–83., 21. See A.A. Cannella and D .C. Hambrick, “Executive Departure and Acquisition, Performance,” Strategic Management Journal 14 (1993), pp. 137–52., 22. The intern was an MBA student of Charles Hill., 23. Sources: Google S1 form, filed with the SEC; “Spiders in the Web,” The Economist, May 15, 2004, pp. 14–16; “The Weakness of Goo gle,” The Economist ,, May 1, 2004, pp. 67–68; B. Elgin, “Google’s Success Is Spurring Competitors to, Take Search Technology to the Ne xt Level,” BusinessWeek, May 17, 2004, pp., 46–47;. Google 10K form, 2004., , 10/30/06 2:39:17 PM, 10/30/06 2:39:17 PM

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7, LEARNING OBJECTIVES, , MANAGING OPERATIONS, After Reading This Chapter You Should Be Able to:, 1, , Explain how operational excellence can lead to competitive advantage., , 2, , Describe different operating strategies managers can pursue., , 3, , Explain the role of operations in an enterprise., , 4, , Outline how the design of production systems and strategies for asset utilization, improving, product quality, managing inventory, managing supply chains, and developing products can all, improve the efficiency of an organization., , 5, , Describe methodologies for improving operating processes, and explain how improvements in, processes over time can lead to competitive advantage., , Productivity and Efficiency, Configuring the Production, System, Traditional Production Systems, Production Systems, Flexibility,, and Costs, New Production Technologies:, Mass Customization, Optimizing Work Flow: Process, Reengineering and Process, Innovation, Asset Utilization, Quality Management, Managing Inventory, Economic Order Quantity and, Setup Time, , hiL30123_ch07_156-179.indd 156, , / / / / / / / / / / / / / / /, , Just-in-Time Inventory Systems, Build to Order and Inventory, Supply Chain Management, and Information Systems, Product Development and, Productivity, In Conclusion: Why Does It, Matter?, Management Challenges, Management Portfolio, Closing Case: Improving, Productivity in the Auto, Industry, , 10/31/06 5:11:19 AM

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Managing Operations \\ CHAPTER 7, , 157, , Six Sigma Health, Care. Mount Carmel, Health has been one, of the leaders in, health care of using, process improvement, methodologies such, as six sigma to boost, the productivity of, their operations., Courtesy of Mount Carmel, Health System, , / / / / / / / / / / / / / / / / / / / / /, , A, , fter years of poor financial performance, managers, at Mount Carmel Health, a health care provider in, Ohio, decided to implement a six sigma program (explained later in this chapter) to improve their operating, efficiency. One of the first projects focused on a simple, and common problem among health care providers:, timely and accurate reimbursement of costs. Mount, Carmel discovered that it was writing off large amounts, of potential revenue from Medicare HMO plans as, uncollectible because the charges were denied by, Medicare administrators. Mount Carmel had low, expectations for this business anyway, so its managers, had never analyzed why the write-offs were so high., Careful analysis as part of a six sigma project discovered, that a significant portion of the denials were due to the, , hiL30123_ch07_156-179.indd 157, , incorrect coding of reports submitted to Medicare. If the, reports were coded correctly—that is, if fewer errors, were made in the production of forms—the six sigma, team estimated that annual income would be some, $300,000 higher, so they devised improved processes, for coding the forms to reduce the error rate. The result, was that net income rose by over $800,000! It appeared, that improving the coding process for this one parameter, improved the reporting of many other parameters and, led to a reimbursement rate much higher than anticipated. By 2004 Mount Carmel had over 400 six sigma, quality improvement projects either completed or ongoing. The organization estimates that since it launched, the process in July 2000, it has reduced costs by some, $71 million.1, , 10/31/06 3:53:35 AM

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158, , operations, The different activities, involved in creating an, organization’s products and, services., operations, managers, People who manage, operations., , PART 2 // Strategizing, , caseThe, of Mount Carmel Health illustrates the impact that efficient operations management can, have on the perfor mance of an enter prise. The six sigma process is an e xample of a specif ic, operating strategy. In previous chapters we learned that operating strategies are the actions managers take at the operating level to support their business-level strategy and reach the efficiency, frontier in their industry. In this chapter we examine the various operating strategies managers can, pursue. By operations we mean the different activities involved in creating an or ganization’s, products and services. Operations managers manage these activities. The typical responsibilities of operations managers include the management of production systems, product quality,, inventory systems, supply chains, and product and process development. By managing operations, efficiently and effectively, managers can lo wer the costs of their organization and increase the, differentiation of its products, thereby reaching the efficiency frontier in their industry., Many of the operating strategies and methodologies we discuss here are just as impor tant, for ser vice enter prises as for manuf acturing enter prises. Sometimes people er roneously, assume that operations management tools are not applicable to service organizations, and that, service organizations have their own unique character. Although there may be differences in, details and emphasis, fundamentall y all businesses handle the same issues w hether their, product is a ph ysical good or a ser vice. The quality of production processes and of the end, product is an issue of g reat impor tance for both manuf acturing and ser vice enter prises., Improving productivity is a k ey concern in both manuf acturing and ser vice organizations., Like manufacturing enterprises, service enterprises also have to conf igure their production, systems, manage inventory, and design products. In this chapter w e show by examples how, the techniques we discuss apply to both manufacturing and service enterprises., , // Productivity and Efficiency, productivity, The output produced by a, given input., , In the last chapter w e noted that managers stri ve to reach the ef ficiency frontier in their, industry and that doing so requires operational excellence. The key determinant of efficiency, in most organizations is the productivity of two key inputs, labor and capital. Productivity, can be defined as the output produced by a given input:, Productivity ⫽ Output/Input, , productivity of labor, Unit output divided by, some measure of labor, inputs., ■ Productivity in the, automobile industry., , productivity of, capital, Sales divided by the total, capital (money) invested in, a business., ■ Wal-Mart and Target:, Capital productivity., , hiL30123_ch07_156-179.indd 158, hiL30123_ch07_156-179.indd 158, , Theproductivity of labor is typically measured by unit output divided by some measure of, labor input, such as hours w orked or number of emplo yees. F or e xample, managers in, automobile companies often look at the number of emplo yee hours needed to build a car. In, 2004 it took Toyota 20.6 employee hours to build a car in its United States assemb ly operations. This compares to 23.6 hours at General Motors, 25.4 hours at F ord, and 26.0 hours at, Daimler Chrysler.2 Thus we can conclude that Toyota had higher labor producti vity than its, three rivals and should therefore ha ve lower costs and g reater prof itability, which indeed, seems to have been the case. In 2004 Toyota made more profit than the other three companies, combined., The productivity of capital is usuall y measured b y sales di vided by the total capital, (money) invested in a business. Often refer red to as capital turnover, this measure tells, managers how many dollars of sales are produced for e very dollar of capital in vested in the, business.3 In 2005, for e xample, Wal-Mart’s capital tur nover ratio w as 4.16, meaning that, every dollar Wal-Mart invested in its stores, distribution centers, infor mation systems, and, inventory generated $4.16 of sales. By way of comparison, Target had a capital turnover ratio, of just 1.86, which implies that Target was less productive than Wal-Mart in its use of capital, and thus would probably have a higher cost str ucture and higher prof itability. This was the, case in 2005, when Wal-Mart’s profitability, measured by its return on invested capital, was, 14.5 percent compared to 11.5 percent at Target.4, The key point is that the productivity rates of labor and capital are major determinants of, efficiency and thus the cost structure of an enterprise. The task facing managers is to improve, , 11/9/06 7:46:41 PM, 11/9/06 7:46:41 PM

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Managing Operations \\ CHAPTER 7, , 159, , labor and capital producti vity over time, thereby lowering costs and boosting perfor mance., Doing so is important irrespective of whether the business-level strategy of the firm is one of, low costs or dif ferentiation. Even the dif ferentiated f irm has to conf igure its operations as, efficiently as possible, given the constraints imposed by its choice of strategic position, if it is, to reach the efficiency frontier in its industry., The operating strategies we consider in the rest of this chapter all improve the productivity, of labor and capital and thus the competitive position of a business. For example, by reducing, labor time w asted building defecti ve products that subsequentl y ha ve to be repaired or, scrapped, quality enhancement methodologies such as six sigma improve labor productivity., By managing in ventories more ef ficiently, operating strate gies can reduce the amount of, capital tied up in inventory, thereby improving capital productivity., , // Configuring the Production System, The production system of an organization refers to how the flow of work is conf igured., Production can be conf igured in a number of dif ferent ways, depending on the nature of the, product, consumer requirements, and a vailable production technolo gies. Traditionally, production systems have been categorized into one of four main cate gories: job shop, batch, production, assembly line, or continuous flo w. We will look at each system, and ho w the, systems dif fer with re gard to producti vity and costs, before discussing the rise of ne w, production technologies and their role in facilitating what is known as mass customization., , production system, How the flow of work is, configured., job shop, Production systems used, when items are ordered, individually., , // TRADITIONAL PRODUCTION SYSTEMS, small batch, Job shop systems are used when items are ordered individually and tend to be unique to the, Production systems used, requirements of a particular customer. Many small manufacturing operations are organized on, when customers order in, a job shop basis—a high-end cabinetmak er, for example, may produce specialized cabinets, small batches but when, designed for individual homes. Service businesses can also use job shop systems. F or exameach order is different., ple, each job undertaken by a management consulting firm may differ depending on the needs, of the client, requiring the firm to develop a different product for each client. Higher-end restaurants also use job shop systems, producing indi vidual items to order from a menu and, assembly-line, customizing the orders depending on customer requests., production, Small batch production systems are used w hen customers order in small batches, but, Systems used to masswhen each order is different. The cabinetmaking firm, for example, may be able to produce in, produce large volumes of a, small batches if it serves builders who construct 100 houses a year using the same floor plan., standardized product., The cabinetmaker may then make 100 cabinets for a par ticular type of house before altering, the equipment to process a different order., Assembly-line production systems are used to, mass-produce lar ge v olumes of a standardized product., First popularized b y Henr y Ford in the 1920s to produce, the Model T Ford, assembly-line technology is widely used, today. Assembly lines involve breaking down a production, process into discrete steps and assigning emplo yees to, different work stations on a continually moving line where, they perform specialized tasks. Automobile manufacturers, use assembly-line systems to mass-produce specif ic car, models; Dell uses assembly-line systems to mass-produce, personal computers; and food manuf acturers use assembly, lines to produce packaged food. Ser vice enter prises also, use assembly-line processes: McDonald’s restaurants use, an assembly-line methodology to make Big Macs, doctors, may use an assembly-line methodology to perform certain, Every Product Is Unique A high-end cabinetmaker at, procedures (laser-based eye surgery, for e xample), and a, work. Cabinets like these are made using a job shop process., bank may use assembly-line systems to process mor tgage, Courtesy of Mick Harper/Blue Sky Woodworks, LLC, Corrales, NM, loan applications in a highly standardized fashion., , hiL30123_ch07_156-179.indd 159, , 10/30/06 10:23:06 PM

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160, , continuous flow, production, Production systems that, continuously produce a, standardized output that, flows out of the system., , economies of scale, Cost advantages derived, from large-volume, production., , PART 2 // Strategizing, , Finally, continuous flow production systems continuousl y produce a standardized, output that flows out of the system. Oil ref ineries are a good example: They take crude oil as, an input and ref ine that oil to produce a continuous output of g asoline and other oil-based, liquid products. Man y continuous flo w systems cannot be easil y shut do wn; they tend to, operate around the clock, continuously producing a highly standardized output., , // PRODUCTION SYSTEMS, FLEXIBILITY,, AND COSTS, Production systems differ in the degree to which their output is standardized, their flexibility,, and their costs (see Figure 7.1 ). Job shop and small batch systems are more fle xible than, assembly-line and continuous flo w systems; the y have to be because their outputs are less, standardized. They pay a penalty for this fle xibility, however, in the for m of higher costs. In, general, enterprises that use job shop and small batch systems will char ge higher prices to, recoup their costs. In ter ms of the framework introduced in the last chapter, small batch and, job shop systems tend to be used to produce a dif ferentiated product offering that is customized to indi vidual customer requirements. F irms using such systems char ge high prices to, cover the costs of producing a differentiated output., Assembly-line and continuous flo w systems mass-produce or continuousl y produce a, standardized output, and b y doing so the y can reduce costs in tw o ways: economies of, scale and lear ning effects. Economies of scale are the cost adv antages derived from, large-volume production. One source of scale economies is the ability to spread the f ixed, costs associated with tooling a f actory to make a product over a large volume of production. Thus although it might cost Intel $5 billion to build a facility to mass-produce microprocessors, that f ixed cost can be spread over 100 million microprocessors, driving down, the cost of each unit. Similarl y, automobile companies spread the f ixed costs associated, with tooling an assembly line to produce a specific car model over a large output—perhaps, as much as a million units over five years—thereby lowering the costs of each car., Another source of economies of scale is the ability of companies producing in lar ge volumes to achieve a greater division of labor and specialization. Specialization is said to have a, favorable impact on productivity, mainly because it enables employees to become skilled at, performing a particular task. The classic example of such economies is Ford’s Model T car. By, , Nature of technology/product, , Flexible/, customized, , FIG UR E 7 .1, Production Systems—, Costs and Flexibility, , hiL30123_ch07_156-179.indd 160, , Job, shop, , New, production, technologies, Small, batch, Assembly, line, , Continuous, flow, , Inflexible/, standardized, Low cost, , High cost, , 10/30/06 10:23:07 PM

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Managing Operations \\ CHAPTER 7, , 161, , introducing assembly-line mass production techniques, Ford, achieved g reater division of labor (splitting assemb ly into, small, repeatable tasks) and specialization, which boosted, employee productivity. Ford was also able to spread the fixed, costs of developing a car and setting up production machinery over a large volume of output. As a result of these economies, the cost of manufacturing a car at Ford fell from $3,000, to less than $900 (in 1958 dollars)., Learning effects are cost sa vings that come from, learning by doing. For example, workers learn by repetition, how best to car ry out a task. In general, labor producti vity, increases over time and unit costs f all as individuals learn, the most efficient way to perform a particular task. Equally, important, managers in ne w production f acilities lear ns, over time ho w to r un the ne w operation more ef ficiently., Hence production costs decline because of increasing labor, productivity and management ef ficiency due to lear ning., You Can Have It in Any Color You Want, So Long as It’s, Learning ef fects w ere f irst documented in the, Black! The grandfather of all assembly lines—Ford’s, aircraft industry during World War II when military aircraft, Model T assembly line. Introduced in 1913, the Model T, were f irst being mass-produced on Boeing’ s assemb ly, assembly line cut the cost of building a car by two-thirds., lines.5 It was observed that each time cumulative producFrom the collections of Ford Motor Company, tion of a par ticular aircraft model w as doubled, unit costs, fell to 80 percent of their previous level (that is, the fourth, aircraft cost 80 percent as much as the second to assemble,, learning effects, the eight cost 80 percent as much as the fourth, and so on). Further study found the reason:, Cost savings that come, Over time employees found ways to work smarter, made fewer mistakes, and wasted less, from learning by doing., time, all of which boosted labor productivity., Learning effects are just as important in service industries as in manufacturing. One famous, ■ Learning effects at Boeing., study of lear ning in the conte xt of the health care industr y found that more e xperienced, medical providers posted significantly lower mortality rates for a number of common surgical, procedures, suggesting that learning effects are at work in surgery.6 The authors of this study, used the evidence to argue for establishing regional referral centers for the provision of highly, specialized medical care. These centers w ould perfor m many specific surgical procedures, (such as heart surgery), replacing local facilities with lower volumes and presumably higher, mortality rates., Another study found strong evidence of learning effects in a financial institution. The study, looked at a ne wly established document processing unit with 100 staf f and found that o ver, time documents were processed much more rapidl y as the staff learned the process. Overall, the study concluded that unit costs fell with e very doubling of the cumulati ve number of, documents processed since the unit was established.7, The implication is that standardization of work processes associated with assembly-line, and continuous flow production leads to higher productivity and lower costs (due to scale, and learning effects). Indeed, this was the original impetus behind Henr y Ford’s famous, application of assemb ly-line technolo gy to automobile production. By mo ving to an, assembly line Ford helped to lower the cost of making cars by realizing economies of scale, and learning effects. He was then able to lower prices and expand the market, creating the, first mass market for an automobile with his Model T. In what is now regarded as a classic, statement regarding the connection between mass production and product standardization,, Ford said that consumers could ha ve the Model T in any color they wanted, “so long as it, was black.”, In sum, assemb ly-line and continuous flo w processes allo w enter prises to substantiall y, lower costs and thus prices, but a penalty is paid in the lack of product variety—which reduces, differentiation. Thus these systems are most often adopted b y organizations that are tr ying to, adopt a low-cost strategy rather than a differentiated position in their industry. McDonald’s, for, example, applied the assembly-line philosophy to the production of f ast food, which is highly, , hiL30123_ch07_156-179.indd 161, , 10/30/06 10:23:07 PM

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162, , PART 2 // Strategizing, , standardized. This lowered costs and let McDonald’ s lower, prices and increase demand for its product in a classicexample, of the low-cost value circle (see Chapter 6)., , // NEW PRODUCTION, TECHNOLOGIES: MASS, CUSTOMIZATION, The last few decades have seen increasing attention devoted, to the development of new production technologies that are, designed to break the w ell-established relationship between, product customization and higher costs (see Figure 7.1 )., Many of these new technologies are rooted in the observation, that a major source of increased costs associated with greater, customization is the setup costs required to produce small, batches of output. It costs a lot to, retool an automobile, assembly line to produce a new model, so automobile companies prefer to produce fewer models. But what if the time to, retool a factory or to set up machinery could be dramatically, reduced? Wouldn’t that make mass production of a customLearning Environment A modern aircraft assembly line., ized final product economical?, Learning effects are important in aircraft assembly., In the automobile industry this insight was first pursued by, © Louie Psihoyos/Corbis, a remarkable engineer, Ohno Taiichi, who worked at Toyota. 8, Beginning in the mid-1950s Ohno began to think about ways to, ■ Mass customization at, produce auto body parts in small numbers. At that time it could take a full day to set up the equipToyota., ment to stamp out a particular body part—say a right door panel. As a consequence, auto companies found it economical to stamp out 20–30 days of inventory at a time and warehouse it until it, was needed. Ohno thought this was wasteful: It costs money to store inventory, including the, capital tied up in the warehouses and the inventory itself. Ifmachines could be set up quickly, the, company would need to produce enough inventory for only a day or so; inventory holding costs, would fall; and the productivity of capital would rise, as would Toyota’s profitability. Moreover,, Ohno understood that if equipment setup times could be reduced, Toyota could also produce a, greater variety of cars without a cost penalty., Ohno and his engineers began to experiment with a number of techniques to speed up the, time it took to change the dies in stamping equipment.These included using rollers to move, dies in and out of position along with a number of simple mechanized adjustment mechanisms to f ine-tune the settings. These techniques were relatively easy to master , so Ohno, directed production workers to perform the die changes themselv es. This in itself reduced, the need for specialists and eliminated the idle time that w orkers previously had enjoyed, while waiting for the dies to be changed , w hich boosted labor producti vity. Through a, process of trial and er ror, Ohno succeeded in reducing the time required to change dies on, stamping equipment from a full day to 15 minutes by 1962 and to as little as three minutes, by 1971. This meant that Toyota needed to produce only enough inventories for its immediate needs, and costs fell sharply., flexible production, In essence, Ohno Taiichi had in vented a flexible production technology. Flexible, technology, production technologies are a set of methodolo gies that allow enterprises to produce a wider, range of end products from a given production system without incurring a cost penalty.9 They, A set of methodologies, run, the gamut from computer -controlled machine tools g rouped into cells of four to six, that allows enterprises to, machines,, to lower-tech solutions such as those f irst developed by Ohno and his team, which, produce a wider range of, were, based, on pulleys and levers., end products from a given, The, automobile, industr y is among those no w rapidly adopting the latest generation of, production system without, computer-controlled, fle xible manuf acturing technolo gies, w hich mak e intensi ve use of, incurring a cost penalty., robotics. Ford is introducing such equipment into its automotive plants around the world, and, it hopes to ha ve 75 percent of its production built on flexible assembly lines b y 2010. If, , hiL30123_ch07_156-179.indd 162, hiL30123_ch07_156-179.indd 162, , 11/9/06 7:46:42 PM, 11/9/06 7:46:42 PM

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Managing Operations \\ CHAPTER 7, , 163, , successful, F ord’s in vestments in fle xible f actories could, reduce annual costs b y some $2 billion a y ear.10 The cost, savings come from two main sources: the reduced downtime, associated with changing a line to produce a different model,, and the lower inventory holding costs when products can be, produced in small batches. Ford spent $400 million modernizing an 80-year-old assembly plant in Chicago. Prior to the, investment, the plant could produce only a single model. Now, it can produce eight models from two different chassis., Increasingly fle xible production technolo gies are, allowing mass customization, which is the ability to, customize the f inal output of a product to indi vidual, customer requirements without suf fering a cost penalty.11, Mass customization can enable an enter prise to (1) better, differentiate its product of fering, which pays dividends in, The Man Who Made Toyota Ohno Taiichi was, the form of higher prices or greater demand, and (2) garner, responsible for the development of Toyota’s revolutionary, significant cost sa vings from reductions in in ventory, lean production system, which reduced the cost of building, holding costs., an automobile and represented the biggest advance in the, One industr y that is star ting to see the be ginnings of a, industry since Henry Ford introduced the assembly line., move toward mass customization is apparel, where both manCourtesy of Toyota Motor Sales, USA, Inc., ufacturers and retailers are experimenting with this approach., Years ago almost all clothing was made to individual order by, mass customization, a tailor (a job shop production method). Then along came the 20th century and techniques for, mass production, mass marketing, and mass selling. Production in the industry shifted toward, The ability to customize, larger volume and less variety based on standardized sizes. The benefits in terms of producthe final output of a, tion cost reductions w ere enormous, but the customer did not al ways win. Offsetting lower, product to individual, prices was the difficulty of finding clothes that fit as well as tailored clothes once did. People, customer requirements, have an amazing variety of shapes and sizes; but shir ts often come in just four sizes: small,, without suffering a cost, medium, large, and extra large! It is estimated that the current sizing categories in clothing fit, penalty., only about one-third of the population. The rest of us wear clothes with less than ideal fit., The mass production system has dra wbacks for apparel manuf acturers and retailers too., Year after year, apparel firms find themselves saddled with billions of dollars in excess inventory that is either thro wn away or put on sale because retailers had too man y items of the, wrong size and color. To try to solve this problem, clothing retailers have been experimenting, with mass customization techniques. One success story is Lands’ End., To purchase customized clothes from Lands’ End, the customer provides information on ■ Mass customization at, the Lands’ End Web site by answering a series of 15 questions (for pants) or 25 questions (for Lands’ End., shirts) covering everything from waist to inseam. The process takes about 20 minutes the first, time through, but once the information is saved by Lands’ End it can be quickly accessed for, repeat purchases. The customer information is then analyzed by an algorithm that pinpoints a, person’s body dimensions b y r unning these data points ag ainst a huge database of typical, sizes to create a unique, customized pattern. The analysis is done automatically by a computer,, which then transmits the order to one of f ive contract manuf acturing plants in the United, States and elsewhere that cut and sew the garments and ship the finished products directly to, customers., Today customization is a vailable for most cate gories of Lands’ End clothing. Some, 40 percent of its online shoppers choose a customized g arment over the standard-sized, equivalent when they have the choice. Ev en though prices for customized clothes are at, least $20 higher and the y take about three to four w eeks to ar rive, customized clothing, reportedly accounts for a rapidly growing percentage of Lands’ End’s $500 million online, business. Lands’ End states that its prof it margins are roughl y the same for customized, clothes as re gular clothes, but the reductions in in ventories that come from matching, demand to supply account for additional cost savings. Moreover, customers who customize, appear to be more lo yal, with reordering rates that are 34 percent higher than those of, buyers of standard-sized clothing.12, , hiL30123_ch07_156-179.indd 163, hiL30123_ch07_156-179.indd 163, , 11/9/06 7:46:43 PM, 11/9/06 7:46:43 PM

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164, , PART 2 // Strategizing, , // OPTIMIZING WORK FLOW: PROCESS, REENGINEERING AND PROCESS INNOVATION, , A Radio Frequency, Identification (RFID) tag, can be attached to an, object to be tracked., Courtesy of Barcoding Inc., , hiL30123_ch07_156-179.indd 164, , One key to impro ving productivity is to mak e sure the flo w of w ork within a production, system is conf igured optimally. Process e valuation and reengineering are tools commonl y, used to achieve this.13 The goal is to analyze the flow of work in an organization, looking for, possible causes of low productivity, and to streamline that flow if possible so work is performed, more efficiently, thereby lowering costs., The technique most enterprises use to analyze their work processes is a model cell, which, is a fully functioning microcosm of an entire work process. The technique allows managers to, conduct experiments and smooth out kinks w hile working toward an optimal design of work, flow. Onl y w hen a design is perfected is the ne w process rolled out across the entire, organization., Most reengineering projects involve several basic principles. 14 One is ph ysically placing, adjacent processes near one another , which can accelerate w ork flow. A health insurance, company found that its ability to process claims was slow because the employees who received, the claims were located on a different floor from those who processed the claims, and it could, take more than a day for files to shuttle from one floor to another. The company quickened the, work flow simply by placing receivers and processors next to each other., A second principle is to standardize procedures at each step in the work flow, which makes, it easier for replacement w orkers to f ill in for an absent indi vidual. A third principle is to, eliminating loop backs in which work returns to a previous stage for further processing. Loop, backs are a major source of lo w productivity. For example, in product development projects, loop backs can occur when a product is passed from R&D to manuf acturing, only to be sent, back to R&D when the manufacturing personnel find out that as designed, the product cannot, be manufactured economically. The redesign soaks up time and money. If manufacturing and, R&D work together on product design, products can be designed with manuf acturing in, mind., A fourth principle is to balance work loads across different stages in a process to make sure, there are no bottlenecks and no stage has insuf ficient work. A f ifth principle is to separate, nonroutine complex tasks and pass them to specialists so the flo w of routine w ork is not, slowed down by the need to deal with a comple x transaction. Anybody who has stood in line, at a bank while a single teller handles a complex transaction can understand the importance of, this principle. Man y banks ha ve improved their speed of ser ving customers b y having a, specialist customer service representative, rather than a teller, handle complex tasks. A sixth, principle is to share the results of improvements in performance so that all can see the benefits, of the reengineered processes., By adopting such principles many enterprises have been able to dramatically improve their, flow of work and thus their producti vity and costs. Moreover, by analyzing their work flow,, managers have often come up with w ays to take entire steps out of their or ganizations’ work, processes. The resulting process inno vations ha ve enhanced the ef ficiency of these, organizations., For an example, consider Wal-Mart’s management of inventories. In general, inventories are shipped from suppliers to a Wal-Mart distribution center, where they are stored, and shipped when needed to a Wal-Mart store (see Figure 7.2). At the distribution center, this process involved six steps: unloading the contents of an incoming tr uck, scanning, bar codes on the inventory with a handheld scanner, storing the inventory inside the distribution center, retrieving the inventory, scanning it again, and reloading it on a departing tr uck. In the earl y 1990s Wal-Mart realized that if it could coordinate the flo w of, trucks so that incoming tr ucks from suppliers ar rived shortly before trucks were scheduled to depar t to stores, it could tak e one step out of the process b y simply moving inventory directly from an incoming truck to an outgoing truck parked in an adjacent dock, ( Figure 7.2 ). The technique Wal-Mart de veloped to do this is called cross-docking., Cross-docking reduced the need to store and retrie ve inventory. This process improve-, , 10/30/06 10:23:09 PM

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Managing Operations \\ CHAPTER 7, , 165, , F I G U R E 7 .2, Optimizing Work Flow at, Wal-Mart, , Before cross-docking and RFID tags, Unload, trucks, , Scan, incoming, inventory, , Store, inventory, , Retrieve, inventory, , Scan, outgoing, inventory, , Scan, incoming, inventory, , Move to, departing, truck, , Scan, outgoing, inventory, , Load, trucks, , Move to, departing, truck, , Load, trucks, , Load, trucks, , After cross-docking, Unload, trucks, , After RFID tags, Unload, trucks, , ment increased labor productivity and reduced the size required for a distribution center, (less inventory needed to be stored), w hich reduced capital requirements. It also increased the efficiency of inventory management (inventory spent less time sitting in a, distribution center—it got to the stores quicker, where it could be sold). Although not all, inventory can be cross-docked, over 40 percent of Wal-Mart’s inventories are now handled through cross-docking, substantially reducing Wal-Mart’s cost structure., In 2005 Wal-Mart started to eliminate two more steps in the process—those involving the, scanning of inventory. Wal-Mart required suppliers to place radio frequenc y identif ication, (RFID) tags on all pallets of in ventory. The tags emit a radio signal that is pick ed up b y a, receiver connected to Wal-Mart’s information systems. By eliminating the need to manuall y, scan inventory, the RFID tags tak e two more steps out of the process of in ventory sorting,, thereby boosting labor productivity and further reducing costs., Process innovations such as those developed by Wal-Mart push out the efficiency frontier, and enab le a business to sta y ahead of its ri vals in the quest to estab lish a sustainab le, competitive advantage. Many companies currently recognized as having a competitive advantage in their industr y, such as Wal-Mart, Dell, Southwest Airlines, Toyota, and Nucor Steel,, got there because they were, and continue to be, process innovators., , Process optimization at, Wal-Mart., ■, , // Asset Utilization, Almost all organizations have significant physical assets. For a retailer these include its stores,, distribution warehouses, and delivery trucks; for a hospital they include the hospital building, itself; for an automobile manuf acturer they include its assemb ly plants and the equipment, therein; a bank’s assets include the space de voted to branches; restaurant assets include the, space devoted to customer seating and the kitchen equipment; and an airline’ s assets include, aircraft. Assets do not come free—a business needs capital to o wn or lease them. Asset, utilization refers to the e xtent to w hich assets are “w orking,” generating income for the, organization. If operating managers can f ind w ays to utilize their ph ysical assets more, intensively, they can increase the producti vity of the f irm’s capital, thus lo wering the cost, structure of the organization and boosting its profitability., Consider a restaurant: One task for the restaurant owner is to utilize her tables as intensively, as possible to generate more sales for every dollar of capital invested in the restaurant. A key, , hiL30123_ch07_156-179.indd 165, , asset utilization, The extent to which assets, are “working,” generating, income for the, organization., , 10/30/06 10:23:10 PM

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166, , PART 2 // Strategizing, , to utilizing these assets is to tur n the tab les o ver more, frequently. If the tables are just used once a night, sales will, be much lo wer than if tab les are tur ned over two or three, times a night. How can the restaurant owner maximize table, turnover?, First, it is impor tant for the restaurant owner to optimize, capacity, balancing seating capacity with e xpected demand., If the restaurant is too big for the local mark et, asset utilization and capital producti vity will be lo w, and costs will be, high. Assuming that capacity is optimized , asset utilization, can be further enhanced by the efficient operation of the restaurant (which in this case means quick customer service and, cleaning of tab les). By reducing the time people spend at, their tables and the time tables wait to be cleaned (turnaround, Can We Do This in Less Than 15 Minutes? Aircraft, time), quick service and cleaning allow the tables to be used, don’t make money when they are sitting on the ground., more often. Another impor tant method is scheduling when, Southwest Airlines ground crews can turn around aircraft, people are seated, primarily through a good reser vation sysin 15 minutes, which increases productivity through better, tem that coordinates reservations with how long it takes cusasset utilization., tomers to eat a meal, so that new customers are scheduled to, arrive just as a table is being cleared. Some busy restaurants, Courtesy of Southwest Airlines, in New York have taken scheduling further by telling customers that the y have only a cer tain amount of time at the tab le (perhaps two hours). By ef ficiently scheduling the serving of meals, clearing of tables, and reservations, some fashionable, restaurants in New York can use their tables three times a night, dramatically increasing their, asset utilization and capital productivity., Another example of asset utilization can be seen in the airline industry. The key to asset, utilization in the airline industr y is to ha ve aircraft fl y as often as possib le (they don’t, generate money when they are on the ground) and as full as possible. Again, the issue is one, of optimizing capacity and scheduling, coupled with ef ficient operations on the g round to, turn around flights as quickl y as possible. Airlines try to match their capacity on a route, (say Denver to Seattle) with demand. They also schedule flights to match demand and try to, minimize the time a plane has to spend on the g round not just through scheduling but also, by training ground crews to turn around planes as quickly as possible, thereby reducing the, amount of time the assets are not working. At Southwest airlines, for example, ground crews, can turn around an air plane in just 15 minutes, w hich keeps Southwest’s planes in the air, more often., As suggested b y these e xamples, asset utilization is often influenced b y three closel y, related variables: optimizing capacity, scheduling, and quick turnaround to intensify utilization of the asset (see Figure 7.3 ). These three variables are not independent of each other ., Efficient scheduling can reduce the amount of capacity a business needs, as can quick turnaround time. Managers must predict and manage demand as w ell as possible, invest in the, appropriate level of capacity for expected demand, and try to reduce the amount of capacity, needed by efficient scheduling and minimizing tur naround time. Operations managers use, complex algorithms to predict demand flows and optimize scheduling. In a manuf acturing, setting, flexible technologies are used to create quick tur naround (by reducing setup times, for a machine)., Changing prices to mak e sure capacity is full y utilized is also often an option (see, F, igure 7.3). Businesses that tak e orders electronically have a par ticularly good vie w of, real-time order flo ws and can use real-time pricing algorithms to set the best prices to, match demand and supply. Airlines are infamous for adjusting prices, often by the minute,, to try to fully utilize their capacity.15 Railroads too now use dynamic pricing algorithms to, make sure their rolling stock is fully utilized. Dell Computer uses dynamic pricing to optimize capacity utilization in its assembly operations. Dell will alter the prices for specif ic, models and components (sometimes dail y) to k eep its f actories humming at optimal, capacity and to better manage inventory., , hiL30123_ch07_156-179.indd 166, , 10/30/06 10:23:10 PM

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Managing Operations \\ CHAPTER 7, , 167, , F I G U R E 7 .3, Realtime, pricing, , Optimize, capacity, , Efficient, scheduling, , Increasing Asset, Utilization, , Asset, utilization, , Quick, turnaround, , // Quality Management, An important aspect of product quality is product reliability. A product is said to be reliable, when it consistently does the job it was designed for, does it well, and rarely, if ever, breaks, down. Quality management methodologies try to eliminate defects in the process of producing a good or service, thereby producing a more reliable end product. Product reliability can, be a huge source of cost savings for several reasons (see Figure 7.4). First, if defects are reduced, time and materials are not wasted building products that later have to be scrapped or, reworked. Second, if products perfor m as advertised, the f irm will save on warranty costs., Beyond this, if a f irm’s products are vie wed by customers as more reliab le than those of, competitors, this can be a source of differentiation and lead to superior pricing, greater demand, or some combination of the tw o. When demand g rows due to a superior reputation, for quality, the firm can realize greater scale economies, which lowers costs., , Increased, productivity, , Lower rework, and scrap costs, Improved, product reliability, , Lower costs and, higher profitability, Lower, warranty costs, , Improved, reputation, , Greater, sales volume, , Scale, economies, , F I G U R E 7 .4, Superior Product, Reliability and Costs, , hiL30123_ch07_156-179.indd 167, , 10/30/06 10:23:11 PM

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168, , ■, , Quality at Toyota., , TABL E 7 .1, Deming’s Quality, Improvement Steps, , hiL30123_ch07_156-179.indd 168, , PART 2 // Strategizing, , Thus superior product quality , measured b y reliability, can be a source of competiti ve, advantage. Over the last quarter of a century, for example, the rise of Toyota in the global auto, industry has in part been due to the company’s superior reputation for product quality, which has, been an enduring source of differentiation enabling it to charge premium prices across its model, range and gain market share. According to surveys Toyota still has the best quality rankings in, the industry. In 2004 J .D. Power’s Vehicle Dependability Study, which measures quality after, cars have been on the mark et for three y ears, ranked Toyota number one with 207 prob lems, reported per 100 vehicles, compared to an industr y average of 269. J.D. Power’s Initial Quality, Study, which measures problems reported in the first 90 days after sale, similarly ranked Toyota, number one in terms of quality, with a score of 101 against an industry average of 119.16, The principal tool that many managers now use to increase the reliability of their products is, the six sigma quality improvement methodology. The six sigma methodology is a direct descendent of the total quality management (TQM) philosoph y that w as widely adopted, f irst by, Japanese companies and then by American companies, during the 1980s and early 1990s.17 The, TQM concept was developed by a number of American management consultants, including W., Edwards Deming, Joseph Juran, and A. V. Feigenbaum.18 Originally these consultants won few, converts in the United States. However, managers in Japan embraced their ideas enthusiastically, and even named their premier annual prize for manuf acturing excellence after Deming. See, Table 7.1 for Deming’s steps that should be part of any quality improvement program., It took the rise of Japan to the top rank of economic po wers in the 1980s to aler t Western, business to the importance of the TQM concept. Since then quality improvement methodologies, have spread rapidly throughout Western industry. The six sigma methodology that was the focus, of the opening case is widely used today. The term sigma comes from the Greek letter that statisticians use to represent a standard deviation from a mean: The higher the number of sigma, the, fewer the errors. A six sigma production process would be 99.99966 percent accurate, creating, just 3.4 defects per million units.Although it is almost impossible for a company to achieve such, a low defect rate, the idea behind a six sigma program is to strive toward that goal., The six sigma methodology is based on what is known as DMAIC, which stands for d efine,, m easure,a nalyze, improve, and c ontrol.19 With DMAIC a problem is f irst defined and quantified; then measurement data are collected to bound and clarify the problem; analytical tools are, deployed to trace the prob lem to its root cause; a solution to the root cause is identif ied and, implemented; and f inally the ongoing operations are subject to ongoing control to pre vent a, recurrence. Six sigma projects are perfor med by teams that are led b y “black belts,” who are, specially trained six sigma experts. Projects normally take three to six months, and a black belt, should be able to lead four to six projects a year. The power of the six sigma approach lies in the, disciplined methodology it provides for structuring, analyzing, and solving business problems., , Deming identified a number of steps that should be part of any quality, improvement program:, 1. A company should have a clear business model to specify where it is going, and how it is going to get there., 2. Management should embrace the philosophy that mistakes, defects, and poorquality materials are not acceptable and should be eliminated., 3. Quality of supervision should be improved by allowing more time for, supervisors to work with employees and giving them appropriate skills for, the job., 4. Management should create an environment in which employees will not fear, reporting problems or recommending improvements., 5. Work standards not only should be defined as numbers or quotas but should, also include some notion of quality to promote the production of defect-free, output., 6. Management is responsible for training employees in new skills to keep pace, with changes in the workplace., 7. Achieving better quality requires the commitment of everyone in the company., , 10/30/06 10:23:11 PM

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Managing Operations \\ CHAPTER 7, , 169, , Six sigma is a logical problem-solving methodology that in many ways is akin to detective, work. Often six sigma analysis can turn up surprising root causes for a specif ic problem. In, one such case a pharmaceutical company was experiencing rapid growth in demand for a new, drug, but the drug’s manufacturing line had low yields. Management thought the problem lay, in poor-quality raw material from a supplier. However, six sigma analysis uncovered the real, cause of the problem: variation in the temperature in dif ferent parts of the production plant., Adjusting the air conditioning system to mak e sure the entire plant operated at the same, standard temperature impro ved yields b y 60 percent and sa ved the compan y more than, $17 million a y ear. Moreover, the improved yield let the compan y postpone a $500 million, investment in another production facility.20, Despite many e xamples of success, quality impro vement practices are not uni versally, accepted. A study b y the American Quality Foundation found that onl y 20 percent of U .S., companies re gularly re view the consequences of quality perfor mance, compared with, 70 percent of Japanese companies. 21 Another study, this one b y Arthur D. Little, of 500, American companies using TQM found that only 36 percent believed that TQM was increasing, their competitiveness.22 A prime reason for this, according to the study, was that many companies did not fully understand or embrace the TQM concept. They were looking for a quick fix,, whereas implementing a quality improvement program is a long-term commitment., , // Managing Inventory, Inventories are material inputs into a production process and the f inished products that an, organization holds in anticipation of future sales. Although many organizations have to hold, inventories, they tend to be a major cost dri ver in manufacturing and retailing organizations., For manufacturing enterprises, inventories take three basic forms: inventories of inputs into a, production process, inventories of work in progress, and inventories of finished goods. For an, automobile manufacturer, inventories of inputs include the component parts it must buy from, suppliers to make its cars; inventories of work in progress include partly assembled automobiles that are still progressing through the automobile plant; and inventories of finished goods, include unsold cars sitting on dealers’ lots. F or a retailer , inventories include the stock of, unsold goods sitting in storage or on store shelves., The most obvious component of inventory-driven costs is inventory holding costs. which, include both the capital cost of money tied up in inventory and the cost of the warehouse space, required to store inventory. In addition, other costs are associated with holding excess inventory., For example, in the personal computer industry the prices of components can drop significantly, over the space of a few months. If a manuf acturer purchases too much inventory of a memory, chip, and the price subsequently drops by 40 percent before most of that inventory is used, component devaluation costs will be associated with having purchased too much product too soon., Similarly, if a manuf acturer produces too much of a par ticular computer model and has to reduce prices to shift unsold inventory, a price reduction cost must be borne (this is the difference, between the planned price and the actual price). In the case of excess production, some products, might also be returned to the manufacturer from the retailer because they were not sold ( return, costs), and the firm might have to write off the value of some finished goods that have become, obsolete (obsolescence costs). But there are also costs associated with having too little inventory., The inability to make goods due to shortages of component parts and finished products creates, stockout costs, which are the opportunity costs associated with lost business., The total inventory-driven costs of an enter prise are thus the sum of holding costs,, component devaluation costs, price reduction costs, retur n costs, obsolescence costs, and, stockout costs. The actual magnitude of in ventory-driven costs will v ary depending on the, nature of the business, but the y can constitute a signif icant percentage of the o verall cost, structure of an enter prise. One study of He wlett-Packard, for example, found that before it, adopted inventory reduction programs, the total inventory-driven costs in its mobile computer, division amounted to 18.7 percent of revenue (the study did not measure stockout costs).23, Given the importance of inventory-driven costs as a component of the overall cost structure of, an enterprise, managers often de vote considerable attention to for mulating and implementing, , hiL30123_ch07_156-179.indd 169, , inventory holding, costs, The capital cost of money, tied up in inventory and the, cost of the warehouse, space required to store, inventory., , ■ Dell Computer: Inventory, turnover., , 10/30/06 10:23:12 PM

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170, , PART 2 // Strategizing, , strategies for reducing the amount of inventory an organization, has to hold. One goal often embraced is to have inventory arrive, just in time to enter a production process or be placed on a, store shelf for sale. The success of managers at doing this can, be assessed by inventory turnover, which is normally measured by the number of days it takes to totally replace inventory., Different businesses will turn over inventory at different rates., Wal-Mart, which is one of the most ef ficient retailers when it, comes to inventory management, turns over its inventory every, 45 days. Dell, which is the most efficient company in the personal computer industr y, tur ns over its in ventory every two, days! At Dell the mantra is to “replace inventory with information,” meaning that the only inventory Dell wants is that in transit between suppliers and Dell’s assembly operations., Asset or Liability? Inventory sitting on shelves in a, The bottom line is that if in ventory can be tur ned over, warehouse can be expensive. Just-in-time inventory, more often, in ventory-driven costs will be signif icantly, management systems are designed to minimize inventory, reduced. The business will have less capital tied up in invenand reduce inventory holding costs. The goal is to get rid of, tory, it will need less space to store in ventory, and it will be, warehouses like these., far less lik ely to suf fer other in ventory-driven costs. As a, © Stock Trek/Getty Images, result, its profitability should be significantly higher. Indeed,, superior management of inventory is widely recognized as a, principle source of competitive advantage at both Wal-Mart and Dell and a major reason why, just in time, both of those enter prises are on the efficiency frontier in their respective industries. So how, Inventory that enters a, can managers increase inventory turnover and reduce inventory-driven costs?, production process just in, time to be used., , // ECONOMIC ORDER QUANTITY AND SETUP TIME, , inventory turnover, The speed with which, inventory is replaced., , One starting point of inventory analysis is to determine how much inventory should be held., A widely used algorithm, called economic order quantity (EOQ), helps managers to do this., EOQ is defined as follows:, EOQ ⫽ (2 ⫻ D ⫻ FC) (VC ⫻ K), where:, D ⫽ Annual demand, FC ⫽ Fixed costs of producing/procuring inventory, VC ⫽ Variable costs of inventory, K ⫽ Inventory holding costs, For illustration, suppose the manager of an automobile assemb ly plant has to decide ho w, many right door panels to order from the body stamping shop at a time. The factory produces, 200,000 cars a y ear, so total annual demand for the door panels is 200,000. The fixed cost of, setting up equipment in the stamping shop to produce the panels is $10,000, and the v ariable, cost of each panel is $50. The inventory holding costs (the costs associated with the capital tied, up in the inventory and the cost of warehousing) are 20 percent of the variable costs. Then, EOQ ⫽ (2 ⫻ 200, 000 ⫻ 10, 000) (50 ⫻ 0.20) ⫽ 20, 000, This algorithm tells the manager that the economical batch size is 20,000 units, (see Table 7.2 ). The factory consumes 200,000 right door panels a y ear, so she will ha ve to, reorder 10 times a year (200,000 divided by 20,000). Because there are 365 days in a year, she, , hiL30123_ch07_156-179.indd 170, , 10/31/06 5:10:28 PM

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Managing Operations \\ CHAPTER 7, , EOQ, , Annual, Demand, , Fixed, Costs, , 20,000, 15,492, 8,944, 6,325, 2,000, 632, , 200,000, 200,000, 200,000, 200,000, 200,000, 200,000, , $ 10,000, $ 6,000, $ 2,000, $ 1,000, $, 100, $, 10, , Variable, Costs, 50, 50, 50, 50, 50, 50, , Holding, Costs, , Inventory, Turnover, (days), , Inventory, Holding, Costs, , 20%, 20%, 20%, 20%, 20%, 20%, , 36.5, 28.3, 16.3, 11.5, 3.7, 1.2, , $ 100,000, $ 77,460, $ 44,721, $ 31,623, $ 10,000, $ 3,162, , 171, , TA B LE 7 .2, EOQ and Inventory, Holding Costs with, Different Fixed Costs, , should reorder every 36.5 days (365 divided by 10). In other words, under this ordering system, the inventory would turn over every 36.5 days., We can also use the algorithm to calculate the cost of holding the in ventory, which is the, holding costs, K, times the v ariable cost, VC, times half of the EOQ . (We are assuming that, the inventory is depleted at a steady rate and the new inventory arrives just as the inventory in, storage is depleted, so that the a verage inventory in storage is half of the EOQ .) Thus the, inventory holding costs are, 1, Inventory holding costs ⫽ K ⫻ VC ⫻ _2 (EOQ), ⫽ 20% ⫻ $50 ⫻ _1 (20,000units), 2, , ⫽ $100,000, So far so good! However, if the goal of the f irm is to maximize prof itability, the manager, should see the $100,000 in in ventory holding costs as something to be reduced. This was, exactly the issue that confronted Ohno Taiichi, the engineer at Toyota who pioneered the, development of flexible production systems in the compan y. Ohno’s solution was to reduce, the f ixed costs of setting up equipment to produce in ventory (FC). As can be seen from, Table 7.2 , which shows the EOQ and in ventory holding costs using dif ferent assumptions, regarding fixed costs, the impact of this can be quite dramatic. If the fixed cost can be reduced, from $10,000 to just $1,000, for example, the EOQ falls to 6,325 units, and inventory holding, costs decline to $31,623. As discussed earlier, at Toyota Ohno and his team reduced setup, times (which drive fixed costs) from a day down to minutes. The effect was to boost inventory, turnover and reduce inventory holding costs. The last row in Table 7.2 is a good analogy for, what Ohno achie ved by his de velopment of fle xible manufacturing technology: The f ixed, costs associated with setting up machiner y were reduced to almost zero (just $10 in our, example), EOQ batch size fell to about a da y’s worth of inventory, and holding costs became, trivial ($3,162 in our example). As a result, Toyota’s profitability increased., , // JUST-IN-TIME INVENTORY SYSTEMS, By pioneering attempts to reduce setup times, Ohno not only invented a flexible manufacturing technology, but also created the concept of just-in-time in ventory. When the f ixed costs, associated with setting up equipment to produce a component par t can be reduced to almost, zero, the parts can be produced economically in very small batches and enter the production, process almost immediately—in essence, just in time for them to be used. To coordinate the, flow of materials within Toyota, Ohno developed another process inno vation known as the, kanban system. Under the kanban system, component par ts were delivered to the assemb ly, line in containers. As each container was emptied, it was sent back to the previous step in the, manufacturing process. This became the signal to make more parts., At Toyota the just-in-time system was originally developed in-house, but over time it was, also extended to embrace most of the compan y’s suppliers. Toyota helped its suppliers adopt, flexible manufacturing technologies and the kanban system. Man y of these suppliers located, , hiL30123_ch07_156-179.indd 171, , ■ Toyota: Just-in-time, inventory., , 10/30/06 10:23:13 PM

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172, , ■ Dell Computer: Just-in-time, inventory., , buffer stocks, Inventories held for some, unexpected contingency., , build-to-stock, Stocking a distribution, channel in the anticipation, that a customer will, purchase those products., build-to-order, Taking an order first, and, then building the product., , hiL30123_ch07_156-179.indd 172, hiL30123_ch07_156-179.indd 172, , PART 2 // Strategizing, , their plants adjacent to Toyota’s assembly operations to reduce the amount of in ventory in, transit as much as possible. By doing this Toyota was able to extend the gains from in-house, inventory reductions to its entire suppl y chain, w hich reduced the costs it had to pa y for, component parts from suppliers and therefore its overall cost structure., Toyota’s just-in-time model has no w been replicated in man y or ganizations and, as at, Toyota, has often been e xtended to e ven those with globall y dispersed suppl y chains. In a, 21st-century variant of the kanban system, Dell Computer electronicall y shares information, regarding the orders it recei ves through its Web site on a real-time basis with its suppliers., This helps Dell’s suppliers optimize their own production schedules and inventory, producing, just what Dell needs. The flow of parts in transit, whether via ship, plane, or tr uck, is tightly, controlled and synchronized so par ts arrive at Dell’s assembly plants just in time to enter the, manufacturing process., As at Dell, moder n infor mation systems and fle xible manuf acturing technologies have, made it easier for other or ganizations to adopt just-in-time in ventory systems. Fle xible, technologies mean that more goods can no w be economically produced in smaller lot sizes., Bar code scanning of in ventory, along with Inter net-enabled data links betw een a f irm, its, suppliers, and transpor tation providers shipping inventory, have made it possib le to tightl y, control the flow of inventory, which reduces inventory-driven costs., Just-in-time systems are also impor tant for retailers. If inventory arrives at a store just in, time to be placed on the shelf for sale, the store does not ha ve to de vote space to holding, inventory (reducing in ventory holding costs), w hich means more space can be de voted to, displaying goods for sale. Moreover, just-in-time delivery of goods means the retailer is less, likely to be left with inventory that it cannot sell or has to mark down, thereby avoiding price, reduction and obsolescence costs., A final tangible benefit associated with just-in-time systems is that defective parts show up, in the production process soon after they have been made. This makes it easier to identify and, fix the source of the defect than if the par ts had been stored in a w arehouse for an extended, period. In effect, just-in-time inventory systems help managers impro ve product quality b y, eliminating defects from the production process., The biggest drawback with just-in-time systems is that they eliminate inventory buffers., Buffer stocks of inventory are inventories held for some une xpected contingency—for, example, if the equipment in a supplier’s plant breaks down and has to be replaced. If no, buffer stock is held in reser ve, the entire assemb ly operation could stop w hile the f irm, waited for its supplier to f ix equipment. As insurance ag ainst such contingencies, some, organizations keep buffer stocks of inventory on hand—perhaps a few days’ more supply, than the y need. Of course doing so raises in ventory-driven costs. Managers in some, organizations, such as Dell, have decided to operate without such buffer stocks. This means, that from time to time, w hen unanticipated e vents occur, they may have to scramb le to, solve a sudden shortage of inventory. This happened to Dell twice in the early 2000s: once, after the terrorist attacks on the United States on September 11, 2001, and once during the, outbreak of the SARS vir us in China during 2003. Although the total shutdo wn of por ts, and air ports in the after math of September 11 hur t Dell, it w as ab le to adapt to the, slowdown of supplies from China by reconfiguring its supply chain, pulling supplies from, ships and flying them directly to the United States., , // BUILD TO ORDER AND INVENTORY, A f inal way of reducing inventory-driven costs is to move from a build-to-stock business, model toward a build-to-order business model. In a build-to-stock model, a business, makes products to stock the distribution channel in the anticipation that customers will, purchase those products. Thus General Motors builds cars to stock dealers’ lots, HewlettPackard builds personal computers to stock the shelv es of electronic retailers, and Le vi, makes jeans to stock the racks of clothing retailers. In a build-to-order model a firm, takes an order f irst and then builds the product. When Lands’ End sells customized shir ts, and pants over the Internet, it is adopting a build-to-order strate gy—as does Dell when it, , 11/9/06 7:46:43 PM, 11/9/06 7:46:43 PM

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Managing Operations \\ CHAPTER 7, , takes customer orders for personal computers o ver the Inter net, or Boeing w hen it takes, orders to build commercial jet aircraft., Build-to-order systems have two big advantages over build-to-stock systems. First, because, the company knows exactly how much of an item it will sell in adv ance of production, it can, order just enough par ts for orders in hand. Second , a build-to-order system eliminates the, problems associated with building too lar ge or too small an in ventory of f inished products., Thus the f irm does not ha ve to mark do wn products to shift unsold in ventory and does not, suffer stockout costs. Under a build-to-order system the f irm does not ha ve to guess w hat, demand will be, so it can closel y align supply and demand and reduce its in ventory-driven, costs., With these adv antages, you might wonder why all f irms don’t build to order . There are, several reasons. First, building to order normally implies smaller production lots, which may, drive up costs, particularly for products where mass production is still the best manufacturing, method (such as making toothpaste). Second , consumers may not w ant to order indi vidual, items, instead preferring to walk into a store and purchase w hat they want (nobody wants to, place a special order for toothpaste). Third, it generally takes a while to build products to or der, and consumers may not want to wait. (Who wants to wait two weeks for toothpaste to be, delivered?), Finally, le gacy considerations ma y mak e it dif ficult for a business to mo ve from, a build-to-stock to a build-to-order business model. For example, Hewlett-Packard (HP) would, love to run its personal computer business entirely on a build-to-order basis, as Dell does, basing production on orders coming in over the company Web site. However, HP has a vast network of dealers that cur rently sell its products. If HP shifted to a Web-based build-to-order, system overnight, its sales would probably slump because the increase in Web sales would not, likely offset the decline in sales through traditional retail channels. Interestingl y, HP is starting to move toward a build-to-order model and now sells personal computers via the Web; but, , 173, , ■ Hewlett-Packard: Build to, order., , Build Your Own Car Toyota is moving to a build-to-order system for its cars., Courtesy of Toyota Motor Sales, USA, Inc., , hiL30123_ch07_156-179.indd 173, , 10/30/06 10:23:13 PM

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174, , PART 2 // Strategizing, , it still distributes the v ast majority of its personal computer products through traditional, channels., As with HP, many manufacturing enterprises, particularly those that mak e large durable, products, are trying to move toward a build-to-order business model, or at least increase the, proportion of their sales that come this way. The rise of flexible manufacturing systems, with, their implications for mass customization, has made build-to-order systems more economical., Several automobile companies are experimenting with a build-to-order approach in an attempt, to eliminate the problems that arise from inventory overstocking or understocking. Nissan has, calculated that if it could mo ve to a build-to-order system with a shor t cycle time, it could, reduce costs by as much as $3,600 a v ehicle.24 In Germany, BMW now builds 60 percent of, its cars to order, but the delivery time can be as long as tw o months. Toyota, too, is trying to, build more cars to order . In late 2004 the automak er claimed that it w as building about, 11 percent of the cars it sold in the United States to order, with a build time of just 14 days.25, , // Supply Chain Management and Information Systems, supply chain, The chain of suppliers that, provides raw materials,, partly finished products, or, finished products to an, organization., , hiL30123_ch07_156-179.indd 174, , The supply chain of an or ganization is the v ertically integrated chain of suppliers that, provides raw materials, par tly f inished products, or f inished products to an or ganization., Wal-Mart’s supply chain, for e xample, includes all or ganizations that supply the products it, sells in its stores. Similarl y, Dell’s suppl y chain includes all enter prises that mak e the, component parts for its assembly operations., The central task in suppl y chain management is to synchronize the flo w of products, from suppliers, through transpor tation networks, to the f irm, and then out to the f irm’s, customers, so that inventory is minimized and capacity utilization is optimized. One w ay, in which managers tr y to improve supply chain coordination is to ha ve suppliers locate, close to their own operations. Many of Toyota’s suppliers, for example, locate their plants, next to Toyota’s assembly operations, making it easier to implement just-in-time inventory, systems. However, in today’s global economy, this is not always desirable. Many suppliers, have moved production facilities to low-cost locations such as China, Malaysia, or Mexico, to take advantage of low labor costs. Indeed, the demands of a firm for lower-priced inputs, may force them to do this. Thus many of Wal-Mart’s suppliers have established production, facilities in China to better serve the giant retailer’s demands for lower prices., As a result of such trends, in recent decades the suppl y chains of man y enterprises have, stretched out geographically. Coordinating such globally dispersed supply chains is a major, challenge for operations managers., Fortunately Web-based information systems give operating managers tight control over, such dispersed supply chains. By tracking component parts through a supply chain, information systems let a f irm optimize its production scheduling according to w hen components are e xpected to ar rive. By locating component par ts in the suppl y chain precisely,, good information systems allow a f irm to accelerate production w hen needed by pulling, key components out of the regular supply chain and having them flown to the manufacturing plant., Firms increasingly use electronic data interchange (EDI) to coordinate the flow of materials into manuf acturing, through manuf acturing, and out to customers. EDI systems require, computer links between a f irm, its suppliers, and its shippers. Sometimes customers also are, integrated into the system (as in Dell’s build-to-order system). These electronic links are used, to place orders with suppliers, register parts leaving a supplier, track them as they travel toward, a manufacturing plant, and re gister their ar rival. Suppliers typically also use an EDI link to, send invoices to the purchasing f irm. One consequence of an EDI system is that suppliers,, shippers, and the purchasing firm can communicate with each other with no time delay, which, increases the fle xibility and responsi veness of the w hole supply system. A second consequence is that much of the paperwork between suppliers, shippers, and the purchasing firm is, eliminated., Before the emergence of the Internet as a major communication medium, f irms and their, suppliers normally had to purchase e xpensive proprietary software solutions to implement, , 10/30/06 10:23:14 PM

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Managing Operations \\ CHAPTER 7, , 175, , EDI systems. The ubiquity of the Internet and the availability of Web-based applications have, made most of these proprietary solutions obsolete. Less expensive Web-based systems that are, much easier to install and manage no w dominate the mark et for supply chain management, software. These Web-based systems are rapidl y transfor ming the management of suppl y, chains, allowing even small f irms to achie ve a much better balance betw een supply and, demand, thereby reducing the inventory in their systems and reaping the associated productivity benefits. With increasing numbers of f irms adopting these systems, those that don’ t may, find themselves at a significant competitive disadvantage., , // Product Development and Productivity, The creation and commercialization of ne w products for m a central mission in man y, organizations. Indeed, without a po werful new product development engine, many businesses would ultimately go into decline as their products are made obsolete by the advances, of others. Computer companies, wireless phone companies, and consumer electronics, concerns must re gularly produce smaller , better, cheaper, f aster new products—or lose, market share. Automobile companies ha ve to de velop new models and update their old, ones—or lose share. Pharmaceutical companies have to develop new drugs to replace those, that come of f patent and go generic, or their g rowth will f alter. Frozen food companies, must produce better food that contains superior ing redients, tastes good , and can be, prepared easily—or lose share to competitors. Breakfast cereal companies have to develop, new brands to increase their mark et share, as K ellogg’s has recentl y done with its ne w, varieties of Special K that contain freeze-dried fr uit. Nor is it just manuf acturing companies that must develop new products. For example, one way that financial institutions compete is by developing new financial products that they can use to attract business, asMerrill, Lynch did in the early 1990s when it created the first cash management accounts that combined a traditional brokerage account with the features of a checking account to gi ve customers greater financial flexibility. In short, creating new and better products is how many, firms dif ferentiate their of ferings from those of competitors and g ain competiti ve, advantage., Product development is so impor tant for so many businesses that we devote a signif icant, part of Chapter 18 to discussing the product development process and what managers can do, to manage that process ef fectively and ef ficiently. Here w e note that if a f irm wishes to, increase productivity and reach the efficiency frontier in its industry, it must design products, that can be manufactured easily., Design for manufacturing is a philosophy that tries to increase productivity by designing products that are easy to manuf acture. For example, by cutting the number of par ts that, make up a product, R&D can dramatically decrease the required assembly time, which translates into higher employee productivity, lower costs, and higher prof itability. After Texas Instruments redesigned an infrared sighting mechanism that it supplies to the P entagon, it had, reduced the number of par ts from 47 to 12, the number of assemb ly steps from 56 to 13, the, time spent fabricating metal from 757 minutes to 219 minutes per unit, and unit assembly time, from 129 minutes to 20 minutes. The result was a substantial decline in production costs. In, another recent example, Toyota took a close look at the grip handles mounted above the doors, inside most cars. By working closely with suppliers Toyota managed to reduce the number of, parts in these handles from 34 to 5, w hich cut procurement costs by 40 percent and reduced, installation time from 12 seconds to 3 seconds.26, Design for manuf acturing requires close coordination betw een the production and R&D, functions of the company. R&D and production personnel have to work concurrently on product design issues so that production issues are foremost in the minds of product de velopment, engineers when they design new products. The creation of cross-functional teams that contain, production and R&D personnel w ho work jointly on design prob lems is a popular w ay of, achieving this. We discuss the management of cross-functional product development teams in, more detail in Chapter 18., , hiL30123_ch07_156-179.indd 175, hiL30123_ch07_156-179.indd 175, , ■ Product development at, Kellogg’s., , design for, manufacturing, Trying to increase, productivity by designing, products that are easy to, manufacture., , 11/9/06 7:46:43 PM, 11/9/06 7:46:43 PM

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176, , PART 2 // Strategizing, , IN CONCLUSION, , WHY DOES IT MATTER?, , As we have seen, managing operations is a central task of an organization. The, skilled and effective management of operations can increase productivity and lower, costs, enabling a firm to outperform rivals and reach the efficiency frontier in its, industry. The competitive advantage of many enterprises is based on their superior, operating capabilities—their ability to achieve operating excellence—which in turn is, the result of hard work by managers at the operating level., By configuring the firm’s production system, adopting flexible production technologies, and pioneering process innovations, operating managers can lower costs. Productivity can be further enhanced by taking actions to make sure the physical assets of an, organization are fully utilized by, for example, optimizing capacity investments, production scheduling, and turnaround time. Quality improvement methodologies such as six, sigma and various techniques for inventory management can lower costs even further,, as can the efficient management of supply chains and designing products that are easy, to manufacture., Effective operations management can also help a firm better differentiate its, product offering. Mass customization, which is made possible by modern flexible, production technologies, can increase customer loyalty and repeat purchases., Customers keep coming back because they can get products that are perfect for, their particular needs. Efficient management of inventory, by making sure the firm, does not suffer stockouts, also keeps customers coming back to an organization, because they can be confident the firm will have the products they are looking, for in stock. And finally, by boosting product reliability, quality improvement methodologies such as six sigma increase the quality that consumers ascribe to the firm’s, product offering—and therefore its ability to differentiate that offering from that of, rivals., In short, effective operations management is clearly key to establishing competitive, advantage. Moreover, improving the efficiency of operations over time is how a firm, stays ahead of rivals and sustains its competitive advantage., , MANAGEMENT CHALLENGES, 1., 2., , 3., , 4., 5., , hiL30123_ch07_156-179.indd 176, , “Inventory is the enemy of efficiency.” Discuss this statement. Is it always true?, What are the key drivers of operating efficiency in the supermarket business?, (Think about this the next time you visit a supermarket.) What operating strategies, should managers at supermarkets pursue to reach the efficiency frontier in their, industry?, How important is the utilization of physical assets in driving down costs in the steel, industry, the airline industry, and the computer software industry? What accounts for the, differences in importance across these industries?, What are the benefits of having a globally dispersed supply chain? What are the risks?, How can information systems enhance the benefits and reduce the risks?, How might a build-to-order strategy, if successfully implemented, change the economics, of the automobile industry? What is required at the operating level for such a strategy to, work?, , 10/30/06 10:23:15 PM

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Managing Operations \\ CHAPTER 7, , 177, , MANAGEMENT PORTFOLIO, FOR THE ORGANIZATION YOU HAVE CHOSEN TO FOLLOW:, 1., 2., , 3., , 4., , Is this firm efficiently run at the operating level? What is your evidence? (Hint: One, way of getting at this is comparing the firm against its competitors.), Are there any ways in which the firm might be able to improve its operating, efficiency? If so, what operating strategies could it pursue, and how might they, enhance the competitiveness of the enterprise?, If the firm is a manufacturing enterprise, could the firm implement a build-to-order, strategy? What would be the benefits of doing so? What would it have to do to, deliver on that strategy? (If the firm already has a build-to-order strategy, outline the, benefits and state how it implemented that strategy)., If the firm is a service enterprise, is its product offering standardized or customized, to individual customers or customer groups? Are there benefits to increasing product, customization? What operating process would have to be put in place to do that?, , CLOSING CASE, , IMPROVING PRODUCTIVITY IN THE AUTO INDUSTRY, , In 2004 Detroit’s big three car makers—GM, Ford, and Daimler, Chrysler—accounted for only 58.6 percent of vehicles sold in, the United States, the lowest level ever, down from 76.7 percent, in 1984. F or most of the last decade strong sales of spor ts, utility vehicles, in which Detroit dominates, have held overall, market share losses in check; but now foreign producers such, as Toyota, Honda, and Kia are going after that segment too,, creating huge potential problems for Detroit., The American automobile makers have responded by trying to reinvigorate their passenger car business, coming out, with a host of new designs and cutting the costs ofdeveloping, and producing those cars. The old r ule of thumb in the industry was that it took four y ears and cost $1 billion to design a ne w car and tool a f actory to produce it. To recoup, these costs, Detroit would typically sell a car for seven years, before de veloping a ne w design. Unfor tunately for the, American producers, the Japanese ha ve shor tened the life, cycle of a typical vehicle to f ive years; and by lowering development and tooling costs, the y have been ab le to mak e, good money on their car models., Now the American producers are tr ying to strik e back., Typical is Ford, which has reduced its product de velopment, time b y a quar ter since the late 1990s and continues to, reduce development time by 10 percent per y ear. Ford now, designs almost a third of its models in less than 30 months., One reason for this pro gress has been the increase in, communication among designers at F ord. Ford designers, used to w ork in dif ferent teams and did not share enough, , hiL30123_ch07_156-179.indd 177, , knowledge about parts and platform design. Now teams get, together to see how they can share the design work., Moreover, design teams are trying to use the same parts in a, wider variety of car models, and w here appropriate use par ts, from old models in ne w cars. Detroit auto designers used to, boast that new models were completely redesigned from the, floor up with all new parts. Now that is seen as costly and timeconsuming. At General Motors, for example, the goal is now to, reuse 40–60 percent of par ts from one car generation to the, next, thereby reducing design time and tooling costs. At Ford, the number of parts has been slashed. For example, Ford engineers now choose from just 4 steering w heels instead of contemplating 14 different designs., Another important trend has been to reduce the number, of platfor ms used for car models. This is something, Japanese producers have long done. Honda, for e xample,, builds its Odysse y mini van and Pilot and Acura MDX, SUVs on the same platform and has added a pickup truck, to the mix. Cur rently Chr ysler bases its v ehicle fleet on, 13 distinct platforms. The company is trying to bring this, down to just four platfor ms, reducing the product de velopment budget from $42 billion to $30 billion in the process. Ford and General Motors ha ve similar aims. The, platform for GM’ s ne w small car of fering, the P ontiac, Solstice, will also be used for its ne w Satur n coupe and, perhaps one more GM car. As GM develops its next generation Chevy Silverado and GMC Sierra pickups, it plans, to reuse much of the existing platform, cutting development, , 10/30/06 10:23:15 PM

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178, , PART 2 // Strategizing, , costs in half to nearly $3 billion. Over the next eight years, Ford plans to use its Mazda 6 sedan platform (Ford owns, Mazda) as the basis for 10 new vehicles. The idea, according to Ford’s head of operations, is to engineer it once and, use it often., Along with these changes in design philosoph y, the, Detroit companies are retooling their f actories to reduce, costs and mak e them capab le of producing se veral car, models from the same line. By doing so the y hope to reduce the break even point for a ne w car model. GM’ s, Solstice, for e xample, is forecast to sell around 25,000, units a year—too few to recoup f ixed costs under the old, design and build philosophy. But GM has cut design costs, (by using a common platform and parts) and tooling costs, (by investing in fle xible manufacturing technologies that, can produce multiple designs based on the Solstice platform from the same basic line). GM has also worked hard, to get unions to ag ree to changes in inflexible work rules., Assembly-line workers now perform several different jobs,, which reduces w aste and boosts producti vity. Similarly,, Ford hopes to ha ve 75 percent of its production b uilt on, flexible assembly lines by 2010; if successful, its in vestments in fle xible f actories could reduce annual costs b y, some $2 billion a year., The big prob lem with the ne w vision coming out of, Detroit, as critics see it, is that not much is ne w about it., , The techniques being talked about will reduce development, time and tooling costs; b ut Japanese automakers have been, pursuing the same techniques for years. The critics fear that, Detroit is chasing a moving target, and when they arrive in, the promised land it will be too late because their global, competitors will already have taken competition to the next, level.27, CASE DISCUSSION QUESTIONS, 1. How ha ve lo wer de velopment and tooling costs gi ven, Japanese auto manufacturers an advantage in the marketplace?, 2. What steps are the Detroit automobile mak ers taking to, reduce product de velopment time and tooling costs? If, they are successful, w hat are the implications of these, initiatives for the number of car models they can sell and, breakeven v olumes for indi vidual models? Will these, initiatives benefit Detroit’s customers? How?, 3. The Japanese producers have for years used many of the, methodologies now being introduced in Detroit. Why do, you think it has tak en the Detroit automak ers so long to, respond to their foreign competitors?, 4. If the Detroit companies successfull y implement their, new operating strategies, do you think it will give them a, competitive advantage in the marketplace?, , ENDNOTES, 1. Sources: I.R. Lazarus and K. Butler, “The Promise of Six Sigma,” Managed, Healthcare Executive, October 2001, pp. 22–26; D. Scalise, “Six Sigma, the, Quest for Quality,” Hospitals and Health Networks, December 2001, pp. 41–44;, S.F. Gale, “Building Frameworks for Six Sigma Success,” Workforce, May 2003,, pp. 64–69; J. Goedert, “Crunching Data: The Key to Six Sigma Success,” Health, Data Management, April 2004, pp. 44–48., , (New York: Halstead Press, 1986); Womack, Jones, and Roos, The Machine That, Changed the World; R. P arthasarthy and S.P. Seith, “The Impact of Fle xible, Automation on Business Strate gy and Or ganizational Str ucture,” Academy of, Management Review 17 (1992), pp. 86–111; J.H. Gilmore and B.J. Pine II, “The, Four F aces of Mass Customization, ” Harvard Business Re view, January–, February 1997, pp. 91–101., , 2. Data reported in J. Palmer, “Can Anyone Stop Toyota,” Barron’s, September 13,, 2004, pp. 25–29., , 10. J. Muller, “The Little Car That Could,” Forbes, December 8, 2003, p. 82; “The, Year of the Car,” The Economist, January 3, 2004, p. 47., , 3. T. Copeland, T. Koller, and J. Murrin, Valuation: Measuring and Mana ging the, Value of Companies (New York: Wiley, 1996). Also see S.F. Jablonsky and N.P., Barsky, The Manager’s Guide to Financial Statement Analysis (New York: Wiley,, 2001)., , 11.B.J. Pine, Mass Customization: The Ne w F rontier in Business Competition, (Boston: Harvard Business School Press, 1993); S. Kotha, “Mass Customization:, Implementing the Emer ging Paradigm for Competiti ve Advantage,” Strategic, Management Journal 16 (1995), pp. 21–42; Gilmore and Pine, “The Four Faces, of Mass Customization.”, , 4. Figures computed by the author from Value Line data., 5. A.A. Alchian, “Reliability of Pro gress Cur ves in Airframe Production, ”, Econometrica 31 (1963), pp. 679–93., 6. H. Luft, J. Bunker, and A. Enthoven, “Should Operations Be Regionalized?” New, England Journal of Medicine 301 (1979), pp. 1364–69., 7. S. Chambers and R. Johnston, “Experience Cur ves in Ser vices,” International, Journal of Operations and Production Management 20 (2000), pp. 842–60., 8. M.A. Cusumano, The Japanese Automobile Industry; (Boston, MA: Har vard, University Press, 1989) ;O. Taiichi, Toyota Production System (Cambridge,, MA: Producti vity Press, 1990; Japanese edition, 1978); J .P. Womack, D.T., Jones, and D . Roos, The Mac hine That Chang ed the World (Ne w York:, Macmillan,1990)., 9. See P. Nemetz and L. F ry, “Flexible Manufacturing Organizations: Implications, for Strate gy F ormulation,” Academy of Mana gement Re view 13 (1988),, pp. 627–38; N . Greenw ood, Implementing Flexib le Manufacturing Systems, , hiL30123_ch07_156-179.indd 178, , 12. Sources: J. Schlosser, “Cashing In on the New World of Me,” Fortune, December, 13, 2004, pp. 244–49; V.S. Borland, “Global Technology in the Twenty-First, Century,” Textile World, January 2003, pp. 42–56; www.landsend.com ., 13. M. Hammer, “Deep Change: How Operational Innovation Can Transform Your, Company,” Harvard Business Review, April 2004, pp. 84–94., 14 C.K., ., Swank, “The Lean Service Machine,” Harvard Business Review, October, 2003, pp. 123–32., 15. D. Ber tsimas and S. de Boer , “Dynamic Pricing and In ventory Control for, Multiple Products,” Journal of Revenue and Pricing Management, January 2005,, pp. 303–30., 16. J.D. Power press release, April 28, 2004, “K orean Branded Vehicles Overtake, Europeans and Domestics in Initial Quality”; J.D. Power press release, June 29,, 2004, “T oyota Motor Sales Capture Top Cor porate Rankings in Vehicle, Dependability.”, , 10/31/06 4:01:44 AM

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Managing Operations \\ CHAPTER 7, , 179, , 17.See the articles published in the special issue of the Academy of Mana gement, Review on Total Quality Mana gement 19, no. 3 (1994). The following ar ticle, provides a good o verview of man y of the issues in volved from an academic, perspective: J.W. Dean and D.E. Bowen, “Management Theory and Total Quality,”, Academy of Management Review 19 (1994), pp. 392–418. Also see T.C. Powell,, “Total Quality Management as Competitive Advantage,” Strategic Management, Journal 16 (1995), pp. 15–37., , 24. “Fighting Back (A Sur vey of the Car Industr y),” The Economist, September 4,, 2004, pp. 14–16., , 18.For general backg round infor mation, see “Ho w to Build Quality ,” Economist,, September 23, 1989, pp. 91–92; A. Gabor, The Man Who Discovered Quality, (New York: Penguin, 1990); and P.B. Crosby, Quality Is Free (New York: Mentor,, 1980)., , 26. B. Bremner and C. Da wson, “Can Anything Stop Toyota?” BusinessWeek,, November 17, 2003, pp. 114–17., , 19.M. Hammer, “Process Management and the Future of Six Sigma, ” MIT Sloan, Management Review, Winter 2002, pp. 26–32., 20. Hammer, “Process Management and the Future of Six Sigma.”, 21. J. Bowles, “Is American Management Really Committed to Quality?” Management Review, April 1992, pp. 42–46., , hiL30123_ch07_156-179.indd 179, , 22. O. Port and G. Smith, “Quality,” BusinessWeek, November 30, 1992, pp. 66–75., See also “The Straining of Quality,” Economist, January 14, 1995, pp. 55–56., 23. G. Callioni et al., “In ventory Driven Costs,” Harvard Business Review, March, 2005., , 25. R. Rosmarin, “Your Custom Car Is Ready at Toyota,” Business 2.0, October, 2004, pp. 150–51., , 27. Sources: D. Welch and K. Kerwin, “Detroit Tries It the Japanese Way,” Business, Week, January 26, 2004, p. 76; A. Taylor, “Detroit Buffs Up,” Fortune, February, 9, 2004, pp. 90–94; Muller, “The Little Car That Could”; “The Year of the Car,”, The Economist., , 10/30/06 10:23:16 PM

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8, , // PART 3, Organization Architecture, , LEARNING OBJECTIVES, , ORGANIZING, After Reading This Chapter You Should Be Able to:, 1, , Explain what is meant by organization architecture., , 2, , Explain the advantages and disadvantages of centralization and decentralization., , 3, , Discuss the pros and cons of tall versus flat structures., , 4, , Outline the different kinds of structure a firm can operate within and explain how strategy should, determine structure., , 5, , Describe the different integrating mechanisms managers can use to achieve coordination within a, firm, and explain the link between strategy, environment, and integrating mechanisms., , / / / / / / / / / / / / / / / / / /, , Organization Architecture, Designing Structure:, Vertical Differentiation, Centralization and, Decentralization, Tall versus Flat Hierarchies, Designing Structure:, Horizontal Differentiation, Functional Structure, Multidivisional Structure, Geographic Structure, Matrix Structure, , hiL30123_ch08_180-205.indd 180, hiL30123_ch08_180-205.indd 180, , Designing Structure:, Integrating Mechanisms, Formal Integrating Mechanisms, Informal Integrating, Mechanisms: Knowledge, Networks, Strategy, Coordination, and, Integrating Mechanisms, In Conclusion: Why Does It, Matter?, Management Challenges, Management Portfolio, Closing Case: Dow Chemical, , 10/31/06 9:40:08 PM, 10/31/06 9:40:08 PM

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Organizing \\ CHAPTER 8, , 181, , Pay for Performance, Is in Our Nature, Managers at Nucor, Steel believe that the, competitive, advantage of the, company is rooted in, its flat decentralized, structure, pay for, performance systems,, and organizational, culture—all aspects, of its organization, architecture., Courtesy of Nucor, Corporation, , / / / / / / / / / / / / / / / / / /, , N, , ucor Corporation, a manufacturer of steel and, steel products, is something of a phenomenon. In, an industry characterized by shrinking demand, excess, capacity, tough pricing, and persistent losses that have, driven some of the most venerable steelmakers in the, United States into bankruptcy, Nucor has made good, money and grown its sales and profits steadily for over, 30 years. Today Nucor is both the largest steelmaker in, the United States and the most profitable. How did the, firm get to be this way? Part of the answer is that Nucor, was an early investor in minimill technology, a smallscale steelmaking technology that uses electric arc, furnaces to smelt scrap steel. However, Nucor is hardly, , hiL30123_ch08_180-205.indd 181, hiL30123_ch08_180-205.indd 181, , alone in this; many other steelmaking enterprises use, minimill technology. What distinguishes Nucor is its, organization architecture—including a flat organization, structure, a tradition of decentralizing decision making, to the lowest level possible, controls and incentive pay, systems that reward the workforce for hitting productivity goals, an egalitarian culture characterized by gain, sharing, and an employee base selected for its ability to, thrive within this environment. Collectively these elements of Nucor’s organization architecture combine to, foster very high employee productivity, which lowers, Nucor’s cost structure and helps the company to record, strong profits while its rivals struggle., , 10/31/06 9:40:10 PM, 10/31/06 9:40:10 PM

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182, , organization, architecture, The totality of a firm’s, organization, including, formal organization, structure, control systems,, incentive systems,, organizational culture,, and people., , PART 3 // Organization Architecture, , In Chapter 6 we noted that strategy is implemented through the organization architecture of a, firm. High perfor mance requires that a f irm’s strategy be suppor ted by the right operations, and the right organization architecture. In Chapter 7 w e reviewed operations strategy. In the, next four chapters we zero in on or ganization, and we discuss how managers can shape the, architecture of their organization to successfully implement the f irm’s strategy and reach, the efficiency frontier in their industr y. Nucor is an e xample of a f irm that has done just, this. Nucor has pursued a low-cost strategy. To make that strategy work, managers at Nucor, designed an organization architecture that has helped raise producti vity and lower costs. In, this chapter w e give a general o verview of or ganization architecture and then focus on an, important element of architecture, or ganization structure. In subsequent chapters we look at, control and incentive systems, or ganizational culture, and de veloping and managing teams, within the context of a specific organization architecture., , // Organization Architecture, organization, structure, The location of decisionmaking responsibilities, in the firm, the formal, division of the organization, into subunits, and the, establishment of, integrating mechanisms, to coordinate the activities, of subunits., controls, Metrics used to measure, the performance of, subunits and to judge how, well managers are running, those subunits., , Theterm organization architecture refers to the totality of a f irm’s or ganization,, including formal organization structure, control systems, incentive systems, organizational, culture, and people. 1 Figure 8.1 illustrates these dif ferent elements. By organization, structure we mean three things: the location of decision-making responsibilities in the, firm (centralized or decentralized); the for mal division of the or ganization into subunits, such as functions, product di visions, and national operations; and the estab lishment of, integrating mechanisms to coordinate the acti vities of subunits (such as cross-functional, teams)., Controls are the metrics used to measure the perfor mance of subunits and judge ho w, well managers are r unning those subunits. Incentives are the de vices used to encourage, desired employee behavior. Incentives are closely tied to performance metrics. For example,, the incentives of a manager in charge of General Electric’s lighting business might be linked, to the perfor mance of that division. We will take a close look at controls and incenti ves in, Chapter 9., Organizational culture refers to the v alues and assumptions that are shared among, the employees of an or ganization. Just as societies ha ve cultures, so do or ganizations., Organizations are societies of indi viduals who come together to perfor m collective tasks., They have their own distinctive patterns of culture and subculture.2 As we will see when we, return to this issue in Chapter 10, organizational culture can have a profound impact on how, , incentives, Devices used to encourage, desired employee, behavior., , Structure, , Controls, , organizational, culture, Values and assumptions, that are shared among the, employees of an, organization., , Incentives, , Culture, , F I GU RE 8. 1, , hiL30123_ch08_180-205.indd 182, , People, , Organization Architecture, , 10/31/06 9:40:12 PM, 10/31/06 9:40:12 PM

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Organizing \\ CHAPTER 8, , 183, , a f irm performs. Finally, by people we mean not just the emplo yees of the or ganization,, people, but also the strategy used to recruit, compensate, motivate, and retain those individuals and, The employees of an, the type of people they are in terms of their skills, values, and orientation—in other words,, organization, the strategy, their human capital (we discuss the people aspects of organization later in the book)., used to recruit,, As illustrated by the arrows in Figure 8.1, the various components of organization architeccompensate, motivate, and, ture are not independent of each other: Each component shapes the others., An ob vious, retain those individuals,, example is the strate gy regarding people. This can be used proacti vely to hire indi viduals, and the type of people they, whose internal values are consistent with those the f irm wishes to emphasize in its organizaare in terms of their skills,, tional culture. The people component of architecture can be used to reinforce the pre vailing, values, and orientation., culture of the organization., If a business enter prise to going to attain a competiti ve advantage and maximize its, performance, it must pa y close attention to achie ving inter nal consistency between the, various components of its architecture, and the architecture must suppor t the strategy and, operations of the f irm. For illustration, let’s return to the example of Nucor Cor poration., As noted earlier, Nucor operates in a v ery tough industr y that has been characterized b y, decades of sluggish demand, excess capacity, and price competition. Whereas many U.S., steelmakers have gone bankrupt in the last decade, Nucor’s performance has been exem- ■ Organization architecture at, Nucor., plary. Between 1994 and 2005 sales re venues g rew from $2.9 billion to $12.7 billion;, earnings per share increased from $1.30 to $8.26; and the company’s profitability, measured, by ROIC, has averaged around 13.5 percent. Ho w did Nucor achie ve this strong perfor mance in such a hostile environment?, The short answer is that Nucor has the lowest operating costs in the industry due to the successful implementation of a low-cost strategy. What is particularly interesting is how its organization architecture helped Nucor attain this position. Nucor is a minimill: It uses electric arc, furnaces to smelt scrap steel. It has some 25 steelmaking plants, each of which is organized as, a stand-alone division. There are only three management la yers in each plant—a di visional, general manager, a depar tment manager, and a super visor. The divisional general manager, reports directly to Nucor’s small head of fice. The workforce in each plant is or ganized into, 20–30 person self-managing teams that are responsible for an entire work process and that can, schedule work and develop process improvements. Each plant has about 300 employees. Thus, Nucor has a very flat organization, which lowers costs, and a high level of decentralization., From a control perspecti ve, each plant is assigned a prof itability target, and each w ork, group a productivity goal. Due to the decentralized nature of the organization, the plant managers and work groups are responsible for their own performance, which is quite visible. This, makes accountability and control relati vely easy. Senior managers monitor perfor mance, against goals, intervening only when goals are not met. These control systems are linked to, aggressive performance-based incentive pay systems. Nucor’s philosophy is to tie pay closely, to performance. Employees in the work groups are paid weekly performance bonuses based, on their ability to meet and e xceed productivity goals. Although Nucor’s base pay is lower, than the steel industry average, the bonuses can total 80–150 percent of an emplo yee’s base, pay, making take-home pay signif icantly above the average. To get bonuses, ho wever, employees have to w ork productively, which lowers Nucor’s costs and helps mak e the f irm, competitive. Similar incentive plans are in place for department managers and general managers. The bonus pay of general managers is linked to that of Nucor as a whole. As a result,, if employees within a division find ways to improve production processes over time (which, their incentives encourage them to do), lowering the costs of the di vision, the general manager has an incentive to quickly share these with other di visions because that will boost the, performance of Nucor as a whole and hence his or her bonus pay. Thus the bonus pay system, creates an incentive for sharing knowledge across divisions., Nucor’s pa y-for-performance systems and high le vels of decentralization are not for, everybody. Nucor’s managers realize that self-reliant, goal-oriented individuals will do best in, its organization, so its human resource professionals tr y to hire indi viduals that ha ve this, particular prof ile (the y gi ve prospecti ve emplo yees psychometric tests to identify their, personalityprofiles)., , hiL30123_ch08_180-205.indd 183, hiL30123_ch08_180-205.indd 183, , 10/31/06 9:40:13 PM, 10/31/06 9:40:13 PM

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184, , PART 3 // Organization Architecture, , Nucor’s culture is focused on cost minimization, commitment to emplo yees, and an egalitarian ethos. The culture of the or ganization was largely shaped b y the for mer CEO, Ken, Iverson. Iv erson engaged in signif icant symbolic beha vior that sent strong signals to all, employees that cost containment was important. Iverson drove an old car, had a low base salary (much of his pay was performance linked), answered his own phone, flew in coach class,, stayed in inexpensive hotels when traveling, and would walk rather than take a taxi if that was, possible. At the head of fice there are no assigned parking spaces and no e xecutive dining, room (the dining room is a delicatessen across the road from the head office). Nucor operates, with an “open book” philosophy, so all employees know how their work groups, divisions, and, the company are doing. Nucor has had a long-standing commitment to all emplo yees that, when demand turns down in this cyclical industry, no one will be laid off. Instead employees, work fewer hours, and managers tak e cuts in their base pa y! The culture shaped b y these, actions creates an atmosphere within w hich employees recognize the impor tance of cost, containment and are moti vated to reduce costs because the or ganization is committed to its, employees., In sum, Nucor’s flat decentralized or ganization str ucture, simple but po werful control, systems, aggressive pay-for-performance systems, hiring practices, and organizational culture, combine to create an or ganization architecture that encourages emplo yees to w ork in a, productive manner (which lowers the cost structure of Nucor) and to discover and share ways, of improving work process to attain higher producti vity (thereby pushing out the ef ficiency, frontier in the industr y). Organization architecture, in other words, is a key to Nucor’s competitive advantage., As the Nucor e xample illustrates, or ganization architecture is the bedrock upon w hich, efficient operations and effective strategy implementation are built. However, the organization, that works for Nucor might not make sense for a business that is pursuing a different strategy, in a different industry. A retail business like Nordstrom, for example, which competes through, differentiation (in Nordstrom’s case superior in-store customer service), may need a different, type of or ganization architecture. A cr ucial task of managers, therefore, is to design an, organization architecture that makes sense for the market in which an enterprise competes and, the basic strategic positioning it is trying to achieve. The start of this process is to design the, correct organization structure., , // Designing Structure: Vertical Differentiation, Organization structure can be thought of in terms of three dimensions:, vertical, differentiation, The location of decisionmaking responsibilities, within a structure., horizontal, differentiation, The formal division of the, organization into subunits., , 1. Vertical differentiation, which refers to the location of decision-making responsibilities within a structure (that is, centralization or decentralization) and also to the number, of layers in a hierarchy (that is, whether the organizational structure is tall or flat)., 2. Horizontal differentiation, which refers to the formal division of the organization, into subunits., 3.The establishment of integrating mechanisms, which are mechanisms for coordinating subunits., We discuss these dimensions next., , // CENTRALIZATION AND DECENTRALIZATION, integrating, mechanisms, Mechanisms for, coordinating subunits., , hiL30123_ch08_180-205.indd 184, hiL30123_ch08_180-205.indd 184, , A f irm’s vertical differentiation deter mines where in its hierarch y the decision-making, power is concentrated. 3 Are production and marketing decisions centralized in the offices, of upper-level managers, or are the y decentralized to lower-level managers? Where does, the responsibility for R&D decisions lie? Are important strategic and f inancial decisions, pushed down to operating units, or are the y concentrated in the hands of top managers?, , 10/31/06 9:40:13 PM, 10/31/06 9:40:13 PM

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Organizing \\ CHAPTER 8, , 185, , There are arguments for both centralization and decentralization. Centralization is the, concentration of decision-making authority at a high le vel in a management hierarch y., Decentralization vests decision-making authority in lo wer-level managers or other, employees., Arguments for Centralization There are four main ar guments for centralization. F irst,, centralization can facilitate coordination. Consider a firm that manufactures components in, California and perfor ms f inal assemb ly in Seattle. These acti vities ma y need to be, coordinated to ensure a smooth flow of components to the assemb ly operation. This might, be achieved by centralizing production scheduling at the f irm’s head of fice. In another, example, Microsoft recently reduced the number of divisions in its organization from six to, three, thereby centralizing decision making in fe wer senior managers, in an attempt at, greater coordination. Microsoft felt that having six divisions in the company led to confused, sales, marketing, and product de velopment efforts and that g reater centralization was required to harmonize efforts.4, Second, centralization can help ensure that decisions are consistent with or ganizational, objectives. When decisions are decentralized to lo wer-level managers, those managers ma y, make decisions at v ariance with top managers’ goals. Centralization of impor tant decisions, minimizes the chance of this occur ring. Major strate gic decisions, for e xample, are often, centralized to make sure the entire organization is pulling in the same direction. In this sense, centralization is a way of controlling the organization., Third, centralization can avoid duplication of activities by various subunits within the organization. For example, many f irms centralize their R&D functions at one or tw o locations., Similarly, production activities may be centralized at k ey locations to eliminate duplication,, attain economies of scale, and lower costs. The same may also be true of purchasing decisions., Wal-Mart, for example, has centralized all purchasing decisions at its headquarters in Arkansas., By wielding its enormous bargaining power, purchasing managers at the head office can drive, down the costs Wal-Mart pays for the goods it sells in its stores. It then passes on those savings, to consumers in the for m of lower prices, which lets the company grow its market share and, profits., Fourth, by concentrating power and authority in one individual or a management team,, centralization can give top-level managers the means to bring about needed major organizational changes. Often f irms seeking to transfor m their or ganizations centralize power, and authority in a key individual (or group) who then sets the ne w strategic direction for, the f irm and redra ws organization architecture. Once the ne w strategy and architecture, have been decided on, ho wever, g reater decentralization of decision making nor mally, follows. Put dif ferently, temporary centralization of decision-making po wer is often an, important step in organizational change., , centralization, The concentration of, decision-making authority, at a high level in a, management hierarchy., decentralization, Vesting decision-making, authority in lower-level, managers or other, employees., , ■, , Wal-Mart: Centralization., , Arguments for Decentralization There are f ive main arguments for decentralization., First, top management can become o verburdened w hen decision-making authority is, centralized. Centralization increases the amount of infor mation senior managers ha ve to, process. As a result of information overload, managers might suffer the constraints imposed, by bounded rationality.5 The cognitive biases discussed in Chapter 5 are more lik ely to, occur w hen managers are stretched too thin, ha ve too much infor mation to process,, experience the constraints imposed by bounded rationality, and rely on simple heuristics to, make complex decisions. Decentralization gives top management time to focus on critical, issues by delegating more routine issues to lower-level managers and reducing the amount, of infor mation top managers ha ve to process, making them less vulnerab le to co gnitive, biases., Second, motivational research f avors decentralization. Beha vioral scientists ha ve long, argued that people are willing to gi ve more to their jobs w hen they have a greater degree of, individual freedom and control over their work. The idea behind employee empowerment is, that if y ou give employees more responsibility for their jobs the y will w ork harder, which, increases productivity and reduces costs., , hiL30123_ch08_180-205.indd 185, hiL30123_ch08_180-205.indd 185, , 10/31/06 9:40:13 PM, 10/31/06 9:40:13 PM

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186, , PART 3 // Organization Architecture, , FIG UR E 8 .2, Decentralization and, Control, Decentralization of, decisions to a, subunit ..., , autonomous, subunit, A unit that has all the, resources and decisionmaking power required to, run its operation daily., , Increases, responsibility ..., , Which, increases, accountability ..., , Thereby, enhancing, control., , Third, decentralization permits greater flexibility—more rapid response to environmental, changes. In a centralized f irm the need to refer decisions up the hierarch y for approval can, significantly slow decision making and inhibit the ability of the firm to adapt to rapid environmental changes.6 This can put the firm at a competitive disadvantage. Managers deal with this, by decentralizing decisions to lo wer le vels within the or ganization. Thus at Wal-Mart,, although purchasing decisions are centralized so the f irm can realize economies of scale in, purchasing, routine pricing and stocking decisions are decentralized to indi vidual store managers, who set prices and choose the products to stock depending on local conditions. This, enables store managers to respond quickl y to changes in their local en vironment, such as a, drop in local demand or actions by a local competitor., Fourth, decentralization can result in better decisions. In a decentralized str ucture,, decisions are made closer to the spot b y indi viduals w ho (presumab ly) ha ve better, information than managers several levels up a hierarchy. It might make little sense for the, CEO of Procter & Gamb le to mak e mark eting decisions for the deter gent business in, Germany because he or she is unlik ely to ha ve the rele vant e xpertise and infor mation., Instead those decisions are decentralized to local mark eting managers, w ho are more in, tune with the German market., Fifth, decentralization can increase control (see Figure 8.2 ). Decentralization can, establish relati vely autonomous, self-contained subunits within an or ganization. An, autonomous subunit has all the resources and decision-making po wer required to run, its operation daily. Managers of autonomous subunits can be held accountable for subunit, performance. The more responsibility subunit managers ha ve for decisions that impact, subunit perfor mance, the fe wer e xcuses the y have for poor perfor mance and the more, accountable they are. Thus by giving store managers the ability to set prices and mak e, stocking decisions, Wal-Mart’s top managers can hold local store managers accountab le, for the performance of their stores, and this increases the ability of top managers to control, the organization. Just as centralization is one w ay of maintaining control in an or ganization, decentralization is another . We retur n to this issue in Chapter 9 w hen we discuss, control systems., The Choice between Decentralization and Centralization The choice between centralization and decentralization is not absolute. Frequently it makes sense to centralize some, decisions and decentralize others, depending on the type of decision and the firm’s strategy., We have already noted, for example, how Wal-Mart has centralized purchasing decisions, but decentralized pricing and stocking decisions. Similarl y, Microsoft perfor ms major, development activities for its Windows operating system at its Redmond corporate campus,, but the company has decentralized responsibility for marketing and sales to local managers, in each country and region where it does business. Although the choice between centralization and decentralization depends on the circumstances being considered , a few important, generalizations can be made., , hiL30123_ch08_180-205.indd 186, hiL30123_ch08_180-205.indd 186, , 10/31/06 9:40:14 PM, 10/31/06 9:40:14 PM

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Organizing \\ CHAPTER 8, , 187, , First, decisions regarding overall f irm strategy, major f inancial, expenditures, financial objectives,, and legal issues are centralized at, the senior management le vel in, most organizations. Operating decisions, such as those relating to, production, marketing, R&D, and, human resource management,, may or ma y not be centralized, depending on the f irm’s strategy, and conditions in the e xternal, environment., Second, when the realization of, economies of scale is an important, Local Adaptation. Unilever decentralizes to local subsidiaries decisions about, factor, there tends to be g reater, packaging and marketing of its food products., centralization. Thus purchasing, © AP Photo/Fabian Bimmer, © AP Photo/Joerg Sarbach, and manuf acturing decisions are, often centralized in an attempt to, eliminate duplication and realize, scale economies. In contrast, sales decisions tend to be more decentralized because economies of scale are less of a consideration here., Third, when local adaptation is impor tant, decentralization is typicall y favored. Thus, when there are substantial differences between conditions in local markets, marketing and, sales decisions are often decentralized to local mark eting and sales managers. Man y, multinational consumer products f irms, such as Unile ver, centralize decisions about, manufacturing and purchasing to realize scale economies, but decentralize marketing and, sales decisions to local brand managers in dif ferent countries because competitive conditions differ from country to country and local adaptation is required.7, Finally, decentralization is f avored in en vironments that are characterized b y high ■ Decentralization at Google., uncertainty and rapid change. When competitive conditions in a firm’s market are changing, rapidly, with new technologies and competitors emerging and conditions changing in ways, that are difficult to anticipate, centralization, because it slows down decision making, can, put the f irm at a competiti ve disadv antage. This is w hy man y high-technolo gy f irms, operate with a g reater degree of decentralization than f irms operating in more stable and, predictable en vironments.8 At Goo gle, for e xample, lower-level emplo yees are gi ven, explicit permission to develop new business ideas and the right to lobby top managers for, the funds to de velop those ideas. Such decentralization of strategy making would not be, found in f irms operating in a more stab le and predictable environment, such as the automobile industry., A vivid example of the costs of making the wrong choice betw een centralization and, decentralization occurred in 2005, when the Federal Emergency Management Agency (FEMA), had to respond to the devastating impact of Hurricane Katrina on New Orleans. The hurricane, flooded much of New Orleans and resulted in a mandatory evacuation of the city. FEMA, the, federal agency responsible for disaster response, was widely criticized for being very slow to, help the hundreds of thousands of mostl y poor people w ho had been made homeless. F or, several days while thousands of homeless people huddled in the Ne w Orleans Superdome,, lacking food and adequate sanitar y facilities, FEMA was nowhere to be seen. Later anal ysis ■ FEMA: The costs of being, revealed that one reason for FEMA’s slow response was that the once autonomous agency had too centralized., been placed under the direct super vision of the Depar tment of Homeland Security after, September 11, 2001. FEMA officials apparently felt that they had to discuss relief efforts with, their superiors before proceeding. This cost the agency crucial hours in the earl y part of the, disaster, which signif icantly slowed its response and meant that the relief ef fort was less, effective than it might have been.9, , hiL30123_ch08_180-205.indd 187, hiL30123_ch08_180-205.indd 187, , 10/31/06 9:40:14 PM, 10/31/06 9:40:14 PM

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188, , PART 3 // Organization Architecture, , The Consequence of a Slow Response Victims of Hurricane Katrina are ferried from their, flooded homes in New Orleans. FEMA’s slow response to Katrina was in part due to FEMA’s lack, of autonomy within the Department of Homeland Security., © AP Photo/Eric Gay, , // TALL VERSUS FLAT HIERARCHIES, tall hierarchies, Organizations with many, layers of management., flat hierarchies, Organizations with few, layers of management., , hiL30123_ch08_180-205.indd 188, hiL30123_ch08_180-205.indd 188, , A second aspect of vertical differentiation refers to the number of le vels in an organization’s, hierarchy. Tall hierarchies have many layers of management; flat hierarchies have few, layers (see Figure 8.3). Most f irms start out small, often with onl y one or at most two layers, in the hierarchy. As they grow, however, managers f ind that there is a limit to the amount of, information they can process and the control the y can exert over daily operations. To avoid, being stretched too thin and losing control, they tend to add layers to the management hierarchy, hiring more managers and dele gating some decision-making authority to them. In other, words, as an or ganization gets larger it tends to become taller . In addition, as or ganizations, grow they often start to undertake more activities—expanding their product lines, diversifying into adjacent activities, vertically integrating, or expanding into new regional or national, markets. This too creates problems of coordination and control, and once again these are often, solved by adding layers to the management hierarchy., For example, consider the history of a business founded by the father of this chapter’s author., The business was a small factory that made wood products for the construction industry, such as, doors, window frames, and stairs. Initiall y the factory had just one manager , who was also the, CEO (the author’ s f ather), and 10 emplo yees. At this point the CEO perfor med multiple, functions—managing employees, planning production, going on sales calls, doing the books,, purchasing lumber, and so on. The firm was soon successful and business grew, so the CEO hired, more employees. Soon he was too busy to perform all the tasks he had been doing. At this point, he hired help—a factory manager to supervise employees and plan production, a sales manager, and three other salespeople to seek business, an accounts manager to manage the books, and a, purchasing manager to buy lumber. This freed the CEO to concentrate on bigger strategic issues., In effect, the CEO added another layer to the management hierarchy to cope with growth., The process did not stop here. Ov er time the CEO decided to enter other businesses that, were related to the wood products industry, including home building, a brickmaking business,, and a constr uction equipment rental compan y. With more businesses to manage the CEO, found that he was once again stretched, so he created four di visions: the wood products factory, the home builder, the brick factory, and the equipment rental company. To run each division he appointed a general manager . The CEO then managed the general managers and, focused his attention on issues that cut across businesses, while the general managers manage, , 10/31/06 9:40:15 PM, 10/31/06 9:40:15 PM

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Organizing \\ CHAPTER 8, , 189, , F I G U R E 8 .3, Tall versus Flat, Hierarchies, A tall hierarchy has, many layers and, narrow spans of, control., A flat hierarchy, has few layers, and wide, spans of control., , Tall hierarchy, T, , Flat hierarchy, , people within their businesses. In effect the CEO added a third layer to the management hierarchy. To better manage growth and diversification of the firm, he made the hierarchy taller., As this example illustrates, growth in the number of layers in a hierarchy is driven by the, size of an or ganization and the number of dif ferent activities it under takes. Adding more, levels in the hierarchy is a response to the problems of control that mount when a manager has, too much work. How many layers are added is also par tly determined by the span of control, managers can effectively handle., Span of Control The term span of control refers to the number of direct repor ts a, manager has. At one time it w as thought that the optimal span of control w as only about, six subordinates. 10 The ar gument w as that a manager responsib le for more than six, subordinates would soon lose track of w hat was going on. No w we recognize that the, relationship is not this simple. The number of direct reports a manager can handle depends, on the nature of the w ork being supervised, how visible the performance of subordinates, is, and the extent of decentralization within the organization. Generally if the work being, performed by subordinates is routine, if the perfor mance of subordinates is visib le and, easy to measure, and if the subordinates are empo wered to mak e man y decisions b y, themselves, managers can operate with a wide span of control. How wide is the subject of, some debate, but it seems that good managers can effectively handle as many as 20 direct, reports if the circumstances are right., In sum, as or ganizations grow and under take more activities, the management hierarch y, tends to become taller. How tall depends on the span of control that is feasible, which in turn, depends on the nature of the work, the visibility of subordinate performance, and the extent of, decentralization within the or ganization. Note that managers can influence the visibility of, subunit performance and the extent of decentralization through organization design, thereby, limiting the impact of organization size and diversity on the size of a management hierarchy, (see Figure 8.4). This is signif icant because we know that although adding layers to an organization can reduce the workload of higher-level managers and attenuate control loss, tall hierarchies have their own problems., , span of control, The number of direct, reports a manager has., , Problems in Tall Hierarchies Several problems can occur in tall hierarchies that ma y, result in lower organizational efficiency and ef fectiveness. First, there is a tendenc y for, , hiL30123_ch08_180-205.indd 189, hiL30123_ch08_180-205.indd 189, , 10/31/06 9:40:16 PM, 10/31/06 9:40:16 PM

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190, , PART 3 // Organization Architecture, , FIG UR E 8 .4, Number of Levels, in a Hierarchy, , Size of, organization, Nature of work, Performance visibility, Decentralization, Number of, different, activities, , Size of, hierarchy, , These factors can be, controlled by good, organization design,, allowing for a flatter, hierarchy., , influence costs, The loss of efficiency, caused by deliberate, information distortion for, personal gain within an, organization., , hiL30123_ch08_180-205.indd 190, hiL30123_ch08_180-205.indd 190, , information to get accidentally distorted as it passes through la yers in a hierarch y. The, phenomenon is familiar to an yone who has pla yed the game “telephone. ” In this game, players sit in a circle; somebody whispers a message to the next person, who then whispers, the message to the ne xt person, and so on around the circle. By the time the message has, been transmitted b y a number of people, it becomes distor ted and the meaning star ts to, change (this can have amusing consequences, w hich of course is the point of the g ame)., Human beings are not good at transmitting infor mation; they tend to embellish or miss, data, which distorts the information. In a management context, if crucial information has, to pass through man y layers in a tall hierarchy before it reaches decision mak ers, it may, get distor ted in the process. So decisions ma y be based on inaccurate infor mation, and, poor performance may result., There is also the problem of deliberate distortion by midlevel managers who are trying to, curry favor with their superiors or pursue some agenda of their own. For example, the manager, of a division might suppress bad information and exaggerate good information in an attempt to, window-dress the perfor mance of his or her unit to higher -level managers and win their approval. By doing so the manager may get access to more resources, earn performance bonuses,, or avoid sanctions for poor performance. Other things being equal, the more layers there are in, a hierarchy, the more opportunities there are for people to deliberatel y distort information. To, the extent that infor mation is distor ted, senior managers will mak e decisions on the basis of, inaccurate information, which can result in poor perfor mance. Economists refer to the loss of, efficiency that arises from deliberate information distortion for personal gain within an organization as influence costs, and they argue that influence costs can be a major source of lo w, productivity.11, A third problem with tall hierarchies is that they are expensive. The salaries and benefits of, multiple layers of midlevel managers can add up to signif icant overhead, which can increase, the cost structure of the firm; unless there is a commensurate benefit, a tall hierarchy can put, a firm at a competitive disadvantage. A final problem concerns the inherent inertia associated, with a tall hierarchy. As we will see in Chapter 18 when we discuss change, organizations are, inherently inert—they are difficult to change. One cause of iner tia in organization is that to, protect their turf and perhaps their jobs, managers often argue for the maintenance of the status quo. In tall hierarchies there is more turf (more centers of po wer and influence) and thus, more voices arguing against change. Thus tall hierarchies tend to be slower to change., , 10/31/06 9:40:16 PM, 10/31/06 9:40:16 PM

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Organizing \\ CHAPTER 8, , 191, , Delayering: Reducing the Size of a Hierarchy Given, the disadvantages associated with tall hierarchies, man y, firms attempt to limit the size of the management hierar chy. During the last 15 years or so, delayering to reduce, the number of le vels in a management hierarch y has, become a standard component of man y attempts to boost, firms’ performance. 12 Dela yering is based on the, assumption that when times are good, firms tend to expand, their management hierarchies beyond the point of efficiency., The bureaucratic inefficiencies associated with a tall, hierarchy become e vident onl y w hen the competiti ve, environment becomes tougher , at w hich time managers, seek to delayer the organization. Delayering, and simultaneously widening spans of control, is also seen as a way of, enforcing greater decentralization within an or ganization, The King of Delayering During his tenure as CEO of, and reaping the associated efficiency gains., General Electric, Jack Welch cut the number of layers in the, The process of dela yering was a standard feature of, management hierarchy from nine to five, instituting wide, Jack Welch’s tenure at General Electric, during which he, spans of control., laid off 150,000 people, reduced the number of la yers in, © Najlah Feanny/Corbis SABA, the hierarchy from nine to f ive, and simultaneousl y increased General Electric’s prof its and re venues. Welch, believed that GE had become too top-hea vy during the tenure of his successors. A key, delayering, element of his strate gy was to transform General Electric into a leaner and f aster-moving, Reducing the number of, organization—which required delayering. Welch himself had a wide span of control, with, layers in a hierarchy., some 20 subordinates repor ting directly to him, including the heads of GE’ s 15 top businesses. Similarly, Jeffery Immelt, the head of GE’s medical systems business under Welch,, had 21 direct reports (Immelt replaced Welch as CEO).13, Delayering has also been prompted b y the realization that lar ge f irms can function with ■ Delayering at General, relatively flat structures if their or ganization architecture is designed cor rectly. Nucor, for Electric., example, has onl y four layers in its hierarch y, yet it is the lar gest steelmaker in the United, States. As at Nucor, achieving a flat hierarchy requires decentralization of responsibility for, many decisions to lower-level managers who run autonomous self-contained units (in Nucor’s, case, individual steel plants). If these units are managed on an ar m’s-length basis, with top, management intervening in subunit operations only when performance goals are not met, the, top managers can handle a wide span of control, w hich makes a flat or ganization feasible., Nucor, for e xample, has 25 di visions. The general manager of each repor ts directly to the, CEO, which implies that the CEO has a v ery wide span of control (probab ly close to 30 if, other corporate executives such as the COO are included)., Although performance benef its are often associated with mo ving to a flat str ucture, the, process of delayering is not an easy one; and research sho ws that delayering can cause significant stress and poor morale among managers if the process is not handled correctly.14 Jack, Welch believed that the key to successful delayering is to move fast (thereby eliminating lingering uncertainty among managers concerning their job security) and to reward and promote, managers who thrive within the new structure, thereby indicating the management style that, will be favored., , // Designing Structure: Horizontal, Differentiation, As we have seen, vertical differentiation is concer ned with the location of decision-making, responsibilities within an or ganization. In contrast, horizontal dif ferentiation is concer ned, with how to divide the organization into subunits. We look at four different types of structure, here: functional, multidivisional, geographic, and matrix., , hiL30123_ch08_180-205.indd 191, hiL30123_ch08_180-205.indd 191, , 10/31/06 9:40:17 PM, 10/31/06 9:40:17 PM

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192, , PART 3 // Organization Architecture, , // FUNCTIONAL STRUCTURE, , functional structure, A structure that follows, the obvious division of, labor within the firm, with, different functions, focusing on different tasks., , Most firms begin with no formal structure and are run by a single entrepreneur or a small team, of individuals. As they grow, the demands of management become too great for an individual or, small team to handle. At this point the organization is split into functions that typically represent, different aspects of the f irm’s value chain. In other w ords, in a functional structure the, structure of the organization follows the obvious division of labor within the firm, with different, functions focusing on dif ferent tasks. Thus there might be a production function, an R&D, function, a marketing function, a sales function, and so on (see Figure 8.5). These functions are, typically overseen by a top manager, such as the CEO, or a small top management team., Functions themselves can be and often are subdivided into subunits. Further horizontal, differentiation within functions is typicall y on the basis of similar tasks and processes., Within the manufacturing facilities of Toyota, for example, the workforce is grouped into, teams, and each team is responsib le for a discrete activity or task, such as the production, of a major component that goes into an automobile.At Nucor too the workforce is grouped, into teams, with each team taking on responsibility for a particular step in the steelmaking, process. These teams ma y ha ve signif icant decision-making responsibility , be held, accountable for their performance, and ha ve their pa y and bonuses tied to teamwide, goals., A functional structure can work well for a firm that is active in a single line of business, and focuses on a single geographic area. But problems can develop once the firm expands, into different businesses or geographies. Consider first what happens when a firm expands, into dif ferent business lines. The Dutch multinational Philips NV , for e xample, be gan, making electric lights, but di versification took the compan y into consumer electronics, (visual and audio equipment), industrial electronics (inte grated circuits and other electronic components), and medical systems (MRI scanners and ultrasound systems). In such, circumstances a functional structure can be clumsy. Problems of coordination and control, arise when different business areas are managed within the frame work of a functional, structure.15, It becomes dif ficult to identify the prof itability of each distinct business—and thus to, assess whether a business is performing well or poorly—when the activities of businesses are, scattered across various functions. Moreover, because no individual or management team is, responsible for the performance of each business, there is a lack of accountability within the, organization, and this too can result in poor control. As for coordination, when the different, , Develops strategy and, manages subordinates, , CEO, , FIG UR E 8 .5, , Purchasing, manager, , Production, manager, , Marketing, , Sales, manager, , R&D, manager, , Human, resource, manager, , Purchases, material, inputs, , Schedules, and, manages, production, , Develops, and, executes, marketing, plan, , Goes on, sales calls, , Develops, new, products, , Hires, employees, , A Typical Functional, Structure, , hiL30123_ch08_180-205.indd 192, hiL30123_ch08_180-205.indd 192, , 10/31/06 9:40:18 PM, 10/31/06 9:40:18 PM

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Organizing \\ CHAPTER 8, , 193, , activities that constitute a business are embedded in dif ferent functions, such as production, and mark eting, that are simultaneousl y managing other businesses, it can be dif ficult to, achieve the tight coordination between functions needed to effectively run a business. Moreover, it is dif ficult to r un a functional depar tment that is super vising the v alue creation, activities of several business areas., , // MULTIDIVISIONAL STRUCTURE, The problems we have just discussed were first recognized in the 1920s by one of the pioneers, of American management thinking, Alfred Sloan, w ho at the time w as CEO of General, Motors, then the largest company in the world.16 Under Sloan GM had diversified into several, businesses. In addition to making cars under se veral distinct brands, it made tr ucks, airplane, engines, and refrigerators. After struggling to run these different businesses within the framework of a functional str ucture, Sloan realized that a fundamentall y different structure was, required. His solution, w hich has since become the classic w ay to organize a multibusiness, enterprise, was to adopt a multidivisional structure (see Figure 8.6)., In a multidivisional structure the firm is divided into different product divisions, each, of which is responsible for a distinct business area. Thus Philips created product divisions for, lighting, consumer electronics, industrial electronics, and medical systems. Each di vision is, set up as a self-contained, largely autonomous entity with its own functions. Responsibility for, operating decisions and business-level strategy is typicall y decentralized to the di visions,, which are then held accountab le for their perfor mance. Headquar ters is responsib le for, the overall strategic development of the f irm (corporate-level strategy), for the control of the, various divisions, for allocating capital betw een divisions, for supervising and coaching the, managers who run each division, and for transferring valuable skills between divisions., The product divisions are generally left alone to r un their daily operations so long as they, hit performance targets, which are typically negotiated annually between the head office and, divisional management. Head of fice management, ho wever, will often help di visional, managers think through their strategies. Thus while Jack Welch at GE did not de velop strategy for the v arious businesses within GE’ s por tfolio (that w as decentralized to di visional, managers), he did probe the thinking of divisional managers about their strategies. In addition,, Welch devoted a lot of effort to getting managers to share best practices across divisions. For, example, Welch was a driving force in getting different divisions at GE to adopt the six sigma, process improvement methodology (see Chapter 7 for details)., , Head office, , Product, division 1, , Each business is placed, into its own division., , Production, , Marketing, , Each division has its, own functions., , multidivisional, structure, A structure in which a firm, is divided into different, divisions, each of which is, responsible for a distinct, business area., , The HO controls, the divisions., , Product, division 3, , Product, division 2, , R&D, , ■ Multinational structure at, Philips NV., , Sales, , F I G U R E 8 .6, A Multidivisional, Structure, , hiL30123_ch08_180-205.indd 193, , 11/1/06 1:53:49 AM

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194, , PART 3 // Organization Architecture, , Structural Engineer Alfred, Sloan, the longtime CEO of General, Motors, was the first to introduce, a multidivisional structure. Sloan, later wrote about his management, experiences in a famous autobiography, My Years at General Motors,, which is still widely read today. Bill, Gates has described Sloan’s book, as the most important management, book ever written., © Bettmann/Corbis, , geographic, structure, A structure in which a firm, is divided into different, units on the basis of, geography., , hiL30123_ch08_180-205.indd 194, hiL30123_ch08_180-205.indd 194, , One of the g reat virtues claimed for the multidi visional structure is that it, creates a n internal en vironment that gets di visional managers to focus on, eff iciency.17 Because each di vision is a self-contained entity , its perfor mance is, highly visible. The high level of responsibility and accountability implies that divisional managers ha ve few alibis for poor perfor mance. This motivates them to, focus on improving efficiency. Base pay, bonuses, and promotional opportunities, for divisional managers can be tied to ho w well the divisions do. Capital is also, allocated by top management between the competing divisions depending on how, effectively top managers think the di vision managers can invest that capital. The, desire for capital to g row their businesses, and for pa y increases and bonuses,, creates further incentives for divisional managers to focus on improving the competitive positions of the businesses under their control., On the other hand , if the head of fice puts too much pressure on di visional, managers to improve performance, this can result in some of the worst practices, of management. These can include cutting necessary investments in plant, equipment, and R&D to boost shor t-term performance, even though such actions can, damage the long-term competitive position of the enter prise.18 To guard against, this possibility, head office managers need to de velop a good understanding of, each division, set performance goals that are attainable, and have staff who can, regularly audit the accounts and operations of divisions to ensure that each division is not being managed for shor t-term results or in a w ay that destro ys its, long-term competitiveness., , // GEOGRAPHIC STRUCTURE, , Some firms first grow not by expanding into different businesses through diversification, but by expanding into other geo graphic regions—either within their, home countries or (increasingl y in today’s global economy) into other national, markets. For firms that are active in multiple regions with a single business, the, structural solution to managing g rowth is to adopt a geo graphic structure. In a, geographic structure the main subunits of the or ganization are geographic, areas, such as regions within a country, countries, or multicountry regions., F, igure 8.7 illustrates a for m of geo graphic str ucture found in some inter national, businesses.19 Under this structure the firm is divided into geographic areas. An area may be, a country (if the market is large enough) or a group of countries. Each area division tends to, be a self-contained , largely autonomous entity. Each ma y have its o wn set of functions, (such as its own production, marketing, R&D, and human resource functions). Operations, authority and strategic decisions relating to each of these activities may be decentralized to, each area, with headquar ters retaining authority for the o verall strategic direction of the, firm and financial control., This str ucture f acilitates responsiveness to local mark et conditions. Because decisionmaking responsibilities are decentralized , each area can customize product of ferings,, marketing strategy, and business strate gy to the local conditions. As we saw in Chapter 3,, there are signif icant differences in cultures and business systems across nations, so this, approach has some appeal. On the other hand, this structure also encourages fragmentation of, the organization into highly autonomous entities, which can make it difficult to transfer core, skills between areas. Moreo ver, because each geo graphic re gion has its o wn production, facilities, duplication inhibits the realization of economies of scale that could be gained if the, firm ser ved the entire w orld market from a single f avorable location. The duplication of, functions across re gions also implies that the f irm is not placing dif ferent functions w here, they can be performed most efficiently.20, To solve these problems, many international businesses operate with a hybrid geographic–, functional structure, similar to that illustrated in Figure 8.8 . In this str ucture functions lik e, R&D, purchasing, and production are centralized at the optimal locations. The world is then, divided into geographic regions for local marketing and sales., , 10/31/06 9:40:19 PM, 10/31/06 9:40:19 PM

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Organizing \\ CHAPTER 8, , 195, , F I G U R E 8 .7, Geographic Structure, , Head office, , Geographical, area 1, , Geographical, area 1, , R&D, , Production, , Geographical, area 1, , Marketing, , Sales, , Each geographical area, has its own functions., , A geographic structure, or a hybrid geographic–functional structure, can become unwieldy, when a f irm is engaged in several different businesses. Under such circumstances each geographic area might itself be divided into different product divisions—one for each business—, with functions appearing under neath the divisions. This was the str ucture Unilever used to, operate with. Although this structure had the advantage of allowing Unilever to customize its, product of fering and mark eting strate gy from countr y to countr y, the duplication of, manufacturing facilities drove up costs. By the late 1990s this structure was no longer tenable,, and in 2000 Unilever established two worldwide product divisions: one to manage its foods, business (packaged foods) and one to manage its home products business (shampoos, deter gents). The division heads were responsible for the worldwide profitability of the businesses, under their control., Under this new structure Unilever consolidated its manuf acturing in fewer facilities, each, located where costs were favorable. Those facilities served regional or global markets, letting, the company realize economies of scale and drive down costs. R&D was also centralized at the, , Head office, , Area 1, , Area 1, , Local, marketing, , Area 1, , Local, sales, , Area 1, , Global, purchasing, , Local, HR, , Global, production, , Global, R&D, , These functions are globally, centralized and produce, products for the areas to sell., , Each area has its own, local marketing, sales,, and HR functions., , FIG U RE 8 .8, , hiL30123_ch08_180-205.indd 195, hiL30123_ch08_180-205.indd 195, , Hybrid Geographic–Functional Structure, , 10/31/06 9:40:19 PM, 10/31/06 9:40:19 PM

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196, , PART 3 // Organization Architecture, , FIG UR E 8 .9, Unilever’s Structure, , CEO, Divisions responsible, for manufacturing,, R&D, and worldwide, profit, , Food, division, , Home, products, division, , Europe, , Americas, , Asia/Africa, Areas responsible for local marketing, and sales, and area/country profit, , Employee located here belongs to, American Group and Food Division, , divisional level. However, Unilever still felt that it needed to customize aspects of its sales and, marketing strategy, as well as product packaging, to account for countr y differences in tastes,, preferences, distribution systems, and the lik e. To solve this dilemma, Unilever has kept elements of its geographic structure in place, with the head of each geo graphic area maintaining, responsibility for profitability in the area under his or her control, and country managers within, each region being given responsibility for local marketing and sales (and held accountable for, performance in that country). Unilever’s structure as of 2005, which is illustrated in Figure 8.9,, is an attempt to solve conflicting demands on the organization while maintaining the best features of a multidi visional structure and a geo graphic structure.21 Unilever is hardl y alone is, struggling with such a dilemma; many other f irms do as well. One solution to such or ganizational dilemmas is to adopt a matrix structure, which is in effect how Unilever is now operating., As we will see next, however, matrix structures also have problems., , // MATRIX STRUCTURE, matrix structure, An organization with two, overlapping hierarchies., , ■, , Structure at Unilever., , hiL30123_ch08_180-205.indd 196, , The matrix structure is sometimes adopted when no single structural design seems to solve all, of a firm’s problems. With a matrix structure, managers try to combine two different organizing philosophies in a single design. Unilever, for example, saw benefits to being organized, both on the basis of di visions (enabling the company to consolidate manufacturing facilities, and realize economies of scales) and on the basis of geographic areas (enabling the company, to respond to different national and regional markets). The firm’s senior managers want all of, these benefits, so they have adopted a matrix structure with two overlapping hierarchies: one, on the basis of business and one on the basis of area. This means that a lower-level manager, might have two bosses—divisional and regional., In addition to diversified multinational firms like Unilever, high-technology firms based in, rapidly changing environments sometimes adopt a matrix str ucture.22 In such cases the need, for a matrix is driven by the desire for tight coordination between different functions, particularly R&D, production, and mark eting. Tight coordination is required so that R&D designs, products that can be manuf actured ef ficiently and are designed with customer needs in, mind—both of which increase the probability of successful product commercialization. Tight, coordination between R&D, manufacturing, and marketing has also been sho wn to result in, , 11/1/06 1:53:50 AM

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Organizing \\ CHAPTER 8, , 197, , F I G U R E 8 .1 0, CEO, , Sales not part, of team/matrix, , Matrix Structure in a, High-Tech Firm, , Development, team, R&D, , Manufacturing, , Marketing, , Sales, , Product, development, team 1, Product, development, team 2, Product, development, team 3, , faster product de velopment, which can help a f irm gain an adv antage over its ri vals.23 As, illustrated in Figure 8.10 , in such an or ganization an employee may belong to tw o subunits, within the f irm. For e xample, a manager might be a member of both the manuf acturing, function and a product development team., A matrix structure looks nice on paper, but the reality can be different. Unless this structure, is managed carefull y it ma y not w ork w ell.24 In practice a matrix can be clumsy and, bureaucratic. It can require so many meetings that it is difficult to get any work done. The dual, hierarchy structure can lead to conflict and per petual power struggles between the different, sides of the hierarchy. In one high-technology firm, for example, the manufacturing manager, was reluctant to staf f a product de velopment team with his best people because he felt that, would distract them from their functional w ork. As a result, the product de velopment teams, did not work as well as they might., To make matters worse, it can prove difficult to ascertain accountability in a matrix structure. When all critical decisions are the product of ne gotiation between different hierarchies,, one side can always blame the other w hen things go wrong. As a manager in one high-tech, matrix structure said to the author when reflecting on a failed product launch, “Had the engineering (R&D) group provided our development team with decent resources, we would have, gotten that product out on time, and it w ould have been successful.” For his part, the head of, the engineering g roup stated, “We did e verything we could to help them succeed , but the, project was not well managed. They kept changing their requests for engineering skills, which, was very disruptive.” Such f inger-pointing can compromise accountability, enhance conflict,, and make senior management lose control over the organization., However, there is also e vidence that properl y managed matrix str uctures can w ork.25, Among other things, making a matrix w ork requires clear lines of responsibility . Normally, this means that one side of the matrix must be given the primary role while the other is given, a support role. In a high-tech f irm, for e xample, the product de velopment teams might be, given the primary role because getting good products to mark et as quickly as possible is key, to competitive success. In a diversified multinational f irm like Unilever, the divisions might, be given the primary role because they are responsible for manufacturing costs and product, development, while the geographic areas take on the support role. Clear goals should be well, prioritized so that when conflicts occur, which is inevitable, the goals help to indicate what is, , hiL30123_ch08_180-205.indd 197, , 11/1/06 1:53:50 AM

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198, , PART 3 // Organization Architecture, , most important. In Unilever’s case, for example, driving down costs is an important goal, and, the need to f irst satisfy this goal can be used as a decision r ule to help solv e any conflicts, between the division and area hierarchies in the matrix., Despite such steps, managing within a matrix str ucture is dif ficult. In light of these, problems, managers have sometimes tried to build “flexible” matrix structures based more on, enterprisewide management knowledge networks, and a shared culture and vision, than on a, rigid hierarchical arrangement. Within such companies the infor mal structure plays a greater, role than the for mal structure. We discuss this issue w hen we consider infor mal integrating, mechanisms in the next section., , // Designing Structure: Integrating Mechanisms, In the previous section we explained how firms divide themselves into subunits. Now we need, to examine some means of coordinating those subunits. One w ay of achieving coordination is, through centralization. If the coordination task is complex, however, centralization may not be, effective. Higher-level managers responsib le for achie ving coordination can soon become, overwhelmed by the volume of work required to coordinate the activities of various subunits,, particularly if the subunits are lar ge, diverse, or geo graphically dispersed. When this is the, case, managers look toward integrating mechanisms, both formal and informal, to help achieve, coordination. Here we introduce the various integrating mechanisms managers use and discuss, how the choice of integrating mechanism is determined by the strategy of the firm., , // FORMAL INTEGRATING MECHANISMS, The formal integrating mechanisms used to coordinate subunits vary in complexity from simple, direct contact and liaison roles, to teams, to a matrix structure (see Figure 8.11). In general, the, greater the need for coordination betw een subunits, the more comple x for mal integrating, mechanisms need to be.26, Direct contact betw een subunit managers is the simplest inte grating mechanism:, Managers of the v arious subunits just contact each other w henever they have a common, , High, , Matrix, structure, , Need for coordination, , Favored by firms in, rapidly changing and, high-technology, environments, Teams, Liaison, roles, , Favored by firms, in stable and, low-technology, environments, , Direct, contact, , Centralization, Low, Simple, , FIG UR E 8 .1 1, , Complex, Integrating mechanisms, , Integrating Mechanisms, , hiL30123_ch08_180-205.indd 198, hiL30123_ch08_180-205.indd 198, , 10/31/06 9:40:21 PM, 10/31/06 9:40:21 PM

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Organizing \\ CHAPTER 8, , 199, , concern. Direct contact may not be effective, however, if, managers ha ve dif fering orientations that impede, coordination. Managers of v arious subunits ma y have, different orientations partly because they have different, tasks. For example, production managers are typicall y, concerned with production issues such as capacity utilization, cost control, and quality control, w hereas marketing managers are concer ned with mark eting issues, such as pricing, promotions, distribution, and mark et, share. These dif ferences can inhibit communication, between managers, w ho may not “speak the same language.” Managers can also become entrenched in “functional silos,” which can lead to a lack of respect between, subunits and inhibit the communication required to, achieve cooperation and coordination. For these reasons,, Teamwork This cross-functional product development team, direct contact may not be suf ficient to achieve coordinais working on the design of interior trim for heavy-duty trucks., tion between subunits w hen the need for inte gration is, Cross-functional product development teams are widely used, high., in firms that compete through product innovation. The teams, Liaison roles are a bit more comple x than direct, represent the best way of achieving tight coordination between, contact. As the need for coordination betw een subunits, different functions., increases, inte gration can be impro ved b y assigning, © Digital Vision, a person in each subunit to coordinate with another subunit. Through these roles, the people involved establish a, permanent relationship. This helps attenuate any impediments to coordination., When the need for coordination is g reater still, f irms use temporary or permanent teams, composed of indi viduals from the subunits that need to achie ve coordination. Teams often, coordinate product development efforts, but they can be useful when any aspect of operations, or strategy requires the cooperation of multiple subunits. Product de velopment teams are, typically composed of personnel from R&D, production, and marketing. The resulting coordination aids the development of products that are tailored to consumer needs and that can be, produced at a reasonable cost (through design for manufacturing)., When the need for integration is very high, firms may institute a matrix structure, in which, all roles are vie wed as integrating roles. This structure is designed to maximize integration, among subunits. As discussed earlier, common matrix organizations include structures based, on functions and product development teams, as in high-technology firms (see Figure 8.10),, or on divisions and geographic areas, as in di versified multinational enter prises (see Figure, 8.9). However, as we have already noted, matrix str uctures can bog down in a bureaucratic, tangle that creates as many problems as it solves. If not well managed, matrix structures can, become bureaucratic, inflexible, and characterized by conflict rather than the hoped-for cooperation. For such a structure to work it needs to be somewhat flexible and to be supported by, informal integrating mechanisms.27, , // INFORMAL INTEGRATING MECHANISMS:, KNOWLEDGE NETWORKS, In attempting to alle viate or avoid the problems associated with for mal integrating mechanisms in general and matrix str uctures in par ticular, f irms with a high need for inte gration, have been experimenting with an informal integrating mechanism: knowledge networks supported by an or ganizational culture that v alues teamwork and cross-unit cooperation. 28 A, knowledge network is a network for transmitting information within an organization that, is based not on for mal organization structure, but on infor mal contacts betw een managers, within an enter prise and on distributed infor mation systems. 29 The great strength of such a, network is that it can be a nonbureaucratic conduit for kno wledge flows within an enter prise.30 For a network to exist, managers at different locations within the organization must be, , hiL30123_ch08_180-205.indd 199, hiL30123_ch08_180-205.indd 199, , knowledge network, A network for transmitting, information within an, organization based on, informal contacts between, managers within an, enterprise and on, distributed information, systems., , 10/31/06 9:40:22 PM, 10/31/06 9:40:22 PM

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200, , PART 3 // Organization Architecture, , FIG UR E 8 .1 2, A Knowledge Network, , B, , G, , C, , A, , ■, , Knowledge network at 3M., , hiL30123_ch08_180-205.indd 200, hiL30123_ch08_180-205.indd 200, , E, , D, , F, , linked to each other at least indirectl y. For example, Figure 8.12 shows the simple netw ork, relationships between seven managers within a complex multinational f irm. Managers A, B,, and C all know each other personally, as do Managers D, E, and F. Although Manager B does, not know Manager F personally, they are linked through common acquaintances (Managers C, and D). Thus Managers A through F are all part of the network. Manager G is not., Imagine Manager B, a marketing manager in Spain, needs to know the solution to a technical, problem to better ser ve an important European customer. Manager F, an R&D manager in the, United States, has the solution to Manager B’s problem. Manager B mentions her problem to all, of her contacts, including Manager C, and asks if the y know anyone who might be able to provide a solution. Manager C asks Manager D , who tells Manager F, who then calls Manager B, with the solution. In this w ay coordination is achie ved informally through the netw ork rather, than by formal integrating mechanisms such as teams or a matrix structure., For such a network to function effectively it must embrace as many managers as possible., For example, if Manager G had a problem similar to Manager B’s, he would not be able to use, the informal network to find a solution; he would have to resort to more formal mechanisms., Establishing firmwide knowledge networks is difficult. Although network enthusiasts speak, of networks as the “glue” that binds complex organizations together, it is unclear how successful firms have been at building companywide networks. Techniques that establish knowledge, networks include information systems, management development policies, and conferences., Firms are using distributed computer and telecommunications information systems to provide the foundation for infor mal knowledge networks.31 Electronic mail, videoconferencing,, high-bandwidth data systems, and Web-based search engines make it much easier formanagers, scattered over the globe to get to know each other, to identify contacts that might help solve a, particular problem, and to pub licize and share best practices within the or ganization. WalMart, for e xample, uses its intranet to communicate ideas about merchandizing strate gy, between stores located in different countries., Firms are also using management development programs to build informal networks. Tactics include rotating managers through v arious subunits re gularly so the y build their o wn, informal network and using management education pro grams to bring managers of subunits, together so they can become acquainted. In addition, some science-based f irms use inter nal, conferences to establish contact between people in different units of the or ganization. At 3M, regular multidisciplinary conferences g ather scientists from dif ferent business units and get, them talking to each other . Apart from the benef its of direct interaction in the conference, setting, after the conference the scientists ma y continue to share ideas, increasing kno wledge, flow within the organization. 3M has many stories of product ideas that were the result of such, , 11/9/06 7:47:17 PM, 11/9/06 7:47:17 PM

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Organizing \\ CHAPTER 8, , 201, , knowledge flo w—including the ubiquitous P ost-it note,, whose inventor, Art Fry, first learned about its adhesive from, a colleague w orking in another di vision of 3M, Spencer, Silver, w ho had spent se veral y ears shopping his adhesive, around 3M.32, Knowledge networks by themselves may not be suf ficient to achie ve coordination if subunit managers pursue, subgoals that are at v ariance with f irmwide goals. F or, a knowledge network to function properly (and also for a, formal matrix str ucture to w ork) managers must share a, strong commitment to the same goals. To appreciate the, nature of the problem, consider again the case of Managers, B and F. As before, Manager F hears about Manager B’ s, Post-It Note Man Art Fry, the inventor of the Post-it, problem through the netw ork. However, solving Manager, note, first learned about the adhesive that he would later, B’s problem would require Manager F to de vote consideruse on Post-it notes through 3M’s internal knowledge, able time to the task. If this w ould divert Manager F away, network., from regular tasks—and the pursuit of subgoals that differ, from those of Manager B—he ma y be unwilling to do it., Thus Manager F may not call Manager B, and the informal, network would fail to solve Manager B’s problem., To eliminate this flaw, organization managers must adhere to a common set of nor ms and, values that o verride differing subunit orientations.33 In other w ords, the f irm must ha ve a, strong organizational culture that promotes teamwork and cooperation. When this is the case,, a manager is willing and able to set aside the interests of his own subunit when doing so benefits the f irm as a w hole. If Managers B and F are committed to the same or ganizational, norms and value systems, and if these or ganizational norms and values place the interests of, the firm as a whole above the interests of any individual subunit, Manager F should be willing, to cooperate with Manager B on solving her subunit’ s problems. We look at what managers, can do to promote a strong organizational culture in Chapter 10., , // STRATEGY, COORDINATION, AND, INTEGRATING MECHANISMS, All enter prises need coordination betw een subunits, w hether those subunits are functions,, businesses, or geographic areas. However, the degree of coordination required and the integrating mechanisms used vary depending on the strategy of the firm. Consider first enterprises, that are active in just one business. In the single-business enterprise, the need for coordination, between functions is greater in firms that are competing through product innovation.34 As we, discussed earlier, such organizations need to coordinate the R&D, manufacturing, and marketing functions of the f irm to ensure that ne w products are developed in a timely manner, are, designed to be efficiently manufactured, and match consumer demands. We saw that a matrix, structure is one w ay of achie ving such coordination. Another more common solution is to, form temporary teams to oversee the development and introduction of a ne w product. Once, the new product has been introduced , the team is disbanded and emplo yees return to their, usual functions or move to another team., There is also a high need for coordination in firms that face an uncertain and highly turbulent competiti ve en vironment, w here rapid adaptation to changing mark et conditions is, required for survival.35 In such cases there is a need to make sure the different functions of the, firm are all pulling in the same direction so that the firm’s response to a changing environment, is coherent and embraces the entire or ganization. Temporary teams are often used to effect, such coordination. For example, in the mid-1990s the World Wide Web, which is based on a, computer language kno wn as HTML, emer ged with stunning speed and in a w ay that w as, anticipated by very few managers. The rise of the WWW produced a profound change in the, environment facing computer software f irms, such as Microsoft, w here managers quickl y, realized that they needed to shift their strategy, make their products Web enabled, and position, , hiL30123_ch08_180-205.indd 201, hiL30123_ch08_180-205.indd 201, , 10/31/06 9:40:27 PM, 10/31/06 9:40:27 PM

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202, , PART 3 // Organization Architecture, , the marketing and sales activities of the f irm to compete in this new landscape. At Microsoft, the entire company quickly embraced the WWW, and all products w ere soon Web enabled., Making this shift required tight coordination betw een different software engineering groups,, such as those working on the software code for Windows, Office, and MSN, so that all of the, products not only were Web enabled but also worked seamlessly with each other. Microsoft, achieved this b y forming cross-functional teams. In addition to for mal integrating mechanisms, firms with a high need for coordination betw een subunits, such as those based in tur bulent high-technology environments, would do well to foster informal knowledge networks, to facilitate greater coordination between subunits., In contrast, if a f irm is based in a stable environment characterized by little or no change,, and if developing new products is not a central aspect of the firm’s business strategy, the need, for coordination between functions may be lower. In such cases a firm may be able to function, with minimal integrating mechanisms, such as direct contact or simple liaison roles. These, mechanisms, coupled with a strong culture that encourages employees to share the same goals, and to cooperate with each other for the benef it of the entire organization, may be all that is, required to achieve coordination between functions., For multibusiness firms organized into product divisions, the need for coordination varies, with the type of diversification strategy managers are pursuing. 36 In particular, if a f irm has, diversified into related businesses and is tr ying to realize economies of scope b y sharing, inputs across product divisions, or is trying to boost prof itability by leveraging valuable core, competencies across product di visions, it will need inte grating mechanisms to coordinate, product division activities. (See Chapter 6 for details of di versification strategies.) Liaison, roles, temporary teams, and permanent teams can all be used to ensure such coordination. On, the other hand , if top management is focusing primaril y on boosting prof itability through, superior governance, and if each division is managed on a stand-alone basis with no attempt, to leverage competencies or realize economies of scope, the f irm may well operate well with, minimal or no integrating mechanisms between divisions., , I N CO N C LU S IO N, , W H Y D O E S IT MATTER?, , There are numerous reasons why managers should care about the structure of their, organization. Structure is the way in which work is allocated in an organization. Structure, clarifies who is responsible and accountable for tasks within an organization. The accountability derived from structure is an important aspect of control in an organization. For, example, the head of a product division is responsible and accountable for the performance of that division. The head office will exercise control by setting goals for the, division, monitoring its performance, rewarding divisional managers for attaining or, exceeding those goals, and holding the head of the division accountable if the goals are, not met. Similarly, the head of a function (such as manufacturing) or a cross-functional, team (such as a product development team) is responsible and accountable for the tasks, of that subunit, and controls should be linked to how well that unit reaches its goals., Structure, in other words, is more than a way of allocating tasks; it is also an important, means through which managers control the organization. Without the right structure, it, may be impossible to exercise effective control over the operations of an enterprise., Moreover, strategy is implemented in part through organization structure. If the, structure of the firm does not match its strategy, the result can be poor performance., A diversified firm that operates with a functional structure will probably perform poorly,, as will a high-tech firm based in a rapidly changing environment that does not use crossfunctional teams. Structure must match strategy for superior performance. Managers, need to get structure right if they are to successfully implement the strategy of their, firm and attain competitive advantage. But structure is just one aspect of organization, architecture. Structure must be aligned with control systems, incentives, organizational, culture, and people for strategy to be successfully implemented. In the next few, chapters we look at these other elements of an organization’s architecture., , hiL30123_ch08_180-205.indd 202, hiL30123_ch08_180-205.indd 202, , 10/31/06 9:40:29 PM, 10/31/06 9:40:29 PM

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Organizing \\ CHAPTER 8, , 203, , MANAGEMENT CHALLENGES, 1., , 2., 3., 4., 5., , Successful organizations tend to increase the number of layers in their management, hierarchy. Why do you think this happens? Is this a good thing? What can be done to, limit hierarchical growth?, Explain the links among structure, decentralization, responsibility, accountability,, and control., Accountability is often compromised within a matrix organization. Why?, Under what circumstances might a large, diversified enterprise want to centralize at the, corporate head office decisions regarding (a) purchasing and (b) human resource policies?, Even though Microsoft is a global corporation, it has centralized much of its R&D, activities at its Redmond headquarters. Why do you think this is the case? Can you see, any downside to this approach?, , MANAGEMENT PORTFOLIO, FOR THE ORGANIZATION YOU HAVE CHOSEN TO FOLLOW:, 1., 2., , 3., 4., 5., , Describe the basic organization structure of the enterprise., Does the structure match the strategy of the enterprise? If it does, explain how. If it does, not, explain why not, and outline what should be changed to bring strategy and structure, into alignment., Does the organization have a tall or flat management hierarchy? Is the number of levels, in the hierarchy appropriate?, What is the span of control of the CEO? In your judgment is this span too narrow, too, wide, or just right?, What decisions within this organization are centralized at the head office? What, decisions are decentralized to subunits? Does the approach toward centralization and, decentralization make sense?, , CLOSING CASE, , DOW CHEMICAL, , A handful of major pla yers compete head-to-head around, the world in the chemical industr y. These companies are, Dow Chemical and Du P ont of the United States, Great, Britain’s ICI, and the Ger man trio of B ASF, Hoechst AG,, and Bayer. The barriers to the free flo w of chemical products between nations largely disappeared in the 1970s. This,, along with the commodity nature of most bulk chemicals, and a severe recession in the early 1980s, ushered in a prolonged period of intense price competition. In such an environment, the company that wins the competitive race is the, one with the lowest costs. Dow Chemical was long among, the cost leaders., , hiL30123_ch08_180-205.indd 203, hiL30123_ch08_180-205.indd 203, , For years Dow’s managers insisted that part of the credit, belonged to its “matrix” organization. Dow’s organizational, matrix had three interacting elements: functions (such as, R&D, manufacturing, and marketing), businesses (like ethylene, plastics, and phar maceuticals), and geo graphy (for, example, Spain, Germany, and Brazil). Managers’ job titles, incorporated all three elements (plastics marketing manager, for Spain), and most managers repor ted to at least tw o, bosses. The plastics marketing manager in Spain might report to both the head of the worldwide plastics business and, the head of the Spanish operations. The intent of the matrix, was to mak e Do w operations responsi ve to both local, , 10/31/06 9:40:29 PM, 10/31/06 9:40:29 PM

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204, , PART 3 // Organization Architecture, , market needs and cor porate objectives. Thus the plastics, business might be char ged with minimizing Do w’s global, plastics production costs, while the Spanish operation might, determine how best to sell plastics in the Spanish market., When Dow introduced this str ucture, the results w ere, less than promising: Multiple reporting channels led to confusion and conflict. The many bosses created an unwieldy, bureaucracy. The overlapping responsibilities resulted in, turf battles and a lack of accountability. Area managers disagreed with managers o verseeing business sectors about, which plants should be built w here. In shor t, the str ucture, didn’t work. Instead of abandoning the str ucture, however,, Dow decided to see if it could be made more flexible., Dow’s decision to keep its matrix structure was prompted, by its move into the pharmaceuticals industry. The company, realized that the pharmaceuticals business is very different, from the bulk chemicals business. In bulk chemicals, the, big retur ns come from achie ving economies of scale in, production. This dictates estab lishing large plants in k ey, locations from w hich re gional or global mark ets can be, served. But in phar maceuticals, regulatory and mark eting, requirements for dr ugs v ary so much from countr y to, country that local needs are f ar more impor tant than, reducing manufacturing costs through scale economies. A, high de gree of local responsi veness is essential. Do w, realized its pharmaceutical business would never thrive if it, were managed b y the same priorities as its mainstream, chemical operations., Accordingly, instead of abandoning its matrix, Do w, decided to make it more flexible to better accommodate the, different businesses, each with its o wn priorities, within a, single management system. A small team of senior e xecutives at headquarters helped set the priorities for each type, of business. After priorities were identif ied for each business sector , one of the three elements of the matrix—, function, business, or geographic area—was given primary, authority in decision making. Which element took the lead, varied according to the type of decision and the mark et or, , location in which the company was competing. Such flexibility required that all emplo yees understand w hat w as, occurring in the rest of the matrix. Although this may seem, confusing, for y ears Do w claimed this fle xible system, worked well and credited much of its success to the quality, of the decisions it facilitated., By the mid-1990s, however, Dow had refocused its business on the chemicals industr y, divesting itself of its phar maceutical activities where the company’s performance had, been unsatisf actory. Reflecting the change in cor porate, strategy, in 1995 Dow decided to abandon its matrix str ucture in favor of a more streamlined structure based on global, product divisions. The matrix str ucture was just too complex and costly to manage in the intense competiti ve environment of the time, par ticularly given the compan y’s renewed focus on its commodity chemicals where competitive, advantage often w ent to the lo w-cost producer. As Dow’s, then-CEO put it in a 1999 interview, “We were an organization that was matrixed and depended on teamwork, but there, was no one in char ge. When things w ent well, we didn’t, know whom to re ward; and w hen things w ent poorly, we, didn’t kno w w hom to b lame. So w e created a global, divisional str ucture and cut out la yers of management., There used to be eleven layers of management between me, and the lowest-level employees; now there are five.”37, CASE DISCUSSION QUESTIONS, 1. Why did Dow Chemical f irst adopt a matrix str ucture?, What benefits did it hope to derive from this structure?, 2. What problems emerged with this str ucture? How did, Dow try to deal with them? In retrospect, do y ou think, those solutions were effective?, 3. Why did Dow change its structure again in the mid-1990s?, What was Dow trying to achieve this time? Do you think, the cur rent str ucture makes sense gi ven the industry in, which Dow operates and the strategy of the firm? Why?, , ENDNOTES, 1. D. Naidler, M. Gerstein, and R. Shaw, Organization Architecture (San Francisco:, Jossey-Bass, 1992)., 2. G. Morgan, Images of Organization (Beverly Hills, CA: Sage Publications, 1986)., 3. The material in this section draws on J. Child, Organizations (London: Harper &, Row, 1984). Recent work addressing the issue includes J.R. Baum and S. Wally,, “Strategic Decision Speed and F irm P erformance,” Strategic Mana gement, Journal 24 (2003), pp. 1107–20; and D.I. Jung and B.J. Avolio, “Effects of Leadership Style and Followers’ Cultural Orientation on Performance in Groups and, Individual Task Conditions,” Academy of Mana gement J ournal 42 (1999),, pp. 208–18., 4. J. McCarthy and E. Montalbano, “Microsoft Reshuffles the Deck,” InfoWorld 27, (September 26, 2005), pp. 12–13., 5. This is a k ey tenet of the infor mation processing view of or ganizations. See J., Galbraith, Designing Complex Organizations (Reading, MA: Addison-Wesley,, 1972)., , hiL30123_ch08_180-205.indd 204, hiL30123_ch08_180-205.indd 204, , 6. J. Kim and R.M. Bur ton, “The Effects of Uncer tainty and Decentralization on, Project Team Performance,” Computational & Mathematical Or ganization, Theory8 (2002), pp. 365–84., 7. J. Birkinshaw, N. Hood, and S. Jonsson, “Building F irm Specific Advantages in, Multinational Cor porations: The Role of Subsidiar y Initiati ves,” Strategic, Management Journal 19 (1998), pp. 221–41., 8. K.M. Eisenhardt, “Making F ast Strategic Decisions in High Velocity Environments,” Academy of Management Journal 32 (1989), pp. 543–75., 9. “When Government Fails—Katrina’s Aftermath,” The Economist, September, 2005, p. 25., 10. G.P. Hattrup and B.H. Kleiner, “How to Establish a Proper Span of Control for, Managers,” Industrial Management 35 (1993), pp. 28–30., 11. The classic statement was made by P. Milgrom and J. Roberts, “Bargaining Costs,, Influence Costs, and the Organization of Economic Activity,” in Perspectives in, , 10/31/06 9:40:29 PM, 10/31/06 9:40:29 PM

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Organizing \\ CHAPTER 8, , Positive Political Economy, ed. J.E. Alt and K.A. Shepsle (Cambridge: Cambridge, University Press, 1990). Also see R. Inderst, H.M. Muller, and K. Warneryd, “Influence Costs and Hierarchy,” Economics of Governance 6 (2005), pp. 177–98., 12. C.R. Littler, R. Wiesner, and R. Dunford, “The Dynamics of Delayering,” Journal, of Management Studies 40 (2003), pp. 225–40., 13. J .A. Byr ne, “Jack: A Close Look at Ho w America’s #1 Manager Runs GE, ”, BusinessWeek, June 8, 1998, pp. 90–100. Also see GE’s Two-Decade Transformation (Harvard Business School Case #9-399-150)., 14. L. Worrall and C. Cooper, “Managers, Hierarchies, and Perceptions,” Journal of, Managerial Psychology 19 (2004), pp. 41–55., 15. A.D . Chandler, Strategy and Structure: Chapters in the History of the Industrial, Enterprise (Cambridge, MA: MIT Press, 1962). Also see O .E. Williamson,, Markets and Hierarchies: Analysis and Anti-Trust Implications (New York: Free, Press, 1975)., 16. A.P. Sloan, My Years at General Motors (New York: Bantum Books, 1996). This, book was originally published in 1963., 17. C.W.L. Hill, M.A. Hitt, and R.E. Hoskisson, “Cooperati ve versus Competitive, Structures in Related and Unrelated F irms,” Organization Science 45 (1992),, pp. 501–21; Williamson, Markets and Hier archies: Analysis and Anti-Trust, Implications., 18. C.W.L. Hill, M.A. Hitt, and R.E. Hoskisson, “Declining U.S. Competitiveness:, Reflections on a Crisis, ” Academy of Mana gement Executive 2 (1988),, pp. 51–60., 19. J.M. S topford a nd L .T. Wells, Strategy and Structur e of the Multinational, Enterprise(New York: Basic Books, 1972)., 20. C.A. Bartlett and S. Ghoshal, Managing across Borders (Boston: Harvard Business School Press, 1989); S.M. Davis, “Managing and Organizing Multinational, Corporations,” in Transnational Management, ed. C.A. Bar tlett and S. Ghoshal, (Homewood, IL: Richard D. Irwin, 1992). Also see J. Wolf and W.G. Egelhoff,, “A Reexamination and Extension of Inter national Strategy–Structure Theory,”, Strategic Management Journal 23 (2002), pp. 181–89., 21. “ Unilever’s Restr ucturing Mak es Us Lik e P&G,” Marketing Week, February, 24, 2005, pp. 8–9; Unile ver’s Q4 2004 Roadsho w Presentation archi ved at, http://www.unilever.com/resources/downloadlibrary.asp., 22. P.R Lawrence and J. Lorsch, Organization and Environment (Boston: Harvard, University Press, 1967)., 23. K.B. Clark and S.C. Wheelwright, Managing New Product and Process Development (New York: Free Press, 1993); M.A. Schilling and C.W.L. Hill, “Managing, the New Product Development Process,” Academy of Management Executive 12,, no. 3 (August 1998), pp. 67–81; S.L. Bro wn and K.M. Eisenhardt, “Product, Development: Past Research, Present Findings, and Future Directions,” Academy, of Management Review 20 (1995), pp. 343–78., , hiL30123_ch08_180-205.indd 205, hiL30123_ch08_180-205.indd 205, , 205, , 24. L.R. Bur ns, and D .R. Whorley, “ Adoption and Abandonment of Matrix, Management Pro grams: Ef fects of Or ganizational Characteristics and, Interorganizational Networks,” Academy of Mana gement Journal, February, 1993, pp. 106–38; C.A. Bartlett, and S. Ghoshal, “Matrix Management: Not a, Structure, a F rame of Mind ,” Harvard Business Review, July–August 1990,, pp. 138–45., 25. S. Thomas and L.S. D’Annunizo, “Challenges and Strate gies of Matrix Organizations,” HR Human Resource Planning 28 (2005), pp. 39–49., 26. See Galbraith, Designing Complex Organizations., 27. M. Goold and A. Campbell, “Structured Networks: Toward the Well-Designed, Matrix,” Long Range Planning, October 2003, pp. 427–60., 28. Bar tlett and Ghoshal, Managing across Borders; F.V. Guterl, “Goodb ye, Old, Matrix,” Business Month, February 1989, pp. 32–38; I. Bjorkman, W. BarnerRasussen, and L. Li, “Managing Kno wledge Transfer in MNCs: The Impact of, Headquarters Control Mechanisms,” Journal of International Business 35 (2004),, pp. 443–60., 29. M.S. Granovetter, “The Strength of Weak Ties,” American Journal of Sociology, 78 (1973), pp. 1360–80., 30. A .K. Gupta and V.J. Govindarajan, “Kno wledge Flo ws within Multinational, Corporations,” Strategic Management Journal 21, no. 4 (2000), pp. 473–96;, V.J. Govindarajan and A.K.Gupta, The Quest f or Global Dominance (San, Francisco: Jossey-Bass, 2001); U. Andersson, M. Forsgren, and U. Holm, “The, Strategic Impact of External Networks: Subsidiary Performance and Competence, Development in the Multinational Cor poration,” Strategic Management Journal, 23 (2002), pp. 979–96., 31. F or examples, see W.H. Davidow and M.S. Malone, The Virtual Corporation, (New York: Harper Collins, 1992)., 32. 3M, A Century of Inno vation: The 3M Story (3M, 2002)., http://www.3m.com/about3m/century/index.jhtml., , Available at, , 33. W.G. Ouchi, “Mark ets, Bureaucracies, and Clans, ” Administrative Science, Quarterly 25 (1980), pp. 129–44., 34. D. Miller, “Relating Porter’s Business Strategies to Environment and Structure,”, Academy of Management Journal 31 (1988), pp. 280–308., 35. Lawrence and Lorsch, Organization and Environment., 36. Hill, Hitt, and Hoskisson, “Cooperative versus Competitive Structures in Related, and Unrelated Firms.”, 37. Sources: “Dow Draws Its Matrix Again, and Again, and Again,” The Economist,, August 5, 1989, pp. 55–56; Anonymous, “Dow Goes for Global Str ucture,”, Chemical Marketing Reporter, December 11, 1995, pp. 4–5; R.M. Hodgetts,, “Dow Chemical CEO William Stavropoulos on Structure and Decision Making,”, Academy of Management Executive 13 (November 1999), pp. 29–35., , 10/31/06 9:40:29 PM, 10/31/06 9:40:29 PM

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9, LEARNING OBJECTIVES, , CONTROL SYSTEMS, After Reading This Chapter You Should Be Able to:, 1, , Discuss the attributes of a typical organizational control system., , 2, , Describe the different kinds of controls that are used in organizations., , 3, , Explain how different controls should be matched to the strategy and structure of an organization., , 4, , Outline the features of the balance score card approach to control metrics, and explain why it is, useful., , 5, , Discuss informal or backchannel control methods., , / / / / / / / / / / / / / / /, , Control Systems, Establishing Goals and, Standards, Measuring Performance, Comparing Performance, against Goals and Standards, Taking Corrective Action, Providing Reinforcement, Methods of Control, Personal Controls, Bureaucratic Controls, Output Controls, Cultural Control, Control through Incentives, Market Controls, Summary, , hiL30123_ch09_206-229.indd 206, , Matching Controls to, Strategy and Structure, Controls in the Single Business, Controls in Diversified Firms, Choosing Control Metrics:, The Balanced Scorecard, Backchannel Control, Methods, In Conclusion: Why Does It, Matter?, Management Challenges, Management Portfolio, Closing Case: Lincoln, Electric, , 10/31/06 10:19:45 PM

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Inventory Controller., By focusing its, control systems on, inventory, Nordstrom, was able to increase, its inventory turnover, and profits., © Getty Images, , / / / / / / / / / / / / / / / / / / / / /, , I, , n 2001 Nordstrom, the venerable high-end department store, was facing some challenges. Despite, industry-leading sales per square foot, profits had fallen, short of the company’s goals for three years in a row, and were down some 35 percent from 1999. The problem: Poor inventory controls meant that Nordstrom, had either too much merchandise that was in low, demand or too little of the merchandise consumers, wanted. The failure to have popular items in stock, meant Nordstrom was losing high-margin sales. To, correct this problem, Nordstrom revamped its inventory, control systems. The company invested heavily in information technology to track its inventory on a realtime basis. It also built electronic links with suppliers, to show what was selling at Nordstrom and what the, , hiL30123_ch09_206-229.indd 207, , reorder pattern would be. The goal was to stock only, what consumers demanded by having inventories delivered to stores as needed. To measure the success of, this program, Nordstrom focused on two metrics—, inventory turnover and the average inventory per, square foot of selling space. In 2001 the company was, turning over its inventory 3.73 times a year, and on average throughout the year had $60 of inventory for, every square foot of selling space in a store. By 2004,, as a result of better inventory controls, inventory was, turning over 4.51 times a year, and the company held, $52.46 of inventory for every square foot of selling, space. Due to improved operating efficiency, net profits, surged from $125 million in 2001 to $406 million in, 2004.1, , 11/9/06 7:48:31 PM

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208, , PART 3 // Organization Architecture, , ■ Control systems at, Nordstrom., , criticalAtask of managers is to control the activities of their organization. As we noted in, Chapter 8, controls are an inte gral part of an enter prise’s organization architecture. Controls, are necessary to make sure an organization is operating efficiently and in a manner consistent, with its intended strate gy. Without adequate controls, control loss occurs and the or ganization’s performance will suffer. This was clearly the case at Nordstrom in the earl y 2000s. A, lack of adequate systems to track inventory meant that Nordstrom lost control over what was, stocked in its stores. This translated into higher costs and lower profits. To rectify this problem, and regain control, Nordstrom had to put an inventory control system in place. In this chapter, we look in detail at control systems. We begin by reviewing basic control systems and the, various ways in which managers control their organizations., , // Control Systems, control, The process through which, managers regulate the, activities of individuals, and units., standard, A performance requirement, that the organization is, meant to attain on an, ongoing basis., , subgoal, An objective that, if, achieved, helps an, organization attain or, exceed its major goals., , W, ithin organizations, control can be viewed as the process through which managers regulate the activities of individuals and units so they are consistent with the goals and standards, of the organization.2 As we noted earlier in the book, a goal is a desired future state that an, organization attempts to realize (see Chapter 5). A standard is a performance requirement, the organization is meant to attain on an ongoing basis. As we will see, there are se veral, different ways in which managers can regulate the activities of individuals and units so they, remain consistent with organization goals and standards. Before considering these, however,, we need to review the workings of a typical control system. As illustrated in Figure 9.1, this, system has f ive main elements: establishing goals and standards, measuring perfor mance,, comparing performance against goals and standards, taking corrective action, and providing, reinforcement.3, , // ESTABLISHING GOALS AND STANDARDS, Most organizations operate with a hierarchy of goals. In the case of a business enter prise,, the major goals at the top of the hierarch y are normally expressed in terms of prof itability, and prof it growth (see Chapter 6). These goals are typicall y translated into subgoals that, can be applied to individuals and units within the organization. A subgoal is an objective, that helps the organization attain or exceed its major goals. As with major goals, subgoals, should be precise and measurab le, address impor tant issues, be challenging but realistic,, and specify a time period., , Feedback, , Establish goals, and standards, , FIG UR E 9 .1, , Feedback, , Take, corrective action, , Variance between, performance and, goals and standards, , Measure, performance, , Compare, performance against, goals and standards, , Provide, reinforcement, , Performance meets, or exceeds, goals and standards, , A Typical Control, System, , hiL30123_ch09_206-229.indd 208, , 10/31/06 10:19:49 PM

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Control Systems \\ CHAPTER 9, , 209, , To illustrate what we mean by a goal hierarchy, suppose Nordstrom decides to achieve a, 15 percent retur n on in vested capital (R OIC) in the coming y ear. This is the compan y’s, major profitability goal. One way of doing this is to reduce the amount of capital needed to, generate a dollar’s worth of sales—perhaps by reducing the amount of capital tied up in inventory. How does the compan y do that? By tur ning over inventory more rapidl y! Thus, Nordstrom might operate with a subgoal of tur ning over inventory f ive times in the ne xt, year. If it reaches that subgoal, w hich is precise, measurable, and challenging and must be, achieved within a prespecified period, the company’s profitability, measured by ROIC, will, increase., Dell Computer is a good example of a company that adopts a hierarchical approach to goal, setting and performance measurement. According to Michael Dell, in an ef fort to boost performance in the mid-1990s Dell introduced a compan ywide approach to educate e veryone, about the importance of boosting profitability as measured by return on invested capital. “We, explained specif ically how everyone could contribute (to higher R OIC) by reducing c ycle, times, eliminating scrap and w aste, selling more, forecasting accuratel y, scaling operations, effectively, increasing inventory turns, collecting accounts recei vable efficiently, and doing, things right the first time.”4 Dell went further: It made goals relating to these items the core of, the company’s control and incentive compensation systems., Standards are similar to goals in that they too are objectives; but standards tend to be things, the organization is expected to achieve as a par t of its routine operations rather than a challenging goal it is striving to attain. For example, an organization might operate with a standard, that vendors should be paid within 30 days of submitting an invoice, customer inquiries should, be answered within 24 hours, all employees should have a formal performance review and be, given written feedback once a year, safety checks should be perfor med on production equipment every six months, or employees should fly coach on business trips., A key element in the control process is generating the right goals, subgoals, and standards., Managers need to choose goals and standards carefull y in case they generate the wrong kind, of behavior. There is an old sa ying: “You get what you measure.” If you choose the wrong, goals and standards, y ou will get the wrong beha vior. A few years ago a placement agenc y, decided to evaluate and reward its staff based on how many job seekers they sent to job interviews. This productivity measure seemed to produce the desired results—over the next few months more job seek ers got, interviews. However, after a while the numbers started to drop, off alar mingly. When managers look ed into the issue, the y, found that several prospective employers would no longer interview people referred to them by the placement agency. In an, effort to hit their numbers, staf f members had been sending, people to interview for jobs for which they were not qualified., This had damaged the reputation of the placement agenc y, among prospecti ve employers and reduced business for the, agency—the opposite of w hat managers had been tr ying to, achieve. Managers subsequently changed the measure to reflect, the number of job seekers who were actually hired., A similar example occurred in the customer service call center of a large organization. In an attempt to raise the productivity, of call center staff, managers instituted a standard that customer, complaints should be resolved within 5 minutes. What happened, Hammer It In! American automobile companies, (predictably perhaps) w as that call center staf f would cut of f, discovered that because assembly-line workers were not, customers 4 minutes and 58 seconds into a call, whether the cusgiven goals relating to quality, they did not pay attention, tomer problem had been resolved or not! This behavior damaged, to quality when building a car. It took the rise of highthe company’s reputation for service quality.5, quality Japanese manufacturers to persuade American, Another important consideration when choosing goals is, companies to give quality goals to workers on an, to make sure the right goals are assigned to the right indiassembly line., viduals and units. A classic mistak e is to assign a goal to, © Getty Images, people who lack the responsibilities and resources required, , hiL30123_ch09_206-229.indd 209, , 10/31/06 10:19:49 PM

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210, , PART 3 // Organization Architecture, , to attain it while not assigning the goal to those w ho do. In traditional automobile assembly operations, for e xample, quality goals w ere assigned to the quality assurance, department, which checked f inished automobiles for defects w hen they came of f an assembly line. This might seem logical, but it didn’t work well. The defects were normally, built into cars upstream in the manuf acturing process, and the quality assurance depar tment could not improve the manuf acturing process. Moreover, the people w ho made the, mistakes (the assemb ly-line employees) were not gi ven quality goals—rather the y were, assessed on volume output goals, such as the number of employee hours it took to build a, car. Because they were not measured on quality, they had no incentive to pay attention to, quality issues, and defect rates remained high. This problem was fixed only when automobile companies started to make assembly-line workers responsible for product quality.6, , // MEASURING PERFORMANCE, Once goals, subgoals, and standards ha ve been established, performance must be measured, against the criteria specified. This is not as easy as it sounds. Infor mation systems have to be, put in place to collect the required data; and the data must be compiled into usab le form and, transmitted to the appropriate people in the or ganization. Repor ts summarizing actual, performance might be tabulated daily, weekly, monthly, quarterly, or annually. Wal-Mart, for, example, produces weekly reports summarizing the performance of every store across a range, of key measures such as profits and inventory turnover. Moreover, some performance metrics,, such as store sales, are repor ted daily. Achieving such comprehensive and timely reporting, requires signif icant investments in infor mation technology. Thus for Nordstrom to measure, inventory turnover, bar codes have to be placed on all merchandise, which is scanned when it, enters a store and scanned again when it is sold. The data are loaded onto a central computer, that tracks in ventory at all Nordstrom stores, and in ventory data are communicated to, managers and suppliers. To implement such a system, Nordstrom had to in vest in computer, technology and scanners., With the massive advances in computing power that have occurred over the last three, decades, managers have seemingly inf inite quantitative information at their disposal. As, advantageous as this is, there is danger in rel ying too much on quantitati ve data. Performance measurement has a soft element; the data might not tell the full stor y. It is in the, interests of managers to lea ve their desks, visit the f ield, and tr y to see behind the numbers. For example, for y ears Wal-Mart’s data sho wed that indi vidual stores w ere hitting, profit goals. In the earl y 2000s, ho wever, a b lizzard of la wsuits alleged that some store, employees had been pressured to w ork overtime for no e xtra pay. Apparently some store, managers were hitting their perfor mance goals b y resor ting to beha viors that w ere not, sanctioned by the compan y and in f act e xplicitly violated both the la w and the v alues, of the or ganization. Such beha vior could not be detected simpl y b y re viewing, quantitative data.7, , // COMPARING PERFORMANCE AGAINST GOALS, AND STANDARDS, The next step in the control process is to compare actual perfor mance against goals and, standards. If performance is in line with goals or standards, that is good. However, managers, need to make sure the reported performance is being achieved in a manner consistent with, the values of the organization. If repor ted performance falls short of goals and standards,, managers need to f ind the reason for the v ariance. This typically requires collecting more, information, much of which might be qualitative data gleaned from f ace-to-face meetings, and detailed probing. The same is true if reported performance exceeds goals or standards., Managers must find the reasons for such favorable variance, and doing so requires collecting more information., , hiL30123_ch09_206-229.indd 210, , 10/31/06 10:19:50 PM

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Control Systems \\ CHAPTER 9, , 211, , For e xample, a hobb y game compan y noted that sales of a ne w game w ere f alling, significantly behind sales goals in the United States w hile exceeding goals in Europe.8 To, examine these v ariances, managers met with distributors and retailers to see w hat w as, occurring. The U.S. distributor was in financial difficulty and had cut back on its sales force, without informing the company: It was not promoting the game to retailers. In contrast, in, Europe the major distributor had adopted an agg ressive posture, setting up retail displa ys, where potential customers could pla y the g ame before purchasing it. This strategy proved, successful. Apparently the game w as so unusual that customers w ere initially put of f; but, once they played it, many former skeptics became enthusiastic customers. Thus by collecting, additional qualitative data, managers found the reason for the variances from goals., , // TAKING CORRECTIVE ACTION, Variances from goals and standards require that managers take corrective action. When actual, performance easily exceeds a goal, cor rective action might include raising the goal. When, actual performance falls short of a goal, depending on what further investigation reveals, managers might change strategy, operations, or personnel. After Nordstrom failed to hit its prof it, goals for three years running, the board of directors f ired the CEO and replaced him with a, member of the founding f amily, Blake Nordstrom, w ho at the time w as only 39 y ears old., Blake Nordstrom led the charge to improve the operating efficiency of the company. His first, action was to visit the stores and talk to emplo yees to discover what was going wrong. His, actions included putting another f amily member, James Nordstrom, in char ge of revamping, Nordstrom’s inventory management system (which he successfully executed)., Radical change is not always the appropriate response when an organization fails to reach, a major goal. In vestigation might re veal that the original goal w as too agg ressive, or that, changes in mark et conditions outside the control of management accounted for the poor, performance. In such cases the response to a shortfall might be to adjust the goal downward., In the case of the hobby game company just discussed, after discovering the reason for the, variance managers ter minated the relationship with the U .S. distributor and hired a small, sales force to visit retailers. In addition, the company adopted the strategy that had pro ved so successful in, Europe—setting up displays in retail, stores so potential customers could, play the game. In Europe, managers, raised the sales goals., , ■ Nordstrom: Taking, corrective action., , // PROVIDING, REINFORCEMENT, If the goals and standards are met or, exceeded, managers need to pro vide, timely positive reinforcement to those, responsible—congratulations for a, job well done, awards, pay increases,, bonuses, or enhanced career prospects. Pro viding positi ve reinforcement is just as important an aspect of, a control system as taking cor rective, action. Behavioral scientists ha ve, long known that positi ve reinforcement increases the probability that, those being ackno wledged will continue to pursue such beha vior in the, , hiL30123_ch09_206-229.indd 211, , Fourth-Generation Family Hero Blake Nordstrom took over as president of, Nordstrom after the company failed to hit its performance goals for several years., A fourth-generation member of the founding family, he decided to revamp the, company’s inventory management system., © Deseret Morning News, , 10/31/06 10:19:50 PM

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212, , PART 3 // Organization Architecture, , future.9 Without positive reinforcement, people become discouraged, feel underappreciated,, may not be willing to w ork as hard, and might look for other emplo yment oppor tunities, where they are better appreciated., , // Methods of Control, Now that we have a clear idea of ho w a control system w orks, we can look at the dif ferent, ways in which managers can re gulate the activities of individuals and units so that the y are, consistent with organization goals and standards. Here we review six main ways of achieving, control: personal controls, bureaucratic controls, output controls, cultural controls, control, through incentives, and market controls.10, , // PERSONAL CONTROLS, As the name suggests, personal control is control by personal contact with and direct supervision of subordinates. Personal control consists of making sure through personal inspection, and direct super vision that individuals and units beha ve in a w ay that is consistent with the, goals of the organization. Personal control can be very subjective, with the manager assessing, how well subordinates are performing by observing and interpreting their behavior. As a philosophy for control within an or ganization, personal control tends to be found primaril y in, small firms where the activities of a few people might be regulated through direct oversight. By, its nature personal control tends to be associated with the centralization of power and authority, in a key manager, who is often the owner of the small business. Personal control may work best, when this key manager is a charismatic individual who can command the personal alle giance, of subordinates., Personal control has serious limitations. F or one thing, e xcessive super vision can be, demotivating. Employees may resent being closely supervised and may perform better with, a greater degree of personal freedom. Moreover, the subjective nature of personal control can, create a lack of objecti vity and procedural justice in the perfor mance re view process., Subordinates may feel that favoritism, personal likes and dislikes, and individual idiosyncrasies are as important in performance reviews as actual performance. Personal control is also, costly in that managers must devote considerable time and attention to direct super vision of, subordinates, which takes their attention away from other important issues. The real problem, with personal control, however, is that it starts to break down as an organization grows in size, and complexity. As this occurs, the key manager has no choice, but to decentralize decision making to others within the hierarchy if the enter prise is to continue g rowing. Doing so ef fectively requires the adoption of different control philosophies., However, e ven in lar ge or ganizations some limited per sonal control is still used, although typically as an adjunct to, other control methods. For example, while relying on objective metrics to monitor perfor mance, the CEO ma y also use, personal control to shape the behavior of his or her immediate, subordinates. In turn, these managers may use personal control in addition to other control methods to influence the, behavior of their subordinates, and so on do wn through the, organization. Jack Welch, the longtime CEO of General Electric, had regular one-on-one meetings with the heads of all of, GE’s major businesses.11 He used these meetings to probe the, managers about the strate gy, structure, and f inancial performance of their operations and to communicate to his subordiCan I Take a Look at That? Close supervision is, nates the impor tance of cer tain k ey v alues. In doing so, required for personal control., he exercised some personal control over these managers and, © Ryan McVay/Getty Images, undoubtedly o ver the strate gies the y f avored. At the same, , personal control, Making sure through, personal inspection and, direct supervision that, individuals and units, behave in a way that is, consistent with the goals, of an organization., , hiL30123_ch09_206-229.indd 212, , 10/31/06 10:19:51 PM

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Control Systems \\ CHAPTER 9, , 213, , time, managers like Welch also give their subordinates considerable autonomy, reviewing, their performance by looking at objective measures such as the perfor mance of the units, under their control., , // BUREAUCRATIC CONTROLS, The great German sociologist Max Weber was the f irst to describe the nature of bureaucratic, controls.12 Writing in the early 20th century, Weber described how bureaucratic organizations, emerged as a rational and efficient response to the problems of organizing large-scale economic, and social activity. According to Weber, bureaucracies are goal-oriented organizations characterized by hierarchical management systems and extensive division of labor into specialized tasks., Weber saw control within a bureaucracy as being achieved by impersonal written rules and standardized procedures. Advancement within such organizations, according to Weber, was based on, the ability of an individual to perform well against predetermined standards., Following Weber, bureaucratic control is typically defined as control through a formal, system of written rules and procedures.13 Bureaucratic control methods rely primarily on prescribing what individuals and units can and cannot do—that is, on estab lishing bureaucratic, standards. At the University of Washington, for e xample, a bureaucratic standard specif ies, that faculty members can perform no more than one day a week of outside work. Other standards articulate the steps to be taken when hiring and promoting faculty, purchasing computer, equipment for faculty, and so on., Almost all large organizations use some bureaucratic controls. Familiar examples are budgetary controls and controls o ver capital spending. Budgets are essentiall y a set of r ules for, allocating an organization’s financial resources. A subunit’s budget specifies with some precision how much the unit may spend and how that spending should be allocated across different, areas. Senior managers in an organization use budgets to control the behavior of subunits. For, example, an R&D budget might specify ho w much an R&D unit can spend on product, development in the coming y ear. R&D managers kno w that if the y spend too much on one, project, they will have less to spend on others; so they modify their behavior to stay within the, budget. Most budgets are set b y negotiation between headquar ters and subunit managers., Headquarters managers can encourage the g rowth of certain subunits and restrict the g rowth, of others by manipulating their budgets., Similarly, capital spending r ules might require senior managers to appro ve any capital, expenditure by a subunit that exceeds a certain amount. (A budget lets headquar ters specify, the total amount a subunit can spend in a gi ven year, whereas capital spending r ules give, headquarters additional control over how that money is spent.) Headquarters can be expected, to deny approval for capital spending requests that are at variance with the overall goals of the, enterprise and to approve those that are congruent with enterprise objectives., As you should realize b y now, although the ter m bureaucratic often has ne gative connotations, in fact bureaucratic control methods can be useful in organizations. They allow managers, to decentralize decision making within the constraints specified by formal rules and procedures., However, too g reat a reliance on bureaucratic r ules can lead to prob lems. Excessively formal, rules and procedures can be stifling, limiting the ability of individuals and units to respond in a, flexible way to specif ic circumstances. This can sour perfor mance and sap the moti vation of, those who value individual freedom and initiative. As such, extensive bureaucratic control methods are not w ell suited to or ganizations facing dynamic, rapidly changing environments or to, organizations that employ skilled individuals who value autonomy. The costs of monitoring the, performance of individuals and units to make sure they comply with bureaucratic rules can also, be significant and may outweigh the benefits of establishing extensive rules and standards., Bureaucratic standards can also lead to unintended consequences if people try to find ways, around rules that they think are unreasonable. An interesting and controversial case is forced, school busing in the United States. In the 1970s school districts aroundAmerica started to bus, children to schools outside their immediate neighborhoods to achieve a better racial mix. This, well-intentioned bureaucratic r ule w as designed to speed racial inte gration in a society, characterized by signif icant racial discrimination. Unfor tunately the r ule had unintended, , hiL30123_ch09_206-229.indd 213, , bureaucratic control, Control through a formal, system of written rules and, procedures., , 10/31/06 10:19:52 PM

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214, , PART 3 // Organization Architecture, , Social Engineering Forced school busing was a well-intentioned effort to speed up racial, integration in the United States. Unfortunately, like many bureaucratic rules, it had unintended, consequences—in this case “white flight” to the suburbs., © Comstock/Picture Quest, , consequences. Parents of all races objected to their children being bused to distant schools. In, many large cities where forced busing was practiced, white families with children responded, by fleeing to suburbs w here there were few minorities and busing w as not practiced, or by, sending their children to expensive private schools within the city. As a result, rather than advancing racial integration, busing had the opposite effect. For example, in Seattle the percentage of white students in city schools dropped from 60 percent to 41 percent over the 20 years, of forced busing.14 In the 1990s most school districts ended forced busing., , // OUTPUT CONTROLS, , ■ FedEx: Use of output, controls., , output controls, Setting goals for units or, individuals to achieve and, monitoring performance, against those goals., , hiL30123_ch09_206-229.indd 214, hiL30123_ch09_206-229.indd 214, , Output controls can be used when managers can identify tasks that are complete in themselves, in the sense of having a measurable output or criterion of overall achievement that is visible.15, For example, the overall achievement of an automobile factory might be measured by the number of employee hours required to build a car (a measure of producti vity) and the number of, defects found per 100 cars produced by the factory (a measure of quality). Similarly, Nordstrom, measures the overall achievement of the unit responsib le for inventory management b y the, number of inventory turns per year, and FedEx measures the performance of each of its local, stations in its express delivery network by the percentage of packages delivered before 10:30, a.m. In a multibusiness compan y such as GE or 3M, senior management might measure the, output of a product division in terms of that division’s profitability and profit growth., When complete tasks can be identif ied, output controls are goals set for units or individuals to achieve; performance is monitored against those goals. Unit managers’ performance, is then judged by their ability to achieve the goals.16 If goals are met or exceeded, unit managers will be re warded (an act of reinforcement). If goals are not met, senior managers will, normally intervene to find out why and take appropriate corrective action. Thus, as in a classic, control system, control is achieved by comparing actual performance against targets, providing reinforcement, and intervening selectively to take corrective action., , 11/9/06 7:48:33 PM, 11/9/06 7:48:33 PM

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Control Systems \\ CHAPTER 9, , 215, , The goals assigned to units depend on their role in the f irm. Self-contained product divisions are typically given goals for profitability and profit growth. Functions are more likely to, be given goals related to their par ticular activity. Thus R&D will be gi ven product development goals, production will be given productivity and quality goals, marketing will be given, market share goals, and so on., As with budgets, output goals are nor mally established through negotiation between units, and senior managers at headquarters. Generally headquarters tries to set goals that are challenging but realistic so unit managers are forced to look for w ays to improve their operations—but, not so pressured that they will resort to dysfunctional behavior. Output controls foster a system, of “management b y exception” in that so long as units meet their goals, unit managers are, granted considerable autonomy. If a unit fails to attain its goals, however, headquarters managers, are likely to ask questions. If they don’t get satisfactory answers, they are likely to intervene in a, unit, perhaps by replacing managers and looking for ways to improve efficiency., The great virtue of output controls is that they facilitate decentralization and give individual, managers within units much g reater autonomy than either personal controls or bureaucratic, controls. This autonomy lets managers within a unit conf igure their w ork environment to, match the particular contingencies they face, rather than having a work environment imposed, from above. Thus output controls are useful when units have to respond rapidly to changes in, the markets they ser ve. Output controls also in volve less e xtensive monitoring than either, bureaucratic or personal controls. Senior managers can achie ve control by comparing actual, performance against targets and intervening selectively. As such, output controls reduce the, workload on senior executives and allow them to manage a larger and more diverse organization with relati ve ease. Thus many lar ge multiproduct and multinational enter prises rely, heavily on output controls in their various product divisions and foreign subsidiaries., Like personal and bureaucratic controls, output controls ha ve limitations. First, as noted, earlier when we discussed control systems, senior managers need to look behind the numbers, to make sure unit managers are achieving goals in a way that is consistent with the v alues of, the organization. Second, as also noted earlier, managers need to choose the right output criteria to measure lest they encourage dysfunctional behavior., Third, output controls do not al ways work well if there are e xtensive interdependencies between units. 17 The performance of a unit ma y be ambiguous if it is based on cooperation with, other units. To illustrate this problem, consider the case of a diversified enterprise—PDN Inc.—, that has three product divisions making three different products: paper towels, disposable diapers,, and napkins (see Figure 9.2a). Initially the head office places each product into a self-contained, product division, each with its own functions, and assigns each division a profitability target. At, this point the output controls work well. However, all three divisions sell to the same customers,, supermarkets. Imagine that these customers don’ t want to deal with three dif ferent sales forces, from the same company, so they pressure PDN Inc. to consolidate its sales force. PDN responds, by creating a four th division that is responsib le for marketing and selling the three products to, supermarkets ( Figure 9.2b ). The three product divisions are still assigned prof itability goals,, whereas the marketing and sales division is evaluated on the basis of sales growth., , Head, office, , hiL30123_ch09_206-229.indd 215, , Paper, towels, , Disposable, diapers, , Napkins, , Customers, , Customers, , Customers, , F I G U R E 9 .2 A, PDN Inc. before, Reorganization, , 10/31/06 10:19:53 PM

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216, , PART 3 // Organization Architecture, , FIG UR E 9 .2 B, PDN Inc. after, Reorganization, , Head, office, , Marketing and, sales, , Paper, towels, , Disposable, diapers, , Napkins, , Divisions supply marketing and sales with products, Customers, , performance, ambiguity, A situation that occurs, when the link between, cause and effect is, ambiguous., , cultural control, Regulating behavior by, socializing employees so, that they internalize the, values and assumptions of, an organization and act in, a manner that is consistent, with them., self-control, Occurs when employees, regulate their own, behavior so that it, is congruent with, organizational goals., , hiL30123_ch09_206-229.indd 216, , All this seems reasonable; but now consider what occurs if the disposable diaper business, fails to reach its prof itability target for the y ear, and the mark eting division misses its sales, target for diapers. Top management asks the head of the diaper di vision to explain why this, has occurred. He replies, “It’s not my fault; my division executed well, but the guys in the, marketing division screwed up. I gave them a great product, and they didn’t sell it well.” Next, the top managers ask the head of the marketing division what the problem was. She says, “My, people did everything expected of them and more, but we were dealt a poor hand. The diaper, division produced a poor-quality product that cost too much, and try as we might we could not, sell enough to hit our sales goal.”, The interdependence between the diaper di vision and the mark eting division has created, performance ambiguity. Performance ambiguity occurs when it is difficult to identify the, cause of poor (or strong) perfor mance—that is, w hen the link betw een cause and ef fect is, ambiguous. Performance ambiguity means senior managers cannot ef fectively control the, division simply by relying on obvious output controls. They have to discover the true causes, of poor or strong perfor mance. In this case, because the statements from the tw o divisional, executives contradict each other, top managers have no choice but to audit the operations of, both divisions, collecting more infor mation, to deter mine the tr ue cause of the poor perfor mance. This of course can be done, but doing so increases the costs of controlling the organization. Thus, in general, interdependence betw een units within an or ganization can create, performance ambiguities that mak e output controls more dif ficult to inter pret. Resolving, these ambiguities requires managers to collect more information, which places more demands, on top management and raises the monitoring costs associated with output controls. It also, increases the possibility that managers will become overloaded with information, run into the, constraints implied by bounded rationality, and fall back on simple heuristics w hen making, decisions, which can lead to cognitive biases (see Chapter 5)., , // CULTURAL CONTROL, As noted already, organizational culture consists of the values and assumptions that are shared, among employees of an organization. Cultural control involves regulating behavior by socializing employees so that the y internalize the values and assumptions of the or ganization, and act in a manner that is consistent with them. When this occurs, employees tend to engage, in self-control—they regulate their own behavior so that it is congruent with organizational, goals. In enterprises with a strong culture where the values and assumptions of the organization are accepted by most employees and self-control is widely practiced, the need for other, control systems, and particularly extensive personal and bureaucratic controls, is correspondingly reduced. By encouraging self-control, cultural controls reduce the monitoring costs associated with managing an organization., In the last chapter we noted that the steelmaker Nucor Corporation has a strong organizational, culture. We could say Nucor uses cultural controls to re gulate behavior within the or ganization., , 10/31/06 10:19:53 PM

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Control Systems \\ CHAPTER 9, , Nucor is not alone. Microsoft, for e xample, has a very, strong culture that w as set by the company’s founder,, Bill Gates. Gates al ways placed a high v alue on, technical brilliance, competitiveness, and a willingness, to work long hours, something that he himself did (as, did Ste ve Ballmer , the cur rent CEO). Gates and, Ballmer hired people who shared these characteristics, and then led by example. As a result, today Microsoft, remains a compan y w here technical brilliance and, competitiveness are highl y valued and w here people, work long hours—not because an y bureaucratic rules, Grrrrrr...Let Me at Them!, tell them to do so, and not because super, visors, Microsoft CEO Steve Ballmer, explicitly require them to do so, but because ne w, embodies the hard-driving, competiemployees are socialized into these nor ms b y their, tive culture of the company. Because, coworkers, who themselves were thus socialized in the, employees are so well socialized, past. At Microsoft cultural control has reduced the need, into this culture, the company does, for bureaucratic and personal controls. The company, not have to use other controls to, can trust people to work hard and to beha ve in a very, encourage competitive behavior., competitive manner because this is such a per vasive, © Reuters/Corbis, aspect of the culture., Although cultural control can mitig ate the need, for other controls, thereb y reducing monitoring, costs, it is not universally beneficial. Cultural control can have dysfunctional aspects too. The, hard-driving, competitive aspect of Microsoft’s culture was arguably a contributing factor in, the antitr ust violations of w hich the compan y was accused in the 1990s (the U .S. Justice, Department, which brought the antitrust case against Microsoft in the United States, used as, evidence inter nal e-mail messages at Microsoft in w hich one senior manager stated that, Microsoft would “cut off a competitor’s air supply”). Moreover, Microsoft’s culture of working, long hours clearl y has a do wnside: Man y good emplo yees ha ve bur ned out and left the, company. The company is aware of this; and as its workforce has aged and started families, it, has tried to become more accommodating, stressing that output is more impor tant than hours, worked. However, culture is dif ficult to change, and therein lies the prob lem: If cultural, controls need to be changed, it may not be easy to do so., , 217, , ■, , Culture at Microsoft., , // CONTROL THROUGH INCENTIVES, Incentives are de vices used to encourage and re ward appropriate emplo yee behavior., Many employees receive incentives in the form of annual bonus pay. Incentives are usually, closely tied to the performance metrics used for output controls. For example, targets linked, to prof itability might be set to measure the perfor mance of a subunit, such as a product, division. To create positive incentives for employees to work hard to exceed those targets,, they may be given a share of any profits above those targeted. If a subunit has set a goal of, a 15 percent retur n on in vested capital and it actuall y achieves a 20 percent retur n, unit, employees may be given a share in the profits generated in excess of the 15 percent target in, the form of bonus pay., The idea is that giving employees incentives to work productively cuts the need for other, control mechanisms. Control through incenti ves is designed to f acilitate self-control—, employees regulate their own behavior in a manner consistent with or ganizational goals to, maximize their chance of ear ning incentive-based pay. Although paying out bonuses and the, like costs the organization money, well-designed incentives typically pay for themselves. That, is, the increase in performance due to incentives more than offsets the incentives’ costs., The type of incentive used may vary depending on the employees and their tasks. Incentives for emplo yees working on the f actory floor will probab ly differ from the ones for, senior managers. The incentives used must match the type of w ork performed. The employees on the factory floor of a manufacturing plant may be broken into teams of 20 to 30, , hiL30123_ch09_206-229.indd 217, , incentives, Devices used to encourage, and reward appropriate, employee behavior., , 10/31/06 10:19:53 PM

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218, , PART 3 // Organization Architecture, , individuals, and they may have their bonus pay tied to the, ability of their team to reach or e xceed targets for output, and product quality. In contrast, the senior managers of the, plant may be rewarded according to metrics link ed to the, output of the entire operation. The basic principle is to, make sure the incentive scheme for an individual employee, is linked to an output target over which he or she has some, control. Individual employees on the factory floor may not, be able to influence the perfor mance of the entire operation, but they can influence the performance of their team,, so incentive pay is tied to output at this level., When incentives are tied to team perfor mance they have, the added benef it of encouraging cooperation between team, members and fostering a de gree of peer control. Peer, control occurs when employees pressure others within their, team or work group to perform up to or in e xcess of the exParenting Incentives. This onsite day care facility for, pectations of the organization.18 Thus if the incentive pay of a, employees provides positive incentives for parents to, 20-person team is linked to team output, team members can, continue working full time after they have had a child. Abbott, be expected to pressure those in the team w ho are perceived, Labs, IKEA, and Microsoft are just some of the companies, as slacking off, urging them to pick up the pace and make an, that offer onsite day care facilities to their employees., equal contribution to team effort. Strong peer control reduces, the need for direct super vision of a team and can facilitate, © AP Photo/Ann Heisenfelt, attempts to move toward a flatter management hierarchy., In sum, incentives can reinforce output controls, induce employees to practice self-control,, increase peer control, and lower the need for other control mechanisms. Like all other control, peer control, methods discussed here, control through incenti ves has limitations. Because incenti ves are, Occurs when employees, typically linked to the metrics used in output controls, the points made about output controls, pressure others within, also apply here. Specif ically, managers need to mak e sure incentives are not tied to output, their team or work group to, metrics that result in unintended consequences or dysfunctional behavior. Moreover, incentive, perform up to or in excess, systems have been abused in some f irms, with senior managers being a warded incentive, of the expectations of the, contracts that set the performance bar so low that they earn significant bonus pay, irrespective, organization., of whether there is a substantial improvement in the performance of the organization. In 2004,, for e xample, the CEO of Blockbuster Inc. ear ned $56.8 million in pa y and bonuses (an, increase of 541 percent over 2003) in a y ear when the operating income of Blockbuster fell, 50 percent and its share price declined b y 47 percent! In par t this was achieved because the, board of directors replaced 4.3 million of his stock options—w hich were worthless because, the exercise price for them was significantly above the current stock price—with an outright, ■ Blockbuster: Excess, grant of 1.6 million shares of stock as a “retention measure. ” Incentives like these seem to, compensation?, reward senior managers for mediocre performance or worse, and as such they are not worthy, of being called incentives. As an aside, it is worth noting that due to massive boosts in incentive, pay, in 2004 the a verage CEO of an American public company earned 400 times w hat the, average hourly worker took home, up from 42 times since 1980. Looking at these f igures,, many commentators have argued that senior managers have benefited from an abuse of incentive pay and are reaping huge gains at the expense of other employees and shareholders.19, , market controls, Regulating the behavior of, individuals and units, within an enterprise by, setting up an internal, market for some valuable, resource such as capital., , hiL30123_ch09_206-229.indd 218, hiL30123_ch09_206-229.indd 218, , // MARKET CONTROLS, Market controls involve regulating the behavior of individuals and units within an enter prise, by setting up an internal market for some valuable resource such as capital.20 Market controls are, usually found within di versified enterprises organized into product di visions, where the head, office might act as an inter nal investment bank, allocating capital funds between the competing, claims of the dif ferent product di visions based on an assessment of their lik ely future perfor mance. Within this internal market, all cash generated by the divisions is viewed as belonging to, the head office. The divisions then have to compete for access to the capital resources controlled, , 11/9/06 7:48:34 PM, 11/9/06 7:48:34 PM

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Control Systems \\ CHAPTER 9, , by the head of fice. Because they need that capital to, grow their divisions, the assumption is that thisinternal, competition will drive divisional managers to look for, ways to improve the efficiency of their units. One of, the first companies in the world to establish an internal, capital market was the Japanese electronics manufacturer Matsushita (best kno wn for its P anasonic, brand name), which introduced such systems in the, 1930s.21, In addition, in some enterprises divisions compete, for the right to develop and sell new products. Again,, Matsushita has a long histor y of letting dif ferent, divisions develop similar new products, then assigning, overall responsibility for producing and selling the, product to the division that seems to be furthest along, in the commercialization process. Although some, people might vie w such duplication of product, development ef fort as w asteful, Matsushita’ s, Industrial Samurai Konosuke, legendary founder, Konosuke Matsushita, belie ved, Matsushita, the legendary founder, that the creation of an inter nal market for the right to, of Japan’s Matsushita, which is best, commercialize technology drove divisional managers, known for its Panasonic brand name,, to maximize the ef ficiency of product de velopment, believed that fostering internal, efforts within their unit. Similarl y, within Samsung,, competition between divisions for, the K orean electronics compan y, senior managers, the right to develop new products, often set up tw o teams within dif ferent units to, and for access to capital created, develop new products such as memor y chips. The, incentives for divisional managers, purpose of the internal competition between the teams, to run their units efficiently., is to accelerate the product de velopment process,, Courtesy of Panasonic, with the winning team ear ning significant accolades, 22, and bonuses., The main problem with market controls is that fostering inter nal competition between, divisions for capital and the right to develop new products can make it difficult to establish, cooperation betw een di visions for mutual g ain.23 If tw o dif ferent di visions are racing, against each other to develop similar new products and are competing ag ainst each other, for limited capital resources, they may be unwilling to share technological know-how with, each other, perhaps to the detriment of the entire cor poration. Companies lik e Samsung, deal with this prob lem by using inte grating mechanisms, such as the liaison role, and, assigning the responsibility for leveraging technological know-how across divisions to key, individuals., , 219, , ■, , Controls at Matsushita., , // SUMMARY, To recap, managers can use six dif ferent control methods to re gulate the beha vior of, individuals and units within their organization: personal controls, bureaucratic controls, output, controls, cultural controls, incentive controls, and market controls. In practice, few managers, rely on just one control method. Most or ganizations mix methods to achie ve control. Some, personal controls might be used to manage relationships with direct reports; bureaucratic controls are frequently used to set standards for budgets and capital spending; output controls are, used for relatively self-contained units that produce a measurable output; and incentives may, also be tied to the metrics used for output controls. Both cultural and incenti ve controls can, induce employees to regulate their own behavior in a manner that is consistent with the goals, of the organization, and market controls might help allocate capital resources betw een competing divisions within diversified enterprises. Each control method has adv antages and disadvantages. As we will see in the next section, the choice between different methods has to be, made in light of prevailing circumstances., , hiL30123_ch09_206-229.indd 219, , 10/31/06 10:19:55 PM

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220, , PART 3 // Organization Architecture, , // Matching Controls to Strategy and Structure, Although organizations typically use most of the control methods discussed here, the precise, mix of controls tends to v ary with the size, strate gy, and or ganization str ucture of the, enterprise. As organizations g row they tend to rel y less on personal controls and more on, other methods. Beyond this generalization, w e need to consider ho w controls vary with the, strategy and str ucture of an enter prise. Here w e look at dif ferent controls f irst in singlebusiness enterprises and then in multibusiness enterprises., , // CONTROLS IN THE SINGLE BUSINESS, In the last chapter we noted that the organization structure of a single business depends on the, strategy it is pursuing and the en vironment in which it is based. Specif ically, firms in stable, environments with little product innovation tend to operate with functional structures and use, simple integrating mechanisms, such as direct contact and liaison roles, to achie ve coordination between functions. In contrast, f irms in dynamic and uncer tain environments, such as, those characterized by rapid technological change, tend to operate with functional str uctures, and achieve tight coordination with more complex integrating mechanisms such as temporary, or per manent cross-functional teams or matrix str uctures. Ho w might the controls that, managers use vary across such enterprises?, Functional Structure with Low Integration Consider first a firm with a functional structure and no integrating mechanisms between functions beyond direct contact and simple liaison roles. The environment facing the f irm is stable, so the need for inte gration is minimal., Within such a firm, bureaucratic controls in the form of budgets are used to allocate financial, resources to each function and to control spending. Output controls assess ho w well each, function is performing. Different functions are assigned different output targets, depending on, their specif ic tasks. The procurement function might be assigned an output tar get based on, procurement costs as a percentage of sales; the manuf acturing function might be gi ven productivity and product quality tar gets such as output per emplo yee and defects per thousand, products; the logistics function might ha ve an inventory turnover target; the mark eting and, sales function might be gi ven sales g rowth and mark et share goals; and the success of the, service function might be measured by the time it takes to resolve a customer problem. To the, extent that each function hits these tar gets, the overall performance of the f irm will improve, and its profitability will increase., Output controls might also be pushed further down within functions. Thus the manufacturing process might be subdi vided into discrete tasks, each of w hich has a measurab le, output. Employee teams might be for med and empowered to tak e ownership of each discrete task. Each team will be assigned an output tar get. To the extent that functions can be, divided into teams and output controls applied to those teams, this will facilitate decentralization within the organization, wider spans of control ( because it is relatively easy to control a team by monitoring its outputs), and a flatter organization structure., Within such a str ucture, the CEO will control the heads of the functions. They in, turn will exercise control over units or teams within their functions. There may also be, some degree of personal control within the str ucture, with the CEO using personal supervision to influence the beha vior of functional heads, w ho in tur n will do the same, for their direct reports. Incentives will be tied to output targets. Thus the incentive pay, of the head of manuf acturing might be link ed to the attainment of predeter mined productivity and quality tar gets for the manuf acturing function; the incenti ve pay of the, head of logistics might be linked to increases in inventory turnover; and so on. Incentives might also be pushed further down within the organization, with members of teams, within functions being rewarded on the basis of the ability of their teams to reach or, exceed targets. A portion of the incentive pay for managers (and perhaps all employees), might also be tied to the overall performance of the enterprise to encourage cooperation, and knowledge sharing within the organization., , hiL30123_ch09_206-229.indd 220, , 10/31/06 10:19:56 PM

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Control System \\ CHAPTER 9, , 221, , Finally, such an enter prise can ha ve strong cultural controls, w hich, may reduce the need for personal controls and bureaucratic r ules. Individuals might be tr usted to behave in the desired manner because the y, accept the pre vailing culture. Thus cultural controls might allo w the, firm to operate with a flatter or ganization structure and wider spans of, control and generally increase the effectiveness of output controls and, incentives., Functional Structure with High Integration A functional structure, with high inte gration presents managers with a more comple x control, problem. The problem is par ticularly severe if the f irm adopts a matrix, structure. As noted in the last chapter, such a structure might be adopted, by a firm based in a dynamic environment where competition centers on, product development. Within such an enter prise bureaucratic controls, will again be used for f inancial budgets, and output controls will be applied both to the dif ferent functions and to cross-functional product development teams. Thus a team might be assigned output targets covering, development time, production costs of the new product, and the features, the product should incor porate. For functional managers, incentive controls might be linked to output targets for their functions, whereas for the, members of a product development team, incentives will be tied to team, performance., The problem with such an arrangement is that the performance of the, Extreme Incentives Yahoo! CEO Terry, product development team depends on suppor t from the v arious funcSemel agreed to cut his salary to just $1 a, tions, including people and information from manufacturing, marketing,, year, and take all of his compensation tied to, and R&D. Consequently, significant performance ambiguity might comthe performance of Yahoo’s stock price., plicate the process of using output controls to assess the perfor mance of, © Rick Wilking/Reuters/Corbis, a product development team. The failure of a product development team, to achieve output targets might be due to the poor perfor mance of team, members, but it could just as w ell be due to the f ailure of functional personnel to suppor t, the team. Identifying the cause of performance variations requires senior managers to collect more infor mation (much of it subjecti ve), which increases the time and ener gy they, must devote to the control process, diverts their attention from other issues, and increases, the costs of monitoring and controlling the or ganization. Other things being equal, this, reduces the span of control senior managers can handle, suggesting the need for a taller, hierarchy—which as we saw in the last chapter creates additional problems., Performance ambiguity raises the question of w hether there is a better solution to the, control problem. One step is to mak e sure the incentives of all key personnel are aligned., The classic way of doing this is to tie incenti ves to a higher le vel of organization performance. Thus, in addition to being re warded for the perfor mance of their functions, functional heads might also be rewarded for the overall performance of the firm. Insofar as the, success of product de velopment teams increases f irm performance, this gives functional, heads an incentive to make sure the product development teams receive adequate support., In addition, strong cultural controls can help estab lish companywide nor ms and v alues, emphasizing the importance of cooperation between functions and teams for their mutual, benefit., , // CONTROLS IN DIVERSIFIED FIRMS, In the last chapter w e discussed how diversified enterprises are organized into a str ucture, based on product di visions. In a classic multidi visional structure, each business is placed, into its own division with its own functions as a self-contained entity. The role of the head, office is to control divisions, determine the overall strategic direction of the enterprise, and, , hiL30123_ch09_206-229.indd 221, , 10/31/06 10:19:56 PM

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222, , PART 3 // Organization Architecture, , allocate capital resources betw een the dif ferent di visions to maximize the economic, performance of the enterprise., In Chapter 6 w e saw three w ays in w hich diversified f irms might tr y to impro ve the, performance of their constituent units: le veraging core competencies across di visions,, sharing resources across di visions to realize economies of scope, and superior inter nal, governance., Controls in the Diversified Firm with Low Integration In firms that focus primarily on, boosting performance through superior internal governance, the need for integration between, divisions is low. These firms are not trying to share resources or leverage core competencies, across divisions, so there is no need for comple x integrating mechanisms, such as crossdivisional teams, to coordinate the acti vities of dif ferent divisions. In these enter prises the, head office typically controls the divisions in four main ways.24, First, bureaucratic controls re gulate the f inancial budgets and capital spending of the, divisions. Typically each division must have its f inancial budgets approved for the coming, year by the head of fice. In addition, an y capital expenditures in excess of a cer tain amount, have to be approved by the head office. Thus, for example, any item of spending by a division, in excess of $50,000 might have to be approved by the head office., Second, the head office will use output controls, assigning each di vision output targets, that are nor mally based on measurab le f inancial criteria such as the prof itability, prof it, growth, and cash flow of each division. Typically targets for the coming year are set by negotiation between divisional heads and senior managers at the head of fice. So long as the, divisions hit their tar gets, they are left alone to r un their operations. If perfor mance falls, short of tar gets, however, top managers will nor mally audit the af fairs of a di vision to, discover why this occur red, taking cor rective action if necessar y by changing strate gy or, personnel., Third, incentive controls will be used, with the incentives for divisional managers tied to, the financial performance of their divisions. Thus to earn pay bonuses, divisional managers, will have to achie ve or e xceed the perfor mance targets previously negotiated between the, head office and the di visions. To make sure divisional managers do not tr y to “talk down”, their performance targets for the year, making it easy for them to earn bonuses, the head office will normally benchmark a product division against its competitors, take a close look at, industry conditions, and use this infor mation to establish performance targets that are challenging but attainable., Fourth, the head of fice will use mark et controls to allocate capital resources betw een, different divisions.25 As noted earlier, in multidivisional enterprises the cash generated by, product divisions is normally viewed as belonging to the head of fice, which functions as, an internal investment bank, reallocating cash flows between the competing claims of different divisions based on an assessment of lik ely future perfor mance. The competition, between divisions for access to capital creates further incentives for divisional managers to, run their operations ef ficiently and ef fectively. In addition, as at Matsushita, the head, office might use mark et controls to allocate rights to de velop and commercialize ne w, products between divisions., Within divisions, the control systems used will be those found within single-business, enterprises. Head office managers might also use personal controls to influence the beha vior, of divisional heads. In par ticular, the CEO might e xercise control over divisional heads by, meeting with them and probing for richer feedback about operations., Controls in the Diversified Firm with High Integration The control prob lem is more, complex in diversified firms that are trying not only to improve performance through superior, internal governance but also to le verage core competencies across product di visions and, realize economies of scope. 3M is an e xample of such an enter prise. 3M is a diversified, enterprise with multiple product divisions. The company devotes a lot of effort to leveraging, core technology across divisions (and as we saw in Chapter 8, one way in which the company, , hiL30123_ch09_206-229.indd 222, , 10/31/06 10:19:57 PM

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Control Systems \\ CHAPTER 9, , does this is b y establishing internal knowledge networks). In addition, the compan y tries to, realize economies of scope, particularly in the areas of marketing, sales, and distribution with, a marketing and sales group that sells the products of se veral 3M divisions. In this sense 3M, has an organization structure that is similar in some respects to PDN Inc. (see Figure 9.2b )., More generally, when a multidivisional enterprise tries to improve performance through economies of scope and via the leveraging of core competencies across divisions, the need for integration between divisions is high., In such organizations top managers use the standard repertoire of control mechanisms discussed in the last section. Ho wever, they also have to address two control problems that are, not found in multidi visional f irms with no cooperation and inte gration between divisions., First, they have to f ind a control mechanism that induces di visions to cooperate with each, other for mutual g ain. Second, they need to handle the perfor mance ambiguities that arise, when divisions are tightly coupled, sharing resources and performance results., The solution to both prob lems is in essence the same as that for single-business f irms, with high inte gration between functions. Specif ically, the f irm needs to adopt incenti ve, controls for divisional managers that are linked to higher-level performance—in this case, the perfor mance of the entire enter prise. Improving the perfor mance of the entire f irm, requires cooperation betw een di visions; such incenti ve controls should f acilitate that, cooperation. In addition, strong cultural controls can create v alues and nor ms that, emphasize the impor tance of cooperation betw een divisions for mutual g ain. At 3M, for, example, there is a long-estab lished cultural nor m that w hile products belong to the, divisions, the technology underlying those products belongs to the entire compan y. Thus, the surgical tape business might use adhesive technology developed by the office supplies, business., Despite such solutions to control prob lems, top managers in f irms with tightl y integrated divisions have to cope with g reater performance ambiguities than top managers in, less complex multidivisional organizations. Integration between various product divisions, means that it is hard for top managers to judge the performance of each division merely by, monitoring objective output criteria. To get a tr ue picture of perfor mance and achie ve, adequate controls, they probably have to spend more time auditing the operating divisions, and talking to divisional managers to get a more qualitative picture of performance. Other, things being equal, this might limit the span of control the y can effectively handle—and, thus the scope of the enterprise.26, , 223, , ■, , Controls at 3M., , // Choosing Control Metrics: The Balanced, Scorecard, An important issue confronting managers, par ticularly with re gard to output and incenti ve, controls, is deciding what metrics to use for a firm’s control systems. Historically many firms, have relied on financial metrics, such as profitability, profit growth, and cash flow. Such metrics are important and should always be used in a business enterprise; but several commentators have argued that overreliance on a narrow set of financial metrics to control an organization can ha ve ne gative consequences. 27 Most notab ly, in an attempt to impro ve cur rent, financial performance managers might pursue actions that boost shor t-term profitability at, the expense of long-term competitiveness and profits. The problem with such an approach, for, example, is that a lack of investment in equipment and products can significantly hurt the firm, down the road., One approach to this problem is to use what is known as the balanced scorecard. Robert, Kaplan and David Norton, who developed the balanced scorecard, suggest that managers use, a number of different financial and operational metrics to track perfor mance and control an, organization.28 In addition to traditional financial measures, which they refer to as the financial, perspective, they suggest that managers use metrics related to ho w customers see the organization (the customer per spective), w hat the or ganization must e xcel at (the operational, , hiL30123_ch09_206-229.indd 223, , the balanced, scorecard, A control approach that, suggests managers use, several different financial, and operational metrics to, track performance and, control an organization., , 10/31/06 10:19:57 PM

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224, , PART 3 // Organization Architecture, , perspective), and the ability of the or ganization to lear n and impro ve its of ferings and, processes over time (the innovation perspective )., The precise metric used to capture each of these perspecti ves will vary from business to, business depending on the strategy of the enterprise, the nature of its production process, and, the industry in which it is based. Obviously a retailer like Wal-Mart or Costco would use different operational measures from a softw are company like Microsoft or a manuf acturing, company such as General Motors. Examples of the kinds of metrics managers might use are, given in Figure 9.3, which summarizes some of the measures for a balanced scorecard used, by a high-tech medical equipment compan y that the author consulted for . This company, wished to differentiate itself from competitors by being able to f ill customer orders quickly, (many of its competitors operated with long backlo gs) and offering industry-leading aftersale service and suppor t. Thus for the customer perspecti ve, it chose to measure the time, from order to delivery and the time taken to solve customer service problems. From the operational perspective the strategic objective was to be an efficient, high-quality manufacturer, of medical equipment; thus managers selected a series of operational metrics including unit, costs, inventory turnover, and defect rates in manufacturing to track operating efficiency. For, the innovation perspective, the compan y was based in an industr y where technology was, advancing rapidly and timely new product development was crucial for long-term success., Managers tracked success along this dimension b y the percentage of sales generated from, , Financial perspective, Objective, Metrics, Survive, , Cash flow, , Prosper, , Profitability, (ROIC), Growth in, sales and, net profit, , Growth, , Innovation perspective, Objective, Metrics, , Customer perspective, Objective, Metrics, Responsive Delivery time, supply, Service, Time taken to, excellence solve service, problems, , New, products, Time to, market, , % of sales, from new, products, Development, time, , Operational perspective, Objective, Metrics, Operational, excellence, High, quality, , FIG UR E 9 .3, , hiL30123_ch09_206-229.indd 224, , Unit costs, Inventory turns, Defect rate, , The Balanced Scorecard, , 10/31/06 10:19:57 PM

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Control Systems \\ CHAPTER 9, , new products introduced in the last three years and by the time it took to develop a new product. With regard to the financial perspective, the company wished to sur vive, prosper, and, grow, so it chose a f airly standard set of f inancial metrics, including cash flow measures, a, profitability measure (return on invested capital or ROIC), and growth measures., Kaplan and Norton’s contention is that the balanced scorecard is akin to the dials and, indicators in an airplane cockpit. It gives managers a fast but comprehensive view of the, business that balances f inancial measures with operational, customer-centered, and innovation measures; and it gi ves a better view of the overall health of the business than, relying on just f inancial measures. Implementing the balanced scorecard approach requires managers to identify w hich individuals and units within the organization should, be responsible for achie ving which metrics, linking output controls and incenti ves to, those metrics. Thus manuf acturing managers might be gi ven the responsibility for, achieving the unit cost, inventory turn, and defect rate goals detailed in Figure 9.3. They, might also be given responsibility for goals related to delivery time because that is largely within the control of manufacturing. Customer service managers might be responsible, for goals related to the time taken to solve customer service problems; reducing product, development time might be a responsibility shared b y marketing, manuf acturing, and, R&D managers because all three functions must work together closely to develop products quickly., , // Backchannel Control Methods, , 225, , ■ Backchannel control at, Starbucks., ■ Backchannel control at, Southwest., , backchannel, An informal channel, through which managers, can collect important, information., , The control methods discussed so f ar in this chapter all rel y for their e xecution on for mal, reporting channels within an organization. In addition to these formal systems, managers often, use backchannel methods to collect additional qualitati ve information that gives them another, view of how the organization is performing, adds richness to the data collected through formal, channels, and enab les them to achie ve g reater control. A, backchannel is an infor mal channel via w hich managers, can collect important information. To establish a backchannel,, managers have to de velop a netw ork of contacts within the, organization that gives an honest picture of how the organization is performing., At Starbucks, for e xample, the f irst thing CEO Jim, Donald does every morning is call 5 to10 stores to talk to the, managers and other employees there and get a sense of how, their stores are performing. Donald also stops at a local Starbucks every morning on the way to work to buy his morning, coffee. This has allowed him to get to kno w individual employees there well. Donald f inds these infor mal contacts a, useful source of infor mation about ho w the compan y is, performing.29, Managers often buy products from their own organization,, interacting with it as customers, to see how well it is treating, this crucial constituency. Some senior managers work alongside lo wer-level employees—partly to build a netw ork of, contacts and partly to understand how the organization is performing at that level. Herb Kelleher, the charismatic founder, and former CEO of Southwest Airlines, would often help airHerb Kelleher, the founder and Executive Chairman of, line attendants on Southw est flights, distributing refreshSouthwest Airlines, pictured here on a Harley-Davidson, ments and talking to customers. One frequent flyer on Southmotorcycle given to him by his pilots, is enjoying the, west Airlines reported sitting next to Kelleher three times in, company’s chili cook-off. Organizational events such as, 10 years. Each time K elleher asked him and others nearb y, these help build the organization’s culture., how Southw est Airlines w as doing in a number of areas,, Courtesy Southwest Airlines, looking for trends and spotting inconsistencies.30, , hiL30123_ch09_206-229.indd 225, hiL30123_ch09_206-229.indd 225, , 11/9/06 7:48:36 PM, 11/9/06 7:48:36 PM

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226, , PART 3 // Organization Architecture, , I N CO N C LU S ION, , WH Y DOE S IT M ATTER?, , It is difficult to overemphasize the importance of the material covered in this chapter, for managers. Control is a fundamental task of management. Without adequate, control systems in place, an organization can drift from its goals and will not attain, a satisfactory level of performance. Without adequate control systems in place,, managers will not know how well the organization is actually operating, what is, working and what is broken, or whether employees are complying with critical, standards., It is not enough, however, just to put any old control systems in place: Managers, must put the right systems in place. As we have seen in this chapter, the wrong, systems can have unintended consequences. They can produce dysfunctional behavior,, stifle employee initiative with too much bureaucracy, and inhibit needed cooperation., Managers can choose a number of different metrics and control methods; the best, choice depends on the strategy of the firm and its organization structure. Strategy,, structure, and controls must be matched. A business operating in a stable environment, may require very different control systems from a dynamic enterprise based in a rapidly, changing environment. Deciding which methods are best, and what criteria to use to, judge the performance of the organization, is one of the most challenging tasks of, management—and one of the most critical., , MANAGEMENT CHALLENGES, 1., 2., , 3., 4., 5., , “As the name suggests, bureaucratic control systems are demotivating and should be, avoided at all costs.” Do you agree with this statement?, Why might cooperation between two units in an organization to achieve a common, goal lead to performance ambiguities? What can managers do to overcome these, ambiguities?, What are the benefits of using market controls within an organization? What are the, potential costs? When do you think it makes most sense to establish market controls?, Why might it pay managers to develop backchannel control methods? Can you see any, drawbacks of such methods?, For a long time in Britain, the National Health Service paid dentists for each filling they, installed. What might be the unintended consequences of this system? Can you think of, a better system?, , MANAGEMENT PORTFOLIO, FOR THE ORGANIZATION YOU HAVE CHOSEN TO FOLLOW:, 1., 2., 3., , hiL30123_ch09_206-229.indd 226, , Try to discover all you can about the main methods top managers use to control the, organization., Do these control methods make sense given the structure and strategy of the enterprise?, How?, Would you suggest any change in control methods for the organization? If so, what?, , 10/31/06 10:19:59 PM

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Control Systems \\ CHAPTER 9, , CLOSING CASE, , 227, , LINCOLN ELECTRIC, , Lincoln Electric is one of the leading companies in the global, market for arc welding equipment. This is a cost-competitive, business in w hich consumers are price sensiti ve. Lincoln’s, success has been based on extremely high levels of employee, productivity. The compan y attributes its producti vity to a, strong organizational culture and an incentive scheme based, on piecework. Lincoln’s organizational culture dates back to, James Lincoln, who in 1907 joined the company his brother, had estab lished a fe w y ears earlier. Lincoln had a strong, respect for the ability of the individual and believed that, correctly motivated, ordinary people could achieve extraordinary, performance. He emphasized that the compan y should be a, meritocracy where people were rewarded for their individual, effort. Strongl y e galitarian, Lincoln remo ved bar riers to, communication between workers and managers, practicing, an open-door policy. He made sure that all w ho worked for, the company were treated equally; for example, everyone ate, in the same cafeteria, there w ere no reserved parking places, for managers, and so on. Lincoln also belie ved that an y, productivity gains should be shared with consumers in the, form of lower prices, with emplo yees in the for m of higher, pay, and with shareholders in the form of higher dividends., The or ganizational culture that g rew out of James, Lincoln’s beliefs w as reinforced b y the compan y’s incentive system. Production workers receive no base salary but, are paid according to the number of pieces the y produce., The piecework rates at the compan y enable an emplo yee, working at a nor mal pace to ear n an income equivalent to, the average wage for manuf acturing workers in the area, where a f actory is based. Workers are responsible for the, quality of their output and must repair an y defects spotted, by quality inspectors before the pieces are included in the, piecework calculation. Since 1934 production workers have, been awarded semiannual bonuses based on merit ratings., These ratings are based on objecti ve criteria (such as an, employee’s level and quality of output) and subjecti ve criteria (such as an emplo yee’s attitudes toward cooperation, and his or her dependability). These systems give Lincoln’s, employees an incenti ve to w ork hard and to generate, innovations that boost producti vity—doing so influences, , Productivity Beaters! The pay of employees at, Lincoln Electric is tied closely to productivity targets. So, successful have these incentive systems been that the, company has the highest productivity in its industry, along, with the lowest cost structure., Courtesy of the Lincoln Electric Company, , their level of pay. Lincoln’s factory workers have been able, to earn a base pay that often exceeds the average manufacturing wage in the area by more than 50 percent, and the y, also receive bonuses that in good y ears can doub le their, base pay. Despite high employee compensation, the workers, are so producti ve that Lincoln has a lo wer cost str ucture, than its competitors.31, CASE DISCUSSION QUESTIONS, 1. What kind of control systems does Lincoln Electric rel y, on to generate high employee productivity?, 2. Can you think of any possible unintended consequences, of an incenti ve pay system based on piece work? How, does Lincoln guard ag ainst these unintended consequences?, 3. Do Lincoln’s control systems match the strate gy of the, enterprise? How?, , ENDNOTES, 1. J. Batsell, “Cost Cutting, In ventory Control Help Boost Nordstrom’s Quarterly, Profit,” Knight Ridder Tribune News, February 22, 2002, p. 1; Nordstrom’s 2004, 10K statement., . 2J. Child, Organization: A Guide to Pr oblems and Pr actice (Har per & Ro w:, London, 1984)., 3. S.G. Green and M.A. Welsh, “Cybernetics and Dependence: Reframing the Control, Concept,” Academy of Management Review 13, no. 2 (1988), pp. 287–301., , 4.M. Dell, Direct from Dell: Strategies That Revolutionized an Industry (New York:, Harper Collins, 1999), p. 135., 5. A. Neely et al., “Dysfunctional Performance through Dysfunctional Measures,”, Cost Management 17, no. 5 (2003), pp. 41-46., 6. J.P. Womack, D.T. Jones, and D . Roos, The Machine That Changed the World, (New York: Macmillan, 1990)., 7. C.R. Gentry, “Off the Clock,” Chain Store Age, February 2003, pp. 33–36., , 227, , hiL30123_ch09_206-229.indd 227, , 10/31/06 10:19:59 PM

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228, , PART PART, 3 // 3Organization, Architecture, // Organizational, Architecture, , 8. The author serves on the advisory board of the company., 9. For a recent summary, see D.M. Wiegand and E.S. Geller, “Connecting Positive, Psychology and Organization Behavior Management,” Journal of Organization, Behavior Management 24, no. 12 (2004–2005), pp. 3–20., 10. See J. Child, “Strategies of Control and Organization Behavior,” Administrative Science Quarterly 18 (1973), pp. 1–17; K. Eisenhardt, “Control: Or ganizational and, Economic Approaches,” Management Science 31 (1985), pp. 134–49; S.A. Snell,, “Control Theory in Human Resource Management,” Academy of Management Review 35 (1992), pp. 292–328; W.G. Ouchi, “The Transmission of Control through, Organizational Hierarchy,” Administrative Science Quarterly 21 (1978), pp. 173–92., 11.J. Welsh and J . Byr ne, Jack: Str aight fr om the Gut (W arner Books: Ne w, York, 2001)., 12.M. Weber, Economy and Society, trans. and ed. G. Roth and C. Wittich (New, York: Bedminster Press, 1968/1921)., 13.Child, Organization: A Guide to Problems and Practice., 14.R. Teichroeb, “End to F orced Busing Creates Ne w Prob lems for Seattle’ s, Schools,” Seattle Post Intelligencer, June 3, 1999, Web edition., 15.Child, Organization: A Guide to Problems and Practice., 16. C.W.L. Hill, M.E. Hitt, and R.E. Hoskisson, “Cooperati ve versus Competitive, Structures in Related and Unrelated Diversified Firms,” Organization Science 3, (1992), pp. 501–21., 17.J.D. Thompson, Organizations in Action (New York: McGraw-Hill, 1967)., 18. Peer control has long been argued to be a characteristic of many Japanese organizations. See M. Aoki, Information, Incentives, and Bar gaining in the J apanese, Economy (Cambridge: Cambridge University Press, 1988)., 19. L. Lavelle, “A Payday for Performance,” BusinessWeek, April 18, 2005, pp. 78–81., , 20.O.E. Wiliamson, The Economic Institutions of Capitalism (New York: Free Press,, 1985)., 21.C. Bartlett, Philips versus Matsushita: A New Century, a New Round. (Harvard, Business School Case # 9-302-049, 2005)., 22. L. Kim, “The Dynamics of Samsung’s Technological Learning in Semiconductors,” California Management Review 39, no. 3 (1997), pp. 86–101., 23. Hill, Hitt, and Hoskisson, “Cooperative versus Competitive Structures in Related, and Unrelated Diversified Firms.”, 24. Hill, Hitt, and Hoskisson, “Cooperative versus Competitive Structures in Related, and Unrelated Diversified Firms.”, 25. C.W.L. Hill, “The Role of Cor porate Headquarters in the Multidivisional Firm,”, in Fundamental Issues in Str ategy Resear ch, ed. R. Rumelt, D .J.Teece, and, D. Schendel (Cambridge, MA: Har vard Business School Press, 1994),, pp. 297–321., 26.C.W.L. Hill and R.E. Hoskisson, “Strate gy and Str ucture in the Multiproduct, Firm,” Academy of Management Review 12 (1988), pp. 331–41., 27. C.W.L. Hill, M.A. Hitt, and R.E. Hoskisson, “Declining U .S. Competitiveness:, Reflections on Crisis,” Academy of Management Executive 2 (1988), pp. 51–60., 28.R.S. Kaplan and D.P. Norton, The Balanced Scorecard: Translating Strategy into, Action (Boston: Harvard Business School Press, 1996)., 29. Comments were made by Jim Donald at a presentation to University of Washington, MBA students., 30.B. McConnell and J. Huba, Creating Customer Evangelists (Chicago: Dearborn, Trade Publishing, 2003)., 31.Sources: J. O’Connell, Lincoln Electric: Venturing Abroad (Har vard Business, School Case # 9-398-095, April 1998); and www.lincolnelectric.com ., , 228, , hiL30123_ch09_206-229.indd 228, , 10/31/06 10:19:59 PM

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Control Systems \\ CHAPTER 9, , 229, , NOTES, , 229, , hiL30123_ch09_206-229.indd 229, , 10/31/06 10:20:00 PM

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10, LEARNING OBJECTIVES, , ORGANIZATIONAL, CULTURE, After Reading This Chapter You Should Be Able to:, 1, , Describe the elements of organizational culture., , 2, , Discuss the importance of organizational subcultures., , 3, , List four categories of artifacts through which corporate culture is deciphered., , 4, , Discuss the conditions under which cultural strength improves corporate performance., , 5, , Identify four strategies to change and strengthen an organization’s culture., , 6., , Compare and contrast four strategies for merging organizational cultures., , / / / / / / / / / / / / / / /, , What Is Organizational Culture?, Shared Values, Shared Assumptions, Content of Organizational Culture, Organizational Subcultures, Deciphering an Organization’s, Culture, Organizational Stories and Legends, Rituals and Ceremonies, Organizational Language, Physical Structures and Décor, Is Organizational Culture Important?, Organizational Culture Strength and Fit, Corporate Cults and Suppressing, Dissent, Adaptive Cultures, Organizational Culture and Business, Ethics, , hiL30123_ch10_230-253.indd 230, , How to Change and Strengthen, Organizational Culture, Actions of Founders and Leaders, Aligning Artifacts, Introducing Culturally Consistent, Rewards, Selecting and Socializing Employees, Managing Organizational Culture, during Mergers, Strategies to Merge Different, Organizational Cultures, In Conclusion: Why Does It Matter?, Management Challenges, Management Portfolio, Closing Case: Schwab Acquires, U.S. Trust, , 10/31/06 6:36:31 PM

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When Dell’s sales, and stock price fell, during the dot-com, fallout, CEO Kevin, Rollins (at left with, founder Michael Dell), discovered that, the company’s culture, needed adjustment so, the computer maker, would succeed in the, future., © 2006 Dell Inc. All Rights, Reserved., , / / / / / / / / / / / / / / / / / / / / /, , ell Inc.’s sales slumped and its stock price dived, when the dot-com bubble burst a few years ago., The downturn also revealed that Dell’s corporate culture was too focused on financial performance. “In, the dot-com boom, a lot of people got very wealthy,, and we had a company culture that was (focused on), the stock price,” says Dell CEO Kevin Rollins. Employees, even had stock tickers as screen savers. So when the, stock price tanked, so did morale. An internal survey, of Dell employees also found that more than 50, percent of them would quit if offered a similar job, elsewhere., This lack of loyalty was due not just to the stockfocused culture; it was also due to the fact that Dell’s, culture was so obsessed with work efficiency and winning business that employee well-being often took a, , D, , hiL30123_ch10_230-253.indd 231, , backseat in most decisions. “We have folks who get, great business results, but they break too much glass, along the way,” admits Michael George, Dell’s chief, marketing officer. “They’re not collaborative with their, colleagues.” A related concern was the ethical consequences of a company with a stock-focused culture., Enron, another Texas-based firm, had just gone bankrupt, because its pathological focus on stock value led to illegal accounting practices. Rollins wanted to steer Dell, away from that risk.1, Rollins was convinced that Dell’s culture had to be, adjusted, but is it possible to change organizational, culture? And if so, how could Rollins and other managers alter the existing culture? Equally important,, what culture should guide Dell employees into the, future?, , 10/31/06 6:36:33 PM

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232, , PART 3 // Organization Architecture, , Managers at Dell and most other companies are paying a lot of attention these days to organizational culture. This chapter looks at the meaning and management of organizational culture, as it addresses the questions that faced Dell’s managers. It begins by describing the concept of, organizational culture and identifying ways to determine its particular characteristics—its cultural content—in your company. Next we consider the importance of organizational culture to, an organization’s success. This is followed by a discussion of whether the content and strength, of organizational culture can be altered and, if so, how managers can bring about the required, cultural changes. The final section of this chapter examines corporate culture issues when two, companies are merged or when one is acquired by the other., , // What Is Organizational Culture?, , organizational, culture, The values and, assumptions shared within, an organization., , The concept of organizational culture has been around for decades and star ted to gain popularity beyond academic circles in the 1980s. Today it seems that most cor porate leaders actively think about their compan y’s culture dail y or w eekly. Cer tainly it is on the minds of, Kevin Rollins and Michael Dell at Dell Inc. What is this abstract thing w e call organizational culture? As we noted in Chapter 2, it consists of the v alues and assumptions shared, within an organization.2 Organizational culture directs e veryone in the or ganization toward, the “right way” of doing things. It frames and shapes the decisions that managers and other, employees should make and the actions they should take. As this def inition states, organizational culture consists of two main components: shared values and assumptions. Figure 10.1, illustrates how these shared v alues and assumptions relate to each other and are associated, with artifacts, which we discuss later in this chapter., , Artifacts, • Stories/legends., • Rituals/ceremonies., • Organizational language., • Physical structures/decor., , Shared values, • Conscious beliefs., • Evaluates what is good, or bad, right or wrong., , FIG UR E 1 0 .1, Organizational Culture, Assumptions, Values,, and Artifacts, Source: Based on information, in E.H. Schein, Organizational, Culture and Leadership: A, Dynamic View (San Francisco:, Jossey-Bass, 1985)., , hiL30123_ch10_230-253.indd 232, , Visible, , Invisible, , Shared assumptions, • Unconscious,, taken-for-granted, perceptions or beliefs., • Mental models of ideals., , 10/31/06 6:36:34 PM

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Organizational Culture \\ CHAPTER 10, , 233, , // SHARED VALUES, Values, which were introduced in Chapter 1, are stable, evaluative beliefs that guide our preferences for outcomes or courses of action in a v ariety of situations. 3 They are conscious perceptions about what is good or bad, right or wrong. Values tell us to what we “ought” to do. They, serve as a moral compass that directs our moti vation and potentially our decisions and actions, (Figure 10.2). Everyone has values because they partly define who we are as individuals and as, members of groups with similar values. People organize the dozens of values into a hierarchy or, value system. Some people value security and tradition; others give these values a much lower, priority. Instead they might give top priority to the values of excitement and challenge., Security, tradition, e xcitement, challenge, and dozens of other v alues e xist within, individuals. Yet values also e xist as a component of or ganizational culture in the for m of, shared values. Shared values are values that people within the organization or work unit have, in common and place near the top of their hierarch y of values.4 At Dell, employees place a, high priority on winning, meaning that the y value performance and achievement more than,, say, security or tradition., It has become trendy for leaders to determine and publicly announce their company’s shared, values. Yahoo!, the online por tal company, is no e xception. Its Web site proudly says that six, values represent its cor porate DNA or “what makes it tick”: e xcellence, innovation, customer, fixation, teamwork, community, and fun. Do these values really represent the content ofYahoo!’s, culture? Maybe, but what companies say they value isn’t necessarily what they actually value., The key distinction managers need to consider is w hether they are refer ring to espoused, values or enacted v alues.5 Espoused values represent the v alues people say they use and, in, many cases, think they use even if they don’t. Values are socially desirable, so people create a, positive public image by claiming to believe in values that others expect them to embrace. For, instance, one large international corporation hung signs around its headquar ters proclaiming, that its culture embraced “trust”; yet the same company required all employees to be searched, whenever they entered or exited the building. Furthermore, even if the company’s dozen or so, top executives embrace these values, they are not necessarily the values held by most people, throughout the organization. Enacted values , on the other hand, represent the values people, actually rely on to guide their decisions and actions. These values in use are apparent b y, watching people in action. An organization’s culture consists of these enacted v alues, not, espoused values.6, , ■, , Yahoo’s DNA., , 1, , Ranking of corporate culture (tied with employee benefits) among list of job, applicant inquiries during interviews, as reported by Fortune 1,000 executives., 1 Ranking of corporate culture among reasons why 147 employed U.S., executives surveyed by ExecuNet want to change jobs., 2 Ranking of “good fit with company culture” among factors 1,000 hiring, managers look for when evaluating college graduates for employment, (number one factor was relevant experience)., 3 Ranking of corporate culture as a factor influencing American MBA students, in their decision to accept or reject a job offer (top two factors were, compensation package and challenging role)., 36 Percentage of Finnish university students who say the best employers have a, strong culture., 36 Percentage of employers who list corporate culture as one of the benefits of, working at their company., , FIG U RE 1 0 .2, , How Important Is Corporate Culture?, , Sources: “As Employment Market Improves,” ExecuNet press release, December 1, 2005; “More Jobs and, Higher Salaries in Store,” CareerBuilder press release, April 5, 2006; Universum Communications,, American MBA Survey, 2005; Universum Communications, Graduate Survey, Finnish Edition, 2005;, Robert Half International, Office of the Future 2005 study., , hiL30123_ch10_230-253.indd 233, , 10/31/06 6:36:34 PM

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234, , PART 3 // Organization Architecture, , // SHARED ASSUMPTIONS, , ■ Procter & Gamble’s cultural, resistance., , The deepest element of organizational culture (some experts believe it is really the essence of, culture) is the shared assumptions that people car ry around in their heads. Assumptions are, unconscious perceptions or beliefs that have worked so well in the past that the y are considered the correct way to think and act toward problems and opportunities. These assumptions, are so deep that they are taken for granted—they are so obviously good and right for the company that no one really thinks about or questions them. For many decades Hewlett-Packard’s, culture was so deeply embedded that no one really questioned its underlying assumptions. The, California-based technology company’s legendary culture, known as “the H-P Way,” revered, innovation, employee well-being, and collegial teamwork. It was a role model for cultures in, other Silicon Valley companies., The opening vignette to this chapter pro vides another example of how strong organizational cultures operate at a le vel of unconscious assumptions. Dell’s focus on winning the, competition game had been so successful o ver the y ears that no one questioned it. Ev en, when Dell’s executives realized that the compan y’s winning culture had changed into one, that focused too much on the compan y’s stock price, they didn’t try to disturb the underlying emphasis on winning. “It’s not that we didn’t have a culture with the qualities that drive, business success,” explains Paul McKinnon, Dell’s vice president of human resources. “We, were performance-driven, cost-driven, built on speed, very low on politics. We just aspired, to do better.… What would a new winning culture look like here at Dell?”7, Along with being the deepest par t of organizational culture, shared assumptions are the most, difficult to change. Consider the corporate culture, of Procter & Gamb le. Until a fe w years ago employees at the consumer goods company lived and, breathed a culture of insular secrec, y and a, managerial hierarch y. Top positions w ere f illed, through promotions; rarely would anyone consider, hiring an outsider to f ill a management role. Anyone who left P&G was considered a traitor, never, Ripping Out P&G’s Deep, to be w elcomed back. Ne w hires w ere quickl y, Assumptions Until recently,, “Procterized”; they completely embraced the culemployees at Procter & Gamble, ture or left the compan y. P&G’s culture had been, (P&G) lived and breathed a culture, so successful for so long that it w ould be ridicuof insular secrecy and a managerial, lous to question it. This culture remained intact, hierarchy. The promotion-from-within, even when P&G lost mark et share during the late, culture had been so successful in the, 1990s to more customer -focused competitors., past that few insiders questioned it., P&G’s chief executive at the time tried to change, One CEO tried to change the culture, the culture, complaining that he w ould “lik e to, when competitors threatened P&G’s, have an organization where there are rebels.” The, market share, but he was ousted, CEO underestimated the depth of shared, within two years. A.G. Lafley, P&G’s, assumptions. After pushing through culture, current CEO, has been more, changes for two years, he w as replaced. His sucsuccessful, mainly due to his gentler, cessor, A.G. Lafley, was more successful by taking, persistence and the increasing, a gentler but equall y persistent approach to makcompetitive threats., ing employees aware that P&G’s old culture w as, dysfunctional.8, © AP Photo/Elise Amendola, , // CONTENT OF ORGANIZATIONAL CULTURE, Contrasting cultures of SAS, Institute and Wal-Mart., ■, , hiL30123_ch10_230-253.indd 234, , Organizations differ in their cultural content—that is, the relati ve ordering of values and, assumptions. Spend some time at SAS Institute and you will soon discover that the world’s, largest privately held software company has one of the most employee-friendly cultures on, the planet. Located on a 200-acre campus in Cary, North Carolina, SAS supports employee, , 10/31/06 6:36:34 PM

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Organizational Culture \\ CHAPTER 10, , 235, , well-being with free on-site medical care, unlimited sick days, heavily subsidized day care,, ski trips, personal trainers, ine xpensive gour met cafeterias, and tai chi classes. Unlik e, other software companies, SAS encourages its employees to stick to a 35-hour workweek.9, In contrast, visit Wal-Mart’s headquarters in Bentonville, Arkansas, and y ou will f ind a, workplace that almost screams fr ugality and efficiency. The world’s largest retailer has a, spartan waiting room for suppliers. Visitors pay for their o wn soft drinks and cof fee. In, each of the building’s inexpensive cubicles, emplo yees sit at ine xpensive desks f inding, ways to squeeze more ef ficiencies and lower costs out of suppliers as w ell as their o wn, work processes.10, How many corporate cultural values are there? Some writers and consultants have attempted, to classify or ganizational cultures into se veral categories. One of these models claims that, there are seven corporate cultures in the world: attention to detail, outcome orientation, people, orientation, team orientation, agg ressiveness, stability, and innovation and risk taking. Another organizational culture model identifies eight cultures organized around a circle, indicating that some cultures are opposite to each other . A rules-oriented culture is opposite to an, innovation culture; an internally focused culture is opposed to an externally focused culture; a, controlling culture is opposite to a flexible culture; and a goal-oriented culture is opposite to a, supportive culture.11, Managers like to use these organizational culture models because they are handy templates, when figuring out what kind of culture they currently have and what kind of culture they want, to develop. Although they probably clarify the messy business of sor ting out organizational, values, these models oversimplify the diversity of cultural values in organizations. The fact is,, there are dozens of individual values, so there are likely as many organizational values. Thus, managers need to be wary of models that reduce the v ariety of organizational cultures into a, few simple categories with catchy labels. By relying on these models, managers could possibly form an impression of their culture that is not sufficiently accurate or precise., , // ORGANIZATIONAL SUBCULTURES, When discussing organizational culture, we are actually referring to the dominant culture:, the values and assumptions shared most widely by people throughout the organization. However, organizations also ha ve subcultures located throughout their v arious divisions, geographic regions, and occupational groups.12 Some subcultures enhance the dominant culture, by espousing parallel assumptions, values, and beliefs. For instance, some teams or depar tments within Dell probably feel more strongly about customer ser vice than about winning., Both are important, so the subculture’s values are compatible; but the priorities of values are, somewhat different., Other subcultures are called countercultures because they directly oppose the organization’s core values. Procter & Gamble’s clubby hierarchical culture was likely opposed by a, few small teams or w ork units, w hose members protected themselv es from the dominant, culture and w ere able to nur ture a culture of creati vity and inno vation within their little, niches. These contrarians are typically tolerated if small enough or f ar enough away from, headquarters., Subcultures (particularly countercultures) potentiall y create conflict and dissent among, employees, but they also serve two important functions. 13 First, they maintain the organization’s standards of perfor mance and ethical beha vior. Employees who hold countercultural, values are an important source of surveillance and critique over the dominant order. They encourage constructive conflict and more creati ve thinking about how the organization should, interact with its en vironment. By pre venting employees from b lindly following one set of, values, subcultures help the organization to abide by society’s ethical values., The second function of subcultures is that the y are the spa wning grounds for emer ging, values that keep the f irm aligned with the needs of customers, suppliers, society , and other, stakeholders. Companies eventually need to replace their dominant v alues with ones that are, more appropriate for the changing environment. If subcultures are suppressed, the organization, may take longer to discover and adopt values aligned with the emerging environment., , hiL30123_ch10_230-253.indd 235, , 10/31/06 6:36:35 PM

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236, , PART 3 // Organization Architecture, , // Deciphering an Organization’s Culture, artifacts, The observable symbols, and signs of an, organization’s culture., , ■ Mayo Clinic’s cultural, expedition., , ■ Dell, , searches for its, culture., , hiL30123_ch10_230-253.indd 236, , We can’t directly see an organization’s shared values and assumptions. Instead, as Figure 10.1, illustrated earlier, organizational culture needs to be deciphered through artifacts. Artifacts, are the observable symbols and signs of an organization’s culture, such as the way visitors are, greeted, the physical layout, and how employees are rewarded.14 Some experts suggest that, artifacts are the essence of cor porate culture, whereas others view artifacts as symbols or indicators of culture. Either way, artifacts are important because they represent the best source, of information about a company’s culture. Discovering an organization’s culture is much like, an anthropological investigation of a new society. It involves observing workplace behavior,, listening for unique language in everyday conversations, studying written documents, and interviewing staff about cor porate stories. As we will lear n later, artifacts are also impor tant, because they reinforce and potentially support changes to an organization’s culture., The Mayo Clinic recognized the impor tance of deciphering its or ganizational culture, through artifacts. The medical center has a well-established culture at its original clinic in, Rochester, Minnesota, but maintaining that culture in its e xpanding operations in Florida, and Arizona has been challenging. “We were struggling with growing pains [and] we didn’t, want to lose the culture, [so] we were looking at how to keep the heritage alive,” explains, Matt McElrath, Ma yo Clinic human resources director in Arizona. The Ma yo Clinic, retained anthropologist Linda Catlin to decipher Mayo’s culture and identify ways to reinforce it at the two newer sites. Catlin shadowed employees and posed as a patient to observe, what happens in waiting rooms. “She did countless, interviews, joined physicians on patient visits, and, even spent time in the operating room,, ” sa ys, McElrath. At the end of her six-week cultural expedition, Catlin submitted a repor t outlining Ma yo’s, culture and how its satellite operations varied from, that culture. The Mayo Clinic adopted all of Catlin’s, 11 recommendations, such as requiring all ne w, physicians at the three sites to attend an orientation, in Rochester where they learn about Mayo’s history, and values.15, Kevin Rollins hadn’ t conducted a full anthropological expedition when he concluded that Dell’s culture was amiss, but he did use ar tifacts to identify, some cultural content. Rollins noticed that employees, talked about the compan y’s stock v alue more often, than do people in other firms. He observed that many, employees used a stock market ticker as a screen saver, on their computer monitors. And when the stock price, crashed from $58 to $16 per share, Rollins sa w the, Mayo Clinic’s Cultural, effect on morale and turnover intentions., After this initial diagnosis, Dell engaged a consultExpedition The Mayo Clinic, ing f irm to more for mally anal yze the compan y’s, hired an anthropologist to help deculture.16 The process, consisting of a length y quescipher its organizational culture and, tionnaire completed by all employees, confirmed that, find ways to transfer that culture, Dell has a culture that values winning and operational, from its original center in Rochester,, excellence (ef ficiency and speed). The results also, Minnesota, to its expanding operaconfirmed Rollins’s worry that Dell’s relentless purtions in Florida and Arizona. The, suit of growth and efficiency was sometimes hurting, anthropologist’s six-week expediemployee well-being. “[The] surveys showed that certion included shadowing employees, tain sales leaders w ere routinely rewarded and proand posing as a patient to observe, moted despite trampling on the feelings of their team, what happens in waiting rooms., members,” recalls Michael George, Dell’s chief marCourtesy of Mayo Clinic, keting officer. “New hires complained that the y had, , 10/31/06 6:36:35 PM

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Organizational Culture \\ CHAPTER 10, , 237, , been thrown into the most challenging position of their li ves with little suppor t or backup, from superiors.”, Surveys can reveal some information about a company’s culture, but managers should not, rely on that infor mation alone to understand the compan y’s culture. Se veral organizational, culture experts have warned that culture is too deep and there are too man y varieties of, cultural values to be adequately captured in a pencil-and-paper questionnaire. Instead the y, recommend a combination of sur veys and painstaking assessment of man y artifacts.17 Four, broad categories of ar tifacts are organizational stories and le gends, rituals and ceremonies,, language, and physical structures and symbols., , // ORGANIZATIONAL STORIES AND LEGENDS, Many years ago Southwest Airlines introduced an ad campaign with the phrase “Just Plane, Smart.” Unknowingly the Dallas-based airline had infringed on the “Plane Smar t” slogan at, Stevens Aviation, an aviation sales and maintenance company in Greensville, South Carolina., Rather than paying buckets of money to lawyers, Stevens chairman Kurt Herwald and Southwest CEO Herb K elleher decided to settle the dispute with an old-f ashioned arm-wrestling, match at a run-down wrestling stadium in Dallas. A boisterous crowd watched the “Malice in, Dallas” event as “Smokin” Herb Kelleher and “Kurtsey” Herwald battled their designates and, then each other. When Kelleher lost the final round to Herwald, he jested (while being carried, off on a stretcher) that his defeat w as due to a cold and the strain of w alking up a flight of, stairs. Stevens Aviation later decided to let Southw est Airlines continue to use its ad campaign, and both companies donated funds from the event to charities.18, Malice in Dallas is a legend that almost every Southwest employee knows by heart. It is a, tale that communicates one of the ma verick airline’s core values—that having fun is par t of, doing business. Stories and le gends about past cor porate incidents ser ve as powerful social, prescriptions of the way things should (or should not) be done. They also provide human realism to corporate expectations, individual performance standards, and assumptions about ideal, behaviors and decisions., Not all stories and le gends are positive. Some are communicated to demonstrate w hat is, wrong with the dominant corporate culture. Some time ago General Motors (GM) was known, for its strong hierarchical culture, in w hich employees were expected to respect the position, and power of their higher -ups. Employees who rejected the automak er’s dominant culture, liked to tell how dozens of GM people would arrive at the airport to meet a senior executive., An executive’s status was symbolized by the number of vehicles leaving the airport with the, executive; but critics told this stor y to illustrate the decadence and time w asted in ser ving, GM’s leaders rather than other stakeholders.19, Stories are important artifacts because they personalize the culture and generate emotions, that help people remember lessons within these stories. Stories ha ve the g reatest effect at, communicating corporate culture when they describe real people, are assumed to be true, and, are remembered by employees throughout the organization. Stories are also prescriptive—they, advise people what to do or not to do.20, , // RITUALS AND CEREMONIES, Rituals are the programmed routines of daily organizational life that dramatize an organization’s culture. They include how visitors are greeted, how often senior executives visit subordinates, how people communicate with each other, how much time employees take for lunch,, and so on. BMW is well known for its fast-paced culture, which is soon apparent quite liter ally in how quickly employees walk around the German carmaker’s offices. “When you move, through the corridors and hallways of other companies’ buildings, people kind of crawl—they, walk slowly,” says BMW board of management chair Helmut Panke. “But BMW people tend, to move faster.”21 Ceremonies are more formal artifacts than rituals. Ceremonies are planned, activities conducted specifically for the benefit of an audience, such as publicly rewarding (or, punishing) employees or celebrating the launch of a new product or newly won contract., , hiL30123_ch10_230-253.indd 237, , ■ Southwest Airlines’ cultural, legend., , ■ General Motors’, countercultural story., , ■, , BMW’s fast-moving culture., , rituals, The programmed routines, of daily organizational, life that dramatize the, organization’s culture., ceremonies, Planned activities, conducted specifically for, the benefit of an audience., , 10/31/06 6:36:35 PM

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238, , PART 3 // Organization Architecture, , // ORGANIZATIONAL LANGUAGE, The language of the workplace speaks volumes about the company’s culture. How employees, address coworkers, describe customers, e xpress anger, and g reet stakeholders are all v erbal, symbols of cultural values. Employees at The Container Store compliment each other about, “being Gumby,” meaning that they are being as flexible as the well-known green toy—going, outside their regular jobs to help a customer or another employee. (A human-sized Gumby is, displayed at the retailer’s headquarters.)22 Language also highlights values held by organizational subcultures. For instance, consultants w orking at Whirlpool kept hearing employees, talk about the appliance compan y’s “PowerPoint culture.” This phrase, which names Microsoft’s presentation software, is a critique of Whirlpool’s hierarchical culture in which communication is one-way (from executives to employees).23, , // PHYSICAL STRUCTURES AND DÉCOR, ■, , Oakely’s fortress culture., , The size, shape, location, and age of buildings might suggest the compan y’s emphasis on, teamwork, environmental friendliness, fle xibility, or an y other set of v alues. An e xtreme, example is the “interplanetary headquarters” of Oakley Inc. The ultra-hip eyewear and clothing company built a vaultlike structure in Foothill Ranch, California, complete with towering, metallic walls studded with o versize bolts, to represent its secreti ve and protective culture., Ejection seats from a B-52 bomber furnish the waiting area. A full-size torpedo lies in a rack, behind the receptionist’s armored desk. Overall, the building symbolizes a highl y protective, culture in which employees believe they are at war with the competition. “We’ve always had a, fortress mentality,” says an Oakle y executive. “What w e make is gold, and people will do, anything to get it, so we protect it.”24, Even if the building doesn’t make much of a statement, there is a treasure tro ve of physical, artifacts inside. Desks, chairs, office space, and wall hangings (or lack of them) are just a few of, the items that might convey cultural meaning. Each of these artifacts alone might not say much,, but enough of them together make the company’s culture easier to decipher. Consider Chandler, Chicco Agency’s (CCA’s) offices in Manhattan’s meatpacking district. The creative advertising, agency is a cubicle-free and status-free zone. Desks are arranged in clusters where senior staffers, , Oakley’s Fortress Culture Oakely Inc.’s bunkerlike, headquarters in Foothill Ranch, California, symbolizes a, culture that is highly protective of its product inventions. The, company’s Physics Elevated to an Art Form approach to product design is enforced by more than 545 worldwide patents., Courtesy of Oakley, Inc., , hiL30123_ch10_230-253.indd 238, , 10/31/06 7:57:38 PM

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Organizational Culture \\ CHAPTER 10, , 239, , share the same space and similar responsibilities as those w ho joined the company a week ago., These artifacts suggest that CCA has an egalitarian and possibly frugal culture.25, , // Is Organizational Culture Important?, Why would executives at Dell Inc. and other companies w ant to tamper with their culture?, Does corporate culture really make a difference? The answer, in a word, is yes. Various studies indicate that companies with strong cultures are more lik ely to be successful, but onl y, under a par ticular set of conditions. 26 The explanation of how organizational culture influences corporate prosperity and emplo yee well-being has a fe w twists and tur ns, which we, walk through in this section., To begin, the effect of organizational culture depends par tly on its strength. Cor porate, culture strength refers to how widely and deeply employees hold the company’s dominant, values and assumptions. In a strong or ganizational culture, most employees across all subunits hold the dominant v alues. These v alues are also institutionalized through w ellestablished artifacts, thereby making it dif ficult for those v alues to change. Fur thermore,, strong cultures tend to be long-lasting; some can be traced back to the beliefs and v alues, established by the company’s founder. In contrast, companies have weak cultures when the, dominant v alues are shor t-lived and held mainl y b y a fe w people at the top of the, organization. A strong cor porate culture potentiall y increases the compan y’s success b y, serving three important functions:, 1. Control system: In Chapter 2 we briefly noted that organizational culture influences, what managers and employees can and can’t do. And in Chapter 9 we noted that culture, is a deeply embedded form of social control that influences employee decisions and, behavior.27 As a control system, culture is pervasive and operates unconsciously. You, might think of it as an automatic pilot, directing employees in ways that are consistent, with organizational expectations., 2. Social glue: Organizational culture is the “social glue” that bonds people together and, makes them feel part of the organizational experience.28 Employees are motivated to, internalize the organization’s dominant culture because it fulfills their need for social, identity. This social glue is increasingly important as a way to attract new staff and, retain top performers., 3. Sense making: Organizational culture assists the sense-making process.29 It helps, employees understand what goes on and why things happen in the company. Corporate, culture also makes it easier for them to understand what is expected of them and to, interact with other employees who know the culture and believe in it., , // ORGANIZATIONAL CULTURE, STRENGTH AND FIT, Strong cultures are potentially good for business, as we just explained, but studies have found, only a modestly positive relationship between culture strength and success. 30 Why the weak, relationship? One reason is that a strong culture increases or ganizational performance only, when the cultural content is appropriate for the organization’s environment (see Figure 10.3)., Recall from a few pages back that culture content refers to the relative ordering of values and, assumptions. Trouble occurs when the relative ordering of cultural values is misaligned with, the f irm’s environment. This lack of f it causes employees to make decisions and eng age in, behaviors that are inconsistent with the compan y’s best interests. Strong cultures create a, greater risk because culture strength indicates that a g reater number of emplo yees will be, guided by those values and assumptions., The corporate landscape is dotted with companies that suf fered performance setbacks, because their culture became dangerously misaligned with the external environment. Home, Depot is a recent e xample. Founded in 1978, America’s second largest retailer (Wal-Mart, , hiL30123_ch10_230-253.indd 239, , ■ Home Depot’s cultural realignment., , 10/31/06 6:36:36 PM

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240, , PART 3 // Organization Architecture, , FIG UR E 1 0 .3, Organizational Culture, and Performance, , Culture content fits, environment, , Moderately strong, culture, , • Corporate performance, • Ethical conduct, , Adaptive culture, , is number one) grew and prospered through a culture of “entrepreneurial high-spiritedness,”, a passionate commitment to customers, and an a version to bureaucrac y. But w hen, competition set in, Home Depot’s freewheeling culture became a liability . The company, was an inefficient hodgepodge of f iefdoms representing different regions that practically, ignored the head office. Each region even had its own supplier ag reements, whereas one, companywide ag reement would have signif icantly increased Home Depot’ s purchasing, power. The company needed a culture that emphasized more str ucture and ef ficiency to, squeeze out unnecessar y costs. Leading this transfor mation w as for mer GE e xecutive, Robert Nardelli. Over the past five years Nardelli has introduced a much more efficiencyfocused, perfor mance-oriented culture, similar to GE’ s f amous culture. Nardelli f aced, considerable resistance, but Home Depot’s culture is changing. “He sa ved the company,”, claims Home Depot cofounder Ken Langone.31, Kevin Rollins also started to notice a lack of cultural f it at Dell Inc. As noted in the opening vignette to this chapter, the stock-focused culture hurt employee morale and possibly performance whenever the stock dipped. The intense winning orientation fur ther undermined, employee loyalty when Dell, poised to double in size over the next few years, couldn’t afford, to lose valuable talent. Although the existing culture was generally effective for driving Dell’s, performance, it needed adjustment., “We wanted our culture to be as rich and as well-defined as our operational model,” says, Rollins. “And so we also launched the concept of the Soul of Dell. ” To add substance and, commitment to the “Soul of Dell,” employees were asked what they would expect to see in, a great place to work. That feedback, along with results from the cultural audit sur vey, became the foundation of f ive values: customer-focused, team-oriented, direct relationships,, global citizenship, and a passion for winning. Rollins sa ys this culture par tly exists today, and par tly is a goal to w hich the compan y aspires. “I w ould like our emplo yees to sa y,, ‘That’s what I believe in, that’s what the company believes in, and that’s why I’m proud to, be at Dell.’”32, CORPORATE CULTS AND SUPPRESSING DISSENT A second reason w hy companies, with strong cultures aren’ t necessarily more effective is that the y become cor porate cults, that lock decision makers into mental models and blind them to new opportunities or unique, problems. Thus strong cultures might cause decision mak ers to o verlook or incor rectly, define subtle misalignments between the organization’s activities and the changing environment. Several bankrupt steel manufacturers apparently suffered from this problem. “It was, 100 years of inte grated culture,” recalls Mittal Steel vice president John Mang III, w ho, , hiL30123_ch10_230-253.indd 240, , 10/31/06 6:36:36 PM

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Organizational Culture \\ CHAPTER 10, , 241, , worked at one of the now-bankrupt firms for three decades., “People in the or ganization are inbreds, including m yself., You grew up in the culture; you didn’t see anything else. …, It is a culture from within, so y ou have these rose-colored, glasses that everything’s fine.”33, A third consideration is that v ery strong cultures tend to, suppress dissenting subcultural v alues. As we noted earlier,, subcultures encourage constructive conflict, which improves, creative thinking and of fers some le vel of ethical vigilance, over the dominant culture. In the long r un, a subculture’s nascent values could become important dominant values as the, environment changes. Strong cultures suppress subcultures,, thereby undermining these benefits., , // ADAPTIVE CULTURES, , Home Depot’s Cultural Realignment Home Depot, became one of the fastest-growing and most successful, retailers in history, thanks to its freewheeling, entrepreneurial culture. But this culture became a liability, when competition set in, requiring a more cost-conscious, and performance-oriented mindset. CEO Robert Nardelli was, hired to transform Home Depot’s culture for better alignment, with its environment., , So far we have learned that strong cultures are more effective, when the cultural v alues are aligned with the or ganization’s, environment. Also, no corporate culture should be so strong, that it b linds employees to alter native viewpoints or completely suppresses dissenting subcultures. Research from, © Michael Newman/PhotoEdit, various sources adds one more recommendation to this list—, namely that or ganizations are more lik ely to succeed w hen, they have an adaptive culture. 34 An adaptive culture exists when employees focus on the, changing needs of customers and other stakeholders and support initiatives to keep pace with, these changes. Adaptive cultures have an external focus, and employees assume responsibility, for the organization’s performance. As a result, they are proactive and quick. Employees seek, opportunities rather than waiting for them to arrive. They act quickly to learn through discovery rather than engaging in “paralysis by analysis.”, Organizational culture experts are starting to piece together the elements of adaptive cultures.35 First and foremost, adaptive cultures have an external focus. Employees hold a common mental model that change is both necessar y and inevitable to keep pace with a dynamic, external environment. Second, employees in adaptive cultures pay as much attention to organizational processes as the y do to or ganizational goals. They continuously improve internal, processes (production, customer ser vice, and so on) to ser ve external stakeholders. Third,, employees in adaptive cultures have a strong sense of ownership. They assume responsibility, for the organization’s performance. In other words, they believe “It’s our job” rather than “It’s, not my job.” Fourth, adaptive cultures are proactive and quick. Employees seek out opportunities, rather than w ait for them to ar rive. They act quickly to lear n through discovery rather, than engage in “paralysis by analysis.”, , adaptive culture, An organizational culture, in which employees focus, on the changing needs of, customers and other, stakeholders and support, initiatives to keep pace, with these changes., , // ORGANIZATIONAL CULTURE AND, BUSINESS ETHICS, An organization’s culture influences more than just the bottom line; it can also potentially influence its ethical conduct. This makes sense because good behavior is driven by ethical values. An organization can guide the conduct of its emplo yees by embedding ethical values in, its dominant culture. Dell e xecutives saw this connection w hen they developed the “soul of, Dell” initiative. CEO Kevin Rollins was concerned that the obsession with prof its and stock, price among many Dell employees increased the risk of unethical conduct. Such a focus on, stock price led Enron, the Texas-based energy company, and Worldcom, the Louisiana-based, telecommunications giant, into bankruptcy., , hiL30123_ch10_230-253.indd 241, hiL30123_ch10_230-253.indd 241, , ■, , Dell’s ethical culture., , 11/9/06 7:49:47 PM, 11/9/06 7:49:47 PM

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242, , PART 3 // Organization Architecture, , So Dell’s new set of cultural values include clear linkages, to ethical conduct. Its “direct relationships” v alue includes, “behaving ethically in every interaction and in e very aspect, of how we conduct business.” Its “global citizenship” v alue, refers to participating responsibly in the global marketplace., When discussing the company’s passion for winning, Rollins, emphasizes that it is reall y about “winning with inte grity.”, All of these principles are connected to the compan y’s code, of conduct, called “the higher standard.”36, Unfortunately it seems that companies mak e headlines, every day for f ailing to incor porate ethics into their culture. Citibank illustrates this in its serious ethical lapse in, Japan. In just six years Citibank Japan’s business increased, tenfold and deli vered prof its that outscored all other priCitibank’s Culture Pushes Ethical Boundaries In just, vate banks in the compan y’s huge network. Unfortunately, six years Citibank Japan’s business increased tenfold and, the Japanese go vernment’s f inancial w atchdog recentl y, delivered profits that outscored all other private banks in, concluded that Citibank Japan’s culture suppor ted “a lawthe company’s huge network. Unfortunately much of this, evading sales system, ” citing infractions ranging from, success was due to unethical dealing. Citigroup chief, grossly overcharging clients to helping them f alsify prof it, executive Charles Prince, shown here with a colleague, and manipulate stock. With 83 infractions, Citig roup was, bowing at a Tokyo news conference in apology for the, told to close some of its Japanese operations. “It’s our fault,, violations, admits that Citigroup’s culture had been too, because all we talk about is delivering the numbers. We’ve, numbers-focused., done this forever,” admits Citigroup chief executive Charles, Prince. Prince f ired several top e xecutives in Tokyo and, Yuriko Nakao/Reuters/Corbis, New York and is no w on a mission to change Citibank’ s, culture. He has a major challenge ahead of him. Do w Jones ne ws ser vice repor ts that, Citigroup’s culture has an “estab lished reputation for pushing the limits of acceptab le, ■ Citibank’s culture pushes, banking behavior.”37, ethical boundaries., , // How to Change and Strengthen Organizational Culture, , ■, , Defeated by “the HP Way.”, , hiL30123_ch10_230-253.indd 242, , Can managers change an organization’s culture? Yes, but it isn’t easy, it rarely occurs quickly,, and often the culture ends up changing managers. Remember that culture is deeply embedded, in the collective mindset. Employees don’t just value some things more than others; they don’t, even question why they believe something is the right thing to do. Artifacts further reinforce, that cultural system of beliefs. The shared assumptions of an organization’s culture are so well, established that employees rely on them to mak e decisions and eng age in behavior without, consciously questioning them. Indeed, when outsiders critique those culturally congruent decisions and actions, emplo yees often respond with disbelief that an yone would doubt such, logical courses of action., Many executives have been driven out of or ganizations because they tried to change the, organizations’ culture. One casualty, as we mentioned earlier in this chapter, was a Procter &, Gamble CEO who lasted only two years because he tried to deculturize an intransigent “Procterized” workforce too quickl y and forcefull y. Carly Fiorina, the for mer CEO of He wlettPackard (HP), is another e xample.38 The California-based technology company’s legendary, culture, known as “the HP Way,” revered innovation, employee well-being, and collegial teamwork. It was a role model for cultures in other Silicon Valley companies. But HP star ted to, lose ground to Dell, Compaq, and other competitors w ho were responding with more agility, and efficiency to customer demands. Fur thermore, an internal assessment revealed that HP’s, culture had shifted. “The HP Way has been misinterpreted and twisted as a gentle bureaucracy, of entitlement instead of a performance-based meritocracy,” said Fiorina soon after becoming, Hewlett-Packard’s CEO., As HP’s first CEO hired from outside the company, Fiorina’s task was to alter the HP Way, so the company would become more competitive. She launched “the Rules of the Garage,” a, , 10/31/06 6:36:37 PM

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Organizational Culture \\ CHAPTER 10, , 243, , set of cultural v alues having symbolic reference to the P alo Alto garage w here founders, William Hewlett and Da vid Packard star ted the compan y in 1939. F iorina reinforced these, performance-focused values with a customer-driven bonus system and organizational structure., Her biggest initiati ve was acquiring Compaq, a f ast-paced and agg ressive competitor from, Texas. The merger was intended to inject “a little of Compaq’s DNA into the HP Way, especially, speed and agility,” said a Compaq executive who later took an executive position at HP., Hewlett-Packard’s acquisition of Compaq seems to ha ve had some ef fect on the HP, culture—but at a cost. Both board members from the founding families (Hewlett and Packard), quit over the changed culture; HP lost its status as one of the top 10 best places to w ork in, America (it isn’t even on the top 100 today); and Fiorina was ousted as CEO. On the surface,, Hewlett-Packard’s board lost conf idence in Fiorina because she failed to raise the company’s, profitability and achieve related targets. But sources say that Fiorina also tried to change more, of the HP Way than was necessary, which battered employee loyalty, productivity, and ultimately profitability. “A little of the HP Way would probably work pretty well right now,” says, Quantum CEO and for mer HP executive Richard E. Belluzzo soon after F iorina was f ired., “The strength of HP has always been its culture and its people.”, The lesson here is that changing an organization’s culture can be a manager’s greatest challenge. At the same time, as w e noted earlier, organizational culture can be a po werful influence on the company’s success. So how can managers change and strengthen or ganizational, culture? Over the next few pages we highlight four strategies that have had some success. This, list, outlined in Figure 10.4, is not exhaustive; but each activity seems to work well under the, right circumstances., , // ACTIONS OF FOUNDERS AND LEADERS, An organization’s culture begins with its founders and leaders. F ounders set the tone, emphasizing what is most impor tant and what should receive a lower priority. They are often, visionaries who provide a powerful role model for others to follow. Experts suggest that the, company’s culture sometimes reflects the founder’ s personality, and this cultural imprint, often remains with the or ganization for decades. Dell Inc. has a winning culture because, Michael Dell is a high achiever. The HP Way culture emphasizes collegiality and employee, well-being because the company’s founders were outgoing and benevolent., Founders establish an organization’s culture, but they and subsequent CEOs can sometimes, reshape that culture. A legendary example is Zhang Ruimin’s corporate culture transformation, , ■ Changing Haier Group’s, culture., , F I G U R E 1 0 .4, Actions of founders and leaders, , Culturally consistent rewards, , • Symbolize the new culture (or, need for one) through memorable, events., • Model the new culture through subtle, decisions and actions., , • Reward employees for culturally, consistent behaviors., • Reward managers who help, employees understand the culture., , Strategies to Change, and Strengthen, Organizational Culture, , Changing and strengthening, organizational culture, Selecting and socializing employees, , Aligning artifacts, , • Hire people whose values are, consistent with the culture., • Inform and indoctrinate new staff, about what the culture means., , • Share stories supporting the culture., • Celebrate goals/milestones to, support the culture., • Inhabit buildings that reflect the, culture., , hiL30123_ch10_230-253.indd 243, , 10/31/06 6:36:38 PM

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244, , PART 3 // Organization Architecture, , of Haier Group, the Chinese state-o wned, appliance manuf acturer. Soon after his, arrival as CEO tw o decades ago, Zhang, was so incensed by the poor quality of the, products built at Haier Group’ s f actory, in Qingdao that he pick ed up a sledgehammer and , with emplo yees w atching,, smashed se veral w ashing machines., Zhang’s dramatic behavior symbolized the, need for radical change, including replacing the entitlement culture with one that, values quality and perfor mance. Today, Haier Group is a model of moder n ef ficiency. Visitors to Qingdao’ s shop floor, will f ind the le gendary sledgehammer, displayed in a glass case, reminding everyone of ho w Haier Group’ s culture has, changed.39, Zhang’s actions illustrate that leaders pla y an impor tant symbolic role in or ganizational, culture change. Fortunately there are ways other than smashing products with a sledgehammer, to communicate the need for cultural change. For example, when Louis Gerstner was brought, in to tur n around troubled IBM in the earl y 1990s, he showed up on the f irst day wearing a, blue shirt. What’s so symbolic about the incoming CEO w earing a blue shirt? Quite a lot at, IBM, where every male employee wore a neatly starched white shirt. (Several decades earlier, IBM founder Thomas Watson had disapproved of anyone wearing shirts that weren’t white.), Gerstner’s blue shirt attire w asn’t accidental. It w as a deliberate signal that he intended to, break the technology firm’s bureaucratic follow-mindless-rules culture. The message was so, powerful that IBM was buzzing for weeks about how the new CEO dared to wear a blue shirt, in IBM’s hallowed halls. Three months later IBM staf fers everywhere were wearing blue, shirts, so Gerstner sometimes re verted to w earing white shir ts! He also made the point to, everyone that IBM emplo yees are not e valuated by the colors of their shir ts. Instead the y, should wear attire appropriate for the occasion and will be rewarded for their performance.40, The leader’s symbolic words and actions are sometimes highlighted in ceremonial e vents, (such as Zhang’s sledgehammer); but they are equally important in more mundane ways, such, as how meetings are conducted, where the manager locates his or her office, and who gets on, the manager’s schedule and for how long. Employees watch managers at all levels of the organization to deter mine how serious they are about changing the culture and ho w that culture, translates into behavior. Thus anything managers say or do that is consistent with the desired, culture will potentially lead the organization toward that culture.41, Founder Michael Dell and CEO Kevin Rollins relied on symbolic events to begin the process of reshaping Dell’s culture. A 360-degree feedback report (in which employees evaluate, their superiors) concluded that Dell was impersonal and emotionally detached, while Rollins, was considered autocratic and antagonistic. So in front of the top management team, Dell, and Rollins candidly told everyone about their 360 results. Dell ackno wledged that he was, intensely shy and would work toward creating a more open and collegial workplace. “I’ve got, some things to work on,” he admitted. Dell taped this self-admission and later sho wed it to, several thousand Dell managers across the country. “It didn’t feel good,” recalls Rollins about, the event, “but what we realized was, if we wanted the organization to improve and to admit, failure, we’d have to set the example. And we did.”42, , Hammering Out a New, Culture Soon after his arrival, as CEO two decades ago, Zhang, Ruimin was so incensed by the poor, quality of the products built at Haier, Group’s factory in Qingdao that he, picked up a sledgehammer and,, with employees watching, smashed, several washing machines. Zhang’s, dramatic behavior symbolized the, need to replace the entitlement, culture with one that values quality, and performance. Today Haier Group, is a model of modern efficiency., © AP Photo/Katsumi Kasahara, , ■ IBM’s culture tries a new, shirt., , ■ Dell’s leaders practice the, new culture., , // ALIGNING ARTIFACTS, Artifacts represent more than just the visible indicators of a company’s culture. They are also, mechanisms that keep the culture in place. Thus by altering these artifacts—or creating new, ones—managers can potentially adjust organizational culture. Stories and legends represent a, type of artifact that can help to reshape an or ganization’s culture. Leaders can play an active, , hiL30123_ch10_230-253.indd 244, , 10/31/06 6:36:38 PM

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Organizational Culture \\ CHAPTER 10, , role in creating memorable events that later become stories. For instance, earlier we described, the executive meeting in w hich Michael Dell and K evin Rollins acknowledged their limitations and goal to change their style. This event is more than symbolic evidence of the leaders’, dedication to a new culture; it has become a story that Dell employees around the world know, about and retell to ne wcomers when they join the compan y. Leaders also play an impor tant, storytelling role by seeking out employee experiences compatible with the desired culture and, telling others about those incidents., Rituals and ceremonies can also be altered to fit the new cultural mandate. If managers want, to instill more open communication, the y might k eep their office doors open or mo ve completely out of their offices into open space. To discourage bureaucracy, some executives have, hosted ceremonies in w hich all employees watch as v olumes of polic y manuals are bur ned., Some firms have also introduced unusual (and perhaps questionab le) ceremonies to engender, a more perfor mance-oriented culture. For instance, Brown & Brown Inc., one of the lar gest, independent insurance companies in the United States, held an event at one of its annual sales, meetings that would shake the nerves of any poor performer. Managers of the worst-performing, divisions were led to a podium by employees dressed as medieval executioners while a funeral, dirge played over loudspeakers. These managers had to explain to an audience of 1,000 salespeople why they failed to meet their annual goals. “It does sound a bit harsh, but that’ s the, culture,” says Brown & Brown’s chief executive. “This is not a warm and fuzzy world.”43, Earlier we observed that buildings and décor are ar tifacts of an organization’s culture. At, the same time some leaders are moving into offices that reflect what they want the company’s, culture to become. National Australia Bank’s (NAB) National@Docklands, a low-rise campuslike building in Melbour ne’s docklands area, is an e xample. The building’s open design, and colorful décor symbolize a more open, e galitarian, and creative culture, compared to the, closed hierarchical culture that N AB executives are tr ying to shed. The docklands building, project was initiated when executives realized that MLC, a f inancial services firm that NAB, had acquired a fe w years earlier, was able to change its culture after mo ving into its funk y, headquarters in Sydney. “There’s no doubt that MLC has mo ved its culture over the last few, years to a more open and transparent style w hich is a good example for the rest of the g roup, to follow,” admits an NAB executive.44, , 245, , ■ Brown & Brown’s, performance culture., , ■ National Australia Bank’s, more open culture., , // INTRODUCING CULTURALLY, CONSISTENT REWARDS, Reward systems are artifacts that often have a powerful influence on steering an organization’s, culture—so much so that we describe them here as a separate culture change strate gy.45 One, of Robert Nardelli’s first steps to change Home Depot’s culture was to introduce precise measures of cor porate perfor mance and drill managers with w eekly perfor mance objecti ves, around those metrics. The previous hodgepodge of subjecti ve performance reviews was replaced with one centralized f act-based system to evaluate store managers and weed out poor, performers. Nardelli instituted quar terly business review meetings in w hich objective measures of re venue, margins, inventory tur ns, cash flo w, and other measures w ere analyzed, across stores and regions. A two-hour weekly conference call became a ritual in which Home, Depot’s top executives were held accountable for the previous week’s goals. All of these actions reinforced a more disciplined (and centralized), perfor mance-oriented culture, w hich, eventually replaced Home Depot’s freewheeling, entrepreneurial culture.46, Kevin Rollins and Michael Dell applied a similar strate gy to adjust Dell’ s culture. But, whereas Nardelli used perfor mance-based re wards to reinforce a perfor mance-oriented, culture, Dell introduced a system that rewarded managers for creating a better place to work., Specifically, while half of the bonus Dell managers receive is still based on reaching or beating sales targets, the other half is no w determined from employee ratings of their bosses in, quarterly surveys. “We now pay our managers ag ainst how their employees vote on them in, terms of their management capability ,” explains Rollins. The f irst few years proved painful, because some managers with over-the-top sales performance had a large part of their bonus, pulled because of low scores on the employee ratings.47, , hiL30123_ch10_230-253.indd 245, , ■ Using rewards to shift, Home Depot’s culture., , 10/31/06 6:36:39 PM

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246, , PART 3 // Organization Architecture, , // SELECTING AND SOCIALIZING EMPLOYEES, ■ Bristol-Myers’s cultural, misfit., , organizational, socialization, The process by which, individuals learn the, values, expected behaviors,, and social knowledge, necessary to assume their, roles in an organization., , People at Bristol-Myers noticed that executives hired from the outside weren’t as successful as, those promoted from within. Within a year many quit or were fired. Managers looked closely, at the problem and ar rived at the following conclusion: “What came through w as that those, who left were uncomfortable in our culture or violated some core area of our v alue system,”, says a Bristol-Myers executive. From this discovery, Bristol-Myers assessed its culture—it’s, team-oriented, consistent with the firm’s research and development roots. Now applicants are, carefully screened to ensure they have compatible values.48, Bristol-Myers and a flock of other or ganizations strengthen and sometimes reshape their, corporate cultures b y hiring people with v alues and assumptions similar to those cultures., They realize that a good fit of personal and organizational values makes it easier for employees to adopt the corporate culture. A good person–organization fit also improves job satisfaction and or ganizational loyalty because ne w hires with v alues compatible to the cor porate, culture adjust more quickly to the organization.49 For instance, Robert Nardelli’s transformation of Home Depot’s culture was aided by hiring many former GE managers w ho already, embraced a performance-oriented culture. He also encouraged employment of former military, personnel, partly because they tend to support a more structured and disciplined approach to, doing business., Job applicants also pay attention to corporate culture during the hiring process. They realize that as employees, they must feel comfortable with the company’s values, not just the job, duties and hours of work. Thus job applicants tend to look at corporate culture artifacts when, deciding whether to join a par ticular organization. By diagnosing the compan y’s dominant, culture, they are more likely to determine whether its values are compatible with their own., Along with selecting people with compatib le values, companies maintain strong cultures, through the process of organizational socialization: the process b y which individuals, learn the values, expected behaviors, and social knowledge necessary to assume their roles in, the organization.50 If the company’s dominant values are communicated, job candidates and, new hires are more likely to internalize these values quickly and deeply., Selection and socialization were issues that Dell had to address when changing its culture., Management realized that the company’s skyrocketing stock price during the late 1990s w as, attracting people who mainly valued f inancial gain. “The dark side of the [dot-com boom], was the possibility that we had attracted a lot of people who thought they would get rich. And, if they all of a sudden thought the y wouldn’t get rich, then they’d wonder what they’re doing, here,” says Michael Dell.51 Today the company carefully interviews and tests job applicants to, see how their values align with the company’s culture., Dell also tells job applicants about its culture before the y receive job offers. For example,, applicants at Dell’s new computer assembly plant in Winston-Salem, North Carolina, are invited to a special information session where they learn about the company and the jobs offered., “We will discuss the Soul of Dell, give them a realistic job preview, and give them the opportunity to complete a job application,” explains Dell’s human resource manager for the plant. “It, will be a chance to determine the mutual interest between the candidates and Dell.”52, , // Managing Organizational Culture during Mergers, , ■ Culture clash of AOL and, Time Warner., , hiL30123_ch10_230-253.indd 246, , Along with changing and strengthening an organization’s culture, managers need to keep a, watchful eye on culture throughout the process of mergers and acquisitions. The corporate, world is littered with mer gers that f ailed or had a dif ficult gestation because of clashing, organizational cultures. Various studies repor t that betw een 60 and 75 percent of all, mergers fail to retur n a positive investment (Figure 10.5). Often cor porate leaders are so, focused on the f inancial or marketing logistics of a merger that they forget to audit their, respective corporate cultures.53, The mar riage of AOL Time Warner is one of the most spectacular recent e xamples. In, theory, the world’s largest merger offered huge opportunities for converging AOL’s dominance, in Inter net ser vices with Time Warner’s deep kno wledge and assets in traditional media., , 10/31/06 6:36:39 PM

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Organizational Culture \\ CHAPTER 10, , 247, , Total Global Value of Announced Mergers and Acquisitions, , (Trillions, T, of dollars), , $4, , $3, , $2, , $1, , F I G U R E 1 0 .5, Merger Mania, , $0, 1998, , 1999, , 2000, , 2001, , 2002 2003, Years, , 2004, , 2005, , 2006, , Instead the tw o cor porate cultures mix ed as w ell as oil and w ater. AOL’s culture v alued, youthful, high-flying, quick deal making. P eople were rewarded with stock options. Time, Warner, on the other hand , had a buttoned-do wn, hierarchical, systematic culture. Ex ecutives were older, and the reward was a decent retirement package (af fectionately known as, the “golden rubber band” because people who left invariably returned later in their careers, for the retirement benefits).54, Organizational leaders can minimize such cultural collisions and fulf ill their duty of, due diligence by conducting a bicultural audit. 55 A bicultural audit diagnoses cultural, relations between companies and determines the extent to which cultural clashes will likely, occur. The bicultural audit process be gins by identifying cultural differences between the, merging companies. Ne xt the bicultural audit data are anal yzed to deter mine w hich, differences between the two firms will result in conflict and which cultural values provide, common ground on which to build a cultural foundation in the mer ged organization. The, final stage in volves identifying strate gies and preparing action plans to bridge the tw o, organizations’ cultures., , Source: Thomson Financial,, Mergers & Acquisitions, Review (quarterly newsletter),, various quarters., , bicultural audit, The practice of diagnosing, cultural relations between, companies and, determining the extent, to which cultural clashes, will likely occur., , // STRATEGIES TO MERGE DIFFERENT, ORGANIZATIONAL CULTURES, In some cases a bicultural audit results in a decision to end merger talks because the two cultures are too different to merge effectively. However, even with substantially different cultures,, two companies may form a workable union if they apply the appropriate merger strategy. The, four main strategies for merging different corporate cultures are assimilation, deculturation,, integration, and separation (see Figure 10.6).56, Assimilation Assimilation occurs when employees at the acquired compan y willingly embrace the cultural v alues of the acquiring or ganization. Cor porate cultural clashes are less, likely to occur with this strategy because the acquired company often has a weak, dysfunctional, culture, whereas the acquiring company’s culture is strong and aligned with the external environment. Research in Motion (RIM), the compan y that makes Blackberry wireless devices,, applies the assimilation strategy by deliberately acquiring only small start-up f irms. “Small, companies…don’t have cultural issues,” says RIM co-CEO Jim Balsillie, adding that they are, typically absorbed into RIM’s culture with little fuss or attention.57, , hiL30123_ch10_230-253.indd 247, , 10/31/06 6:36:39 PM

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248, , PART 3 // Organization Architecture, , Merger Strategy, , Description, , Works Best When:, , Assimilation, , Acquired company, embraces acquiring, firm’s culture., Acquiring firm imposes its, culture on unwilling, acquired firm., , Acquired firm has a weak, culture., , Deculturation, , Integration, , Separation, , F I GU RE 10. 6, , Combining two or more, cultures into a new, composite culture., Merging companies, remain distinct entities, with minimal exchange, of culture or, organizational practices., , Rarely works—may be, necessary only when, acquired firm’s culture, doesn’t work but, employees don’t realize it., Existing cultures can be, improved., Firms operate successfully, in different businesses, requiring different, cultures., , Strategies for Merging Different Organizational Cultures, , Source: Based on ideas in A.R. Malekazedeh and A. Nahavandi, “Making Mergers Work by Managing, Cultures,” Journal of Business Strategy, May–June 1990, pp. 55–57; K.W. Smith, “A Brand-New Culture, for the Merged Firm,” Mergers and Acquisitions 35 (June 2000), pp. 45–50., , Deculturation Assimilation is rare. Employees usually resist organizational change, particularly when they are asked to throw away organizational values that were similar to their personal values. Instead acquiring companies often appl y a deculturation strategy by imposing, their culture and business practices on the acquired organization. They strip away artifacts and, reward systems that support the old culture. People who cannot adopt the acquiring company’s, culture are often terminated. Deculturation may be necessary when the acquired firm’s culture, doesn’t work but employees aren’t convinced of this. However, this strategy is difficult to apply effectively because the acquired f irm’s employees resist the cultural intr usions from the, buying firm, thereby delaying or undermining the merger process., Integration A third strategy is to combine the cultures into a new composite culture that, preserves the best features of the pre vious cultures. Inte gration is slo w and potentiall y, risky because many forces preserve the existing cultures. Still, this strategy should be considered when acquired companies have relatively weak cultures or when their cultures include several overlapping values. Integration also works best when people realize that their, existing cultures are ineffective and are therefore motivated to adopt a new set of dominant, values., Lockheed Martin provides a good e xample of the cultural inte gration strategy. The aerospace giant was created in the mid-1990s from the mer ger of 16 companies. Some of these, firms had previously been accused of unethical conduct in government procurement contracts., When these di verse cultures w ere integrated, senior e xecutives wanted to be sure that the, emerging culture emphasized ethical conduct. To accomplish this, they adopted six core values that represented both the compan y’s culture and its ethical standards: honesty , integrity,, respect, trust, responsibility, and citizenship.58, Separation A separation strategy occurs when the merging companies agree to remain distinct entities with minimal e xchange of culture or or ganizational practices. This strategy is, most appropriate when merging companies are in unrelated industries or operate in different, countries: The most appropriate cultural v alues tend to differ by industry and national culture. However, this separation strate gy doesn’t usually last long because e xecutives in the, , hiL30123_ch10_230-253.indd 248, , 10/31/06 6:36:39 PM

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Organizational Culture \\ CHAPTER 10, , 249, , acquiring firm have difficulty keeping their hands off, Marriage of Cultural, the acquired f irm. According to one sur vey, only 15, Separation Cisco Systems has, percent of acquiring f irms lea ve the acquired, acquired dozens of smaller, 59, organization as a stand-alone unit., companies and typically assimilates, One recent situation in w hich the separation stratthem into Cisco’s culture. However,, egy w as applied is Cisco Systems’ acquisition of, Cisco applied a separation strategy, Linksys. Cisco Systems, the California-based Internet, when it acquired Linksys, because its, equipment mak er, has acquired appro ximately 90, cost efficiency–oriented culture was, companies over the past tw o decades, most of them, more compatible with the highly, small, privately held start-up firms with technical excompetitive home wireless network, pertise in high-growth niches compatible with Cisco’s, market., own products. For most acquisitions Cisco assimilates, © AP Photo/Paul Sakuma, the smaller f irms into its o wn culture. Linksys, the, home wireless netw ork company, was an e xception., Linksys employs 400 people and was just a few years, younger than Cisco. Furthermore, unlike Cisco, Linksys had developed a low-cost business ■ Cultural separation of Cisco, with mass-market retail channels. To avoid disrupting its success, Linksys was kept separate Systems and Linksys., from Cisco. Cisco executives were so concerned that Linksys should retain its existing culture that a “filtering team” was formed to prevent Cisco’s culture or its leaders from taking, over the smaller enterprise. So far the separation strategy has worked. Linksys continues to, thrive in a competiti ve low-cost market even though it is w holly owned by Cisco, w hich, focuses on the high-end network business.60, , IN CO N CL U SI ON, , WH Y DOE S IT M ATT E R ?, , Why does organizational culture matter to managers? Because management is about, getting things done through others, and culture is a form of control that guides, employee behavior in the accomplishment of organizational tasks. To perform their jobs, well, managers need to understand what cultural values and assumptions dominate, their company, and adjust that culture if it is not aligned with strategy and environment., They can do the former by acting as anthropologists—observing artifacts that signify the, culture in subtle ways, such as how employees greet each other, how the building, directs social interaction, what milestones or events get celebrated, where executives, are located, what people say about the company’s history, and so on., Reading the organization’s culture isn’t easy, particularly for managers who have, worked for the organization for many years. But even more challenging is the task, of changing that culture. Cultural values and assumptions are so deeply embedded, that employees don’t think about or question them. The process of changing, organizational culture, on the other hand, not only requires staff members to consciously understand and question the existing culture but also requires them to, abandon those values and assumptions in favor of others. Too often managers, discover that the embedded culture is stronger than their capacity to bring about the, required changes., Managers also need to pay attention to organizational culture in mergers and, acquisitions because cultural clashes are one of the most common reasons why, these corporate marriages fail. As with changing their own culture, managers must, understand the content of the two cultures, determine their compatibility, identify, the extent to which one or both are compatible with the merged company’s strategy, and environment, and then apply the most appropriate cultural merger strategy., Overall, organizational culture may lurk under the radar screen, but it is a powerful, force in organizations. As we discovered in Chapter 9, culture is a significant control, system in organizational settings., , hiL30123_ch10_230-253.indd 249, hiL30123_ch10_230-253.indd 249, , 11/9/06 7:49:48 PM, 11/9/06 7:49:48 PM

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250, , PART 3 // Organization Architecture, , MANAGEMENT CHALLENGES, 1., , 2., , 3., , 4., , 5., , Identify a well-known company with a strong organizational culture. Does the content, of that culture work effectively for the organization? What changes in the external, environment might occur that would make the company’s current culture a poor fit?, Some people suggest that the most effective organizations have the strongest cultures., What do we mean by the “strength” of organizational culture, and what possible, problems are there with a strong organizational culture?, In each of the following categories, identify at least two artifacts you have observed, in an organization where you currently work or have been employed in the past: (a), organizational stories and legends, (b) rituals and ceremonies, (c) language, (d) physical, structures and décor., Acme Inc. is planning to acquire Beta Inc., which operates in a different industry., Acme’s culture is entrepreneurial and fast-paced, whereas Beta employees value slow,, deliberate decision making by consensus. Which merger strategy would you recommend, to minimize culture shock when Acme acquires Beta? Explain your answer., Suppose you are asked by senior officers of a city government to identify ways to, reinforce a new culture of teamwork and collaboration. The senior executive group, clearly supports these values, but it wants everyone in the organization to embrace, them. Identify four types of activities that would strengthen these cultural values., , MANAGEMENT PORTFOLIO, FOR THE ORGANIZATION YOU HAVE CHOSEN TO FOLLOW:, 1., , 2., , CLOSING CASE, , Scan through the company’s Web site to find any explicit statements made about the, company’s culture. Does the company explain how long it has held these cultural values, or how they were formed? To whom are these “espoused” values directed on the Web, site? Prospective employees? Customers?, Look through a recent company annual report and search for recent news stories about, the company (from either Internet searches or full-text newspaper sources available, through your college library’s online portal). Are these stories generally consistent with, or contrary to the company’s “espoused” culture (what it says it values)?, , SCHWAB ACQUIRES U.S. TRUST, , During the peak of the dot-com boom, Charles Schw ab &, Co. CEO David Pottruck was convinced that as investors became wealthier they would migrate from the San Francisco–, based discount broker to full-service firms that offered more, personalized service. So Schwab paid top dollar to acquire, U.S. Trust, a high-brow New York–based private bank that, served onl y clients with at least $10 million to in vest., , hiL30123_ch10_230-253.indd 250, , Schwab customers who grew wealthy would be shunted over, to U.S. Trust for more personalized service., While ne gotiating the tak eover, U.S. Trust e xecutives, expressed concern about possible differences in the cor porate cultures of the two firms. Schwab’s culture values rapid, change, cost-cutting frugality, process efficiency, and egalitarianism. Schw ab emplo yees see themselv es as nimb le, , 10/31/06 6:36:40 PM

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Organizational Culture \\ CHAPTER 10, , nonconformists who empowered millions of people through, low-cost Internet-based stock trading. In contrast, U.S. Trust, was an e xclusive club that w as slow to adopt technolo gy, and preferred to admit ne w clients through refer rals from, existing clients. Clients w ere pampered b y “wealth advisers” who earned huge bonuses and w orked in an en vironment that reeked of luxury., In light of the cultural dif ferences, Schwab ag reed to, leave U.S. Trust as a separate entity. This separation strategy, didn’t last long. Within a y ear Schw ab cut U .S. Trust’s, lucrative bonuses and tied annual re wards to Schw ab’s, financial performance. U.S. Trust executives were pushed to, cut costs and set more agg ressive goals. Schwab even tried, to acculturate several hundred U.S. Trust employees with a, board game that used a giant mat sho wing hills, streams,, and a mountain with founder Charles Schwab’s face carved, into the side. U.S. Trust staff complained that the game was, demeaning—particularly wearing smocks over their highpriced suits as they played the role of investors., In meetings immediately following the acquisition, U.S., Trust executives winced when their counter parts at Schwab, frequently used the term customers. They reminded Schwab’s, staff that U.S. Trust has clients. This reflects the long-ter m,, deep relationships that U .S. Trust staff members have with, their clients, compared with the more impersonal connection, between Schwab’s staff and their customers. U.S. Trust advisers also resisted Schwab’s referrals of newly minted millionaires in blue jeans. “We were flabbergasted,” said one Schwab, board member about the cultural clash. “Some of the U .S., Trust officers simply refused to accept our referrals.”, , 251, , When the depth of cultural intransigence became apparent,, Pottruck replaced U.S. Trust’s CEO with Schw ab executive, Alan Weber. Weber later insisted that “there is no culture, clash” because Schwab “never tried to change the nature of, the organization.” Meanwhile, sources say that more than 300, U.S. Trust wealth advisers have defected to competitors since, the acquisition, taking man y v alued clients with them., Pottruck’s strate gy also backf ired; apparentl y most of, Schwab’s customers still wanted cheap trades as they became, wealthier., Three years after acquiring U.S. Trust, Pottruck lost his, job as Schw ab CEO, in par t because of the acquisition’ s, failure. Obser vers sa y the U .S. Trust acquisition is no w, worth less than half of its original purchase price. “Here are, two first-class companies, but structural and cultural problems keep the combination from the kind of success the y, expected,” explains a financial adviser in Florida.61, , CASE DISCUSSION QUESTIONS, 1. Diagnose the culture of the two companies. What values, did each compan y seem to prize? Identify ar tifacts reflecting those values. Explain why those respective cultures did (or did not) suit the en vironments in which the, two firms operated., 2. What merger strategy did Charles Schwab & Co. apply, when acquiring U.S. Trust? Was this the best strategy under the circumstances? Why or why not? If not, justify, another merger strategy for this situation., , ENDNOTES, 1. “Ringing in the Changes at Dell, ” New Zealand Mana gement, October 2004,, p. 11; “On the Record: K evin Rollins,” San Francisco Chronicle, July 18, 2004,, p. J1; L.M. Fisher, “How Dell Got Soul,” strategy+business 2004, pp. 1–14; A., Schatz, “Dell Reboots Morale of Its Workers,” Austin American-Statesman,, February 16, 2004, p. E1., 2. A. Williams, P. Dobson, and M. Walters, Changing Culture: New Organizational, Approaches (London: Institute of P ersonnel Management, 1989); E.H. Schein,, “What Is Culture?” in Reframing Organizational Culture, ed. P.J. Frost et al., (Newbury Park, CA: Sage, 1991), pp. 243–53., 3. B.M. Meglino and E.C. Ravlin, “Individual Values in Organizations: Concepts,, Controversies, and Research, ” Journal of Mana gement 24, no. 3 (1998),, pp. 351–89; B.R. Agle and C.B. Caldwell, “Understanding Research on Values in, Business,” Business and Society 38, no. 3 (September 1999), pp. 326–87;, S. Hitlin and J.A. Pilavin, “Values: Reviving a Dor mant Concept,” Annual Review of Sociology 30 (2004), pp. 359–93., 4. N.M. Ashkanasy, “The Case for Culture,” in Debating Organization, ed. R. Westwood and S. Clegg (Malden, MA: Blackwell, 2003), pp. 300–10., 5. B. Kabanoff and J. Daly, “Espoused Values in Organisations,” Australian Journal, of Management 27, special issue (2002), pp. 89–104; P. Babcock, “Is Your Company Two-Faced?” HRMagazine, January 2004, pp. 42–47., 6. Edgar Schein’s original model suggested that or ganizational culture consists of, espoused values. But others have subsequently pointed out that enacted v alues, are a more lo gical par t of culture because enacted v alues are consistent with, other elements of the model—namel y shared assumptions on one side and, , hiL30123_ch10_230-253.indd 251, , artifacts on the other. See D. Denison, “Organizational Culture: Can It Be a Key, Lever for Driving Organizational Change?” in International Handbook of Culture and Climate, ed. C. Cooper, S. Cartwright, and P.C. Earley (New York: John, Wiley & Sons, 2000)., 7. Fisher, “How Dell Got Soul,” p. 6., 8. T. P arker-Pope, “Ne w CEO Preaches Rebellion for P&G’ s ‘Cult,’” The Wall, Street Journal, December 11, 1998; K. Brooker and J. Schlosser, “The Un-CEO,”, Fortune, September 16, 2002, pp. 88–93., 9. M. Fan, “Cary, N.C., Software Firm Posts Steady Growth without IPO,” San Jose, Mercury News, July 29, 2001; B. Darrow, “James Goodnight, Founder and CEO,, SAS Institute,” Computer Reseller News, December 12, 2005, p. 23., 10. A . D’Innocenzio, “W al-Mart’s Town Becomes Ne w Address for Cor porate, America,” Associated Press, September 19, 2003; J. Useem, “One Nation under, Wal-Mart,” Fortune, March 3, 2003, pp. 65–78., 11. J .J. van Muijen, “Organizational Culture,” in A Handbook of Work and Organizational Psychology: Organizational Psychology, 2nd ed., ed. P.J.D. Drenth, H. Thierry,, and C.J. de Wolff (East Sussex, UK: Psychology Press, 1998), pp. 113–32., 12. J .S. Ott, The Organizational Culture Perspective (Pacific Grove, CA: Brooks/Cole,, 1989), pp. 45-47; S. Sackmann, “Culture and Subcultures: An Analysis of Organizational Knowledge,” Administrative Science Quarterly 37 (1992), pp. 140–61., 13. A. Sinclair, “Approaches to Organizational Culture and Ethics,” Journal of Business, Ethics 12 (1993); A. Boisnier and J. Chatman, “The Role of Subcultures in Agile, Organizations,” in Leading and Mana ging People in Dynamic Or ganizations,, , 10/31/06 6:36:40 PM

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252, , PART 3 // Organization Architecture, , ed. R. Petersen and E. Mannix (Mahwah, NJ: Lawrence Erlbaum Associates, 2003),, pp. 87–112., 14. Ott, The Organizational Culture Perspective, Chapter 2; J .S. Pederson and J.S., Sorensen, Organizational Cultures in Theory and Practice (Aldershot, England:, Gower, 1989), pp. 27–29; M.O . Jones, Studying Or ganizational Symbolism:, What, How, Why? (Thousand Oaks, CA: Sage, 1996)., 15. M . Doehrman, “Anthropologists-Deep in the Cor porate Bush,” Daily Record, (Kansas City, MO), July 19, 2005, p. 1., 16. Fisher, “How Dell Got Soul,” pp. 9–10., 17. E.H. Schein, “Organizational Culture,” American Psychologist, February 1990,, pp. 109-19; A. Furnham and B. Gunter, “Corporate Culture: Definition, Diagnosis, and Change,” International Review of Industrial and Or ganizational Psychology 8 (1993), pp. 233-61; E.H. Schein, The Corporate Culture Survival, Guide (San Francisco: Jossey-Bass, 1999), Chapter 4; J. Martin, Organizational, Culture: Mapping the Terrain (Thousand Oaks, CA: Sage, 2002), Chapter 7., 18. K. Frieberg and J. Frieberg, Nuts! (New York: Bantam Doubleday Dell, 1998)., 19. J .Z. DeLorean, On a Clear Day You Can See General Motors (Grosse Pointe, MI:, Wright Enterprises, 1979)., 20. A .L. Wilkins, “Organizational Stories as Symbols Which Control the Organization,”, in Organizational Symbolism, ed. L.R. P ondy et al. (Greenwich, CT : JAI Press,, 1984), pp. 81–92; R. Zemk e, “Storytelling: Back to a Basic,” Training 27 (March, 1990), pp. 44–50; J .C. Meyer, “Tell Me a Stor y: Eliciting Or ganizational Values, from Narratives,” Communication Quarterly 43 (1995), pp. 210–24; W. Swap et al.,, “Using Mentoring and Stor ytelling to Transfer Knowledge in the Workplace,”, Journal of Management Information Systems 18 (Summer 2001), pp. 95–114., 21. “The Ultimate Chairman,” Business Times Singapore, September 3, 2005., 22. D . 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Cha, “Leading b y Leveraging Culture,” California Management Review 45 (Summer 2003), pp. 20–34., 28. M . Alvesson, Understanding Or ganizational Cultur e (London: Sage, 2002),, Chapter 2., 29. M .R. Louis, “Sur prise and Sensemaking: What Ne wcomers Experience in, Entering Unfamiliar Organizational Settings,” Administrative Science Quarterly, 25 (1980), pp. 226–51; S.G. Harris, “Organizational Culture and Individual Sensemaking: A Schema-Based Perspective,” Organization Science 5 (1994),, pp. 309–21., 30. D .R. Denison, Corporate Culture and Organizational Effectiveness (New York:, Wiley, 1990); G.G. Gordon and N . DiTomasco, “Predicting Cor porate Performance from Organizational Culture,” Journal of Management Studies 29 (1992),, pp. 783–98; J .P. Kotter and J .L. Heskett, Corporate Culture and Performance, (New York: Free Press, 1992)., , hiL30123_ch10_230-253.indd 252, , 31. D. Howell, “Nardelli Nears Five-Year Mark with Riveting Record,” DSN Retailing Today, May 9, 2005, pp. 1, 38; R. Charan, “Home Depot’s Blueprint for Culture Change,” Harvard Business Re view, April 2006, pp. 61-70; R. DeGross,, “Five Years of Change: Home Depot’ s Results Mix ed under Nardelli,” Atlanta, Journal-Constitution, January 1, 2006, p. F1., 32. L. Tischler, “Can Kevin Rollins Find the Soul of Dell?” Fast Company, November, 2002, pp. 110–14; K. James, “F inding Dell’s Soul,” Business Times Singapore,, October 9, 2004; “Soul of Dell” (Dell Inc., 2006), www .dell.com (accessed, January 25, 2006)., 33. A. Holeck, “Griffith, Ind., Native Takes Over as Steel Plant Manager,” The Times, (Munster, IN), May 24, 2003., 34. Kotter and Heskett, Corporate Culture and Performance; D.R. Denison and A.K., Mishra, “Toward a Theory of Organizational Culture and Effectiveness,” Organization Science 6, no. 2 (March–April 1995), pp. 204–23; J .P. 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Bur rows, “What You Don’t Know about Dell, ” BusinessWeek,, November 3, 2003, p. 76; James, “Finding Dell’s Soul,” p. 6., 43. M. Cooke, “Humiliation as Motivator?” Meetings & Conventions 36 (July 2001),, p. 26; G. Groeller, “Eat or Be Eaten Ethic Boosts Bottom Line,” Orlando Sentinel,, April 30, 2001, p. 16., 44. J. Hewett, “Office Politics,” Australian Financial Review, September 27, 2003, p. 29., 45. J. Kerr and J.W. Slocum Jr., “Managing Corporate Culture through Reward Systems,” Academy of Mana gement Executive 1 (Ma y 1987), pp. 99–107; K.R., Thompson and F. Luthans, “Organizational Culture: A Behavioral Perspective,”, in Organizational Climate and Culture, ed. B. Schneider (San Francisco: JosseyBass, 1990), pp. 319–44., 46. H owell, “Nardelli Nears F ive-Year Mark with Ri veting Record”; Charan,, “Home Depot’s Blueprint for Culture Change”; DeGross, “F ive Years of, Change: Home Depot’s Results Mix ed under Nardelli”; B . Grow, D. Brady,, and M. 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Organizational Culture \\ CHAPTER 10, , 50. J . Van Maanen, “Breaking In: Socialization to Work,” in Handbook of Work,, Organization, and Society, ed. R. Dubin (Chicago: Rand McNally, 1976)., , 253, , “A Brand-New Culture for the Merged Firm,” Mergers and Acquisitions 35 (June, 2000), pp. 45–50., , 51. Fisher, “How Dell Got Soul,” p. 6., , 57. T. Hamilton, “RIM on a Roll,” Toronto Star, February 22, 2004, p. C01., , 52. R. Craver, “Dell Thinning Out List of Job Candidates,” Winston-Salem Journal,, April 23, 2005., , 58. J. Davidson, “The Business of Ethics,” Working Woman, February 1998, pp. 68–71., , 53. Schein, The Corporate Culture Survival Guide, Chapter 8; M.L. Marks, “Mixed, Signals,” Across the Boar d, May 2000, pp. 21-26; J .P. Daly, R.W. Pouder, and, B. Kabanoff, “The Effects of Initial Dif ferences in Firms’ Espoused Values on, Their Postmerger Performance,” Journal of Applied Behavioral Science 40, no. 3, (September 2004, pp. 323–43). The merger failure rates are cited in G. Costa,, “More to Mergers Than Just Doing the Deal,” Sydney Morning Herald, January, 8, 2004; J . Kirby, “The Trouble with Mer gers,” Canadian Business, February, 16–29, 2004, p. 64., 54. A. Klein, “A Merger Taken AO-Ill,” Washington Post, October 21, 2002, p. E1; A., Klein, Stealing Time: Steve Case, Jerry Levin, and the Collapse of AOL Time, Warner (New York: Simon & Shuster, 2003)., 55. C.A. Schorg, C.A. Raiborn, and M.F. Massoud, “Using a ‘Cultural Audit’ to Pick, M&A Winners,” Journal of Corporate Accounting & Finance, May–June 2004,, pp. 47-55., , 59. H ewitt Associates, “Mer gers and Acquisitions Ma y Be Dri ven b y Business, Strategy—but Often Stumb le over People and Culture Issues, ” PR Ne wswire, news release (Lincolnshire, IL: August 3, 1998)., 60. I. Mount, “Be Fast Be Frugal Be Right,” Inc 26, no. 1 (January 2004), pp. 64–70;, S. Anthony and C. Christensen, “Mind o ver Merger,” Optimize, February 2005,, pp. 22–27., 61. F . Vogelstein and E. Florian, “Can Schw ab Get Its Mojo Back?” Fortune,, September 17, 2001, p. 93; B. Morris, “When Bad Things Happen to Good Companies,” Fortune, December 8, 2003, 78; S. Craig and K. Bro wn, “Schwab Ousts, Pottruck as CEO,” The Wall Street Journal, July 21, 2004, p. A1; R. Frank, “U.S., Trust Feels Effects of Switch,” The Wall Street Journal, July 21, 2004, p. A8; R., Frank and S. Craig, “White-Shoe Shuffle,” The Wall Street Journal, September 15,, 2004, p. A1; C. Harrington, “Made in Heaven? Watching the Watchovia-Tanager, Union,” Accounting Today, December 20, 2004, p. 18; J . Kador, “Cultures in, Conflict,” Registered Rep., October 2004, p. 43., , 56. A .R. Malekazedeh and A. Nahavandi, “Making Mer gers Work by Managing, Cultures,” Journal of Business Strategy, May–June 1990, pp. 55–57; K.W. Smith,, , hiL30123_ch10_230-253.indd 253, , 10/31/06 6:36:41 PM

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11, LEARNING OBJECTIVES, , DEVELOPING, HIGH-PERFORMANCE TEAMS, After Reading This Chapter You Should Be Able to:, 1, , Define teams and discuss their benefits and, limitations., , 2, , Discuss the success factors for self-directed, teams., , 3, , Outline the model of team effectiveness., , 4, , Explain the influence on team effectiveness, of a team’s task, composition, and size., , 5, , Describe the five stages of team development., , 6, , Identify three factors that shape team norms., , 7, , List six factors that influence team, cohesiveness., , 8, , Summarize the three levels of trust in teams., , 9, , Analyze the causes of and structural solutions to, conflict in teams., , / / / / / / / / / / / / / / /, , Why Rely on Teams?, Why People Belong to Informal, Groups, , Team Norms, Team Cohesiveness, Team Trust, , The Trouble with Teams, Social Loafing, , Managing Team Conflict, Task versus Relationship, Conflict, Interpersonal Conflict, Management Styles, Structural Solutions to Team, Conflict, , Types of Teams, Self-Directed Teams, Virtual Teams, A Model of Team, Effectiveness, Team Design Features, Task Characteristics, Team Size, Team Composition, Team Roles, Team Processes, Team Development, , hiL30123_ch11_254-283.indd 254, , In Conclusion: Why Does It, Matter?, Management Challenges, Management Portfolio, Closing Case: The Shipping, Industry Accounting Team, , 11/1/06 4:29:49 PM

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Developing High-Performance Teams \\ CHAPTER 11, , 255, , Whole Foods relies, on teams to more, effectively serve, customers and fulfill, employee needs., © Bob Daemmrich/, The Image Works, , / / / / / / / / / / / / / / / / / / / / /, , W, , hen John MacKay cofounded Whole Foods Market in 1980, he adopted one of the central, recommendations from the then-popular Japanese, management books: Successful companies rely on, teams more than individuals. Although the Austin,, Texas, food retailer has grown from a single supermarket, employing 19 people to 181 stores employing 40,000, people in three countries, Whole Foods remains true to, its team-based structure., Every Whole Foods store is divided into about, 10 teams, such as the prepared foods team, the cashier/, front end team, and the seafood team. Teams are “selfdirected” because team members make decisions about, their work units with minimal interference from management. Each team is responsible for managing, inventory, labor productivity, and gross margins. Team, , hiL30123_ch11_254-283.indd 255, , members make many product placement decisions—a, sharp contrast to the centralized purchasing decisions, in most grocery chains., Whole Foods teams also decide whether new hires, get to remain as permanent team members. After a, recruit is temporarily employed for 30 to 45 days, team, members vote on whether the individual should become, a permanent member; at least two-thirds must vote in, favor for the recruit to join the team permanently. Team, members take these hiring decisions seriously because, their monthly bonuses are based on team performance., Every four weeks the company calculates each team’s, performance against goals and cost efficiencies. When, the team finds ways to work more effectively, the unused, budget is divided among them. This team bonus can add, up to hundreds of extra dollars in each paycheck.1, , 11/1/06 4:29:54 PM

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256, , PART 3 // Organization Architecture, , teams, Groups of people who, interact and influence, each other, are mutually, accountable for achieving, common goals associated, with organizational, objectives, and perceive, themselves as a social, entity within an, organization., , Several factors explain why Whole Foods Market has become a retail success story and one of, the best places to work in America, but the company’s focus on teams is clearl y one of those, factors. Many other companies in various sectors of the economy have also adopted the team, approach. Many banks and brok erage f irms have shifted to ward team-based w ork to better, satisfy complex client needs. SANS Fibres, the South African manufacturer of synthetic f iber, and polyester polymers, relies on the team approach to eliminate waste, maximize manufacturing flow, minimize inventories, and meet customer requirements. Inter national Steel Group’s, (ISG) Cleveland plant rose from the ashes of bankruptcy and quickly became profitable in part, because it formed teams in which employees share duties and help others across depar tments., “It wasn’t the traditional one job for one person, ” says ISG executive John Mang III. “It w as, a team.”2, Teams are groups of people who interact and influence each other, are mutually accountable, for achieving common goals associated with organizational objectives, and perceive themselves, as a social entity within an organization.3 This definition has a few important components worth, repeating. First, all teams exist to fulfill some purpose, such as assembling a product, providing a ser vice, designing a ne w manuf acturing f acility, or making an impor tant decision., Second, team members are held together by their interdependence and need for collaboration, to achieve common goals. All teams require some for m of communication so members can, coordinate and share common objectives. Third, team members influence each other, although, some members are more influential than others regarding the team’s goals and activities. Finally,, a team exists when its members perceive themselves to be a team., This chapter be gins by examining the reasons w hy organizations rely on teams, w hy, people join informal groups in organizational settings, and why teams aren’t always necessary or benef icial in work processes. Several types of teams are described , including the, increasing prevalence of self-directed teams and vir tual teams. A large segment of this, chapter examines a model of team ef fectiveness, which includes team and or ganizational, environment, team design, and the team processes of development, norms, roles, cohesiveness, and trust. Next we identify the foundations of conflict in teams. We close this chapter, by discussing ways to manage conflict., , // Why Rely on Teams?, ■ Teamwork, , drives Burberry’s, , success., , hiL30123_ch11_254-283.indd 256, , In the first chapter of this book we described how Rose Marie Bravo engineered the remarkable, turnaround of Burberry, the London fashion house. When asked how this former head of Saks, Fifth Avenue achieved Burberry’s transformation, Bravo highlighted the f act that teams, not, individuals, are at the core of successful companies, and that a manager’s job is to leverage the, power of those teams. “One of the things I think people o verlook is the quality of the team,”, says Bravo. “It isn’t one person, and it isn’t two people. It is a whole group of people—a team, that works cohesively toward a goal—that makes something happen or not.”4, Bravo’s obser vation that teams are impor tant is reflected in a major sur vey of human, resource professionals, which recently concluded, “Teams are now an integral part of workplace management.” Figure 11.1 summarizes a few more interesting numbers, illustrating the, importance of team work. Why are companies paying so much attention to teams? The answer, to this question has a long history, dating back to research on British coal mining in the 1940s, and the Japanese economic miracle of the 1970s. 5 These early studies and a huge v olume of, investigations since ha ve revealed that under the right conditions, teams mak e better decisions, develop better products and ser vices, and create a more eng aged workforce compared, with employees working alone.6, Under the right circumstances, teams are generally more successful than individuals working, alone at identifying problems, developing alternatives, and choosing from those alter natives., Similarly, team members can quickly share information and coordinate tasks, whereas these, processes are slower and prone to more er rors in traditional departments led by supervisors., Teams typically provide superior customer ser vice because the y provide more breadth of, knowledge and expertise to customers than individual “stars” can offer., , 11/1/06 4:29:56 PM

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Developing High-Performance Teams \\ CHAPTER 11, , 257, , 80 Average percentage of production workforce who work in self-directed teams, in top-ranked North American manufacturing firms (averaged across the past, five years of survey results), 11.5 Average number of members in self-directed teams in top-ranked North, American manufacturing firms, 86 Percentage of Canadian executives who view effective teamwork as “very, critical” to the success of their organization., 31 Percentage of Canadian executives who rated their own company’s teamwork, as “very efficient.”, 25 Percentage of organizations in the United Kingdom with team-based bonus, and incentive plans., , FIG U RE 1 1 .1, , Teamwork: Some Key Numbers, , Sources: “Canadian Businesses Failing to Meet the Information Sharing Needs of Employees,” Microsoft, Canada press release, October 21, 2003; Chartered Institute of Personnel & Development, Reward, Management 2006 Survey; T. Purdum, “Teaming, Take 2,”, May 2005, 41–44., , Consider Celestica’s experience with teamwork at its manuf acturing plant in Monter rey,, Mexico.7 The electronics equipment manuf acturer formed a “lean team” of f ive core members, who learned about lean manufacturing practices such as reducing time, space, and movement. Lean manufacturing practices are related to the quality management principles that you, learned about in Chapter 7. The lean team brainstormed with workstation operators to identify, and eliminate non–value-added activities. Another team was set up to revamp the manufacturing line so it would be more responsive to small batch production. The team videotaped the, entire process and measured ho w long it took to complete each step. “W e looked at each, process and w hat tools w ere used,” recalls Christy Mitchell, Celestica’ s customer-focused, team director. “We looked at floor plans and the amount of time it took to go from one station, to the next. We looked at everything.”, After teams had identif ied and implemented changes, the Monter rey plant cut lead time, from almost a w eek to less than tw o days, production changeo ver time from four hours to, 30 minutes, the distance employees walked from 1,173 feet to just 358 feet, and scrap levels by, 66 percent. It also won the prestigious Shingo Prize for these achievements. Celestica has since, extended its lean jour ney to other plants around the w orld. Hundreds of intensive quality improvement investigations of production facilities (called “kaizen blitzes”) have been completed, by dozens of production teams, cutting costs by approximately $200 million in one year., , ■, , Celestica’s lean teams., , // WHY PEOPLE BELONG TO INFORMAL GROUPS, Although most of our attention in this chapter is on for mal teams, employees also belong to, informal g roups. All teams are g roups, but man y g roups do not satisfy our def inition of, teams. Groups include people assembled together whether or not they have any interdependence or organizationally focused objective. The friends you meet for lunch are an informal, group but wouldn’t be called a team because they have little or no task interdependence (each, person could just as easily eat lunch alone) and no organizationally mandated purpose (which, is why they are “infor mal”). Instead they exist primarily for the benef it of their members., Although the terms are used interchangeably, teams has largely replaced groups in the business language referring to employees who work together to complete tasks.8, One reason why informal groups exist is that they fulfill the innate drive to bond. People, invest considerable time and effort forming and maintaining relationships without any special, circumstances or motives beyond the need for af filiation. We define ourselves by our group, affiliations, which motivates us to be associated with work teams or informal groups that are, viewed favorably by others. We are also moti vated to become members of g roups that are, similar to ourselves because this reinforces our self-perception.9, , hiL30123_ch11_254-283.indd 257, , 11/1/06 4:29:56 PM

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258, , PART 3 // Organization Architecture, , A second reason why people join informal groups is that these groups accomplish personal, goals that cannot be achie ved by individuals working alone. F or example, employees will, sometimes form a g roup to oppose or ganizational changes because the y have more po wer, when banded to gether than w hen complaining separatel y. A third e xplanation for infor mal, groups is that in stressful situations w e are comforted by the mere presence of other people, and are therefore moti vated to be near them. This is evident when employees mingle more, often after hearing rumors that the company might be sold., , // The Trouble with Teams, , process losses, Resources (including time, and energy) expended, toward team development, and maintenance rather, than tasks., , We outlined the benef its of teams, but managers also need to k eep in mind that teams aren’t, always needed.10 Some tasks are performed just as easily by one person as by a group. Even if, teams are somewhat useful, they tend to require more care and feeding than individuals working alone. These costs are known as process losses—resources (including time and energy), expended toward team development and maintenance rather than tasks.11, Another issue is that teams require the right en vironment to flourish. Many managers forget this point by putting people in teams without changing anything else. As will be described, more fully later in this chapter, teams require appropriate re wards, communication systems,, team leadership, and other conditions. Without these, the shift to a team str ucture could be a, waste of time and a huge fr ustration for those in volved. Overall, though, managers need to, determine whether changing these environmental conditions to improve teamwork will cost, more than benefits for the overall organization.12, , // SOCIAL LOAFING, social loafing, Occurs when people exert, less effort (and usually, perform at a lower level), when working in groups, than when working alone., , Perhaps the best-kno wn limitation of teams is the risk of producti vity loss due to social, loafing. Social loaf ing occurs when people exert less effort (and usually perform at a lower, level) when working in groups than when working alone.13 A few management scholars question whether social loaf ing is common, but students can cer tainly report many instances of, this problem in their team projects!, Social loafing is most likely to occur in large teams where individual output is difficult to, identify. This particularly includes situations in w hich team members w ork alone toward a, common output pool. Under these conditions emplo yees aren’t as worried that their perfor mance will be noticed. Therefore, one way to minimize social loaf ing is to make each team, member’s contribution more noticeable, such as by reducing the size of the team or measuring, each team member’s performance. Social loaf ing is also less likely to occur when the task is, interesting because individuals have a higher intrinsic motivation to perform their duties. Social, loafing is less common when the group’s objective is important, possibly because individuals, experience more pressure from other team members to perfor m well. Finally, social loaf ing, occurs less frequently among members who value group membership and believe in working, toward group objectives.14, , // Types of Teams, There are many types of teams in organizational settings, most of which are summarized in, Figure 11.2. Some employees work in departmental teams , such as the accounting and f inance departments, where a supervisor coordinates the work flow. Traditional manufacturing, and service operations organize employees into production teams, which produce a common, product or service or make ongoing decisions. Advisory teams provide recommendations to, decision makers. Task forces also make recommendations, but they are usually temporary, and focused on a specif ic issue. Skunkworks are unusual teams that e xist in some, , hiL30123_ch11_254-283.indd 258, , 11/1/06 4:29:56 PM

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Developing High-Performance Teams \\ CHAPTER 11, , 259, , F I G U R E 1 1 .2, Team Type, , Description, , Departmental teams, , Employees have similar or complementary skills, and are located in the same unit of a functional, structure; such teams usually feature minimal, task interdependence because each person, works with employees in other departments., , Production/service/, leadership teams, , Typically multiskilled (having diverse, competencies) team members collectively, produce a common product or service or make, ongoing decisions; production/service teams, typically have an assembly-line type of, interdependence, whereas leadership teams, tend to have tight interactive (reciprocal), interdependence., , Self-directed, teams, , Similar to production/service teams except, (1) they produce an entire product or, subassembly that has low interdependence with, other work units, and (2) they have very high, autonomy (they usually control inputs, flow, and, outputs with no supervision)., , Advisory teams, , These entities, such as committees, advisory, councils, work councils, and review panels,, provide recommendations to decision makers;, they may be temporary but are often, permanent, some with frequent rotation of, members., , Task force (project) teams, , These are usually multiskilled, temporary, entities whose assignment is to solve a, problem, realize an opportunity, or develop a, product or service., , Skunkworks, , These multiskilled entities are usually located, away from the organization and are relatively, free of its hierarchy; such teams are often, initiated by an entrepreneurial team leader, (innovation champion) who borrows people and, resources (bootlegging) to create a product or, develop a service., , Virtual teams, , Members of these formal teams operate across, space, time, and organizational boundaries and, are linked through information technologies to, achieve organizational tasks; they may be, temporary task forces or permanent service, teams., , Types of Formal Teams, in Organizations, , companies; they are relatively free from the cor porate hierarchy and are usuall y located, away from the company’s physical operations to create a product or develop a service. Two, other types of teams that e xist in man y other or ganizations are self-directed teams and, virtual teams. These team str uctures are becoming so impor tant that we look at each of, them in more detail next., , hiL30123_ch11_254-283.indd 259, , 11/1/06 4:29:57 PM

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260, , PART 3 // Organization Architecture, , // SELF-DIRECTED TEAMS, Whole Foods Market organizes its emplo yees not just into teams, but into self-directed, teams. Self-directed teams are similar to production/service teams in that team members typically have diverse competencies and are organized around a common product or ser vice, but, they differ from traditional production/ser vice teams in se veral ways.15 First, self-directed, teams complete an entire piece of w ork, whether it’s a product, a ser vice, or par t of a lar ger, product or service. Team members at Whole Foods are responsible for the entire processes in, their areas, such as food preparation, display, inventory, and some purchasing., Second, the team—not supervisors—assigns tasks that individual team members perform., In other words, the team plans, organizes, and controls work activities with little or no direct, involvement of someone with higher for mal authority. Harley-Davidson has taken this highautonomy approach to such an extreme that there are no supervisors at all at its assembly plant, near Kansas City, Missouri. Instead self-directed teams of 8 to 15 employees make most daily, decisions through consensus. An umbrella, group, representing teams and management,, Motorcycle Teams, makes plantwide decisions. “There’s a lot of, Surrounded by tall prairie, work being done to empower the workforce,”, grass, Harley-Davidson’s, says Karl Eberle, vice president an d general, assembly plant near Kansas, manager of Harley-Davidson’s Kansas City, City, Missouri, exemplifies an, operations. “But there are very few examples, organization that relies on, of where they’ve taken the workforce to run, self-directed teams. In fact,, the factory. And that’s what we’ve done.”16, the facility has no, Third, self-directed teams control most, supervisors. Instead selfwork inputs, flo w, and output. At Whole, directed teams of 8 to 15, Foods, for instance, some self-directed teams, employees make most daily, work directl y with suppliers, and all are, decisions through consensus., responsible for their w ork processes and, An umbrella group,, interacting directl y with customers on the, representing teams and, output side. F ourth, self-directed teams are, management, makes, responsible for cor recting work flow probplantwide decisions., lems as they occur. In other words, the teams, maintain their o wn quality and lo gistical, © AP Photo/Orlin Wagner, control. F ifth, self-directed teams recei ve, team-level feedback and rewards. This recognizes and reinforces the f act that the team—not indi vidual employees—is responsible for the, work, although team members may also receive individual feedback and rewards., Surveys estimate that some where between one-third and tw o-thirds of the medium-sized, and large organizations in the United States use self-directed team str uctures for part of their, operations. In addition, almost all of the top-rated manuf acturing firms rely on these teams. 17, This popularity is consistent with research indicating that self-directed teams potentiall y increase, both producti vity and job satisf action. F or instance, one study found that car dealership, service shops that or ganized employees into self-directed teams w ere signif icantly more, profitable than shops where employees worked without a team structure. Another reported that, both short and long-term measures of customer satisf action increased after street cleaners in a, German city were organized into self-directed teams.18, , self-directed teams, Teams organized around, work processes that, complete an entire piece, of work requiring several, interdependent tasks and, have substantial autonomy, over the execution of those, tasks., , Success Factors for Self-Directed Teams If self-directed teams are so w onderful, why, doesn’t every organization have them? Self-directed teams probably would add value in most, organizations, but they are not easy to put in place. In addition to managing the team dynamics, described later in this chapter, corporate leaders need to ensure the following:19, 1. Responsible for an entire work process: Self-directed teams work best when they are, responsible for making an entire product, providing a service, or otherwise completing, an entire work process. For instance, the seafood team at a Whole Foods store would be, responsible for the entire process of ordering, preparing, and serving food items in this, , hiL30123_ch11_254-283.indd 260, , 11/1/06 4:29:57 PM

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Developing High-Performance Teams \\ CHAPTER 11, , 261, , area of the store. This organization around a work process keeps each team sufficiently, independent that it can change its work process and content without interfering with, or, having interference from, other work units. It also gives employees a sense of interdependence and cohesiveness by working toward a common goal.20, 2. Sufficient autonomy: Self-directed teams should have sufficient freedom from management control to organize and coordinate work. This autonomy allows self-directed teams, to respond more quickly and effectively to client and stakeholder demands. It also, motivates team members through feelings of empowerment. Many high-performance, teams have failed because managers were reluctant to hand over some of their power, or employees did not feel comfortable with their increased responsibilities., 3. Technology-supported team dynamics: Self-directed teams are successful when technology is implemented in a way that supports coordination and communication among, team members and increases job enrichment.21 Too often management calls a group of, employees a “team”; yet the work layout, assembly-line structure, and other technologies isolate employees from each other. For example, automakers have referred to, groups of employees along an assembly line as teams, but assembly-line technology, does not lend itself to effective team dynamics because team members at one end rarely, see coworkers at the other end of the line., , // VIRTUAL TEAMS, PricewaterhouseCoopers (PwC) employs 190 training professionals in 70 of fices across the, United States. These professionals, along with man y more consultants and academics w ho, provide emplo yee de velopment ser vices, routinel y for m vir tual teams for ne w projects., “Virtual teaming is the norm for us,” says Peter Nicolas, a PwC learning solutions manager in, Florham Park, New Jersey.22, PricewaterhouseCoopers makes better use of its human capital by creating virtual teams ., Virtual teams are teams whose members operate across space, time, and organizational boundaries and are linked through information technologies to achieve organizational tasks.23 Virtual, teams differ from traditional teams in two ways: (1) They are not usually colocated (they do not, work in the same ph ysical area), and (2) due to their lack of colocation, members of vir tual, teams depend primarily on infor mation technologies rather than f ace-to-face interaction to, communicate and coordinate their work efforts., Virtual teams are one of the most signif icant developments in organizations over the past, decade. “Virtual teams are now a reality,” says Frank Waltmann, head of learning at pharmaceuticals company Novartis. One reason for their popularity is that the Inter net, intranets,, instant messaging, virtual whiteboards, and other technologies have made it easier than e ver, before to communicate and coordinate with people at a distance. 24 The shift from productionbased to knowledge-based work is a second reason why virtual teamwork is feasible. It isn’t yet, possible to mak e a product w hen team members are located else where, but most of us no w, make decisions and create ideas. Infor mation technologies allow people to e xchange this, knowledge work, such as softw are code, product de velopment plans, and ideas for strate gic, decisions., Information technologies and kno wledge-based work make vir tual teams possib le, but, knowledge management and globalization are tw o reasons why they are increasingly necessary. Virtual teams represent a natural par t of the kno wledge management process because, they encourage employees to share and use kno wledge when geography limits more direct, forms of collaboration. Globalization mak es vir tual teams increasingl y necessar y because, employees are spread around the planet rather than around one city . Thus global businesses, depend on virtual teamwork to leverage their human capital.25, Invensys PLC is a case in point. A few years ago the British process and control engineering f irm became a global leader b y merging companies with of fices in several countries. To make the best use of this f ar-reaching talent, the company introduced information, technologies whereby employees could par ticipate in specialized projects at a moment’ s, , hiL30123_ch11_254-283.indd 261, , virtual teams, Teams whose members, operate across space,, time, and organizational, boundaries and are linked, through information, technologies to achieve, organizational tasks., , 11/1/06 4:29:58 PM

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262, , 24-Hour Virtual Team, Service Invensys PLC, is a global leader in, process and control, engineering with offices, in several countries. To, make the best use of this, far-reaching talent, the, company introduced, information technologies, whereby employees, could participate in, specialized projects at a, moment’s notice without, travel., © Getty Images, , PART 3 // Organization Architecture, , notice without f lying around the w orld. “Our development projects operate in a virtual mode and [gather], people from multiple sites based on project needs, ”, explains Joe Ayers, a manager at In vensys’s process, simulation unit in Lak e F orest, Califor nia. “It is, common for projects to utilize developers from three, different time zones in a ‘follo w the sun’ development, mode.”26, Success Factors for Virtual Teams Virtual teams, have all the challenges of traditional teams as w ell as, the vagaries of distance and time. Infor mation technology plays a critical role for vir tual teams to e xist, and work more ef fectively, but so f ar no technolo gy, completely solves the distance pr oblem. Fortunately, management researchers have been keenly interested, in virtual teams, and their studies are no w revealing, ways to improve virtual team effectiveness. Here are, three of the clearest recommendations:27, • Virtual team competencies: Virtual team members require competencies beyond those, needed in traditional teams. They should have the ability to communicate easily through, technology, strong self-leadership skills to motivate and guide their behavior without, peers or bosses nearby, and higher emotional intelligence so they can decipher the, feelings of teammates from e-mail and other limited communication media. “On a call, I, use subtle listening,” explains Karim Ladak, a Procter & Gamble executive whose virtual, team members live in at least six cities around the world. “I listen for a quiver or a pause., And even then I know that I can very quickly miss something.”28, • Flexible information technologies: Researchers have found that corporate leaders like to, impose technology on virtual teams rather than letting them adopt technology that suits, their needs. The best situation occurs when virtual teams have a toolkit of communication, vehicles (e-mail, virtual white boards, video conferencing,and so on), which gain and lose, importance over different parts of the project., • Occasional face-to-face interaction: This may seem contrary to the entire notion of, virtual teams, but so far no technology has replaced face-to-face interaction for high-level, bonding and mutual understanding. This direct interaction is particularly valuable when, virtual teams form. For instance, when IBM recently formed a virtual team to build an, electronic customer access system for Shell, employees from both firms began with an, “all hands” face-to-face gathering to assist the team development process. The two firms, also made a rule that the dispersed team members should have face-to-face contact at, least once every six weeks throughout the project. Without this, “after about five or six, weeks we found some of that communication would start to break down,” says Sharon, Hartung, the IBM comanager for the project.29, , // A Model of Team Effectiveness, Most U.S. manufacturing firms organize employees into production teams but, as revealed in, a recent survey (see Figure 11.3), most managers in these f irms believe the effectiveness of, these teams is still f ar from ideal. Why are some teams ef fective while others f ail? This, question has challenged organizational researchers for some time, and as y ou might expect,, numerous models of team ef fectiveness have been proposed o ver the y ears.30 Figure 11.4, presents a model of team effectiveness that pulls together most existing literature about team, effectiveness; we’ll examine this model closely over the next several pages., , hiL30123_ch11_254-283.indd 262, , 11/1/06 4:29:58 PM

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Developing High-Performance Teams \\ CHAPTER 11, , 263, , F I G U R E 1 1 .3, Not effective, , Somewhat effective, 15%, , 50.4%, , 20.4%, , No "team program" exists, , How Effective Are Teams, in U.S. Manufacturing, Firms?, Source: Data from the 2004, Industry Week/MPI Census of, Manufacturers survey, cited in, T. Purdum, “Teaming, Take 2,”, May 2005,, 41–44., , 14.1%, Highly effective, , Let’s begin by clarifying the meaning of team effectiveness .Team effectiveness refers, to ho w the team af fects the or ganization, indi vidual team members, and the team’ s, existence.31 First, effective teams achie ve their objecti ves relating to the or ganization or, other system in which the group operates. Second, team effectiveness relates to the satisfaction and well-being of its members. P eople join g roups to fulf ill their personal needs, so, effectiveness is partly measured by this need fulfillment. Third, team effectiveness relates to, the team’s ability to sur vive. It must be ab le to maintain the commitment of its members,, particularly during the turbulence of the team’ s development. Without this commitment,, people may leave and the team can f all apar t. This element of team ef fectiveness also, includes the ability to secure suf ficient resources and f ind a bene volent environment in, which to operate., , team effectiveness, The team’s effect on the, organization, individual, team members, and the, team’s existence., , Team design, Task characteristics, T, Team size, Team composition, Team roles, , Team, effectiveness, , Organizational and, team environment, , Team processes, Team development, Team norms, Team cohesiveness, Team trust, Team conflict, , F I G U R E 1 1 .4, Team Effectiveness, Model, , hiL30123_ch11_254-283.indd 263, , 11/1/06 4:29:59 PM

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264, , PART 3 // Organization Architecture, , Medrad Sees the U in Team Medrad, Inc., found that, one of the best ways to support teams was by replacing, the straight assembly line with a clustered production, arrangement in which members of each team work more, closely in U-shaped work cells. The new physical, arrangement improved team performance by helping, team members observe and assist each other., Courtesy of Medrad, Inc., USA, , The organizational and team en vironment represents all, factors that influence teams and exist beyond their boundaries., Team members tend to work together more effectively when, they are at least partly rewarded for team performance. Communication systems can influence team ef fectiveness—particularly in vir tual teams, w hich are highl y dependent on, information technologies to coordinate work. Another environmental factor is the organizational structure; as we noted, earlier, teams flourish when employees are organized around, work processes because this increases interaction among, team members. High-perfor mance teams also depend on, organizational leaders w ho pro vide suppor t and strate gic, direction while team members focus on operational eff iciency, and flexibility.32, Along with these conditions, the ph ysical layout of the, team’s workspace can mak e a dif ference. Medrad, Inc., the, Indianola, Pennsylvania, medical device manufacturer, redesigned the production process from straight-line assembly to, clustered str uctures in w hich members of each team no w, work more closely in U-shaped work cells. A successful trial, confirmed that the U-shaped cell ph ysical ar rangement, improved team performance by enhancing the ability of team, members to observe and assist each other.33, , // Team Design Features, Along with setting up a compatible environment, managers need to carefully design the team, itself, including task characteristics, team size, team composition, and team roles., , // TASK CHARACTERISTICS, , task interdependence, The extent to which team, members must share, common inputs to their, individual tasks, need to, interact while performing, their work, or receive, outcomes (such as, rewards) that are partly, determined by the, performance of others., , Experts are still figuring out the best types of work for teams. Some evidence says that teams, are more effective when their tasks are well structured because a clear structure makes it easier to coordinate work among several people. But other research indicates that teams flourish, on more complex tasks because the complexity motivates them to work together as a team. 34, Task structure and task comple xity aren’t opposites, but it can be dif ficult to f ind complex, work that is well structured., One task characteristic that is definitely important for teams is task interdependence:, the extent to which team members must share common inputs to their indi vidual tasks, need, to interact while performing their work, or receive outcomes (such as rewards) that are partly, determined by the perfor mance of others. The higher the le vel of task interdependence, the, greater the need for teams rather than individuals working alone. Employees tend to be more, motivated and satisf ied working in teams w hen their tasks are highl y interdependent—but, only w hen team members ha ve the same job goals, such as ser ving the same clients or, collectively assembling the same product.35, , // TEAM SIZE, The most effective teams have the right number of members. One popular (but untested) rule, is that the optimal team size is some where between f ive and se ven people. In reality the, optimal team size depends on a few things. We know that larger teams are typically less effective because members consume more time and ef fort coordinating their roles and resolving, , hiL30123_ch11_254-283.indd 264, , 11/1/06 4:30:01 PM

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Developing High-Performance Teams \\ CHAPTER 11, , differences. A somewhat extreme example is Whole Foods’ 140-person cashier team in Ne w, York City’s Columbus Circle. A team this lar ge is too dif ficult to coordinate, and team, members lack cohesi veness; so Whole Foods divides the g roup into a dozen or so smaller, teams. All cashiers meet as one massive group every month to discuss production issues, but, the subteams work more effectively daily.36, Although companies usuall y need to break up lar ge teams, the y also r un into troub le, when teams are too small to accomplish their objecti ves. The general r ule is that teams, should be large enough to provide the necessary competencies and perspectives to perform, the work, yet small enough to maintain efficient coordination and meaningful involvement, of each member., , 265, , ■ “Hewlett-Packard picks, team players., , // TEAM COMPOSITION, When Hewlett-Packard hires new talent, it doesn’t look for just technical skills and kno wledge. The high-tech computer manufacturer also looks for job applicants w ho fit into a team, environment. “It’s important for candidates to prove to us that they can work well with others,”, explains business development manager Bill Avey. “We’re looking for people who value the, different perspectives that each indi vidual brings to a team. ” Avey describes how HewlettPackard recr uiters will ask applicants to recall a time the y worked in a g roup to solv e a, problem. “Successful candidates tend to sho w how they got differences out in the open and, reached a resolution as a team,” says Avey.37, Hewlett-Packard has a strong team orientation, so it carefully selects people with the necessary motivation and competencies for teamwork. Whole Foods is equally serious about hiring, team members who can work together. As the opening vignette to this chapter described , new, hires are approved for permanent employment by teammates, not by managers. The reason for, the teams’ involvement in hiring is that teams require members w ho are moti vated to work, together rather than alone, abide by the teams’ rules of conduct, and suppor t the teams’ goals., Effective team members also possess v aluable skills and knowledge for the team’s objectives, and can work well with others. Notably, research suggests that high-performing team members, demonstrate more cooperative behavior toward others and generally have better awareness of, others’ needs and views.38, Another important dimension of team composition is di versity.39 Teams whose members, have diverse knowledge, skills, and perspecti ves are generall y more ef fective in situations, involving complex problems requiring innovative solutions. One reason is that people from, different backgrounds see a prob lem or oppor tunity from dif ferent perspectives. A second, reason is that they usually have a broader knowledge base. A third reason favoring teams with, diverse members is that they provide better representation of the teams’ constituents, such as, other departments or clients from similarly diverse backgrounds. However, diverse employees, take longer to become a high-perfor ming team and tend to e xperience more conflict that can, potentially sever alliances of team members into subg roups. For this reason it is sometimes, better to for m a team of lik e-minded and skilled people w hen di verse knowledge is not, required and the team has little time to develop., , // TEAM ROLES, Every work team and informal group has various roles necessary to assist the team’s task and, maintain its smooth functioning. A role is a set of beha viors that people are e xpected to, perform because they hold certain positions in a team and organization.40 Some roles help the, team achieve its goals; other roles maintain relationships so the team sur vives and team, members fulf ill their needs. Man y team roles are for mally assigned to specif ic people, but, several are taken informally based on each team member’s personality, values, and expertise., These role preferences are usually worked out during the storming stage of team development, (discussed in the next section). However, in a dynamic environment team members often need, to assume various roles temporarily as the need arises.41, , hiL30123_ch11_254-283.indd 265, , role, A set of behaviors that, people are expected to, perform because they, hold certain positions in a, team and organization., , 11/1/06 4:30:02 PM

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266, , PART 3 // Organization Architecture, , FIG UR E 1 1 .5, Belbin’s Team Roles, , Role Title, , Contributions, , Allowable Weaknesses, , Sources: R.M. Belbin, Team, Roles at Work (Oxford, UK:, Butterworth-Heinemann,, 1993); www.belbin.com., Reprinted with permission, from Belbin Associates., , Plant, , Creative, imaginative, and, unorthodox; solves difficult, problems., , Ignores details; too, preoccupied to communicate, effectively., , Resource investigator, , Extroverted, enthusiastic, and, communicative; explores, opportunities; develops, contacts., , Overly optimistic; loses, interest once initial, enthusiasm has passed., , Coordinator, , Mature, confident, a good, chairperson; clarifies goals,, promotes decision making,, delegates well., , Can be seen as manipulative;, delegates personal work., , Shaper, , Challenging, dynamic, thrives Can provoke others; hurts, on pressure; has the drive and people’s feelings., courage to overcome, obstacles., , Monitor/evaluator, , Sober, strategic, and, discerning; sees all options;, judges accurately., , Teamworker, , Cooperative, mild, perceptive, Indecisive in crunch situations;, and diplomatic; listens, builds, can be easily influenced., averts friction, calms the, waters., , Implementer, , Disciplined, reliable,, conservative, and efficient;, turns ideas into practical, actions., , Completer/finisher, , Inclined to worry unduly;, Painstaking, conscientious,, reluctant to delegate; can be a, and anxious; searches out, errors and omissions; delivers nitpicker., on time., , Specialist, , Single-minded, self-starting,, and dedicated; provides, knowledge and skills in rare, supply., , Lacks drive and ability to, inspire others; overly critical., , Somewhat inflexible; slow to, respond to new possibilities., , Contributes on only a narrow, front; dwells on technicalities;, overlooks the big picture., , One of the most popular models of team roles is Belbin’ s team role theor y, shown in, Figure 11.5.42 The model identifies nine team roles that are related to specif ic personality, characteristics. People have a natural preference for one role or another , although the y can, adjust to a secondary role. Belbin’s model emphasizes that all nine roles must be eng aged for, optimal team performance. Moreover, certain team roles should dominate over others at various, stages of the team’s project or activities. For example, shapers and coordinators are key figures, when the team is identifying its needs, w hereas completers and implementers are most, important during the follow-through stage of the team’s project., , // Team Processes, Up to this point w e have looked at two sets of elements in the team ef fectiveness model:, (1) or ganizational and team en vironment and (2) team design. The third set of team, effectiveness elements, collecti vely known as team processes, includes team de velopment,, norms, cohesiveness, trust, and conflict management. These represent evolving dynamics that, the team shapes and reshapes over time., , hiL30123_ch11_254-283.indd 266, , 11/1/06 4:30:02 PM

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Developing High-Performance Teams \\ CHAPTER 11, , 267, , // TEAM DEVELOPMENT, A few years ago the National Transportation Safety Board (NTSB) studied the circumstances, under which airplane cockpit crews were most likely to have accidents and related problems., What they discovered was startling: 73 percent of all incidents took place on the cre w’s first, day, and 44 percent occur red on the cre w’s v ery f irst flight to gether. This isn’ t an, isolated example. NASA studied f atigue of pilots after retur ning from multiple-da y trips., Fatigued pilots made more errors in the NASA flight simulator, as one would expect. But the, NASA researchers didn’t expect the discovery that fatigued crews who had worked together, made fewer errors than did rested crews who had not yet flown together.43, The NTSB and NASA studies reveal that team members must resolv e several issues and, pass through several stages of development before emerging as an effective work unit. They, must get to kno w each other , understand their respecti ve roles, disco ver appropriate and, inappropriate behaviors, and learn how to coordinate their work or social activities. The longer, team members work together, the better they develop common mental models, mutual understanding, and effective performance routines to complete the work., The f ive-stage model of team de velopment, shown in Figure 11.6 , provides a general, outline of ho w teams e volve by for ming, stor ming, nor ming, perfor ming, and e ventually, adjourning.44 The model shows teams progressing from one stage to the ne xt in an orderl y, fashion, but the dashed lines illustrate that the y might also f all back to an earlier stage of, development as new members join or other conditions disrupt the team’s maturity., , ■ NASA, , and NTSB discover, power of team development., , Performing, • Task oriented, committed., • Efficient coordination., • High cooperation and trust., • Conflicts resolved quickly., , Norming, • Roles established., • Team objectives agreed., • Common mental models formed., • Cohesion developed., , Storming, • Conflict with proactive behavior., • Compete for team roles., • Influence goals and means., • Establish norms and standards., , Forming, • Discover expectations., • Evaluate value of membership., • Defer to existing authority., • Test boundaries of behavior., , Adjourning, , F I G U R E 1 1 .6, Stages of Team, Development, , hiL30123_ch11_254-283.indd 267, , 11/1/06 9:34:20 PM

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268, , PART 3 // Organization Architecture, , 1. Forming: The first stage of team development is a period of testing and orientation in, which members learn about each other and evaluate the benefits and costs of continued, membership. People tend to be polite during this stage and will defer to the existing, authority of a formal or informal leader, who must provide an initial set of rules and, structures for interaction. Members try to find out what is expected of them and how, they will fit into the team., 2. Storming: The storming stage is marked by interpersonal conflict as members become, more proactive and compete for various team roles. Coalitions may form to influence, the team’s goals and means of goal attainment. Members try to establish norms of, appropriate behavior and performance standards. This is a tenuous stage in the team’s, development, particularly when the leader is autocratic and lacks the necessary conflict, management skills., 3. Norming: During the norming stage, the team develops its first real sense of cohesion, as roles are established and a consensus forms around group objectives. Members have, developed relatively similar mental models, so they have common expectations and, assumptions about how the team’s goals should be accomplished. They have developed, a common team-based mental model that allows them to interact more efficiently so, they can move into the next stage, performing.45, 4. Performing: The team becomes more task-oriented in the performing stage. Team, members have learned to coordinate and resolve conflicts more efficiently. Further, coordination improvements must occasionally be addressed, but the greater emphasis is, on task accomplishment. In high-performance teams, members are highly cooperative,, have a high level of trust in each other, are committed to group objectives, and identify, with the team., 5. Adjourning: Most work teams and informal groups eventually end. During this stage,, members shift their attention away from task orientation to a socioemotional focus as, they realize that their relationship is ending., The team development model is a useful frame work for thinking about ho w teams develop., In fact, a recent study found that it f its nicely with student recollections of their e xperiences, with work on team projects for class assignments. 46 You have, probably e xperienced initial politeness and uncer tainty,, followed by subtle or not-so-subtle conflicts as fello w students, spar for particular roles or squabble over the best way to complete, the project. Some student teams w ork together long enough to, experience nor ming and possib ly perfor ming, par ticularly if, students have collaborated on previous assignments., The team de velopment model is also nicel y illustrated in, Blue Angels training. The U.S. Navy’s aerial demonstration, team needs to complete its maneuv ers with nearl y perfect, timing, and this requires team development to the performing, stage. Although highly experienced before joining the squad ,, the pilots put in long hours of practice to reach the pinnacle of, team development. The F/A-18A Hornets are well spaced apart, during the f irst few practices, but the team g radually tightens, up the formation over the 10-week training program until the, Sky-High Team Development Reaching the performing, fighter jets are at times onl y 18 inches apar t. “I know exactly, stage of team development isn’t just a goal for the Blue, what [the lead] jet is going to do, and when,” says Lt. Cdr. John, Angels; it’s an absolute necessity to ensure that the U.S., Saccomando, w ho flies the Number 2 position. “It tak es a, Navy’s aerial demonstration team completes its maneuvers, while to build that confidence.” Team development is also sped, with nearly perfect timing. Although highly experienced, up through candid debrief ings after every practice. “We close, before joining the squad, the pilots put in long hours of, the door , and there’ s no rank, ” sa ys Saccomando, w ho is, practice to reach the pinnacle of team development.47, expected to offer frank feedback to commanding of ficer and, © Guy Motil/Corbis, flight leader Cdr. Stephen R. F oley. Foley points out that the, , hiL30123_ch11_254-283.indd 268, , 11/1/06 4:30:03 PM

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Developing High-Performance Teams \\ CHAPTER 11, , 269, , safety and success of the BlueAngels depend on how well the team development process works., “The team concept is what makes [everything] here click,” Foley emphasizes.48, Although the team de velopment model is a useful g auge of this team process, it is not a, perfect representation. For instance, it does not show that some teams remain in a par ticular, stage longer than others or that team de velopment is a continuous process. As membership, changes and new conditions emerge, teams cycle back to earlier stages in the de velopmental, process to regain the equilibrium or balance lost by the changes (as shown by the dashed lines, in Figure 11.6)., Speeding Up Team Development through Team Building Before Milton Elementar y, School in Milton, Dela ware, opened its doors for the f irst time, school principal Sheila, Baumgardner took her new teaching and support staff to Arlington Echo Outdoor Education, Center in Millersville, Maryland, for three days of team building. “The idea behind that is to, develop teamwork skills since I’m bringing teachers to gether from buildings all o ver the, district,” Baumgardner explains. Along with walking in the woods and sharing meals together,, staff spent time de veloping school suppor t pro grams. “Our main pur pose is to de velop, teamwork skills—camaraderie—to f acilitate communication once the school y ear begins,”, she says.49, Sheila Baumgardner sped up the team development process through team building —any, formal activity intended to improve the development and functioning of a work team.50 Some, team-building acti vities also impro ve other team processes (such as team nor ms and, cohesiveness). Team building is sometimes applied to newly established teams, such as Milton, Elementary School, because team members are at the earliest stages of team de velopment., However, it is more common among e xisting teams that ha ve regressed to earlier stages of, team development. Team building is therefore most appropriate when a team experiences high, membership tur nover or members ha ve lost sight of their respecti ve roles and team, objectives., Some team-building interventions clarify the team’s performance goals, increase the team’s, motivation to accomplish these goals, and estab lish a mechanism for systematic feedback on, the team’s goal performance. Others clarify roles by having team members reconstr uct their, perceptions of their roles as w ell as the role e xpectations they have of other team members., Popular interventions such as wilderness team activities, paintball wars, and obstacle course, challenges are used in team building as w ays to increase trust and interpersonal bonding. “If, two colleagues hold the rope for y ou while you’re climbing 10 meters up, that is tr uly teambuilding,” explains Jan Antwerpes, a partner in a Ger man communications consulting f irm., “It also shows your colleagues that you care for them.”51, , ■ Team, , building at Milton, Elementary School., , team building, Any formal activity, intended to improve the, development and, functioning of a work team., , // TEAM NORMS, Have you ever noticed how employees in one branch office will be absent from work during, inclement weather or any sign of cold symptoms, whereas their counterparts in another office, practically have to be ordered to sta y home when sick or discouraged from coming to w ork, during bad w eather? These differences are par tly due to norms—the infor mal r ules and, shared expectations that g roups establish to regulate the behavior of their members. Nor ms, apply only to behavior, not to pri vate thoughts or feelings. Moreo ver, norms exist only for, behaviors that are important to the team.52, Norms guide how team members deal with clients, how they share resources, whether they, are willing to be absent from w ork, and many other behaviors in organizational life. Some, norms ensure that employees support organizational goals, whereas other norms might conflict with organizational objectives. For example, studies repor t that employee absenteeism, from work is influenced by absence norms in the workplace, not just the individual’s health or, job satisfaction.53, One reason employees conform to team norms is peer pressure. Coworkers might grimace, if we are late for a meeting or mak e sarcastic comments if w e don’t have our par t of the, project completed on time. Nor ms are also directl y reinforced through praise from, , hiL30123_ch11_254-283.indd 269, , norms, The informal rules and, shared expectations that, groups establish to, regulate the behavior of, their members., , 11/1/06 4:30:04 PM

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270, , PART 3 // Organization Architecture, , high-status members, more access to v alued resources, or other re wards available to the, team. For the most part, however, team members conform to prevailing norms without direct, reinforcement or punishment because they identify with the group. The more a team member, identifies with the g roup, the more he or she is moti vated to avoid negative sanctions from, that group.54, How Team Norms Develop Norms develop as soon as teams form because people need to, anticipate or predict how others will act. Even subtle events during the team’s formation, such, as how team members initially greet each other and where they sit in the f irst meetings, can, initiate norms that are later dif ficult to change. Nor ms also form as team members discover, behaviors that help them function more ef fectively (such as the need to respond quickl y to, e-mail). In particular, a critical event in the team’s history can trigger formation of a norm or, sharpen a previously vague one. A third influence on team nor ms is the past experiences and, values that members bring to the team. If members of a ne w team value work–life balance,, norms are likely to develop that discourage long hours and work overload.55, Preventing and Changing Dysfunctional Team Norms Team nor ms often become, deeply anchored, so the best way to avoid norms that undermine organizational success or, employee well-being is to estab lish desirable norms when teams are f irst formed. As was, just mentioned, norms form from the values that people bring to the team; so one strategy is, to select people with appropriate v alues. If organizational leaders want their teams to have, strong safety norms, they should hire people who already value safety., Another strategy is to clearly state desirable norms as soon as teams are created. For instance,, when Four Seasons Hotels & Resorts opens a new hotel, it forms a 35-person task force consist■ Four Seasons Hotels &, ing of staff from other Four Seasons hotels. The task force “Four Seasonizes” the new recruits by, Resorts shapes team norms., training them and w atching for behaviors and decisions that are inconsistent with the F our, Seasons way of doing things. “The task force helps estab lish nor ms [in the ne w hotel],”, explains a Four Seasons manager who has served on these task forces.56, The suggestions so f ar refer to new teams; how can organizational leaders maintain desirable norms in older teams? One way, which The Container Store has practiced for many years,, is to frequently discuss the team’s norms. One of the first and last tasks of the day is for staff to, gather for the “huddle,” where they learn about the day’s sales target, review the store’s vision,, and discuss issues related to the store’s vision. Generally huddle sessions were introduced to, educate employees, create a team environment, and reinforce norms that the company wants to, instill in employees. “The spirit was to keep people on the same page,” explains Garrett Boone,, cofounder and chair of the Dallas-based seller of customized storage products.57, Team-based re ward systems can also, strengthen, desired norms and weaken counHuddles Reinforce Team, terproductive, nor ms. However, one classic, Norms At The Container, study, repor, ted, that some emplo yees in a, Store in White Plains, New, pajama, f, actory, were able to process up to, York, floor leader Scott Buhler, 100, units, per, hour, and thereb y ear n more, (shown in photo) starts the, money,, but, the, y, all, chose to abide b y the, morning huddle by declaring the, group, norm, of, 50, units, per hour . Only after, day’s sales target. Then he asks, the, team, w, as, disbanded, did the strong per the group about the store’s, formers, working, alone, increase, their perforvision and today’s product tip., 58, mance, to, 100, units, per, hour., Finally,, if dysThe Container Store, functional, nor, ms, are, deepl, y, ing, rained, and, institutionalized huddle, the, previous, solutions, don’t, work,, it, may, be, sessions to educate employees,, necessary, to, disband, the, group, and, replace, it, create a team environment, and, with, people, ha, ving, more, f, avorable, nor, ms., reinforce norms that the, Managers should seize the opportunity to incompany wants to instill in, troduce perfor mance-oriented nor ms when, employees., the new team is for med, selecting members, © Stuart Bayer/The Journal News, who will bring desirable norms to the group., , hiL30123_ch11_254-283.indd 270, , 11/1/06 4:30:04 PM

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Developing High-Performance Teams \\ CHAPTER 11, , 271, , // TEAM COHESIVENESS, Team cohesiveness—the de gree of attraction people feel to ward a team and their, motivation to remain members—is considered an impor tant f actor in a team’ s success. 59, Employees feel cohesiveness when they believe the team will help them achieve their personal, goals, fulfill their need for affiliation or status, or provide social support during times of crisis, or trouble. Cohesiveness is an emotional experience, not just a calculation of whether to stay, or leave the team. It e xists when team members mak e the team par t of their social identity ., Cohesiveness is the glue or esprit de cor ps that holds the g roup together and ensures that its, members fulfill their obligations., Several factors influence team cohesiveness: member similarity, team size, member interaction, difficult entry, team success, and external competition or challenges. For the most part, these factors reflect the individual’s social identity with the group and beliefs about how team, membership will fulfill personal needs., , team cohesiveness, The degree of attraction, people feel toward a team, and their motivation to, remain members., , Member Similarity Earlier in this chapter w e learned that highly diverse teams potentially, tend to experience more conflict, leading to factious subgroups and higher turnover among team, members. Although this suggests that diverse teams are less cohesive than homogeneous teams,, not all forms of diversity have this negative effect. For example, teams consisting of people from, different job groups seem to gel together just as well as teams of people from the same job.60, Team Size Smaller teams tend to be more cohesive than larger teams because it is easier for, a few people to ag ree on goals and coordinate w ork activities. The smallest teams aren’ t, always the most cohesi ve, however. Small teams are less cohesi ve when they lack enough, members to perform the required tasks. Thus team cohesiveness is potentially greatest when, teams are as small as possible, yet large enough to accomplish the required tasks., Member Interaction Teams tend to be more cohesi ve when team members interact with, each other f airly regularly. This occurs when team members perfor m highly interdependent, tasks and work in the same physical area., Somewhat Difficult Entry Teams tend to be more cohesive, when entry to the team is restricted. The more elite the team,, the more prestige it confers on its members, and the more, they tend to value their membership in the unit. Existing team, members are also more willing to welcome and support new, members after they have “passed the test,” possibly because, they have shared the same entry experience.61, Team Success Cohesiveness increases with the team’s level, of success because people feel more connected to teams that, fulfill their goals. Furthermore, individuals are more likely to, attach their social identity to successful teams than to those, with a string of failures., External Competition and Challenges Team cohesiveness, tends to increase when members face external competition or, a challenging objective that is valued. Under these conditions,, employees value the team’s ability to overcome the threat or, competition if they can’t solve the problem individually. They, also value their membership as a form of social support. However, severe external threats can undermine team cohesiveness, when the resulting stress under mines the team’ s ability to, function well.62 For example, staff members at Lighthouse, Publishing are a highly cohesive team because they excel in a, ferociously competitive environment. “Lighthouse staff members [have] kept us independent in the face of stiff competition, , hiL30123_ch11_254-283.indd 271, , Storm-Proof Cohesiveness Staff members at, Lighthouse Publishing in Bridgewater, Nova Scotia,, Canada, are a highly cohesive team because they excel in, a ferociously competitive environment. They have also, overcome numerous internal challenges, such as getting, their weekly newspaper, the Bridgewater Bulletin,, published on time after the printing machinery broke, down. “Lighthouse succeeds because of its multitalented,, highly dedicated team of employees,” says company, president Lynn Hennigar. “It’s a team that embraces, change.”, Courtesy of Lighthouse Publishing. Photo by Robert Hirtle., , 11/1/06 4:30:05 PM

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272, , PART 3 // Organization Architecture, , and corporate takeovers,” says Lynn Hennigar, president of the small ne wspaper publisher in, Bridgewater, Nova Scotia, Canada. Cohesiveness is also strengthened b y internal challenges,, such as when staff scrambled to get the paper out on time after the machinery broke down. This, cohesion partly explains why Lighthouse recentl y earned more than tw o dozen a wards and, its weekly newspaper, the Bridgewater Bulletin, has been judged as one of the top f ive in its, class across Canada.63, Consequences of Team Cohesiveness Every team must ha ve some minimal le vel, of cohesiveness to maintain its e xistence. People who belong to high-cohesion teams are, motivated to maintain their membership and to help the team perfor m effectively. Compared, to lo w-cohesion teams, high-cohesion team members spend more time to gether, share, information more frequently, and are more satisfied with each other. They provide each other, with better social support in stressful situations.64, Members of high-cohesion teams are generall y more sensitive to each other’s needs and, develop better inter personal relationships, thereb y reducing dysfunctional conflict. When, conflict does arise, members tend to resolv e these dif ferences swiftly and ef fectively. For, example, one study repor ted that cohesi ve recreational ice hock ey teams eng aged in more, constructive conflict—that is, team members tried to resolve their differences cooperatively—, whereas less cohesive teams engaged in more combative conflict.65, With better cooperation and more confor mity to nor ms, high-cohesion teams usuall y, perform better than low-cohesion teams. This is true only when team norms are compatible, with organizational values and objecti ves, however. Cohesiveness motivates employees to, perform at a level more consistent with g roup norms, so when team norms conflict with the, organization’s success (such as when norms support high absenteeism or acting unethically),, high cohesion will reduce team performance.66, , // TEAM TRUST, trust, A psychological state, comprising the intention to, accept vulnerability based, on positive expectations of, the intent or behavior of, another person., , hiL30123_ch11_254-283.indd 272, , Any relationship—including the relationship among team members—depends on a cer tain, degree of trust.67 Trust is a psychological state comprising the intention to accept vulnerability, based on positive expectations of the intent or behavior of another person. A high level of trust, occurs when others affect you in situations where you are at risk, but you believe they will not, harm you. Trust includes both your beliefs and conscious feelings about the relationship with, other team members. In other words, a person both logically evaluates the situation as trustworthy and feels that it is trustworthy.68 Trust can also be understood in terms of the foundation of, that tr ust. From this perspecti ve, people tr ust others based on three foundations: calculus,, knowledge, and identification (see Figure 11.7)., Calculus-based trust represents a lo gical calculation that other team members will act, appropriately because the y f ace sanctions if their actions violate reasonab le expectations., Each party believes that the other will deli ver on its promises because punishments will be, administered if they fail.69 In class projects, students ha ve at least a calculus-based le vel of, trust that their teammates will complete their par t of the assignment because the instr uctor, might fail those who do not make any contribution., Predictability of another team member’s behavior is the foundation for knowledge-based, trust. The more we understand others and can predict what they will do in the future, the more, we trust them, up to a moderate level. Even if we don’t agree with a particular team member’s, actions, his or her consistenc y generates some le vel of tr ust. Knowledge-based tr ust also, relates to confidence in the other person’s ability or competence. People trust others based on, their known or perceived expertise, such as when they trust a physician.70, This third and highest foundation of tr ust, called identification-based trust , is based on, mutual understanding and emotional bonds among team members. Identification occurs when, team members think like, feel like, and act like each other. High-performance teams exhibit, this level of trust because they share the same values and mental models. Identification-based, trust is connected to the concept of social identity; the more y ou define yourself in terms of, membership in the team, the more trust you have in that team.71, , 11/1/06 4:30:06 PM

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Developing High-Performance Teams \\ CHAPTER 11, , 273, , F I G U R E 1 1 .7, Type of trust, T, , Description, , Identificationbased trust, , • Based on common mental models and values., • Increases with person's social identity with, team., , High, , Potential, level of, trust, , Knowledgebased trust, , Calculusbased trust, , Three Foundations of, Trust in Teams, , • Based on predictability and competence., • Fairly robust., , • Based on deterrence., • Fragile and limited potential because, dependent on punishment., , Low, , A Hierarchy of Team Trust These three foundations of trust can be arranged in a hierarchy., Calculus-based trust offers the lowest potential level of trust and is easily broken by a violation, of expectations. Generally calculus-based tr ust alone cannot sustain a team’ s relationship, because it relies on deter rence. Relationships don’t become strong w hen based only on the, threat of punishment if one party fails to deliver on its promises. Knowledge-based trust offers, a higher potential level of trust and is more stable because it develops over time. Suppose that, another member of your virtual team submitted documentation to you on schedule in the past,, but it ar rived late this time. Kno wledge-based trust might be dented, but not brok en, in this, incident. Through knowledge-based trust you “know” that the late deli very is probab ly an, exception because it deviates from the coworker’s past actions., Identification-based trust is potentially the strongest and most robust of all three. The individual’s self-image is based par tly on membership in the team and he or she belie ves their, values highly overlap, so an y transg ressions by other team members are quickl y forgiven., People are more reluctant to acknowledge a violation of this high-level trust because it strikes, at their self-image., Dynamics of Team Trust A common misconception is that team members build trust from, a low level when they first join a team. Yet studies suggest that people typically join a virtual, or conventional team with a moderate or high le vel—not a low level—of trust in their ne w, coworkers. The main explanation for the initiall y high tr ust (called swift trust ) in organizational settings is that people usuall y belie ve their teammates are reasonab ly competent, (knowledge-based trust), and the y tend to de velop some de gree of social identity with the, team (identification-based trust). Even when working with strangers, most of us display some, level of trust, if only because it supports our self-image of being a nice person.72, However, trust is fragile in new relationships because it is based on assumptions rather than, experience. Consequently recent studies report that trust tends to decrease rather than increase, over time. In other words, new team members experience trust violations, which pushes their, trust to a lo wer level. Employees who join the team with identif ication-based trust tend to, drop back to knowledge-based or perhaps calculus-based trust. Declining trust is particularly, challenging in vir tual teams because communication among team members is an impor tant, condition for sustaining tr ust. Equally important, employees become less forgiving and less, cooperative to ward others as their le vel of tr ust decreases, w hich under mines team and, organizational effectiveness.73, , hiL30123_ch11_254-283.indd 273, , 11/1/06 4:30:06 PM

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274, , PART 3 // Organization Architecture, , // Managing Team Conflict, ■ Managing, , conflict at, Armstrong Worldwide., , conflict, A process in which one, party perceives that its, interests are being, opposed or negatively, affected by another party., , A fe w y ears ago Armstrong Worldwide, Inc., put to gether a team of infor mation systems, employees and outside consultants to select and install a new client–server network. Before long, team members at the flooring and building materials compan y were engaging in several heated, disagreements. The consultants prefer red working 12-hour da ys, Monday through Thursday,, then flying home on Friday. This didn’t sit well with Armstrong’s people, who lived nearby and, therefore f avored a traditional schedule. A second dispute centered on w ho was in char ge., Armstrong’s executives decided that the consultants should lead the project, but this meant that, Armstrong’s people were stuck with whatever system and configuration the consultants decided.A, third source of tension w as that some infor mation systems emplo yees were worried about, losing their jobs to the outside consultants. “[These conflicts] created a lar ge amount of stress, and some turnover for us,” recalls Armstrong’s information systems development manager.74, The client–server network installation team at Armstrong Worldwide experienced the wrath, of dysfunctional conflict and its consequences. Conflict is a process in w hich one par ty, perceives that its interests are being opposed or ne gatively af fected b y another par ty.75, Armstrong’s infor mation systems emplo yees e xperienced conflict with the consultants, (and with Armstrong’s own managers) because they believed the consultants were deliberately, or incidentall y opposing their interests, including hours of w ork, long-ter m technolo gy, obligations, and job security. Notice that conflict is a perception, w hich means that it begins, long before observable disagreements. Thus managers need to look for subtle signs of conflict, perceptions to prevent dysfunctional behaviors that may follow., , // TASK VERSUS RELATIONSHIP CONFLICT, A few decades ago management e xperts warned that conflict w as bad and that ef fective, managers prevented conflict from de veloping. They obser ved that conflict resulted in the, same problems that Armstrong Worldwide experienced, including stress, turnover, lack of information sharing, and nonproductive behavior toward others. The more intense the conflict,, the lower the team’s performance and satisf action. More recently management writers ha ve, adopted the view that conflict is good to a cer tain degree. They have developed an ele gant, upside-down U-shaped model showing that team performance is highest when managers encourage moderate levels of conflict (the top of the upside-do wn U). This advice is based on, evidence that some level of conflict motivates team members to more thoroughly debate and, analyze problems and opportunities. Conflict-motivated debate brings out new ideas and improves everyone’s understanding of the issue, which then produces better decisions and team, performance, particularly for ambiguous tasks., Unfortunately the “moderate conflict is good” advice isn’t quite correct, either. To understand the influence of conflict on team ef fectiveness, we need to distinguish between taskrelated conflict and relationship conflict. Task-related conflict (also called constructive, conflict) occurs w hen team members percei ve that the conflict is in the task or prob lem, rather than in each other . Team members view the problem as something “out there” that, needs to be resolved, and the employees are merely messengers in this discussion. In contrast, relationship conflict occurs when team members view differences as personal attacks, that threaten their self-esteem and resources. The conflicting par ties view others (their, attitudes, biases, and decisions) as the source of conflict., Consider the different conflict perspectives adopted by Bob Goodenow and Ted Saskin, the, former and current leaders of the National Hockey League Players’ Association. For 15 years, Goodenow took an uncompromising approach that re warded players handsomely, but critics, say it also generated relationship conflict with NHL team o wners. That relationship conflict, may have been a factor in the cancellation of an entire hock ey season a few years ago. When, the owners canceled the season, Goodenow didn’t mince words, saying that the players “never, had a real ne gotiating partner.” Goodenow stepped down when players agreed to the NHL, owners’ request to cap team salaries. Goodenow was replaced by Ted Saskin, who has taken a, more conciliatory and task-oriented approach to the conflict. “W e’ve got to be ab le to work, more cooperatively (with the NHL) in the future,” Saskin announced on the day he took over., , hiL30123_ch11_254-283.indd 274, , 11/1/06 4:30:07 PM

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Developing High-Performance Teams \\ CHAPTER 11, , 275, , NHL board of go vernors chair Harle y Hotchkiss thinks, Saskin’s approach to resolving dif ferences is good for the, sport’s future. “I will say nothing bad about Bob Goodenow,”, insists Hotchkiss. “I just think that in an y business you need, a spirit of cooperation to mo ve forw ard, and I think Ted, Saskin will handle that well.”76, Minimizing Relationship Conflict The “moderate conflict, is good” advice assumes that relationship conflict can remain, low as task-related conflict increases up to some midpoint., Unfortunately it isn’t that simple. Relationship conflict flares, up in some teams even when members experience low levels, of task-related conflict. Other teams can ha ve high levels of, task-related conflict without developing perceptible levels of, relationship conflict. The best advice for managers is to, encourage task-related conflict and apply the following four, strategies to suppress relationship conflict:77, • Emotional intelligence: Relationship conflict is less, likely to occur, or is less likely to escalate, when team, members have high levels of emotional intelligence., Team members have high emotional intelligence when, they are aware of their own and others’ emotions, and, when they are able to manage emotions in themselves, and others. Employees with high emotional intelligence, can better regulate their emotions during debate, which, reduces the risk of escalating perceptions of interpersonal, hostility., , Stick-Handling NHL Conflict Bob Goodenow (left in, photo), who led the National Hockey League Players’, Association over the past 15 years, has been called the, Darth Vader of hockey. His never-give-in style rewarded, players handsomely but may have generated relationship, conflict with NHL team owners. Goodenow stepped down, after a yearlong NHL strike and was replaced by Ted, Saskin (right in photo), who has taken a more conciliatory, and task-oriented approach to the conflict., © AP Photo/Adrian Wyld, CP, , • Cohesive team: Relationship conflict is suppressed when, the conflict occurs within a highly cohesive team. The, longer people work together, get to know each other, and develop mutual trust, the more, latitude they give each other to show emotions without being personally offended., Members of cohesive teams are also motivated to remain with the team, which motivates, them to avoid escalating relationship conflict during otherwise emotionally turbulent, discussions., • Supportive team norms: Various team norms can hold relationship conflict at bay during, constructive debate. When team norms encourage openness, for instance, team members, learn to appreciate honest dialogue without personally reacting to any emotional display, during the disagreements. Other norms might discourage team members from displaying, negative emotions toward coworkers., • Problem-solving conflict management style: Whether relationship conflict emerges from, constructive debate depends to some extent on the interpersonal conflict management, style used by those participating in the conflict. Specifically, team members who take a, problem-solving approach are less likely to trigger strong emotions compared with those, who assertively force their preferences on others. These and other conflict management, styles are discussed next., , // INTERPERSONAL CONFLICT, MANAGEMENT STYLES, Sometimes team members approach conflict with a winner -take-all attitude that vie ws the, other party as a competitor. Or they might try to resolve the conflict with the perception that, everyone can come out ahead through creati ve prob lem solving. The conflict literature, identifies f ive inter personal conflict management styles, each with a unique de gree of, , hiL30123_ch11_254-283.indd 275, , 11/1/06 4:30:07 PM

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276, , PART 3 // Organization Architecture, , High, , Assertiveness, (motivation to satisfy, one's own interests), , Low, Low, Cooperativeness, , High, , (motivation to satisfy, other party's interests), , F IGU RE 11. 8, , Interpersonal Conflict Management Styles, , Source: Adapted from C.K.W. de Dreu, A. Evers, B. Beersma, E.S. Kluwer, and A. Nauta, “A Theory-Based, Measure of Conflict Management Strategies in the Workplace,” Journal of Organizational Behavior, 22 (2001), pp. 645–68. For earlier variations of this model, see T.L. Ruble and K. Thomas, “Support for a, Two-Dimensional Model of Conflict Behavior,” Organizational Behavior and Human Performance, 16 (1976), p. 145., , cooperativeness and assertiveness (see Figure 11.8).78 No single style is best in every situation., However, as we mentioned, some styles are more lik ely than others to transfor m task-related, conflict into relationship conflict., • Problem solving: Problem solving tries to find a mutually beneficial solution for both, parties. Information sharing is an important feature of this style because both parties, collaborate to identify common ground and potential solutions that satisfy both (or all) of, them. This style is often preferred because it minimizes the risk of relationship conflict., However, it won’t work well if team members lack trust and the sides have perfectly, opposing interests., • Avoiding: Avoiding tries to smooth over or avoid conflict situations altogether. It represents a low concern for both self and the other party. For example, some employees will, rearrange their work areas or tasks to minimize interaction with certain coworkers.79 This, style works best when the problem has already generated relationship conflict and the, issue is not worth fighting over., • Forcing: Forcing tries to win the conflict at the other’s expense. This style relies on, assertive influence tactics. The forcing style creates a high risk of relationship conflict,, but it may be necessary when the dispute requires a quick solution or the opposing party’s, views are unethical., • Yielding: Yielding involves giving in completely to the other side’s wishes, or at least, cooperating with little or no attention to your own interests. This style may be necessary, when the opponent has substantially more power or the issue is not as important to you as, to the other party. In the long run, however, yielding may produce more conflict because, it raises the other party’s expectations of an easy win in disputes., • Compromising: Compromising involves actively searching for a middle ground between, the interests of the two parties. This style may be best when there is little hope for mutual, , hiL30123_ch11_254-283.indd 276, , 11/1/06 4:30:08 PM

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Developing High-Performance Teams \\ CHAPTER 11, , 277, , gain through problem solving, both parties have equal power, and both are under time, pressure to settle their differences. However, compromising tends to overlook creative, solutions such as those discovered when using the problem-solving style., , // STRUCTURAL SOLUTIONS TO TEAM CONFLICT, So far we have looked at the inter personal side of team conflict. But w hen conflict escalates, or continues without resolution, managers need to identify the str uctural causes of that conflict and apply corresponding solutions. One of the most common structural causes of conflict, is incompatib le goals. Consider the disag reement described earlier betw een Armstrong, Worldwide employees and the e xternal consultants o ver work schedule preferences. The, employees wanted a well-spaced balance of work and leisure, whereas the external consultants, wanted a large chunk of work so they could fly back home for a longer weekend., There is no easy solution to goal incompatibility , but one idea is to emphasize superordinate, goals to both groups. Superordinate goals are common objectives held by conflicting parties, that are more important than the departmental or individual goals on which the conflict is based. By, increasing commitment to corporatewide goals, employees place less emphasis on, and therefore, feel less conflict with, coworkers regarding competing individual or departmental-level goals., A second source of team conflict is the dif ferent beliefs, backg rounds, and v alues that, employees bring to the group. Your values shape your preferences and motivation, so people with, different values tend to prefer different choices and have different motivations. Earlier we noted, that diverse values and backgrounds improve team effectiveness, so reducing this diversity isn’t, usually the best solution to conflict. Instead managers need to f ind ways for employees to understand each other’s differences—in other words, to increase empathy among team members., Task interdependence is a third reason why conflict exists. The more tightly interconnected, your work is with other people’s work, the more likely your actions are to interfere with their, goals. And because a team is partly defined by the interdependence of its members, conflict is, going to occur. If conflict gets out of hand, managers might look at ways to reduce the intensity, of interdependence. For instance, rather than have two people perform highly interdependent, services for a customer, it may be better for each employee to provide both services., Finally, conflict often results from ambiguity over rules and responsibilities. Look back at the, Armstrong Worldwide conflict ag ain. Armstrong’s employees and the e xternal consultants, lacked clear guidelines over work hours and (at first) leadership responsibilities, which motivated, them to act competitively toward each other. Eventually Armstrong executives doused the conflict by clarifying these duties and e xpectations. They also set up an advisor y group to make, further rules if employees and consultants developed future disputes., , IN CO N CL U SI ON, , superordinate goals, Common objectives held, by conflicting parties that, are more important than, the departmental or, individual goals on which, the conflict is based., , WH Y DOE S IT M ATT E R ?, , What’s so important about managing teams? The answer is this: Teams can make a, significant difference in how well the organization serves its clients, provides creative, ideas, and keeps the workforce engaged toward higher performance. Under the right, circumstances, employees also fulfill their drive to bond through teamwork. At the, same time, managers need to recognize the conditions where teams are valuable and, where they merely increase the cost of production or aggravation to everyone involved, in the team., Managing teamwork also matters because teams do not always work well without, help from management. In fact, there are probably as many team failures as successes, in organizations because managers sometimes wrongly assume that teams can operate, effectively without management guidance and intervention. This is obviously a false, assumption. As we learned in this chapter, teams thrive under the right conditions and, with the right team characteristics. Companies need high-performing managers to put, these potentially high-performing teams together., , hiL30123_ch11_254-283.indd 277, , 11/1/06 4:30:09 PM

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278, , PART 3 // Organization Architecture, , Although high-performance teams can do much to manage their own processes,, managers are always needed to facilitate and offer constructive feedback. For instance,, members of even the highest-performance teams are sometimes reluctant to correct, behavior problems of a fellow teammate; they welcome involvement from managers to, assist. Similarly, managers occasionally need to step forward to point out when the, team needs some intensive team building or when a simmering conflict is dragging, down the team’s performance and camaraderie. Thus although high-performance teams, rely less on managers for day-to-day decisions, they will continue to depend on them to, maintain a team-friendly work environment and help steer the team when members, don’t realize they are heading for shoals., , MANAGEMENT CHALLENGES, 1., 2., , 3., 4., , 5., , 6., 7., , This chapter identifies three success factors for effective self-directed teams. Explain, why these factors might influence the effectiveness of these teams., Suppose the instructor for this course assigned you to a project team consisting of three, other students who are currently taking similar courses in Ireland, India, and Brazil. All, students speak English and have similar expertise in the topic. Use your knowledge of, virtual teams to discuss the problems your team might face, compared with a team of, local students who can meet face-to-face., Diversity is a double-edged sword for team dynamics. Discuss the benefits of team, diversity as well as the problems this diversity potentially creates., You have been put in charge of a cross-functional task force that will develop enhanced, Internet banking services for retail customers. The team includes representatives from, marketing, information services, customer service, and accounting, all of whom will, move to the same location at headquarters for three months. Describe the behaviors, you might observe during each stage of the team’s development., Some firms have turned to volunteering as a form of team building, whereby a group of, employees spends a day working together on a community project, often outside their, expertise. In what ways might volunteering be an effective team building activity?, To what extent would team cohesiveness improve the performance of crew members in, the NASA space shuttle program?, The chief executive officer of Creative Toys, Inc., has read about cooperation in, Japanese companies and wants to bring this same philosophy to the company. The goal, is to avoid all conflict so that employees will work cooperatively and be happier at, Creative Toys. Discuss the merits and limitations of the CEO’s policy., , MANAGEMENT PORTFOLIO, FOR THE ORGANIZATION YOU HAVE CHOSEN TO FOLLOW:, 1., 2., , hiL30123_ch11_254-283.indd 278, , Review the basic structure you described in Chapter 8 for the organization you are, studying. To what extent does that structure organize people into teams?, Does this organization group employees into self-directed teams? Describe the structure, and responsibilities of those teams., , 11/1/06 4:30:10 PM

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Developing High-Performance Teams \\ CHAPTER 11, , 3., , 4., , 279, , Virtual teams are more common in some companies and industries than in others. To, what extent does the company you are studying rely on virtual teams, and in what areas, of the organization? Why do these virtual teams exist here rather than elsewhere in the, organization?, What conflicts in this organization have come to the public’s knowledge? What caused, those conflicts? How would you resolve them?, , CLOSING CASE, , THE SHIPPING INDUSTRY ACCOUNTING TEAM, , For the past f ive y ears I ha ve been w orking at McKa y,, Sanderson, and Smith Associates, a midsize d accounting, firm in Boston that specializes in commercial accounting and, audits. My par ticular specialty is accounting practices for, shipping companies, ranging from small f ishing fleets to a, couple of the big firms with ships along the East Coast., About 18 months ago McKa y, Sanderson, and Smith, Associates became part of a large merger involving two other, accounting firms. These firms have offices in Miami, Seattle,, Baton Rouge, and Los Angeles. Although the other tw o, accounting f irms were much lar ger than McKa y, all three, firms agreed to a void centralizing the business around one, office in Los Angeles. Instead the new firm—called Goldberg,, Choo, and McKay Associates—would rely on teams across, the country to “leverage the synergies of our collective knowledge” (an often-cited statement from the managing par tner, soon after the merger)., The merger affected me a year ago when my boss (a senior, partner and vice president of the merger firm) announced that, I would be working more closely with three people from the, other two firms to become the f irm’s new shipping industr y, accounting team. The other team members w ere Elias in, Miami, Susan in Seattle, and Brad in Los Angeles. I had met, Elias briefly at a meeting in New York City during the merger,, but I had never met Susan or Brad although I knew they were, shipping accounting professionals at the other firms., Initially the shipping team acti vities involved e-mailing, each other about new contracts and prospective clients. Later, we were asked to submit joint monthly reports on accounting, statements and issues. Normally I submitted my own monthly, reports that summarized activities involving my own clients., Coordinating the monthly report with three other people took, much more time, par ticularly because dif ferent accounting, documentation procedures across the three f irms were still, being resolved. It took numerous e-mail messages and a fe w, telephone calls to work out a reasonable monthly report style., During this agg ravating process, it became apparent—, (to me at least) that this “team” business was costing me more, time than it was worth. Moreover, Brad in Los Angeles didn’t, have a clue about how to communicate with the rest of us. He, rarely replied to e-mail. Instead he often used the telephone, , hiL30123_ch11_254-283.indd 279, , voice mail system, w hich resulted in lots of telephone tag., Brad arrives at work at 9:30 a.m. in Los Angeles (and is often, late!), which is early afternoon in Boston. I typicall y have a, flexible work schedule from 7:30 a.m. to 3:30 p.m. so I can, chauffeur my kids after school to sports and music lessons. So, Brad and I ha ve a window of less than three hours to share, information., The biggest nuisance with the shipping specialist accounting, team started two weeks ago when the firm asked the four of us, to develop a ne w strategy for attracting more shipping f irm, business. This new strategic plan is a messy business. Somehow, we have to share our thoughts on various approaches, agree on, a new plan, and write a unif ied submission to the managing, partner. Already the project is taking most of m y time just, writing and responding to e-mail and talking in conference calls, (which none of us did much before the team formed)., Susan and Brad have already had two or three misunderstandings via e-mail about their dif ferent perspectives on, delicate matters in the strategic plan. The worst of these disagreements required a conference call with all of us to, resolve. Except for the most basic matters, it seems that we, can’t understand each other, let alone agree on key issues. I, have come to the conclusion that I w ould never want Brad, to work in m y Boston of fice (thank goodness he’s on the, other side of the countr y). Although Elias and I seem to, agree on most points, the overall team can’t form a common, vision or strategy. I don’t know how Elias, Susan, or Brad, feel, but I would be quite happy to work somewhere that did, not require any of these long-distance team headaches., CASE DISCUSSION QUESTIONS, 1. What type of team was formed here? Was it necessary, in, your opinion?, 2. Use the team effectiveness model to identify the strengths, and weaknesses of this team’s environment, design, and, processes., 3. Assuming that these four people must continue to w ork, as a team, recommend w ays to impro ve the team’ s, effectiveness., , 11/1/06 4:30:10 PM

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280, , PART 3 // Organization Architecture, , ENDNOTES, 1. C. Fishman, “The Anarchist’s Cookbook,” Fast Compan y, July 2004, p. 70;, J. Macka y, “ Open Book Compan y,” Newsweek, No vember 28, 2005, p. 42;, A. Kimball-Stanley, “Bucking the Trend in Benefits,” Providence Journal (Rhode, Island), May 14, 2006, p. H01; K. Zimbalist, “Green Giant, ” Time , April 24,, 2006, p. 24., 2. E. Hart, “Manager of the Year: John Mang,” Iron & Steelmaker, June 2003, pp. 5–7;, P. Haw, “Learning from Lean Principles,” Business Day, July 7, 2003, p. 7., 3. M.E. Shaw, Group Dynamics, 3rd ed. (New York: McGraw-Hill, 1981), p. 8; S.A., Mohrman, S.G. Cohen, and A.M. Mohrman Jr., Designing Team-Based Organizations: New Forms for Knowledge Work (San F rancisco: Jossey-Bass, 1995),, pp. 39–40; E. Sundstrom, “The Challenges of Suppor ting Work Team Effectiveness,” in Supporting Work Team Effectiveness, ed. E. Sundstrom and associates, (San Francisco: Jossey-Bass, 1999), pp. 6–9., 4. S. Beatty, “Bass Talk: Plotting Plaid’s Future,” The Wall Street Journal, September 9,, 2004, p. B1., 5. M. Moldaschl and W. Weber, “The ‘Three Waves’ of Industrial Group Work:, Historical Reflections on Current Research on Group Work,” Human Relations 51, (March 1998), pp. 347–88. The survey quotation is found in J.N. Choi, “External, Activities and Team Effectiveness: Review and Theoretical Development,” Small, Group Research 33 (April 2002), pp. 181–208. Several popular books in the 1980s, encouraged teamwork based on the Japanese economic miracle. These books, included W. Ouchi, Theory Z: How American Management Can Meet the Japanese, Challenge (Reading, MA: Addison-Wesley, 1981); and R.T . Pascale and A.G., Athos, Art of Japanese Management (New York: Simon and Schuster, 1982)., 6. C.R. Emery and L.D. Fredenhall, “The Effect of Teams on Firm Profitability and, Customer Satisfaction,” Journal of Service Research 4 (February 2002), pp. 217–29;, G.S. Van der Vegt and O. Janssen, “Joint Impact of Interdependence and Group, Diversity on Innovation,” Journal of Management 29 (2003), pp. 729–51., 7. B. Jorgensen, “Look before You Leap,” Electronic Business 30, no. 12 (2004),, pp. 35–36; J. Baljko, “The Lean Journey,” Electronics Supply & Manufacturing,, June 2005; C. Mitchell and M. Moreno, “Lean Manuf acturing—a Case Study,”, Surface Mount Technology Magazine, May 2005, pp. 59–61., 8. R.A. Guzzo and M.W. Dickson, “Teams in Organizations: Recent Research on, Performance and Ef fectiveness,” Annual Re view of Psyc hology 47 (1996),, pp. 307–38; D.A. Nadler, “From Ritual to Real Work: The Board as a Team,”, Directors and Boards 22 (Summer 1998), pp. 28– 31; L.R. Offerman and R.K., Spiros, “The Science and Practice of Team Development: Improving the Link,”, Academy of Management Journal 44 (April 2001), pp. 376–92., 9. B.D. Pierce and R. White, “The Ev olution of Social Str ucture: Why Biology, Matters,” Academy of Management Review 24 (October 1999), pp. 843–53; M.A., Hogg et al., “The Social Identity P erspective: Inter group Relations, SelfConception, and Small Groups,” Small Group Research 35, no. 3 (June 2004),, pp. 246–76; J.R. Spoor and J.R. Kelly, “The Evolutionary Significance of Affect, in Groups: Communication and Group Bonding,” Group Processes & Intergroup, Relations 7, no. 4 (2004), pp. 398–412; M. Van Vugt and C.M. Har t, “Social, Identity as Social Glue: The Origins of Group Lo yalty,” Journal of Personality, and Social Psychology 86, no. 4 (2004), pp. 585–98., 10.“The Trouble with Teams,” Economist ,January 14, 1995, p. 6; H. Robbins and, M. Finley, Why Teams Don’t Work (Princeton, NJ: Peterson’s/Pacesetters, 1995),, Chapter 20; E.A. Lock e et al., “The Impor tance of the Indi vidual in an Age of, Groupism,” in Groups at Work: Theory and Research, ed. M.E. Turner (Mahwah,, NJ: Lawrence Erbaum Associates, 2001), pp. 501–28; N.J. Allen and T.D. Hecht,, “The ‘Romance of Teams’: Toward an Understanding of Its Psycholo gical, Underpinnings and Implications,” Journal of Occupational and Or ganizational, Psychology 77 (2004), pp. 439–61., 11.I.D. Steiner, Group Process and Productivity (New York: Academic Press, 1972);, N.L. Kerr and S.R. Tindale, “Group Performance and Decision Making,” Annual, Review of Psychology 55 (2004), pp. 623–55., , 14. M. Erez and A. Somech, “Is Group Productivity Loss the Rule or the Exception?, Effects of Culture and Group-Based Moti vation,” Academy of Mana gement, Journal 39 (1996), pp. 1513–37; K err and Tindale, “Group P erformance and, Decision Making.”, 15.S.A. Mohr man, S.G. Cohen, and J . Mohr man, A.M., Designing Team-Based, Organizations: New Forms for Knowledge Work (San F rancisco: Jossey-Bass,, 1995); D.E. Yeatts and C. Hyten, High-Performing Self-Managed Work Teams: A, Comparison of Theory and Pr actice (Thousand Oaks, CA: Sage, 1998);, E.E. Lawler, Organizing for High Performance (San Francisco: Jossey-Bass, 2001);, R.J. Torraco, “Work Design Theory: A Review and Critique with Implications f or, Human Resource Development,” Human Resource Development Quarterly 16,, no. 1 (Spring 2005), pp. 85–109., 16.C. Eberting, “The Harley Mystique Comes to Kansas City ,” Kansas City Star,, January 6, 1998, p. A1; D. Fields, “Harley Teams Shoot for Better Bike,” Akron, Beacon Journal, June 15, 1998; J . Singer and S. Duv all, “High-Performance, Partnering by Self-Managed Teams in Manuf acturing,” Engineering Management Journal 12 (December 2000), pp. 9–15; P .A. Chansler, P.M. Swamidass,, and C. Cammann, “Self-Managing Work Teams: An Empirical Study of Group, Cohesiveness in ‘Natural Work Groups’ at a Harle y-Davidson Motor Company, Plant,” Small Group Research 34 (February 2003), pp. 101–20., 17. P. Panchak, “Production Workers Can Be Your Competitive Edge,” Industry Week,, October 2004, p. 11; S.K. Muthusam y, J.V. Wheeler, and B.L. Simmons, “SelfManaging Work Teams: Enhancing Or ganizational Innovativeness,” Organization Development Journal 23, no. 3 (Fall 2005), pp. 53–66., 18. C.R. Emery and L.D. Fredendall, “The Effect of Teams on Firm Profitability and, Customer Satisf action,” Journal of Service Resear ch 4 (F ebruary 2002),, pp. 217–29; A. Krause and H. Dunckel, “Work Design and Customer Satisfaction:, Effects of the Implementation of Semi-Autonomous Group Work on Customer, Satisfaction Considering Emplo yee Satisf action and Group P erformance, (translated abstract),” Zeitschrift fur Arbeits-und Organisationspsychologie 47,, no. 4 (2003), pp. 182–93; H. v an Mierlo et al., “Self-Managing Teamwork and, Psychological Well-Being: Review of a Multilevel Research Domain,” Group &, Organization Management 30, no. 2 (April 2005), pp. 211–35., 19. M. Moldaschl and W.G. 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Maynard, “Virtual, Teams: What Do We Kno w and Where Do We Go from Here?” Journal of, Management 30, no. 6 (2004), pp. 805–35. The Novartis quotation is from S., Murray, “Pros and Cons of Technology: The Cor porate Agenda: Managing, Virtual Teams,” Financial Times (London), May 27, 2002, p. 6., , 13.S.J. Karau and K.D. Williams, “Social Loaf ing: A Meta-Analytic Review and, Theoretical Inte gration,” Journal of P ersonality and Social Psyc hology 65, (1993), pp. 681–706; R.C. Liden et al., “Social Loaf ing: A Field Investigation,”, Journal of Management 30 (2004), pp. 285–304., , 25.J.S. Lureya and M.S. Raisinghani, “ An Empirical Study of Best Practices in, Virtual Teams,” Information & Mana gement 38 (2001), pp. 523–44; Y.L. Doz,, J.F.P. Santos, and P .J. Williamson, “The Metanational Advantage,” Optimize,, May 2002, p. 45ff., , hiL30123_ch11_254-283.indd 280, , 11/1/06 4:30:10 PM

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Developing High-Performance Teams \\ CHAPTER 11, , 26.D. Robb, “Global Workgroups,” Computerworld, August 15, 2005, pp. 37–38., 27. D. Robey, H.M. Khoo, and C. P owers, “Situated Lear ning in Cross-Functional, Virtual Teams,” Technical Communication , February 2000, pp. 51–66; Mar tins,, Gilson, and Maynard, “Virtual Teams”; Hertel, Geister, and Konradt, “Managing, Virtual Teams.”, 28.S. Prashad, “Building Trust Tricky for ‘Virtual’ Teams,” Toronto Star , October, 23, 2003, p. K06., 29.G.Buckler, “Staking One for the Team,” Computing Canada , October 22,, 2004, p. 16., 30. M.A. West, C.S. Borrill, and K.L. Unsworth, “Team Effectiveness in Organizations,” International Review of Industrial and Or ganizational Psychology 13, (1998), pp. 1–48; R. F orrester and A.B. Dre xler, “A Model for Team-Based, Organization Performance,” Academy of Mana gement Executive 13 (August, 1999), pp. 36–49; J .E. McGrath, H. Arrow, and J .L. 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Donahue, “Impact of Highly and Less Job-Related Diversity on Work Group Cohesion and P erformance: A Meta-Analysis,” Journal of, Management 27, no. 2 (2001), pp. 141–62., 61.E. Aronson and J. Mills, “The Effects of Severity of Initiation on Liking for a, Group,” Journal of Abnormal and Social Psyc hology 59 (1959), pp. 177–81;, H.F.M. Lodewijkx, M. Van Zomeren, and J. Syroit, “The Anticipation of a Severe, Initiation-Gender Dif ferences in Ef fects on Affiliation Tendency and Group, Attraction,” Small Group Research 36, no. 2 (April 2005), pp. 237–62., 62.M. Rempel and R.J. Fisher, “Perceived Threat, Cohesion, and Group Prob lem, Solving in Intergroup Conflict,” International Journal of Conflict Management 8, (1997), pp. 216–34; M.E. Turner and T. Horvitz, “The Dilemma of Threat: Group, Effectiveness and Ineffectiveness under Adversity,” in Groups at Work: Theory, and Research, ed. M.E. Turner (Mahwah, NJ: La wrence Erlbaum Associates,, 2001), pp. 445–70., , 11/1/06 4:30:11 PM

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282, , PART 3 // Organization Architecture, , 63.F. Piccolo, “Brownie Points,” Atlantic Business, October–November 2004, p. 22., 64.W. Piper et al., “Cohesion as a Basic Bond in Groups,” Human Relations 36 (1983),, pp. 93–108; C.A. O’Reill y, D .E. Caldw ell, and W.P. Bar nett, “W ork Group, Demography, Social Integration, and Turnover,” Administrative Science Quarterly, 34 (1989), pp. 21–37., 65. P. Sullivan, J. and D.L. Feltz, “The Relationship between Intrateam Conflict and, Cohesion within Hock ey Teams,” Small Gr oup Resear ch 32 (June 2001),, pp. 34–55., 66. C. Langfred, “Is Group Cohesiveness a Double-Edged Sword? An Investigation, of the Ef fects of Cohesi veness on P erformance,” Small Gr oup Resear ch 29, (1998), pp. 124–43; K.L. Gammage, A.V. Carron, and P.A. Estabrooks, “Team, Cohesion and Individual Productivity: The Influence of the Norm for Productivity and the Identif iability of Indi vidual Ef fort,” Small Gr oup Resear ch 32, (February 2001), pp. 3–18., 67. S.L. Robinson, “Trust and Breach of the Psychological Contract,” Administrative, Science Quarterly 41 (1996), pp. 574–99; D.M. Rousseau et al., “Not So Different after All: A Cross-Discipline View of Trust,” Academy of Mana gement, Review 23 (1998), pp. 393–404; D.L. Duarte and N.T. Snyder, Mastering Virtual, Teams: Strategies, Tools, and Techniques That Succeed, 2nd ed. (San Francisco:, Jossey-Bass, 2000), pp. 139–55., 68.D.J. McAllister, “Affect- and Co gnition-Based Trust as Foundations for Inter personal Cooperation in Organizations,” Academy of Management Journal 38, no. 1, (February 1995), pp. 24–59; M. Williams, “In Whom We Trust: Group Membership, as an Affective Context for Trust Development,” Academy of Management Review, 26, no. 3 (July 2001), pp. 377–96., 69. O.E. Williamson, “Calculativeness, Trust, and Economic Organization,” Journal, of Law and Economics 36, no. 1 (1993), pp. 453–86., 70. E.M. Whitener et al., “Managers as Initiators ofTrust: An Exchange Relationship, Framework for Understanding Managerial Trustworthy Behavior,” Academy of, Management Review 23 (July 1998), pp. 513–30; J.M. Kouzes and B.Z. Posner,, , hiL30123_ch11_254-283.indd 282, , The Leadership Challenge, 3rd ed. (San Francisco: Jossey-Bass, 2002), Chapter 2;, T. Simons, “Behavioral Integrity: The Perceived Alignment between Managers’, Words and Deeds as a Research Focus,” Organization Science 13, no. 1 (January–, February 2002), pp. 18–35., 71. Hogg et al., “The Social Identity Perspective.”, 72.S.L. Jarvenpaa and D.E. Leidner, “Communication and Trust in Global Virtual, Teams,” Organization Science 10 (1999), pp. 791–815; M.M. Pillutla, D. Malhotra,, and J. Keith Murnighan, “Attributions of Trust and the Calculus of Reciprocity ,”, Journal of Experimental Social Psychology 39, no. 5 (2003), pp. 448–55., 73. K.T. Dirks and D.L. Ferrin, “The Role of Trust in Organizations,” Organization, Science 12, no. 4 (July–August 2004), pp. 450–67., 74.E. Horwitt, “Knowledge, Knowledge, Who’s Got the Knowledge,” Computerworld ,, April 8, 1996, pp. 80–84., 75.J.A. Wall and R.R. Callister, “Conflict and Its Management,” Journal of Management 21 (1995), pp. 515–58; M.A. Rahim, “T oward a Theory of Managing, Organizational Conflict,” International Journal of Conflict Management 13, no. 3, (2002), pp. 206–35., 76.“The NHL Cancels the Season,” CBC Sports Online , February 16, 2004; D. Cox,, “Goodenow’s Downfall,” Toronto Star, July 29, 2005, p. A1; A. Maki, “NHLPA’s, New Leader Is a Peacemaker, Not a Warrior,” Globe & Mail, July 29, 2005, p. S1;, M. Spector, “Players: He Is Your Father,” National Post, July 29, 2005, p. B8., 77. J. Yang and K.W. Mossholder, “Decoupling Task and Relationship Conflict: The, Role of Intergroup Emotional Processing,” Journal of Organizational Behavior, 25 (2004), pp. 589–605., 78.C.K.W. De Dreu et al., “ A Theory-Based Measure of Conflict Management, Strategies in the Workplace,” Journal of Organizational Behavior 22 (2001),, pp. 645–68., 79. K. Jelin, “A Multimethod Examination of the Benef its and Detriments of Intragroup Conflict,” Administrative Science Quarterly 40 (1995), pp. 245–82., , 11/1/06 4:30:11 PM

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12, , // PART 4, Leading, , LEARNING OBJECTIVES, , STAFFING DEVELOPING, A DIVERSE WORKFORCE, AND, , After Reading This Chapter You Should Be Able to:, 1, , Outline the human resource staffing process., , 2, , Explain how human resource staffing is connected to corporate strategic planning., , 3, , Describe the steps followed in human resource planning., , 4, , Discuss the importance of diversity in organizational settings., , 5, , Explain the value of the employer brand in recruitment., , 6, , Identify ways to improve the validity of employment interviews., , 7, , Describe several selection methods for hiring employees., , 8, , Outline training methods and what managers should do to maximize their effectiveness., , Human Resource Planning: Translating, Strategy into Staffing Requirements, Step 1: Conduct Job Analysis, Step 2: Estimate Human Resource Demand, Step 3: Document Current Human Resource, Supply, Step 4: Estimate Future Internal Human, Resource Supply, Step 5: Estimate Future External Human, Resource Supply, Relying on the Contingent Workforce, Staffing a Diverse Workforce, Surface-Level and Deep-Level Diversity, Is Diversity Important?, Recruiting Job Applicants, Nurturing the Employer Brand, Internal versus External Recruitment, Choosing Recruiting Channels, Recruitment and Diversity, , hiL30123_ch12_284-313.indd 284, , / / / / / / / / / / / / / / /, , Selecting Job Applicants, Reliability and Validity of Selection Methods, Application Forms, Résumés, and Reference, Checks, Work Sample Tests, Employment Interviews, Ability and Personality Tests, Selection and Diversity, Orienting and Developing Employees, Employee Orientation, Training Needs Analysis, Training Methods, Supporting the Training Process, In Conclusion: Why Does It Matter?, Management Challenges, Management Portfolio, Closing Case: Rebranding McJobs, , 11/1/06 3:53:36 PM

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Google’s ability to, remain competitive, and to complete its, ambitious projects, depends ultimately, on how well it can, recruit, select, and, develop its, workforce., © Catherine Karnow/, Corbis., , / / / / / / / / / / / / / / / / / / / / /, , G, , oogle has a problem that other companies wouldn’t, mind having. The California-based company that created the world’s most popular search engine needs to hire, at least 10 people in the United States every day to keep, up with its blistering growth. That’s 70 or more people, each week—more than 3,650 people each year. Google is, also growing quickly in India and many other countries., Google’s managers have many initiatives in development,, ranging from wireless Internet access to online retailing,, so they need people to achieve those objectives. “Can we, hire the quality and quantity of people we want to? No,”, admitted cofounder Sergey Brin to several hundred investment analysts. “We’re underinvesting in our business, because of the limitations of hiring.”, Even though the limitations of hiring are dragging, its business growth, Google wants to remain fussy, , hiL30123_ch12_284-313.indd 285, , about who it hires. Alan Eustace, one of Google’s vice, presidents of engineering, explains that one top-notch, engineer is worth “300 times or more than the average.” He suggests that Google would rather lose an, entire incoming class of engineering graduates than, one exceptional technologist. Google’s war for talent, is made all the more challenging because most technology companies are currently hiring while the, applicant pool seems to be shrinking. “We’re working, hard to get [talent], but other companies across Silicon, Valley are doing that as well,” says Google’s staffing, director. The tech wreck of 2000 also had a devastating effect as thousands of people left the area and, industry following massive layoffs. The problem now, is how Google’s managers can keep up with their, staffing requirements.1, , 11/1/06 3:53:37 PM

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286, , PART 4 // Leading, , FIG UR E 1 2 .1, Human Resource, Staffing Process, , Organizational, strategy and, planning, , Plan human, resource, needs, , Recruit job, applicants, , Select job, applicants, , Develop, employees, , Maintain a diverse workforce, , Economists point out that companies depend on land , labor, and capital to sta y in business., Certainly some f irms fail because they undercapitalize (they lack sufficient f inancial and, material resources), and many still require land on which to manufacture products or provide, services. But these days it is really labor—the people hired to w ork toward organizational, goals—that determines an organization’s survival and competitive advantage. This priority, of human capital is par ticularly tr ue in kno wledge industries such as Goo gle’s, high-technology software businesses. Google and other companies depend on employees to, discover the next product breakthrough, to provide a higher level of service than competitors,, and ultimately to secure the land and capital needed to sustain the or ganization. It’s little, wonder, then, w hy we emphasized in Chapter 1 that de veloping employees—including, hiring, training, mentoring, and re warding them—is one of the cor nerstones of ef fective, management. Yet as management gur u Peter Dr ucker has noted , only about one in three, selection and promotion decisions is more than minimally effective.2, This chapter travels through the staffing and development process shown in Figure 12.1., We be gin b y describing the f ive steps in human resource planning and noting issues, with contingent w ork. Ne xt w e look at w orkforce di versity and its impor tance for, organizations. The third section tak es us through the recr uitment process, including the, importance of emplo yer branding, inter nal versus external recr uitment, various types of, recruitment channels, and the role of recr uitment in maintaining a diverse workforce.Then, we describe various selection practices, consider the role of selection in di versity, and, examine how organizational and applicant conflicts interfere with the staffing process. The, final section of this chapter looks at emplo yee development, including tw o methods of, training needs analysis, several training methods, and ways in which managers can support, the training process., , // Human Resource Planning: Translating Strategy, into Staffing Requirements, ■ HR, , planning at Conroe, Independent School District., , human resource, (HR) planning, The process of ensuring, that the organization has, the right kinds of people, in the right places at the, right time., , hiL30123_ch12_284-313.indd 286, , Conroe Independent School District is growing by leaps and bounds. Enrollment at the Texan, school district increased from just under 35,000 in 2000 to 42,000 in 2005. By 2012 the district estimates that it will ser ve more than 52,000 students. 3 Aside from the challenges of, figuring out ho w many schools to build and w here to put them, Conroe’ s managers must, determine how many teachers and other staf f with specif ic capabilities to hire each school, year. In other words, Conroe’s managers rely on various forms of human resource (HR), planning—the process of ensuring that the organization has the right kinds of people in the, right places at the right time.4, HR planning is vital because it puts the right number of people with the right qualifications, in place to achieve the organization’s strategic objectives in the most cost-effective and humane, way. To illustrate the impor tance of HR planning, imagine if Conroe’ s school board didn’ t, plan for its future human resource needs. The school board might not hire enough teachers,, resulting in o vercrowded classrooms. Or if the y hired too man y teachers and other staf f,, , 11/1/06 3:53:39 PM

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Staffing and Developing a Diverse Workforce \\ CHAPTER 12, , 287, , Conroe’s managers would face the difficult task of la ying people off. HR planning extends, beyond numbers of people; it also tries to ensure that the or ganization has people with the, required qualif ications. For instance, HR planning minimizes the risk that Conroe’ s school, board has too many science teachers and not enough technical trades teachers., HR planning is equally important for new strategic initiatives. When Verizon Communications, Inc., recentl y won the cab le franchise in Hillsborough County (T ampa), Florida, its, managers estimated that the telecommunications giant needed to hire 450 cable technicians in, addition to the 1,500 it already emplo yed in the counties sur rounding Tampa Bay.5 By predicting the required number of qualif ied technicians, Verizon was able to quickly activate a, recruitment and selection process and set up facilities to orient and train these new recruits. If, Verizon hadn’t anticipated this number in adv ance, it w ould not ha ve been as responsi ve, when the contract was awarded., HR planning occurs in man y ways—some relevant to large companies, others more relevant to small businesses. However, all HR planning generally follows the five steps shown in, Figure 12.2 and discussed next: (1) Conduct a job analysis, (2) estimate the demand for people, in the future, (3) document the current human resource supply, (4) estimate the future internal, human resource supply, and (5) estimate the future external human resource supply., , // STEP 1: CONDUCT JOB ANALYSIS, Traditionally HR planning be gins with job analysis—the systematic in vestigation and, documentation of duties perfor med, tools and equipment involved, conditions surrounding, work, and competencies required b y job incumbents to perfor m the w ork.6 This analysis, typically results in a job description, which is a written statement of this information. Even, Google, which grew quickly from a hobby at Stanford University in the late 1990s, writes, job descriptions for many positions. This documentation also includes the list of required, competencies for the job (called a job specification). Job analysis allows managers to categorize work so HR planning can identify needs more specif ically. For instance, Conroe Independent School District would have job descriptions for teachers, principals, and various, support staff. Job anal ysis also ensures that all required duties are assigned to people in, specific jobs., An increasing number of companies have reduced their reliance on job descriptions because the boundaries of job duties ha ve become b lurred as companies depend more on, multiskilled teams than individuals to perform work.7 Job descriptions can still be created, in flexible f irms, but the descriptions are necessaril y more generic rather than precisel y, relevant to a specif ic job. Still, job anal ysis remains a le gal requirement to minimize the, risk of job discrimination., , job analysis, The systematic, investigation and, documentation of duties, performed, tools and, equipment involved,, conditions surrounding, work, and competencies, required by job incumbents, to perform the work., , // STEP 2: ESTIMATE HUMAN RESOURCE DEMAND, The second step in HR planning is to predict ho w many people with w hat competencies are, required at some point in the future. As you can imagine, this prediction is not an exact science. It, typically relies on organizational strategy, operational plans, and estimates of future demand for, , Step 1, , Step 2, , Step 3, , Step 4, , Step 5, , Conduct job, analysis., , Estimate, future, HR demand., , Document, current, HR supply., , Estimate future, internal HR, supply., , Estimate future, internal HR, supply., , FIG U RE 1 2 .2, , hiL30123_ch12_284-313.indd 287, , Human Resource Planning Process, , 11/1/06 3:53:39 PM

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288, , PART 4 // Leading, , the organization’s products or services. Verizon would estimate the number of cable technicians to, hire in Hillsborough County based either on the number of miles of cab le that must be installed, and maintained or on the number of customers projected for that area for the ne xt few years. At, Conroe Independent School District and most other school districts, managers lik ely estimate, future demand for teachers based on e xpected student enrollments and the ideal student–teacher, ratio. If student enrollments are expected to grow by 1,000 students next year and the ideal ratio, is 20 students per teacher, Conroe needs to employ 50 more teachers., Of course Conroe will require dif ferent types of teachers, so this macro-le vel estimate, needs to be supplemented with a micro-level prediction. For a micro-level estimate, managers, examine the operational plans within their w ork units and estimate the number of people, required to execute those plans. This information is judgmental but is closer to the ground, so, it can pick up subtle requirements o verlooked by the macro-level predictions. It tends to be, better than macro estimates at taking into account specif ic capabilities, such as ho w many, teachers are required with a backg round in science, w ho speak Spanish fluentl y, or ha ve, completed training in special education programs., , // STEP 3: DOCUMENT CURRENT HUMAN, RESOURCE SUPPLY, Projecting future demand is only part of the forecasting process. Another part is to estimate how, many staff will still be emplo yed by the organization at future dates. This estimate begins by, examining the stock of employees—how many people are currently employed in each job group, with specif ic competencies. Managers might simpl y document the number of employees in, various positions as well as their credentials and competencies. However, most large organizations, have sophisticated human resource information systems that track details about every employee, and provide more precise estimates of future supply., , // STEP 4: ESTIMATE FUTURE, INTERNAL HUMAN RESOURCE, SUPPLY, , Dofasco Keeps Its HR Planning Irons in the, Fire Dofasco, Inc., estimates that more of its managers, will retire over the next few years than it normally promotes, and trains. To ensure that the supply of managers matches, demand, the successful Canadian steelmaker is taking a, micro-level approach to estimating future internal human, resource supply. It is identifying specific employees three or, four levels below the managers who have leadership, potential. This helps the company estimate how many, people will have management capabilities in the future., Courtesy of Dofasco., , hiL30123_ch12_284-313.indd 288, , The next step in human resource planning is to estimate ho w, many current employees will be in various jobs within the organization at some future date. This prediction of future internal human resource supply can occur at a macro le vel, micro, level, or combination of both levels. At the macro level, managers use estimates of past flows of people through and out of, the organization. Conroe Independent School District can predict how many current teachers will be employed next year by, looking at how many quit, retire, or otherwise leave the organization in a typical year. At the micro level, managers predict, and plan for replacement of specific individuals based on their, knowledge of those people. The principal and other managers, at each school would have some information about which staff, members are likely to quit, go on mater nity or medical leave,, or retire ne xt y ear. This micro-le vel approach of fers more, precise information than the macro-level approach about what, skills are required next year., Dofasco, Inc., uses both the macro- and micro-level approaches to estimate its future suppl y of managers. At a, macro-level analysis, it has figured out that more managers, will retire over the next few years than it normally promotes, , 11/1/06 3:53:40 PM

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Staffing and Developing a Diverse Workforce \\ CHAPTER 12, , 289, , and trains during that time. “It takes about 15 years to develop a good manager,” says Dave, Santi, human resource manager at the successful Canadian steelmak er. “We just ha ve to, figure out a way to do it in seven or eight.” At the micro level, Dofasco searches for employees three or four le vels below the manager and identif ies those with leadership potential., “We are trying to find out as much as we can about an individual’s qualities as early as possible,” says Santi. In fact, Dofasco begins its leadership competencies search at campus interviews with prospective employees. “We are looking for leadership qualities right from, day one,” Santi explains. “It is not just the highest marks that get you into the company.”8, , // STEP 5: ESTIMATE FUTURE EXTERNAL HUMAN, RESOURCE SUPPLY, Employees quit, retire, and mo ve into different jobs, so in variably managers depend on the, external labor market for new recruits. But can the external supply deliver the human capital, the company needs? Most managers toda y would loudly complain NO! There is a “w ar for, talent” due to retiring baby boomers, rapidly changing technologies, and a host of other f actors. Google’s staffing dilemma, which we introduced at the beginning of this chapter, is due, in part to the dot-com meltdown a few years ago, which dramatically shrank Silicon Valley’s, pool of high-tech talent. Even so, Google’s pickings were easier a couple of y ears ago when, other high-tech firms were in a holding pattern. Today it seems that every company is battling, over a limited number of applicants. One recent sur vey of 33,000 employers in 23 countries, reported that 40 percent are struggling to find enough qualified job candidates.9, Given every company’s dependence on the external labor market, managers must do all they, can to anticipate and adjust their strategies and plans to estimates of the future human resource, supply. Here’s a recent e xample: Eastern Europe experienced low birthrates during the earl y, 1990s, which will soon result in a signif icant drop in the number of y oung people graduating, from high school. Managers at Anhalt Elektro Motor Works anticipated this prob lem during, their human resource planning process a fe w years ago. The 165-employee specialty engine, maker in Dessau, Ger many, has since adjusted its staf fing activities by hiring more workers, over 50 years old. “Companies that still think the y can just k eep hiring young people out of, school will very soon be in for a shock,” says Anhalt Elektro CEO Reiner Storch.10, , ■ Anhalt Elektro solves, Germany’s skills shortage, with age., , // RELYING ON THE CONTINGENT WORKFORCE, The five-step HR planning process is somewhat simplified because it assumes that everyone, is a per manent emplo yee. Yet o ver the past tw o decades, companies ha ve dramaticall y, increased their reliance on contingent work. Contingent work includes any job in w hich, the individual does not have an explicit or implicit contract for long-term employment, or one, in which the minimum hours of w ork can v ary in a nonsystematic w ay. Many contingent, workers are employees with temporary, fixed-term contracts with a company. Others are contractors assigned to specif ic projects w ho also w ork at other or ganizations. A third g roup, includes people employed by temporary staffing agencies or contracting companies who work, all of the time at a client’ s offices as if the y are employees. By some estimates, more than, 15 percent of the U.S. workforce is employed in a contingent work arrangement. Experts predict that the percentage of the workforce in contingent work will continue to increase.11, Contingent w ork has become more common because it gi ves companies g reater, flexibility in human resource planning. 12 It is easier to increase or decrease the size of the, workforce through contingent work contracts rather than b y hiring and f iring permanent, employees. Organizations also respond faster to market demands by temporarily contracting, skilled people than b y retraining cur rent staff in the ne w skills. Consultants and other, skilled contractors bring v aluable kno wledge to the or ganization that is immediatel y, applied and shared with others.13 Another reason for the increasing reliance on contingent, work is that m any organizations offer fewer employer-paid benef its and lo wer wages to, contingent workers than to permanent staff. Some employers also reduce administrative costs, , hiL30123_ch12_284-313.indd 289, , contingent work, Any work arrangement in, which the individual does, not have an explicit or, implicit contract for longterm employment, or one in, which the minimum hours, of work can vary in a, nonsystematic way., , 11/1/06 3:53:40 PM

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290, , PART 4 // Leading, , by outsourcing and leasing back noncore emplo yees from a lar ge professional compan y, specializing in that field (such as information technology services).14, Although contingent work seems to reduce pa yroll costs and increase fle xibility around, human resource demand, it also creates se veral potential prob lems.15 One concer n is that, contingent workers potentially have less loyalty and motivation to work for the organization, because their emplo yment is temporar y or their alle giance is to the agenc y that actuall y, employs them.16 Another concer n is that both contingent and per manent employees who, work side-by-side may feel uncomfor table or sense injustice because per manent staff have, significantly better work arrangements.17 A third issue is that some contingent workers have, less training and w ork experience, which leads to lo wer-quality products or ser vices and, higher accident rates.18, , // Staffing a Diverse Workforce, , Evaluating Diversity, Maturity Lockheed, Martin, which has made, workforce diversity a, corporate strategy, uses, a diversity maturity model, to evaluate each of its, business units on how well, they have implemented, the company’s diversity, principles., Courtesy of Lockheed Martin., , workforce diversity, Differences in the, demographic, cultural, and, personal characteristics of, employees., surface-level diversity, Observable demographic or, physiological differences in, people, such as their race,, ethnicity, gender, age, and, physical disabilities., , hiL30123_ch12_284-313.indd 290, , As we learned in the opening paragraphs to this chapter, Google is putting a lot of effort into, hiring more people so it can of fer new products and ser vices and, more generally, fulf ill its, strategic mandate. Yet Google’s recruitment binge also includes the objective of maintaining a, diverse workforce. One consultant helped Goo gle f ind more female engineers b y tracking, down all w omen who graduated from the top 50 uni versities in the w orld with a g raduate, degree in ph ysics, math, or computer science. The consultant then personall y telephoned, thousands of these women to assess their interest in a job with Google.19, Lockheed Martin, which has made workforce diversity a corporate strategy, also emphasizes recruitment of specif ic groups., However, the aerospace company goes further by evaluating each, of its business units on how well they have implemented the company’s diversity principles. Units rank ed at Level 1 in Lockheed, Martin’s “diversity maturity model” do nothing to promote diversity. Level 2 units ha ve recruitment and mentoring pro grams in, place, mainly aimed at hiring college and university students with, diverse backgrounds. Work units rank ed at Level 3 have a comprehensive staffing strategy with a full talent pipeline; employees, know their training and career options; and teams are built around, diverse skills and kno wledge. Level 4 units e xtend the di versity, pipeline to employees mo ving into leadership positions; also,, these units ensure that kno wledge flows from v eterans to ne w, hires. Work units with the highest ranking (Le vel 5) in Lockheed, Martin’s diversity maturity model ha ve an inclusi ve workforce, approach to recr uitment. They also ha ve industr y-leading staff development, a mentoring, process that is “embedded in the culture,” and a diverse workforce that provides a competitive, advantage in winning business.20, , // SURFACE-LEVEL AND DEEP-LEVEL DIVERSITY, Google and Lockheed Mar tin are model employers that reflect the increasing di versity of, people living in the United States as well as in many other countries. Workforce diversity, refers to differences in the demographic, cultural, and personal characteristics of employees., Diversity occurs w hen organizations adopt an inclusive corporate culture—that is, the y, respect each emplo yee’s uniqueness and vie w this indi viduality as a source of sustained, competitive advantage.21 Workforce diversity takes many forms. Surface-level diversity, includes observable demographic or physiological differences in people, such as their race,, ethnicity, gender, age, and physical disabilities. This is the most obvious form of diversity,, and it has changed considerably in the United States over the past few decades., People with non-Caucasian or Hispanic origin represent one-third of the American, population, and this propor tion is projected to increase substantiall y over the ne xt few, , 11/1/06 3:53:41 PM

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Staffing and Developing a Diverse Workforce \\ CHAPTER 12, , decades. The Hispanic population recentl y replaced African Americans as the second, largest ethnic g roup. Within the ne xt 50 y ears one in four Americans will be Hispanic,, 14 percent will be African American, and 8 percent will be of Asian descent. By 2060, non-Hispanic Caucasians will be a minority.22 Meanwhile, women now account for nearly, half of the paid workforce in the United States—more than double the participation rate a, few decades ago. Gender -based shifts continue to occur within man y occupations. For, example, the percentage of women enrolled in medical schools has jumped from 9 percent in 1970 to almost 50 percent today.23, Surface-level diversity receives the most attention because it is the most ob vious and, easiest to measure. Ho wever, managers also need to consider deep-level diversity ,, representing differences in the psycholo gical characteristics of emplo yees, including, personalities, beliefs, values, and attitudes.24 We can’t directly see deep-level diversity, but it, is evident in a person’s decisions, statements, and actions. This deep-level diversity is derived, to some e xtent from surf ace-level diversity and demographic characteristics that lie just, below the surf ace. Religion and geo graphic location, for e xample, influence a person’s, personal values. Education and work experience shape a person’s beliefs and attitudes on a, variety of issues. An individual’s personal wealth (income), parental status, and other factors, influence personal needs and preferences., One illustration of deep-level diversity is the different attitudes and e xpectations held, by employees across generational cohor ts.25 Baby boomers—people born between 1946, and 1964—seem to expect and desire more job security and are often intent on improving, their economic and social status. In contrast, Generation-X emplo yees—those bor n, between 1965 and 1979—e xpect less job security and are moti vated more by workplace, flexibility, the oppor tunity to lear n (par ticularly ne w technolo gy), and w orking in an, egalitarian and “fun” organization. Meanwhile some observers suggest that Generation-Y, employees (those born after 1979) are noticeably self-conf ident, optimistic, multitasking,, and more independent than even Gen-X coworkers. These statements certainly don’t apply, to everyone in each cohort, but they reflect the fact that different generations have different, values and expectations., , 291, , deep-level diversity, Differences in the, psychological, characteristics of, employees, including, personalities, beliefs,, values, and attitudes., , // IS DIVERSITY IMPORTANT?, Although companies ha ve been under pressure for se veral decades to improve workforce, diversity, many have made this issue a top priority. Figure 12.3 lists the top 30 companies in, America for diversity. Why do these and other companies acti vely develop a more diverse, workforce? The most widely held explanation is that diversity makes good business sense.26, , 1. Verizon Communications/Wireless*, 2. Consolidated Edison Co. of New York*, 3. The Coca-Cola Co.*, 4. Health Care Service Corp., 5. HBO, 6. PricewaterhouseCoopers, 7. Turner Broadcasting, 8. Abbott, 9. BellSouth*, 10. Blue Cross and Blue Shield of Florida, 11. JPMorgan Chase, 12. Comerica*, 13. HSBC, 14. Sodexho, 15. Cingular Wireless, , hiL30123_ch12_284-313.indd 291, , 16. Colgate-Palmolive, 17. Wells Fargo, 18. PepsiCo*, 19. Sempra Energy, 20. Macy’s/Bloomingdale’s, 21. Wachovia*, 22. Marriott International*, 23. Allstate, 24. Ernst & Young, 25. Bank of America*, 26. IKON Office Solutions, 27. Citigroup*, 28. SunTrust Banks, 29. Toyota North America*, 30. American Express*, , F I G U R E 1 2 .3, America’s Top 30, Companies for Diversity, * Indicates company is also, ranked in Black Enterprise, Top 40 Companies for, Diversity, Sources: Ranking is from the, 2006 DiversityInc Top 50, Companies for Diversity, April, 17, 2006. Black Enterprise list, (noted with asterisk) is from, “Black Enterprise Announces, the 40 Best Companies for, Diversity,” Black Enterprise, news release, June 12, 2006., , 11/1/06 3:53:41 PM

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292, , PART 4 // Leading, , ■ Leveraging diversity at, Southern California Gas Co., and MONY Group., , In fact, 70 percent of the 140 leading organizations in the United Kingdom say that diversity, initiatives are primarily driven by the competitive advantage that diversity offers. “Achieving, excellence in di versity is one of the marks of a tr uly w orld-class compan y,” suggests, Barclays Group chief executive Matt Barrett. “Diversity is not a ‘nice to have’ but a significant part of an answer to our business challenges.”, In support of this view, studies have found that companies with the highest representation, of women on their top management teams e xperienced significantly better f inancial performance than firms with the lowest representation of women. Other research reports that teams, with some forms of diversity (particularly occupational diversity) make better decisions about, complex problems than do teams w hose members have similar backg rounds. Diversity also, makes sense when we recognize that companies lacking diversity are restricting access to the, complete pool of talent in the workforce. By employing mostly white men in top management, positions, for example, an organization loses a wealth of knowledge, skills, and perspectives, that people with other demo graphic backg rounds can of fer. “When there are a v ariety of, different ideas from different people, you find linkages where significant innovation occurs,”, says Deborah Dagit, executive director of the Diversity & Work Environment at pharmaceutical, company Merck & Co. “Where y ou have groups of people who think similarly, there is only, incremental change.”27, Anecdotal evidence also suggests that a diverse workforce is more likely to understand and, respond to the needs of equally diverse customers. For example, many Vietnamese customers, insisted that Southern California Gas Co. field staff remove their steel-toed work boots when, entering the customer’s home, yet doing so would violate safety regulations. Some of the gas, company’s Vietnamese employees found a solution: Customers would be satisfied if employees, wore paper booties o ver the boots. Here’ s another e xample: Ex ecutives at MONY Group, discovered that none of the Ne w York insurance f irm’s employees who served the Hispanic, market were Hispanic. But the executives received a bigger surprise when they started hiring, more Hispanic employees to market these products. “Once w e started hiring and recr uiting, people from those ethnic markets, we found that our products did not relate to these people at, all,” says MONY CEO Michael Roth. So Roth asked employees to revamp MONY’s products, and marketing efforts so they would be more appealing to Hispanic clients.28, Although workforce diversity is a sound business proposition, it is also a doub le-edged, sword. In fact, several experts suggest that the benef its of diversity are subtle and contingent, on a number of f actors. The general conclusion is that most for ms of di versity offer both, advantages and disadvantages.29 As we noted in Chapter 11, di verse employees usually take, longer to become a high-performing team. Diversity is a source of conflict, which can lead to, lack of infor mation sharing and, in extreme cases, morale prob lems and higher tur nover. In, sum, diversity can make a difference to the organization’s reputation and bottom line, but we, still need to untangle what types of diversity make a difference and under what circumstances, their benefits surpass the problems., Diversity as an Ethical and Legal Imperative Whether or not diversity is a business, advantage, managers need to mak e it a priority because surf ace-level diversity is a moral, and legal imperative. Ethically, companies that of fer an inclusi ve workplace are, in essence, making fair and just decisions regarding employment, promotions, rewards, and so, on. Fairness is a well-established influence on employee loyalty and satisfaction. “Diversity is about fairness; we use the term inclusive meritocracy,” says Ann M. Limberg, president of Bank of America New Jersey. “What it does for our w orkforce is build tr ust and, assures that individual differences are valued.”30 This perception of fairness extends to the, organization’s public reputation. Verizon Communications is a good e xample. Minorities, make up 30 percent of Verizon’s workforce of 200,000 and 18 percent of top management, positions. Women represent 43 percent of its w orkforce and 32 percent of top management. This inclusive culture has made Verizon the top compan y in America for diversity, (see Figure 12.3 ); the company has also won awards from numerous organizations representing Hispanics, African Americans, g ays and lesbians, people with disabilities, and, other groups.31, , hiL30123_ch12_284-313.indd 292, , 11/1/06 3:53:41 PM

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Staffing and Developing a Diverse Workforce \\ CHAPTER 12, , 293, , Equal Pay Act of 1963, , Protects men and women who perform substantially equal work, in the same establishment from sex-based wage discrimination., , Civil Rights Act of 1964, , Prohibits employment discrimination based on race, color,, religion, sex, or national origin., , Age Discrimination in Employment Act, of 1967, , Protects individuals who are 40 years of age or older., , Americans with Disabilities Act of 1990, , Prohibit employment discrimination against qualified individuals, with disabilities in the private sector and in state and local, governments., , Rehabilitation Act of 1973, , Prohibits discrimination against qualified individuals with, disabilities who work in the federal government., , Civil Rights Act of 1991, , Provides monetary damages in cases of intentional employment, discrimination., , Family/Medical Leave Act of 1993, , Grants employees up to a total of 12 workweeks of unpaid jobprotected leave during any 12-month period for the birth and care, of the newborn child, adoption or foster care needs, care for an, immediate family member with a serious health condition, or to, take medical leave due to a serious health condition., , FIG U RE 1 2 .4, , U.S. Federal Equal Employment Opportunity Laws, , Sources: Equal Employment Opportunity Commission, “Federal Equal Employment Opportunity (EEO) Laws” (www.eeoc.gov); U.S., Department of Labor, The Family and Medical Leave Act of 1993 (http://www.dol.gov/esa/regs/statutes/whd/fmla.htm)., , In contrast, firms that fail to represent the diversity of people in the relevant labor force, are unf airly discriminating ag ainst those w ho are signif icantly under represented., Employment discrimination occurs w hen some people ha ve a lo wer probability of, being hired, promoted, financially rewarded, or receiving valuable training and development, opportunities due to non–job-related demographic characteristics. U.S. federal legislation, over the past four decades e xplicitly prohibits companies from unf airly discriminating, against job applicants, employees, and other stakeholders. The most important legislation, is listed in Figure 12.4 . Basically, these laws and related cour t cases say that employers, must not unfairly disadvantage people based on their age, race, gender , religion, or other, factors identif ied in the legislation. Notice that our def inition of workforce diversity and, the concept of an inclusi ve cor porate culture e xtend to for ms of di versity beyond these, legal categories., Companies can legally discriminate on the basis of gender or other identifiable categories if they are bona fide occupational qualif ications, meaning that these characteristics, are necessary to perform the job. It’s acceptable for a senior citizen home to emplo y only, women for bathing female residents, for e xample.32 However, these e xceptions are rare, and closely monitored b y government authorities. F or the most par t, managers need to, carefully consider whether any of their decisions and actions unfairly limit the opportunities and benef its that some emplo yees and job candidates recei ve compared to others in, identifiable groups., Without due diligence to maintain a di verse workforce, an organization could be forced, to pay large settlements and f ace great embarrassment. This recently occurred at Morgan, Stanley, w hich paid $54 million to female staf f members after a cour t r uled that the, investment f irm paid them at lo wer rates and promoted them less often than their male, counterparts without justification. A few years earlier, Coca-Cola paid out more than $200, million in racial and gender discrimination la wsuit settlements. Meanwhile the number of, age discrimination cases is g rowing (nearl y 18,000 per y ear) with a median a ward of, $266,000 in recent years.33 Figure 12.5 identifies the percentage of discrimination char ges, that individuals have recently filed with the Equal Employment Opportunities Commission., , hiL30123_ch12_284-313.indd 293, , employment, discrimination, Any situation in which, some people have a lower, probability of being hired,, promoted, financially, rewarded, or receiving, valuable training and, development opportunities, due to non–job-related, demographic, characteristics., , 11/1/06 3:53:41 PM

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294, , PART 4 // Leading, , FIG UR E 1 2 .5, Individual Discrimination, Charges Filed with, the Equal Employment, Opportunity Commission, 2005, Note: Numbers exceed 100, percent because individuals, often file charges claiming, multiple types of, discrimination. This chart, excludes “retaliation”, charges., Source: Equal Employment, Opportunity Commission,, Charge Statistics, 2005 (http://, www.eeoc.gov/stats/charges., html)., , Race, Sex, Age, Disability, National Origin, Religion, Equal Pay Act, 0, , 5, , 10, , 15, , 20, , 25, , 30, , 35, , 40, , Individual Discrimination Charges (%), , These employment discrimination complaints apply to a host of corporate actions, but they, have been most pertinent to the three staffing activities that we describe in the remainder of, this chapter: recruitment, selection, and training and development., , // Recruiting Job Applicants, , recruitment, A set of activities that, improves the number and, quality of people who, apply for employment, and the probability that, qualified and compatible, applicants will accept, employment offers., , hiL30123_ch12_284-313.indd 294, , The human resource planning process described earlier estimates the number of people with, specific qualif ications required in the future to fulf ill the organization’s strategic objectives., Now it is up to recruitment, selection, and development to attract those people, choose the most, suitable applicants, and , w here necessar y, train them in the required competencies., Recruitment, the first of these activities, consists of a set of activities that improves the number and quality of people w ho apply for employment, as well as the probability that qualif ied, and compatible applicants will accept emplo yment offers. A number of myths about recr uitment can cause short- or long-term problems. Here are three of the most common myths:, • Myth #1: Companies should attract as many job applicants as possible. Large applicant, pools can improve the quality of the people hired, but this strategy also creates a few, problems. First, it costs more money to recruit more people, so at some point the cost, exceeds the value. This problem is compounded as the recruitment activities attract, applicants with a poor fit to the job and organization. Second, the company must reject, more applicants as more people apply. A high rejection rate may increase the risk of, discrimination lawsuits or (at least) the risk of having many rejected applicants with, negative feelings toward the company., • Myth #2: Companies should focus their recruitment on people with the highest credentials ., On the surface, this assumption makes sense because applicants with the best credentials, will generally perform the best. But job performance is only one factor to consider when, recruiting and selecting applicants. Particularly during times of low unemployment or high, skill shortages, people’s desire for employment stability as well as their fit with the, organizational culture can be important considerations., • Myth #3: Companies should appear as attractive as possible during recruitment ., Glamorizing the job or hiding negative features of the organization is a common ploy, to attract more job applicants, but this strategy often backfires. Dissatisfaction,, mistrust of management, and turnover can occur as recruits discover that reality is less, than what the company advertised., , 11/1/06 3:53:42 PM

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Staffing and Developing a Diverse Workforce \\ CHAPTER 12, , 295, , Overall, recruitment is a process of communicating infor mation to people who would be, most suitab le to the job and or ganization. However, achie ving this goal be gins not with, recruitment brochures or campus visits. Instead it begins with the more strategic approach of, nurturing the employer brand., , // NURTURING THE EMPLOYER BRAND, Compass Group employs 440,000 people in 96 countries (including 120,000 in the United, States) for its food ser vice operations in hotels, compan y and school cafeterias, and spor ts, complexes. Despite its size and global reach, the British-based company is not well known to, prospective applicants. That w as a concer n for Compass’ s management because it is an, ongoing challenge to f ind and hire qualif ied applicants in this industr y. To improve its, recruiting, Compass held focus g roups with more than 1,000 emplo yees in 20 countries to, understand employee perceptions of the compan y’s brand image as an emplo yer and w hat, could be done to strengthen that image. Compass de veloped a ne w slogan—Great People,, Real Oppor tunities —that captures the impor tance of emplo yees, and the f irm re vised, its global recr uiting to maintain a more consistent message about w hat Compass Group, stands for as an employer. “It’s tough to launch a brand until you know what you stand for,, but this provided a framework and context,” explains Chris Ashcroft, executive vice president, of human resources for Compass Group North America in Charlotte, North Carolina.34, For Compass Group and almost every other company, an important component of recruitment is the comprehensi ve process of de veloping and maintaining an employer brand 35, ., employer brand, This term refers to the package of functional, economic, and psychological benefits provided, The package of functional,, by employment and identified with the company as an employer. It is an organization’s reputaeconomic, and, tion as an employer, including people’s expectations about working at that company, what the, psychological benefits, company values (its corporate culture), and how it differentiates itself from other employers in, provided by employment, that industry or labor market. Employer branding provides a significant advantage in recruiting, and identified with the, and retaining people. It serves the same benef its provided by any product or service brand: a, company as an employer., focused clarity that stands out from a confusing array of choices. A brand bundles the complex, combination of beliefs and expectations about something into a more simplified image. People, immediately recognize GE as a perfor mance-oriented global conglomerate, SAS Institute as, an employee-friendly software company, and Apple Computer as an inno vative computer, company. Each of these brand images gives job applicants, a compressed picture of w hat it might be lik e to work in, those organizations., To nurture their employer brands, companies must ensure, that their re ward systems, cor porate cultures, and career development opportunities are consistent with their brand, images. Employers’ brand images are also hea vily influenced by the brand images of their products and services.36, One study based on personal inter views with more than, 35,000 people across 16 countries repor ted that companies, with well-known products or services are much more highly, regarded as employers than companies with less well-known, brands. Fur thermore, f irms with a lo w-price image are, perceived less f avorably as emplo yers than those w hose, products or services have an expensive brand image., For instance, Figure 12.6 lists BMW as one of the top, Compass Finds Its Brand Compass Group employs 440,000, employer brands in America (based on a survey of 37,000, people worldwide (including 120,000 in the United States), yet, students at 207 uni versities and colle ges). The Ger man, the British-based company is not well known to prospective, automaker has a positive image as an employer because of, applicants. To improve its recruiting, Compass held focus, the reputation of its automobiles. In f act, BMW does no, groups with employees to understand its brand image as an, college recr uitment, par tly because it recei ves so man y, employer and what could be done to strengthen that image., applications already. “Great brands attract g reat people,”, Courtesy of Compass Group., says one BMW executive.37, , hiL30123_ch12_284-313.indd 295, , 11/1/06 3:53:42 PM

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296, , PART 4 // Leading, , FIG UR E 1 2 .6, U.S. Undergraduate and, MBA Student Rankings, of the Top Employer, Brands, Sources: Universum, Communications, “The, American Undergraduate, Edition, 2006” (www., universumusa.com/, undergraduate.html);, Universum Communications,, “The American MBA Edition,, 2006” (www.universumusa., com/mba.html). Reprinted, with permission., , Rank, , All Undergraduate Students, , MBA Students, , 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, , Walt Disney, Google, U.S. Department of State, Federal Bureau of Investigation, Central Intelligence Agency, Microsoft, Apple Computer, Johnson & Johnson, BMW, Sony, , McKinsey & Company, Google, Goldman Sachs, Bain & Company, Boston Consulting Group, Citigroup, Apple Computer, General Electric, Johnson & Johnson, Morgan Stanley, , Developing an emplo yer brand requires a comprehensi ve strate gy that be gins with, becoming aware of the e xisting image, aligning compan y culture and practices with the, desired differentiating brand image, and communicating that image consistentl y and, meaningfully to the pub lic through v arious channels. Here are the main acti vities that, support an employer brand:, • Identify and develop positive differentiating features. Compass Group, described earlier,, followed the first step in employer branding, which is to know the company’s competitive advantages as an employer within the industry or labor market and to further, develop those differentiating features by ensuring that rewards, culture, training, and, other systems are aligned. This process often begins with a survey of current employees, about their perceptions of the company. Where cost-effective, firms should also survey, targeted applicant groups to determine their perceptions of the employer brand., • Raise the company’s public profile. Firms with well-known (and respected) products or, services have stronger employer brands. Other companies need to improve their employer, brands by more heavily marketing their products and services—particularly directed, toward prospective employees rather than just consumers. Experts also suggest that, including the company’s name in the product or service improves employer brand, awareness., • Use consistent messages in recruiting and marketing. The messages communicated to, potential employees must be consistently focused around a common image of the, company. If a company is at the forefront of innovation and wants to be known for this, characteristic, then it must be stated or obvious in college recruitment interviews,, brochures, and marketing literature for the company’s products and services., • Earn third-party recognition. One reason (of several) why corporate leaders bother to, participate in time-consuming awards surveys—as the best employer, the best place for, diversity, the best company for women, and so forth—is that favorable rankings from, these independent sources improve a company’s brand image as an employer., , // INTERNAL VERSUS EXTERNAL RECRUITMENT, Developing and maintaining an emplo yer brand is a signif icant advantage in the recr uitment process, but f inding enough people with the right qualif ications also requires other, strategic decisions and tasks. One of the f irst decisions is w hether to hire outsiders or, promote people within the or ganization. Man y f irms prefer inter nal recr uitment, , hiL30123_ch12_284-313.indd 296, , 11/1/06 3:53:43 PM

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Staffing and Developing a Diverse Workforce \\ CHAPTER 12, , 297, , ( communicating job openings only to current employees) because the applicants’ qualif ications and potential are kno wn from reliab le sources within the or ganization, whereas, information about external job candidates might be sk etchy or biased. Inter nal recruiting, is also less expensive because the company does not pay for job advertisements or headhunters. These first two benefits lead to a third one: It tak es less time to recruit internally, than externally. A fourth advantage of internal recruitment is that job applicants are more, familiar with the or ganization, including its practices and culture, w hereas e xternal, applicants are more lik ely to experience problems adjusting to the job and or ganization., Finally, inter nal recr uitment rewards successful employees through promotions to more, challenging and usually high-paying jobs.38, External recruitment is both necessary and desirable for most entry-level positions as well, as in situations where there aren’t enough qualified current staff members to f ill higher-level, positions. Google faces this situation. It has doubled its size over the past two years, so it relies, on external recruitment at all levels. The need for external hires also occurs when a company, changes its strategy or moves into new fields of knowledge. Again, this shift is occur ring at, Google, w hich is e xpanding into ne w online ser vices such as online retail and pa yment, systems. These new business strate gies require skill sets that are not suf ficiently available, from current employees., External recruiting also brings new perspectives, so managers will take this path when they, want to change the organization’s culture or infuse more creativity. Procter & Gamble (P&G),, which was a solid defender of inter nal recruiting for decades, recently increased its external, hiring to shake up the workforce and proliferate new ideas from different perspectives. While, the consumer products giant was laying off executives and other staff, it dramatically expanded, its design department by hiring an army of creative types from other organizations and pairing, them with long-service P&G staff.39, , // CHOOSING RECRUITING CHANNELS, There are many channels through which job openings are communicated and g ain the attention of prospective employees. Internal recruitment typically occurs through job postings. At, one time lar ge organizations would distribute to all emplo yees throughout the compan y a, weekly newspaper filled with internal job postings. Today employees usually review job postings through the company’s intranet. Internal recruitment also occurs through career planning, and referrals from the employee’s immediate supervisor., Employee referrals represent the most common informal method for externally recruiting, job applicants. National City Corp. is a case in point. The Cleveland-based financial institution doesn’t yet have enough qualif ied people inside the compan y to f ill the expanding, number of broker positions, so it relies on cur rent employees to recr uit their friends and, acquaintances for these jobs. National City and man y other emplo yers prefer this, recruitment method because it is inexpensive and because the refer ring employee tends to, provide applicants with more realistic and detailed infor mation than is available through, formal recruitment methods. Most (but not all) studies ag ree that employee referrals offer, these benefits.40, Other external recruitment channels include advertisements, campus visits, government, and private employment agencies, and executive search firms. Private employment agencies, and executive search firms (often called “headhunters”) are more expensive. However, they, are important sources for professional and senior management job applicants because the y, tend to screen applicants and actively lure them aware from their current employment., , ■ Employee referrals help, National City Corp. recruit, talent., , Online Recruitment (e-Recruitment) The Internet as a medium for recr uitment (often, called “e-recr uitment”) has e xploded o ver the past decade. 41 Ev ery da y appro ximately, 4 million Americans use the Inter net to look for infor mation about jobs. Almost half of all, human resource executives responsible for recruiting believe that online job boards are better, than traditional recruitment channels at finding job candidates. Most medium-sized and large, , hiL30123_ch12_284-313.indd 297, , 11/1/06 3:53:43 PM

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298, , ■ Online recruitment helps, Sainsbury and Nike slash, costs., , PART 4 // Leading, , companies have developed recruitment content on their own Web sites. Google, for example,, has details of available jobs in every country, lists the top 10 reasons to work at the company,, and provides downloadable videos in which Google staff describe what it’s like to work at the, Googleplex. Google and other companies also include for mal job application processes on, these sites; but most f irms rely on specialized Internet job boards developed by third parties,, such as Monster.com, Careerbuilder.com, and Hotjobs.com., Online recr uitment also sa ves time and mone y. Recr uitment content is uploaded more, quickly and at a much lower cost than is possible with newspaper ads or distributed brochures., Applicant details are submitted directl y to the human resource system, sa ving mone y, compared to f iling and coding manual application for ms. Confirmation of applications and, subsequent correspondence typically occur via e-mail, which further saves time and money., Sainsbury, the British supermarket chain, recently slashed its administrative costs by U.S. $8, million by conducting all its recr uitment processes online. Nik e also recently switched to, online recruitment at its European offices, which decreased recruitment costs by more than, 50 percent, cut the time to fill vacancies from 62 to 42 days, and reduced the embarrassment, of losing job applications that candidates had submitted by mail.42, , Guerrilla Recruitment Online recr uiting has become a standard practice in man y, organizations, but it is a passi ve approach that o verlooks many people w ho might not be, thinking about employment at another compan y. Google uses online recr uitment to attract, applicants; but to fulfill its rapidly expanding human resource needs, it also relies onguerrilla, recruiting methods—activities that are proactive, on the ground, and creative. Google has an, army of private and in-house recr uiters who actively seek out technology stars from around, the world. These recruiters increase the number of highly qualified applicants by personally, contacting employees working elsewhere who might not otherwise think about w orking at, Google. Campus recr uiters also rely on guer rilla tactics, such as in viting visitors with the, highest potential to a special meeting the next day with Google’s engineers., Another strategy is to host competitions or sponsor events that offer a parallel benefit of, attracting prospective employees. Google recently funded a “Summer of Code” e vent in, which 410 colle ge-level students (out of thousands w ho, submitted proposals) recei ved mentoring suppor t from, several par tner or ganizations w hile writing open-source, software code. Google paid a small stipend to mentors at, the other or ganizations and $4,500 to students w ho, completed their projects. The Summer of Code was a form, of guerrilla recruiting because it gave Google (and the other, mentoring firms) an inside track on high-quality applicants., “It was a w ay to star t a dialo gue with people around the, world who might not necessarily be looking for a job—but, might become a future emplo yee,” sa ys Judy Gilber t,, Google’s staffing program director. Google also hosts an, online competition called “Code Jam” in which contestants, around the w orld are challenged to write code to solv e, specific problems, then find ways to “break” the code that, others ha ve written. Winners in the f inal round of 100, Google Goes Guerrilla in the War for Talent Google, contestants (out of thousands in the first round) receive up, has a strong employer brand, but it is also becoming well, to $10,000, trips to the Googleplex (Google headquarters),, known for its innovative guerrilla recruitment practices. One, and job offers.43, example was the billboard and subway banners (shown in, Some guer rilla recr uiting strate gies gain attention in, photo) Google created, luring curious commuters to follow a, unusual ways. For instance, Goo gle developed a “Goo gle, series of Web sites with math problems. Only those with topLabs Aptitude Test” (GLAT), posted it on its Web site and, notch math skills could decipher each puzzle, which eventually, in tech mag azines, and in vited engineers to submit their, led to Google’s Web site with an invitation to submit a résumé., answers, to the 21 questions along with their résumés., © David L. Ryan, The Boston Globe., “Score high enough, and w e’ll be in touch, ” says Google., , hiL30123_ch12_284-313.indd 298, , 11/1/06 3:53:43 PM

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Staffing and Developing a Diverse Workforce \\ CHAPTER 12, , 299, , Google also posted a cr yptic message on a billboard in Silicon Valley and commuter banners at subway stops in Cambridge, Massachusetts, inviting viewers to a Web site named as, a 10- digit prime number representing a natural lo garithm. Google wasn’t mentioned on either the posters or the Web site, but curious prob lem solvers found more mathematical, problems to direct them to other Web sites. Eventually they arrived at a Google Web page, asking for their résumés. “One thing we learned while building Google is that it’s easier to, find what you’re looking for if it comes looking for y ou,” said the f inal Google Web page., “What we’re looking for are the best engineers in the world. And here you are!”44, , // RECRUITMENT AND DIVERSITY, Recruiting methods might disadvantage some groups more than others, which potentially, undermines workforce diversity. Online recruiting is f ine for most people, but it tends to, underrepresent people who are older and w ho have less access to computer and Inter net, resources. Emplo yee refer rals also suf fer from potentiall y biased recr uiting because, employees tend to refer people who are similar to them, which can underrepresent minorities and women in the applicant pool. Companies that rely on the top-ranked schools may, also disco ver that the y are cutting out a dispropor tionate number of people in some, demographic categories., To maintain a truly diverse workforce, managers need to seek out people in diverse groups, who might not otherwise consider employment with the organization. Verizon Communications, maintains a diverse workforce through partnerships with the national Black MBA Association,, the National Society of Hispanic MB As, and the National Association of Asian American, Professionals.45, , // Selecting Job Applicants, Selection is the process of deciding w hich job applicants will mak e the most suitab le, employees. This decision process consists of collecting and v erifying details about job candidates, and then using this infor mation to predict who is most suitable to the job and or ganization. Selection occurs after human resource planning, but it tends to r un alongside the, recruitment process. Many of Google’s employees are recr uited through campus f airs, but, their first meeting with the recruiter is also the company’s first step in the selection process., Recruiters don’t just sell the company; they find out more about these students and immediately decide who should receive further attention for recruitment and selection., There are many types of selection methods, and most companies use two or more of them, to identify suitable job applicants. But how do managers know which methods to rely on? To, answer this question, we need to consider two things: (1) what constitutes a “suitable” candidate and (2) how well the selection method measures or predicts that suitability. For the most, part suitability refers to an applicant’s job performance or skills and abilities that are required, for future perfor mance. However, suitability also refers to ho w well the employee’s values, and interpersonal skills fit the organization’s culture.46, , selection, The process of deciding, which job applicants will, make the most suitable, employees., , // RELIABILITY AND VALIDITY OF, SELECTION METHODS, The second issue to consider is ho w well a selection method measures or predicts people’ s, suitability. If a job calls for applicants with strong math skills, then the selection method, should measure math skills with a high degree of reliability and validity. Reliability refers to, how consistently a selection method measures a person’s characteristics. If a job applicant’s, scores on a math test v ary considerably over one month, the test probab ly lacks reliability, because math skills don’ t actually change much o ver that period. To understand the impor tance of reliable selection methods, imagine tr ying to shoot a distant tar get with a bow and, arrows. If y our ar rows land all o ver the tar get, then y ou have low reliability and will onl y, , hiL30123_ch12_284-313.indd 299, , reliability, How consistently a, selection method measures, a person’s characteristics., , 11/1/06 3:53:43 PM

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300, , validity, How well a selection, method predicts an, applicant’s suitability as an, employee., , PART 4 // Leading, , occasionally hit the bull’s-eye. But if your arrows land in the same place (not necessaril y the, bull’s-eye), then y ou have high reliability and it is just a matter of redirecting y our aim, somewhat to hit the bull’s-eye every time., Validity, which refers to how well a selection method predicts an applicant’s suitability, as an employee, is the bull’s-eye. A selection method has a high degree of validity if it does a, good job of predicting how successful applicants will be on the job, such as their job performance, turnover, loyalty, or other impor tant outcomes. Google believes that education is a, highly valid indicator of an applicant’ s suitability. “We’re impressed b y the deter mination, and drive it takes to complete the de grees,” says Stacy Sullivan, Google’s human resources, director.47 Goo gle managers belie ve (and lik ely ha ve e vidence sho wing) that education, predicts a person’s persistence, creativity, and ability to grasp cutting-edge knowledge, all of, which are necessary in new product development. They may have also found that employees, with higher educational degrees or grades are less likely to be overwhelmed with the work,, so they have lower turnover and higher job satisf action at Google. Work experience might, also predict job perfor mance, but Google believes it is less predicti ve (has lower validity), than education., Validating everything we use to select job applicants is a huge challenge, but tw o rules of, thumb offer some guidance.48 The first rule is that past behavior is the best predictor of future, behavior. People who provided good customer ser vice in their pre vious jobs are lik ely to, serve customers w ell in their ne xt jobs, par ticularly in similar situations. The second, and, somewhat related, rule of thumb is that samples of a person’s work are usually better predictors, of future behavior and performance than are abstract signs. Past behavior and work simulations, are samples because the y represent the person’s actual beha vior. Signs, on the other hand ,, include more abstract infor mation, such as personality and aptitude tests. P eople don’ t, complete personality tests as part of their job. Instead the personality test is an abstract sign of, how well people perform their jobs., F, igure 12.7 lists the v arious selection techniques that w e will describe over the next few, pages. Generally selection methods that represent or are close to being samples or represent, , Selection Method, , Popularity, , Validity, , Comments, , Application forms,, résumés, reference, checks, , High, , Moderate, , Validity is only as good as information, provided, so reference checks should, verify application form information., , Work sample tests, , Moderate, , Moderately, high, , Excellent application of “sample” rather, than “sign” as predictor, but can be, expensive (assessment centers) and are, not easy to apply to some jobs., , Unstructured, employment, interview, , Very high, , Low to, moderate, , Validity increases with number of, interviewers involved and types of, questions asked., , Patterned behavior, description, interview, , Moderate, , Moderately, high, , Consistently the most valid interview, method for selection, but less popular, with applicants and interviewers., , Ability tests, , Moderate, , Moderate, , Knowledge-based tests are close to, “samples,” but aptitude tests are also, closely linked to job-related behavior., , Personality tests, , Moderately, low, , Low to, moderate, , Increasingly popular (although still low) in, selection, but only specific personality traits, predict success for specific performance, dimensions on specific jobs., , FIG UR E 1 2 .7, , hiL30123_ch12_284-313.indd 300, , Popularity and Validity of Selection Methods, , 11/1/06 3:53:44 PM

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Staffing and Developing a Diverse Workforce \\ CHAPTER 12, , 301, , past behavior have the highest validity, whereas selection methods that are remote signs tend, to have lower validity. This f igure also indicates the popularity of each selection method ,, which refers to how many companies use each method., , // APPLICATION FORMS, RÉSUMÉS, AND, REFERENCE CHECKS, Usually the first information received is the applicant’s résumé or completed application form., Not long ago, or ganizing and sor ting these documents w as a nightmare. Today, thanks to, online applications and software that transcribes scanned résumés, it is much easier to use this, information to screen out people who lack the minimum education, work experience, or other, requirements. A more sophisticated approach is the weighted application b lank, which, statistically identif ies information in the application for m that best predicts the applicant’ s, suitability.49, One glaring problem is that somewhere between 25 and 50 percent of application forms, contain false infor mation. Although most of these inaccuracies are minor , there are also, many high-prof ile misrepresentations. 50 For example, a for mer CEO of Radio Shack, an, executive at N ASA, a football coach at the Uni versity of Notre Dame, and a ma yor of, Rancho Mirage, California, embellished their educational credentials. Lucent Technologies, discovered that a for mer executive had lied about ha ving a PhD from Stanford Uni versity, and hid his criminal past involving forgery and embezzlement. Ironically this executive was, Lucent’s director of recr uiting! Many f irms conduct reference checks to minimize f alse, information in application forms. They contact previous employers, educational institutions,, and reference sources listed by the applicant to confirm that information in the application, form or résumé is accurate. Reference checks ha ve become dif ficult because man y, organizations refuse to ans wer reference check questions for fear of liability . Fortunately, several states now protect companies that provide reference information in good faith. Also,, according to recent cour t cases, companies ma y be liab le for refusing to di vulge an, applicant’s past wrongdoings if the person causes damage in the next workplace.51, , // WORK SAMPLE TESTS, Work sample tests tend to be a highl y valid selection method because the y require job, candidates to demonstrate their beha vior and perfor mance in a real-time situation. 52, Musicians who apply for a job in a symphon y orchestra are ask ed to perfor m a piece of, music. Graphic ar tists and computer animation specialists might be ask ed to complete a, small piece of w ork in a fe w hours during the hiring process. Inter nships and work-study, programs represent another for m of w ork sampling because the emplo yer obser ves the, student’s behavior and perfor mance in these temporar y roles. The previously mentioned, Summer of Code and Code Jam events that Google sponsors provide small samples of work, from participants before the y even consider appl ying for a job at the search technolo gy, company. Work samples also occur in assessment centers, which are a series of simulations, that test for managerial potential. One typical assessment center simulation is the in-bask et, exercise, in which participants indicate how they would dispense with each issue identif ied, in a series of phone and e-mail messages and notes., Evaluation hiring is an extreme variation of work sampling whereby someone is hired by, an employment agency but works at a client compan y. After a f ixed period the client either, hires the indi vidual as a per manent employee or sends the person back to the emplo yment, agency for work elsewhere. Honda America follows this “tr y-before-you-buy” strategy. All, new production emplo yees are emplo yed by Adecco Employment Ser vices for a tw o-year, training period. Those who remain at the end of the two years are guaranteed an interview for, a permanent job with Honda. 53 Although evaluation hiring is one of the best w ays to predict, employee performance without the encumbrance of actually employing people, it potentially, creates the prob lems of contingent w ork that w e mentioned earlier in this chapter , such as, reduced loyalty and perceived unfairness in the employment relationship., , hiL30123_ch12_284-313.indd 301, , work sample test, A selection method that, requires job candidates to, demonstrate their behavior, and performance in a realtime situation., , ■ Honda America’s, evaluation hiring strategy., , 11/1/06 3:53:44 PM

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302, , PART 4 // Leading, , // EMPLOYMENT INTERVIEWS, Managers regard the employment interview as the most important and trustworthy method for, selecting job applicants.54 Rarely is someone hired without a formal meeting in which they are, asked questions to determine their suitability for the job and organization. What are managers, looking for in employment interviews? They are mainly assessing the applicant’s personality, traits—particularly responsibility, dependability, initiative, and persistence. 55 Unfortunately, studies have found that managers aren’t very good at guessing personality characteristics from, someone’s behavior or statements in an interview setting., Social skills represent the second most common characteristic that managers look for in, employment interviews. In par ticular, they assess the applicant’s interpersonal skills, team, focus, and general ability to work with people. Fortunately managers tend to be f airly good, at evaluating people’s social skills. The reason for this accurac y is that the inter view is a, sample of the job candidate’ s behavior, revealing his or her ability to interact with other, people. Along with social skills and personality , managers rel y on inter views to gather, information about the applicant’ s general mental capability (intelligence) as w ell as job, knowledge and skills., Although popular, traditional unstructured interviews tend to have low validity. Why? One, reason is that the inter views are inconsistent from one applicant to the ne xt, resulting in, different hiring standards. An equally troublesome issue is that the questions might not ha ve, anything to do with the job duties or predict how well the applicant will perform on the job. A, third problem is that interviewers tend to distort the information received during the interview., They ignore or quickl y forget information that is contrar y to their e xpectations and tend to, seek ne gative infor mation more than positi ve infor mation. P erhaps most impor tant,, interviewers tend to for m an opinion of each job applicant within minutes (or , according to, some research, within seconds!)., , patterned behavior, description, interview, A structured employment, interview method that asks, applicants to recall specific, incidents in the past and, describe how they handled, the situations., , hiL30123_ch12_284-313.indd 302, , Improving Employment Interviews Employment interviews are too popular to remo ve, from the selection process, so w e need to f ind ways to make them more useful in selection, decisions. One possible solution is to train managers to be aware of interviewer biases. Several, studies have concluded that training onl y minimally improves the v alidity of emplo yment, interviews, but it has at least some benef it over a complete lack of training. 56 Training is, important, however, for teaching inter viewers what questions the y can and cannot ask in, interviews. For e xample, inter viewers cannot ask if an applicant is mar ried with y oung, children. Instead, if the job in volves frequent tra vel, applicants might be ask ed if the y can, fulfill the required travel obligations., Along with training, companies can impro ve the v alidity of inter views by ensuring that, they are structured and that the questions are related to job perfor mance. One structure that, improves interview validity, called the patterned behavior description interview ,asks, applicants to recall specif ic incidents in the past and describe ho w the y handled these, situations.57 For example, to determine how well applicants work with coworkers, managers, might ask, “Describe a time when a coworker strongly and publicly disagreed with your views, on an important decision. What did you do?” To gather enough details, this “stem” question, is then followed with several “probe” questions, such as “Can y ou tell me more about that?”, or “What did you do next?”, The U .S. di vision of DaimlerChr ysler recentl y introduced the patter ned beha vior, description interview to improve the selection process. “Managers w hose daytime job is not, full-time interviewing wanted a tool they could use quickly, confidently, and easily to make, the best hiring decisions,” explains Sandy Fiaschetti, a human resource manager at theAuburn, Hills, Michigan, automaker. All managers must attend a training pro gram that teaches them, how to identify the competencies to assess, how to conduct behavioral interviewing, and how, to calculate candidates’ scores from the interviews. So far the new interview process seems to, work well. “Some managers who thought they knew which candidate they wanted going into, the interviews used the tool and reached different conclusions,” Fiaschetti says. “[Now] they’re, using the interview to gather data, not reach conclusions.”58, , 11/1/06 3:53:44 PM

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Staffing and Developing a Diverse Workforce \\ CHAPTER 12, , 303, , Along with training and str, uctured, DaimlerChrysler Throttles Up, interviews, companies can improve interview, Behavioral, validity b y using multiple inter viewers. In, Interviewing The U.S., fact, selection decisions based on unstructured, division of DaimlerChrysler, interviews with multiple interviewers are just, introduced patterned behavior, as v alid as selection decisions based on a, description interviewing in, patterned beha vior description inter view, 59, which managers ask applicants, conducted by one interviewer. In some cases, to recall specific past incidents, applicants are inter viewed by a panel w hose, and describe how they, members later compare notes on their, responded to those situations., impressions of the candidate. Google’s on-site, As a structured format, this, interviews typicall y include tw o or more, interview method allows, Google staf f members, including managers, managers to complete the, and coworkers. But Google further strengthens, interview more systematically, the inter view results b y conducting se veral, than the traditional interview., interviews. Typically Goo gle applicants, © Ryan McVay/Getty Images., receive tw o or possib ly three telephone, interviews, which screen out people based on, their basic knowledge, qualifications, and thinking ability. Applicants who pass this hurdle, can count on spending half a da y attending three inter views at Google’s headquarters or, local offices. Applicants who pass those interviews are invited back (usually the next day), for a final interview.60, , // ABILITY AND PERSONALITY TESTS, In addition to application for ms, employment interviews, and possibly work samples, many, firms require applicants to complete tests that assess either their ability or their personality ., Some tests assess the applicant’ s cur rent knowledge about a par ticular topic. Others are, aptitude tests, which measure a person’ s potential ability, such as general intelligence,, perceptual accuracy, mathematical ability, and motor abilities such as f inger dexterity. Some, of these instr uments are paper -and-pencil tests, such as the GMA T, SAT, and MCAT tests, required for entry to college programs. Others involve gamelike activities in which applicants, move objects quickly in a limited time frame. F or example, individuals with superior spatial, and mathematical aptitudes tend to e xcel in architecture. Ban yan Air Ser vice, an aircraft, maintenance f irm in Fort Lauderdale, Florida, gives applicants who lack work experience a, mechanical aptitude test to deter mine their potential as aircraft mechanics. Emplo yment, selection researchers have reported that general intelligence is a good predictor of performance, in a wide variety of jobs.61, Ability tests are signs (rather than samples) of an indi vidual’s future perfor mance, but, they usuall y ha ve moderatel y good v alidity because of their lo gical connection to, job-specific behavior. In contrast, personality tests measure much more abstract signs., Personality, which is described more fully in Chapter 14, is the relatively stable pattern of, behaviors and consistent internal states that explains a person’s behavioral tendencies.62 As, remote signs of behavior, personality tests aren’t the best selection methods. In f act, they, were strongly discouraged in the selection process a few decades ago. However, these tests, have become more popular over the past decade because several studies report that specific, personality traits reall y do predict specif ic types of job perfor mance for some jobs. By, some estimates, 30 percent of U.S. companies use personality tests to hire and place job, applicants or internal recruits.63, , aptitude test, A selection method that, measures a person’s, potential ability, such as, general intelligence and, finger dexterity., , personality, The relatively stable, pattern of behaviors and, consistent internal states, that explains a person’s, behavioral tendencies., , // SELECTION AND DIVERSITY, Throughout the staffing process, managers need to keep an eye on how each activity supports, or interferes with the or ganization’s diversity objectives. The greatest concern is whether a, selection method has an adv erse impact on an yone in a g roup identif ied by employment, , hiL30123_ch12_284-313.indd 303, , 11/1/06 3:53:44 PM

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304, , adverse (or, disparate) impact, The effect of a policy or, practice that appears, neutral but has a, significant and, unintentional negative, influence on one or more, protected groups., affirmative action, Policies and practices to, assist members of, protected groups that are, underrepresented in the, organization., , PART 4 // Leading, , legislation described earlier in this chapter. Adverse (or disparate) impact refers to the, effect of a polic y or practice that appears neutral but has a signif icant and unintentional, negative influence on one or more protected g roups.64 Adverse impact relates to man y, organizational practices, but it is par ticularly noticeab le in the selection process. Any, selection method that creates adv erse impact results in fe wer job offers to people in some, groups compared to other g roups even though there is no signif icant difference in their, ability to perform the job. For example, work samples can result in adv erse impact because, members of some minority g roups might ha ve high potential but lack the e xperience to, perform well in a work sample.65, Adverse impact is justif iable if the organization can demonstrate that the selection method, has high validity. Even so, these companies should consider introducing (or , with government, contracts, are required to introduce) affirmative action programs. Affirmative action consists, of policies and practices to assist members of protected g roups that are underrepresented in the, organization. These practices might include outreach pro grams to encourage more people in, underrepresented groups to apply. Or they might provide reasonable accommodation, such as by, adjusting job content or offering more flexibility so people in disadvantaged groups have a better, opportunity to succeed. If a w ork sample has adv erse impact, then companies should instead, consider testing the aptitudes of job candidates and giving new hires on-the-job training., , // Orienting and Developing Employees, What do employees at Wipro Technologies appreciate most about working at the Indian software giant? Financial rewards and challenging work are certainly on the list, but one of the, top benefits is learning. “Wipro provides great learning opportunities,” says CEO Vivek Paul., “The core of how employees think about us and value us revolves around training. It simply, isn’t something we can back off from.”66 After recruiting and selecting employees, companies need to be sure that they have the knowledge and skills needed to perform their jobs and,, more generally, work effectively within the organization. At Wipro and probably every other, organization these days, employees desire this training as much as managers w ant them to, have it., , // EMPLOYEE ORIENTATION, employee, orientation, The organization’s, systematic process of, helping new employees, make sense of and adapt, to the work context., ■ Laidlaw’s realistic job, preview., , realistic job preview, (RJP), Giving job applicants a, balance of positive and, negative information about, the job and work context., , hiL30123_ch12_284-313.indd 304, , The first training that employees should receive is employee orientation —theorganization’s systematic process of helping ne w employees make sense of and adapt to the w ork, context. In fact, employee orientation should begin before the job applicant is hired. It is a, process of communicating work-related information beginning with recruiting and continuing, through the first few months of employment. Several studies suggest that newcomers adjust, better to an organization when they receive a formal orientation program.67 Even a session, lasting a few hours has a significant effect on stress, turnover, and job performance., One of the first forms of employee orientation should be a realistic job preview (RJP),, which occurs during recr uitment and selection. In man y companies recr uiters exaggerate, positive features of jobs and ne glect to mention their undesirab le elements in the hope that, the best applicants will get “stuck” on the or ganization. In contrast, an RJP offers a balance, of positi ve and ne gative infor mation about the job and w ork conte xt.68 Laidlaw, which, employs about 1,000 bus dri vers on Long Island, shows all job applicants a video of a bus, driver’s worst day on the job, including a bus full of ro wdy kids. This balance helps job, applicants decide for themselves whether their skills, needs, and values are compatible with, the job and or ganization. Although RJPs scare a way some applicants, the y tend to reduce, turnover and increase job performance.69, After people are hired but before they begin work, orientation takes the form of providing, more information about the company and its practices through literature and personal calls or, e-mail messages from new coworkers. On the first day of work (when people traditionally, but, , 11/1/06 3:53:45 PM

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Staffing and Developing a Diverse Workforce \\ CHAPTER 12, , incorrectly, believe orientation begins), new hires should recei ve high-priority infor mation,, such as the location of k ey resources and the roles of k ey people around them. Super visors, and coworkers should demonstrate that the ne w recruit is a w elcome addition to the team,, such as by preparing the necessary facilities and symbols of membership (such as a desk with, a name plate). Many organizations also support employee orientation with a “buddy system”, that assigns newcomers to coworkers for information and social support. Progressive Inc., the, Mayfield, Ohio–based insurance firm, relies on current employees to recruit and socialize job, applicants. “I think candidates can tr ust and respect people w ho already w ork here,” says, Jennifer Cohen, Pro gressive’s national emplo yment director . “The y get a lot of honest, information about the company.” 70, The Bank of Nova Scotia has effectively applied these orientation practices. In par ticular,, the Canadian f inancial institution tak es short-listed job applicants on a tour of the of fices, where they would actually work. They also meet current employees in the work area, who are, quick to show their welcoming support. On the ne wcomers’ f irst day of work, ScotiaBank, assigns buddies to help them adjust to the w orkplace over the f irst two years. “We have to, make sure, once they are in the door, that they start having a great experience as an employee—, and that w e haven’t overpromised,” says Sylvia Chrominska, ScotiaBank’ s executive vice, president of human resources.71, , 305, , ■ Bank of Nova Scotia’s, orientation strategy., , // TRAINING NEEDS ANALYSIS, Training can be expensive, so managers need to identify who needs training, what type of, training works best, and w hen that training is required. These questions are ans wered by, training needs analysis.72 Figuring out the w ho–what–when of training usually takes one, of two forms: performance gap analysis and organizational analysis., Performance gap analysis involves diagnosing gaps in employee performance. Suppose, one of your employees isn’t performing the job as well as he or she should. Does this situation call for training? P ossibly, but there can be man y explanations for the emplo yee’s, poor perfor mance, and some of them are cor rected through other inter ventions.73 One, question to ask is whether the employee has performed the job well in the past. If so, has, the employee had enough oppor tunity to practice the skill recentl y? If not, a training, program might consist of practice sessions rather than a full-blown learning process. If the, employee does use the skill often, maybe he or she isn’t getting meaningful feedback that, there is a problem with the results. Along with examining the employee’s skills, managers, need to consider w hether the w ork environment motivates or discourages good perfor mance. Altogether, this diagnosis works out the cause of the employee’s poor performance, and determines whether training is required to correct the situation., Whereas performance gap analysis determines training needs from each employee’s behavior, and performance, organizational analysis takes a top-down view of training needs. Organizational strategy is translated into specif ic operational plans that cascade do wn to each depar tment and ultimately every employee. Some employees are affected by strategic initiatives, such, as when job duties change or jobs are eliminated. Thus training needs analysis involves anticipating what skills and knowledge employees will require as a result of changes caused b y the, organizational strategy and operational plans. Notice that organizational analysis links back to, the human resource planning process described at the beginning of this chapter. By estimating, future demand and supply in the context of the organization’s objectives, managers can decipher, who needs what training and when they will require it., , // TRAINING METHODS, Suppose you are a manager at a retail f inancial institution (such as a bank branch) and, want to improve the skills and knowledge of customer service staff. What type of training, would you provide? There are many varieties of training, so managers need to consider the, advantages and limitations of each. The right choice is important because training makes a, , hiL30123_ch12_284-313.indd 305, , 11/1/06 3:53:45 PM

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306, , PART 4 // Leading, , difference in the financial services industry. “The difference between [a client accepting or, rejecting your product] is proper training,” explains banking consultant K enneth Kehrer., “Training could be the difference between keeping a customer for life or watching them walk, out the door.” One financial services company that is moving forward on the training front is, Allstate. The company recently rolled out a training pro gram for bank staf f that includes, self-assessments, interactive discussion materials, role-playing activities, video demonstrations,, and goal setting.74, F, igure 12.8 highlights seven categories that represent most types of training methods in the, workplace. Lectures, readings, and discussion sessions are adequate lear ning methods for transferring factual or persuasive knowledge. Audiovisual materials have similar learning outcomes,, although their graphic display of conditions potentially offers higher persuasiveness and recall of, factual knowledge. Visual material is also ef fective for behavior modeling, which offers some, transfer of tacit kno wledge. Computer-based training has become v ery popular because it is, cost-effective and allows trainees to learn on their own time, often anywhere. Most computer-based, training transfers explicit knowledge and may improve some thinking (cognitive) skills., Coaching and mentoring provide one-on-one information, encouragement, and feedback to, trainees from the super visor or co workers. This training method can be v ery effective for, , Training Method, , Description, , Learning Outcomes, , Lectures, readings,, discussions, , Receiving factual or persuasive, information from presenter(s),, documentation, and/or other, trainees., , Transfers explicit knowledge;, changes attitudes., , Audiovisual materials, , Watching or listening to information, or (for visual media) observing, behavior or detailed situations., , Audio transfers explicit knowledge;, video transfers both explicit and, tacit knowledge through role, modeling., , Computer-based, training, , Learning through interaction with a, Web site, CD-ROM, DVD, or related, technology, usually without trainers, present; increasingly incorporates, audiovisual materials., , Develops knowledge and some, cognitive skill., , Coaching/mentoring, , Providing one-on-one feedback and, job-related information to improve, the trainee’s self-awareness and, knowledge about job-related skills., , Develops skills, knowledge, and selfconfidence through feedback,, focused information, and support., , Job rotation, , Giving trainees a series of job, assignments for fixed periods in, different parts of the production, process or around the organization., , Develops skills through practice on, the job., , Simulations and, role-playing, , Practicing job-related behaviors in a, environment that replicates the work, environment or (for role-playing), where the natural work environment, is assumed., , Develops skills through practice, away from the usual work, environment., , Action learning, , Investigating (usually in teams) and, applying solutions to real and, complex organizational problems or, opportunities, with immediate, relevance to the company., , Develops cognitive skills and, knowledge as well as interpersonal, skills in the work environment., , FIG UR E 1 2 .8, , hiL30123_ch12_284-313.indd 306, , Training Methods and Their Learning Outcomes, , 11/1/06 3:53:45 PM

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Staffing and Developing a Diverse Workforce \\ CHAPTER 12, , 307, , developing knowledge and skill as well as self-confidence.75 It is sometimes a formal activity, but often occurs infor mally with new employees. Job rotation involves moving trainees into, different jobs over time so they continuously develop new skills through on-the-job practice., This method usually includes coaching and mentoring from experienced coworkers., Simulations and role-pla ying represent v arious forms of practice a way from the actual, workplace. Some simulations are very lifelike, such as mock disasters for emer gency crews, or aircraft cockpit simulators w here pilots practice for ne w aircraft. Role-playing tends to, have less w orkplace “f idelity”; that is, trainees pretend the y are in a w ork situation e ven, though the sur rounding environment is a classroom or another place that doesn’ t look like, the natural work setting. Action learning is an increasingly popular training method whereby, employees, usually in teams, investigate and apply solutions to a situation that is both real, and complex, with immediate relevance to the company.76 In other words, the task becomes, the source of learning., , // SUPPORTING THE TRAINING PROCESS, Along with diagnosing training needs and determining which method of training works best, for the training content, managers need to take steps to maximize the learning process. Here, are three of the most impor tant issues to consider w hen, introducing a staff training program:77, • Is the trainee ready to learn? The effectiveness of, training depends just as much on the ability and motivation of the employee to learn as it does on the content and, instructional methods. Thus managers need to determine, whether trainees have the prerequisite knowledge, are, sufficiently confident to learn, and believe the training, outcomes are valuable., • Is the training practice well designed? One of the most, important principles of learning is that active practice is, usually more effective than passive learning (such as, through observation or lectures). But practice sessions, need to be arranged in ways that maximize their, effectiveness.78 One consideration is whether to have one, continuous session or to divide the training into several, sessions. Learning is usually more effective when the, practice is spread out over time rather than experienced, all at once. Another issue is whether trainees should, practice all of the behaviors at one time or break up the, learning content in chunks. Complex content should be, divided if feasible., • Is the trainee’s transfer of learning supported? Most, training requires support to ensure that employees, actually use on the job what they learned in a classroom, workshop, or practice area.79 One strategy, called, relapse prevention, involves teaching employees to, anticipate and overcome obstacles in the workplace that, might make it difficult to practice their new skills. This, anticipation of barriers seems to reduce those problems, when they occur. Another strategy is to teach employees, to manage their behavior change. This means that they, learn to set goals that use the new skills, find ways to, monitor how well they are applying those skills, and, reward themselves when performing well with the new, skill set., , hiL30123_ch12_284-313.indd 307, , Lifelike Simulation Training for Emergency Response, Crews Physicians Jonathan Sherbino and Ivy Chong (far, right) prepare to amputate the leg of Wesley Bagshaw,, who is pinned by a fallen beam in this collapsed building., “If we don’t do this, you’re going to die,” says Sherbino in, response to Bagshaw’s anguished protests. Fortunately for, Bagshaw, the bone saw cuts through a pig’s leg rather, than his own. The entire incident was a mock disaster to, help train the Heavy Urban Search And Rescue (HUSAR), team in Toronto, Canada. For four hours HUSAR crews, located victims with dogs and search equipment at this, Toronto Fire Services special operations training site,, secured the structure, treated Bagshaw and 15 other, “victims,” and extricated them to a mock hospital at a, nearby community college. In all, over 300 HUSAR and, Greater Toronto area medical professionals were involved., “People from the hospitals love these exercises because, they get to try out all the ideas they have and no one is, (adversely) affected,” explains one of the event’s, organizers. “It was definitely a lot more realistic than, anything we’ve done in the past.”80, © Michael Stuparyk/Toronto Star., , 11/1/06 3:53:45 PM

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308, , PART 4 // Leading, , I N CO N C LU S ION, , WH Y DOE S IT M ATTER?, , Anyone who wants to run a successful business needs the right number of people, with the right skills, knowledge, and values to accomplish the organization’s objectives. But as Google engineering vice president Alan Eustace pointed out at the, beginning of this chapter, the most important thing is to attract and hire the right, people in the first place rather than try to dramatically improve them after they’re on, the payroll. Training is important—and necessary—for most employees at various, times in their careers; but even the most expensive training can’t replace the value of, having the right people., In this chapter we outlined staffing as a continuous process from human resource, planning to recruiting to selecting to developing. These are cornerstones of effective, management—so much so that we have split them off as a separate category of, managing. (The traditional management categories bury these activities under, “Leading.”) This process of staffing and developing people is so important, in fact, that, the most successful corporate leaders believe it should consume most of their time., The reasoning is that hiring and developing the best employees makes it easier for, leaders to do their jobs in the long run., Even if managers are aware of the importance of human resource planning,, recruiting, selection, and development, many fall into the various traps that exist within, these practices. Human resource planning can degenerate into paralysis by analysis at, one extreme or wishful thinking on the other. Recruitment practices often become sales, jobs that inflate newcomers’ expectations, which crash into frustration with or, disrespect for the employer. Selection practices such as traditional interviews are, notorious for lulling managers into false confidence that they have a special gift for, picking the right candidates when, in fact, the best choices didn’t get job offers., Employee development can also be a house of cards, where managers expend huge, budgets on training programs with uncertain returns. Overall, staffing and developing, isn’t just the cornerstone of effective management; it is its testing ground., , MANAGEMENT CHALLENGES, 1., , 2., , 3., , hiL30123_ch12_284-313.indd 308, , As the manager responsible for staffing at XYZ Manufacturing, you face a major, challenge over the next five years. According to employment records, approximately, 40 of the 200 production employees will be entering their 60s. Although there is no, formal retirement age in this firm, production staff usually retire before age 65 because, they are eligible for full retirement pensions by then. Furthermore, you have noticed that, local colleges are graduating fewer tradespeople in these jobs than they did a decade, ago. What can you do to resolve this problem?, WestCrude, a large oil company, has just decided that its core competency is in, exploring and drilling for oil deposits, and the firm will outsource most of its support, services (human resources, information systems). This will result in a large contingent, workforce in these functions. What issues should WestCrude consider before moving to, a contingent workforce?, Google is exceptionally diverse with respect to representation in ethnicity, race, and, gender. But some critics point out that the Internet search engine company has an, unusually young workforce. What problems, if any, might Google experience with this, lack of age diversity? If Google wanted to increase its age diversity, what should it do,, and what complications might result from these actions?, , 11/1/06 3:53:46 PM

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Staffing and Developing a Diverse Workforce \\ CHAPTER 12, , 4., , 5., , 6., , 309, , In your opinion, which colleges and universities around the country have strong, employer brands—that is, have widely known and well-regarded packages of functional,, economic, and psychological benefits for employees? Why do you think these schools, have strong employer brands whereas others do not? Is the development of employer, branding different for colleges than for, say, consumer goods companies?, Google and a number of other organizations use “guerrilla recruitment” to attract job, applicants. What characteristics of guerrilla recruiting activities make them effective, yet, different from other forms of recruitment? What other guerrilla recruitment tactics do, you know about?, Suppose your organization wants to recruit and hire several marketing specialists across, the country. What selection method(s) would be most effective at identifying the most, suitable applicants?, , MANAGEMENT PORTFOLIO, FOR THE ORGANIZATION YOU HAVE CHOSEN TO FOLLOW:, 1., , 2., , 3., , 4., , Based on available information, does it appear that the company will have a sufficient, supply of staff in various job groups over the next five years? Why or why not? What, environmental conditions, if any, make it easier or more difficult for this company to, estimate its future supply of and demand for employees?, To what extent does this organization actively create and maintain a diverse workforce?, Does the company Web site, annual report, or other literature suggest why this organization wants a diverse workforce? What else could or should this company do to improve, its diversity?, How strong and favorable is the employer brand of this company? If you were hired as, an employer brand consultant, what would you recommend to strengthen this company’s, image as an employer?, To what extent does this organization provide employee training? Do its training, programs seem to be above or below average for this industry? Thinking about, production or service jobs, what training methods seem to be most widely used in this, organization?, , CLOSING CASE, , REBRANDING MCJOBS, , As with most fast-food restaurant chains, McDonald’s needs, more people to f ill jobs in its vast empire. Yet McDonald’s, executives are f inding that recr uiting is a tough sell. The, industry is taking a beating from an increasingl, y, health-conscious society and the popular film Supersize Me ., Equally troub lesome is a fur ther decline in the already, dreary image of emplo yment in a f ast-food restaurant. It, doesn’t help that McJob, a slang term closely connected to, McDonald’s, was recently added to both Merriam-Webster’s, Collegiate Dictionary and the Oxford English Dictionary as, a legitimate concept meaning a lo w-paying, low-prestige,, , hiL30123_ch12_284-313.indd 309, , dead-end, mindless ser vice job in w hich the emplo yee’s, work is highly regulated., McDonald’s has tried to shore up its employment image in, recent years by improving wages and adding some employee, benefits. A fe w y ears ago it created the “I’m loving it”, campaign, which took aim at a positive image of the golden, arches for emplo yees as w ell as customers. The campaign, had some effect, but McDonald’s executives realized that a, focused effort was needed to battle the McJob image., Now McDonald’s is f ighting back with a “My F irst”, campaign to sho w the pub lic—and prospecti ve job, , 11/10/06 4:38:50 AM

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310, , PART 4 // Leading, , applicants—that working at McDonald’s is a w ay to star t, their careers and develop valuable life skills. The campaign’s, centerpiece is a television commercial showing successful, people from around the w orld whose f irst job w as at the, fast-food restaurant. “Working at McDonald’s really helped, lay the foundation for m y career,” says ten-time Ol ympic, track and f ield medalist and for mer McDonald’s cre w, member Carl Lewis, who is featured in the TV ad. “It was, the place where I learned the true meaning of excelling in a, fast-paced environment and what it means to operate as part, of a team.”, Richard Floersch, McDonald’s executive vice president, of human resources, claims that the compan, y’s top, management has deep talent, but the campaign should help, to retain current staff and hire new people further down the, hierarchy. “It’s a very strong message about how when you, start at McDonald’s, the oppor tunities are limitless,” says, Floersch. Ev en the McDonald’s application for m vividly, communicates this message by showing a group of culturally, diverse smiling employees and the caption “At McDonald’s, You Can Go Anywhere!”, McDonald’s has also distributed media kits in se veral, countries with f actoids debunking the McJobs m yth. The, American documentation points out that McDonald’s CEO, Jim Skinner began his career working the restaurant’s front, lines, as did 40 percent of the top 50 members of the worldwide management team, 70 percent of all restaurant, managers, and 40 percent of all o wner/operators. “People, do come in with a ‘job’ mentality, but after three months or, so, they become evangelists because of the leadership and, community spirit that exists in stores,” says David Fairhurst,, the vice president for people at McDonald’ s in the United, Kingdom. “For many, it’s not just a job, but a career.”, McDonald’s also hopes the ne w campaign will raise, employee pride and lo yalty, w hich w ould moti vate the, 1.6 million staf f members to recr uit more friends and, acquaintances through word of mouth. “If each emplo yee, , tells just f ive people something cool about w orking at, McDonald’s, the net ef fect is huge,” explains McDonald’s, global chief mark eting of ficer. So f ar the campaign is, having the desired ef fect. The compan y’s measure of, employee pride has increased by 14 percent, loyalty scores, are up b y 6 percent, and 90-da y emplo yee tur nover for, hourly staff has dropped by 5 percent., But McDonald’s isn’t betting entirely on its new campaign, to attract enough new employees. For many years it has been, an innovator in recruiting retirees and people with disabilities., The most recent inno vation at McDonald’s UK, called the, Family Contract, allows wives, husbands, grandparents, and, children over the age of 16 to s wap shifts without notifying, management. The arrangement extends to cohabiting partners, and same-sex partners. The Family Contract is potentially a, recruiting tool because f amily members can no w share the, same job and take responsibility for scheduling which family, member takes each shift., Even with these campaigns and human resourcechanges,, some senior McDonald’s executives acknowledge that the, entry-level positions are not a “lifestyle” job . “Most of the, workers we have are students—it’s a complementar y job,”, says Denis Hennequin, the P aris-based e xecutive vice, president for McDonald’s Europe.81, CASE DISCUSSION QUESTIONS, 1. Discuss McDonald’s cur rent situation from a human, resourceplanning perspective., 2. Is McDonald’s taking the best approach to improving its, employer brand? Why or why not? If you were in charge, of de veloping the McDonald’ s emplo yer brand , w hat, would you do differently?, 3. Would “guer rilla” recr uiting tactics help McDonald’ s, attract more applicants? Why or w hy not? If so, w hat, tactics might be effective?, , ENDNOTES, 1. “Google Expansion Is Being Held Back b y Hiring Process, ” The Wall Street, Journal, February 10, 2005, p. B5; C. Hymowitz, “Busy Executives Fail to Give, Recruiting Attention It Deserves,” The Wall Street Journal, November 21, 2005,, p. B1; V. Kopytoff, “How Google Woos the Best and Brightest,” San Francisco, Chronicle, December 18, 2005, p. A1; P.-W. Tam and K.J . Delane y, “Talent, Search: Google’s Growth Helps Ignite Silicon Valley Hiring F renzy,” The Wall, Street Journal, November 23, 2005, p. A1., , 7. Committee on Techniques for the Enhancement of Human P erformance:, Occupational Analysis. Commission on Beha vioral and Social Sciences and, Education. National Research Council, The Changing Nature of Work: Implications, for Occupational Analysis (Washington, DC: National Academy Press, 1999)., , .2 P. Drucker, Peter Drucker on the Pr ofession of Management (Boston: Harvard, Business School Press, 1998)., , 8. D. Brown, “Success Be gins in the Middle, ” Canadian HR Reporter , June 2,, 2003, p. 1., , 3. R.C. Lee, “K eeping Up with Gro wth,” Houston Chr onicle, August 17,, 2005, p. 3., , 9. N.R. Lockwood, “Workplace Diversity: Leveraging the Power of Difference for, Competitive Advantage,” HRMagazine, June 2005, pp. A1–A10., , 4. S.E. Jackson and R.S. Schuler , “Human Resource Planning, ” American, Psychologist 45, no. 2 (1990), pp. 223–39., 5. R. Mullins, “V erizon Goes to Great Lengths, ” Tampa Tribune, F ebruary 7,, 2006, p. 1., , hiL30123_ch12_284-313.indd 310, , .6 M.T. Brannick and E.L. Levine, Job Analysis: Methods, Resear ch, and, Applications f or Human Resour ce Mana gement in the Ne w Millennium, (Thousand Oaks, CA: Sage, 2002)., , 10.S. Theil, “The New Old Age,” Newsweek, January 30, 2006., 11. D.G. Gallagher, “Contingent Work Contracts: Practice and Theory,” in The New, World of Work: Challenges and Opportunities, ed. C.L. Cooper and R.J . Burke, (Oxford: Blackwell, 2002), pp. 115–36; K. Bark er and K. Christensen (eds.),, , 11/1/06 3:53:46 PM

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Staffing and Developing a Diverse Workforce \\ CHAPTER 12, , Contingent Work: American Employment in Transition (Ithaca, NY: ILR Press,, 1998); A.E. Polivka, “Contingent and Alternative Work Arrangements, Defined,”, Monthly Labor Review 119 (October 1996), pp. 3–10; S. Nollen and H. Axel,, Managing Contingent Workers (New York: AMACOM, 1996), pp. 4–9., , 311, , Theory for Organizational Practice, ed. S.A. Haslam et al. (New York: Taylor and, Francis, 2003), pp. 61–80; D. v an Knippenber g, C.K.W. De Dreu, and A.C., Homan, “Work Group Diversity and Group Performance: An Integrative Model, and Research Agenda,” Journal of Applied Psyc hology 89, no. 6 (2004),, pp. 1008–22; E. Molleman, “Di versity in Demo graphic Characteristics,, Abilities, and P ersonality Traits: Do F aultlines Affect Team Functioning?”, Group Decision and Negotiation 14, no. 3 (2005), pp. 173–93., , 12. J. Walsh and S. Deery, “Understanding the Peripheral Workforce: Evidence from, the Service Sector,” Human Resource Management Journal 9 (1999), pp. 50–63;, C. von Hippel, S.L. Mangum, D.B. Greenberger, R.L. Heneman, and J.D. Skoglind,, “Temporary Emplo yment: Can Or ganizations and Emplo yees Both Win?”, Academy of Management Executive 11 (February 1997), pp. 93–104., , 30.Birritteri, “Workplace Di versity: Realizing the Benef its of an All-Inclusive, Employee Base.”, , 13. S.F. Matusik and C.W.L. Hill, “The Utilization of Contingent Work, Knowledge, Creation, and Competiti ve Advantage,” Academy of Mana gement Re view 23, (October 1998), pp. 680–97., , 31.Verizon, Making Connections: Verizon Corporate Responsibility Report 2004, (New York: Verizon, December 2004); P. Goffney, “Champions of Diversity: The, Path to Corporate Enlightenment,” Essence, May 2005, pp. 149–57., , 14. J. Larson, “Temps Are Here to Stay,” American Demographics 18 (February 1996),, pp. 26–30., , 32. M.J. 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Google, “Google Code Jam 2005” (Mountain View, CA: 2005), http://www.google., com/codejam/ (accessed March 1, 2006); Hymo witz, “Busy Ex ecutives Fail to, Give Recr uiting Attention It Deser ves”; S.M. K erner, “What I Did at Goo gle’s, Summer of Code, ” Internetnews.com, September 9, 2005; J . Puliyenthuruthel,, “How Google Searches—for Talent,” BusinessWeek, April 11, 2005., 44. “Google Entices Job Searchers with Math Puzzle, ” NPR, September 14, 2004;, S. K uchinskas, “ Are You Goo gle Emplo yee Material?” Internetnews.com,, October 1, 2004; S. Olsen, “Google Recruits Eggheads with Mystery Billboard,”, Cnet News.com, July 9, 2004., 45.Birritteri, “Workplace Diversity.”, 46. D.S. Chapman et al., “Applicant Attraction to Organizations and Job Choice: A, Meta-Analytic Review of the Cor relates of Recr uiting Outcomes,” Journal of, Applied Psychology 90, no. 5 (September 2005), pp. 928–44., 47.K.J. Dunham, “Career Journal: The Jungle,” The Wall Street Journal, October 14,, 2003, p. B12., 48.P.F. Wernimont and J .P. Campbell, “Signs, Samples, and Criteria, ” Journal of, AppliedPsychology 52, no. 5 (October 1968), pp. 372–76., , 11/1/06 3:53:46 PM

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312, , PART 4 // Leading, , 49.L.F. Schoenfeldt, “F rom Dust Bo wl Empiricism to Rational Constr ucts in, Biographical Data,” Human Resour ce Mana gement Re view 9, no. 2 (1999),, pp. 147–67; M.R. Barrick and R.D. Zimmerman, “Reducing Voluntary, Avoidable, Turnover through Selection,” Journal of Applied Psychology 90, no. 1 (2005),, pp. 159–66; J.H. Browne, S.H. Wamock, and N.J. Boykin, “Predicting Success of, Police Of ficer Applicants Using Weighted Application Blanks, ” Journal of, American Academy of Business 6, no. 1 (March 2005), pp. 26–31., 50.S.L. McShane, “ Applicant Misrepresentations in Résumés and Inter views in, Canada,” Labor Law J ournal, Januar y 1994, pp. 15–24; J. Jaucius, “Inter net, Guru’s Credentials a True Work of Fiction,” Ottawa Citizen, June 12, 2001; S., Romero and M. Richtel, “Second Chance,” The New York Times, March 5, 2001,, p. C1; “Up to 40 Percent of U.S. Workers Pad Their Résumés,” Agence France, Presse (Washington, DC), F ebruary 22, 2006; P . Sabatini, “Fibs on Résumés, Commonplace,” Pittsburgh Post-Gazette, February 24, 2006., 51.P.J. Taylor, “Dimensionality and Validity of a Str uctured Telephone Reference, Check Procedure,” Personnel Psychology 57, no. 3 (Autumn 2004), pp. 745–71;, “More Than 70 Percent of HR Professionals Say Reference Checking Is Effective, in Identifying P oor Performers,” PR Newswire (Alexandria, VA), February 3,, 2005; P. Snitzer, “‘Speak No Evil’ Is a Risk y P olicy,” Modern Healthcar e,, December 5, 2005, p. 23., 52. M. Callinan and I.T. Robertson, “Work Sample Testing,” International Journal of, Selection and Assessment 8, no. 4 (2000), pp. 248–60; P.L. Roth, “ A MetaAnalysis of Work Sample Test Validity: Updating and Integrating Some Classic, Literature,” Personnel Psychology 58, no. 4 (2005), pp. 1009–37., 53.T. Matthews, “Ohio-Area Companies Turn to ‘Ev aluation Hiring’ to Pick Best, Employees,” Columbus Dispatch, May 13, 2005., 54. G.H. Harel, A. Arditi-Vogel, and T. Janz, “Comparing the Validity and Utility of, Behavior Description Interview versus Assessment Center Ratings,” Journal of, Managerial Psychology 18, no. 1/2 (2003), pp. 94–104., 55.A.I. Huffcutt et al., “Identif ication and Meta-Anal ytic Assessment of Psychological Constr ucts Measured in Emplo yment Inter views,” Journal of Applied, Psychology 86, no. 5 (October 2001), pp. 897–913; P.L. Roth et al., “Personality, Saturation in Str uctured Inter views,” International J ournal of Selection and, Assessment13, no. 4 (2005), pp. 261–73., 56.R.A. P osthuma, F.P. Morgeson, and M.A. Campion, “Be yond Emplo yment, Interview Validity: A Comprehensive Narrative Review of Recent Research and, Trends over Time,” Personnel Psychology 55, no. 1 (Spring 2002), pp. 1–80., 57.A.L. Day and S.A. Car roll, “Situational and P atterned Behavior Description, Interviews: A Comparison of Their Validity, Correlates, and Perceived Fairness,”, Human Performance 16, no. 1 (2003), pp. 25–47; A.I. Huf fcutt et al., “The, Impact of Job Comple xity and Study Design on Situational and Beha vior, Description Inter view Validity,” International J ournal of Selection and, Assessment 12, no. 3 (2004), pp. 262–73., 58. K. Tyler, “Train for Smarter Hiring,” HRMagazine, May 2005, p. 89., , 63.P.G. Ir ving, “On the Use of P ersonality Measures in P ersonnel Selection, ”, Canadian Psychology 34 (April 1993), pp. 208–14; R. Winters, “Cull of, Personality,” Salt Lake Tribune, November 14, 2005, p. B8; L.T. Cullen, “SATs, for J-O-B-S,” Time, April 3, 2006, p. 89., 64.“History of Disparate Impact Lawsuits,” IOMA’s Human Resource Department, Management Report 5, no. 6 (June 2005), p. 14., 65.P. Bobko, P.L. Roth, and M.A. Buster , “Work Sample Selection Tests and, Expected Reduction in Adverse Impact: A Cautionar y Note,” International, Journal of Selection and Assessment 13, no. 1 (2005), pp. 1–10., 66.“Wipro: Leadership in the Midst of Rapid Gro wth,” Knowledge@Wharton,, February 2005., 67.J.D. Kammeyer-Mueller and C.R. Wanberg, “Unwrapping the Or ganizational, Entry Process: Disentangling Multiple Antecedents and Their P athways to, Adjustment,” Journal of Applied Psychology 88, no. 5 (2003), pp. 779–94., 68.J.A. Breaugh, Recruitment: Science and Pr actice (Boston: PWS-Kent, 1992);, J.P. Wanous, Organizational Entry (Reading,MA: Addison-Wesley, 1992)., 69. J.M. Phillips, “Effects of Realistic Job Previews on Multiple Organizational Outcomes: A Meta-Analysis,” Academy of Management Journal 41 (December 1998),, pp. 673–90; S. Albin, “If You Enjoy Kids and Love to Drive, Have We Got a Job, for You,” The New York Times, September 4, 2005, p. 8., 70. C. Goforth, “Still Recruiting Staff,” Akron Beacon Journal, July 15, 2001., 71.V. Galt, “Kid-Glove Approach Woos Ne w Grads,” Globe & Mail, March 9,, 2005, p. C1., 72.K.N. Wexley and G.P. Latham, Developing and Training Human Resour ces in, Organizations, 2nd ed. (New York: HarperCollins, 1991), Chapter 3., 73.R.F. Mager and P. Pipe, Analyzing Performance Problems (Belmont,CA: Lake, Publishing, 1984)., 74. “New Kehrer Study Finds Training Key to Platform Rep Success,” Business Wire, (Northbrook, IL), November 2, 2004., 75.T. Weiss, Coaching Competencies and Corpor ate Leadership (Boca Raton,FL:, St. Lucie Press, 2003)., 76.R.W. Revans, The Origin and Gr owth of Action Learning (London: Chartwell, Bratt, 1982), pp. 626–27; M.J . Mar quardt, Optimizing the P ower of Action, Learning: Solving Problems and Building Leaders in Real Time (Palo Alto, CA:, Davies-Black, 2004)., 77., Wexley and Latham, Developing and Training Human Resources in Organizations, Chapter 4., 78. J.J. Donovan and D.J. Radosevich, “A Meta-Analytic Review of the Distribution, of Practice Ef fect: No w You See It, No w You Don’ t,” Journal of Applied, Psychology 84, no. 5 (October 1999), pp. 795–805; R. Seabrook, G.D.A. Brown,, and J .E. Solity , “Distributed and Massed Practice: F rom Laborator y to, Classroom,” Applied Cognitive Psychology 19, no. 1 (2005), pp. 107–22., , 59.F.L. Schmidt and R.D . Zimmer man, “ A Counterintuiti ve Hypothesis about, Employment Inter view Validity and Some Suppor ting Evidence,” Journal of, AppliedPsychology 89, no. 3 (2004), p. 553., , 79.W.L. Richman-Hirsch, “Posttraining Inter ventions to Enhance Transfer: The, Moderating Ef fects of Work En vironments,” Human Resour ce De velopment, Quarterly 12, no. 2 (2001), pp. 105–20., , 60.This infor mation is based on se veral online for ums, including the inter views, described on Slashdot. See http://slashdot.or, g/article.pl?sid= 05/01/03/, 0255205&tid=217., , 80.I. Teotonio, “Rescuers Pull ‘Victims’ from Rubble,” Toronto Star, April 8, 2005,, pp. B01, B03., , 61.C.-H. Ho, C. Eastman, and R. Catrambone, “ An Investigation of 2nd and 3rd, Spatial and Mathematical Abilities,” Design Studies in press, cor rected proof;, “The Aviation Maintenance Ex ecutive Roundtable: The Independents’ View,”, Aviation Maintenance, November 15, 2005., 62. B. Reynolds and K. Kar raker, “A Big Five Model of Disposition and Situation, Interaction: Why a ‘Helpful’ Person May Not Always Behave Helpfully,” New, Ideas in Psyc hology 21 (April 2003), pp. 1–13; W. Mischel, “T oward an, Integrative Science of the P erson,” Annual Re view of Psyc hology 55 (2004),, pp. 1–22., , hiL30123_ch12_284-313.indd 312, , 81. “McDonald’s Debuts Advertising on the World of Opportunity under the Golden, Arches,” McDonald’s Corporation news release (Chicago: September 21, 2005);, “McDonald’s Ne w Ads Tout McJobs, ” AFX Asia, September 22, 2005; A., Chabria, “McDonald’s Looks to Boost Staff Pride, Add Top Recruits,” PR Week,, September 26, 2005, p. 5; L. Foster and J. Grant, “McDonald’s Woos Its ‘Burger, Flippers,’” Financial Times (London), April 15, 2005, p. 29; D. Thomas, “HR, Challenges...I’m Loving It,” Personnel Today, September 6, 2005, p. w11; J., Arlidge, “McJobs That All the Family Can Share,” Daily Telegraph (London),, January 26, 2006, p. 1., , 11/1/06 3:53:47 PM

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Staffing and Developing a Diverse Workforce \\ CHAPTER 12, , 313, , NOTES, , hiL30123_ch12_284-313.indd 313, , 11/1/06 3:53:47 PM

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13, LEARNING OBJECTIVES, , MOTIVATING REWARDING, EMPLOYEE PERFORMANCE, AND, , After Reading This Chapter You Should Be Able to:, 1, , Diagram and summarize the MARS model., , 6, , 2, , Describe four-drive theory and explain how these drives, influence motivation and behavior., , Discuss ways to measure employee performance more, accurately., , 7, , Describe the characteristics of effective goal setting and, feedback., , Summarize the equity theory model, including how people, try to reduce feelings of inequity., , 8, , Diagram the job characteristics model of job design., , 9, , Define empowerment and identify strategies to support, empowerment., , 3, 4, , Diagram the expectancy theory model and discuss its, practical implications for motivating employees., , 5, , Discuss the advantages and disadvantages of the four, reward objectives., , / / / / / / / / / / / / / / /, , MARS Model of Individual Behavior and, Results, Motivation, Ability, Role Perceptions, Situational Factors, Using MARS to Diagnose Employee Disengagement, Motivating Employees: A Three-Part Process, Part 1: Managing Motivation through Drives, and Needs, Maslow’s Needs Hierarchy Theory, Learned Needs Theory, Four-Drive Theory, Part 2: Managing Motivation through Goals,, Expectations, and Feedback, Goal Setting and Feedback, Expectancy Theory of Motivation, Part 3: Managing Motivation through Extrinsic, and Intrinsic Rewards, , hiL30123_ch13_314-345.indd 314, , Motivating Employees through Extrinsic, Rewards, Membership- and Seniority-Based Rewards, Job Status–Based Rewards, Competency-Based Rewards, Performance-Based Rewards, Nonfinancial Rewards, Improving Performance Appraisals, Rewarding Employees Equitably, Motivating Employees through Intrinsic, Rewards, Job Characteristics Model, Motivating Employees through Job Enrichment, Motivating Employees through Empowerment, In Conclusion: Why Does It Matter?, Management Challenges, Management Portfolio, Closing Case: Buddy’s Snack Company, , 11/1/06 4:48:22 PM

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Motivating and Rewarding Employee Performance \\ CHAPTER 13, , 315, , ACUITY developed a, highly motivated, workforce by, creating a more, supportive and, empowering work, environment and by, linking rewards to, performance., Courtesy of ACUITY., , / / / / / / / / / / / / / / / / / / / / /, , decade ago ACUITY (then known as Heritage Mutual), was not a company that inspired employees. Chimes, signaled the workday’s fixed starting and ending times., Breaks were also fixed and timed. Managers at the Sheboygan, Wisconsin, property and casualty insurer forbade, employees from having food or drinks in work areas and, discouraged them from placing photos or other personal, objects on their desks. Routine audits made sure that employees followed these regimented practices. Managers, didn’t have much freedom, either, because the CEO was, the sole architect of the company’s business strategy. The, reward system was equally discouraging. Supervisors, used a subjective system to rate employees, and those, results had little or no influence on the salaries employees, received. “It was a very rigid, unfriendly environment,”, , A, , hiL30123_ch13_314-345.indd 315, , says Ben Salzmann, who joined the company as a senior, manager during those dark days., By the time Salzmann was promoted to CEO, ACUITY, was in deep trouble. Its revenue per employee was well, below the industry average. Employee turnover, which, exceeded 25 percent in some years, cost the company, more than $10 million annually. But the greatest worry, was that ACUITY was losing 17 cents for every dollar it, received in insurance premiums. Some of this loss can be, recouped through investment returns, but anything more, than a 10-cent loss soon leads an insurance company to, bankruptcy. Salzmann and his new management team, had to figure out how to keep ACUITY in business. How, could they build a more engaged workforce that would, stay with the company and perform their jobs better?1, , 11/1/06 4:48:26 PM

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316, , employee, engagement, Employees’ emotional and, cognitive (rational), motivation, their perceived, ability to perform the job,, their clear understanding, of the organization’s vision, and their specific role in, that vision, and their belief, that they have been given, the resources to get the, job done., , PART 4 // Leading, , ACUITY’s problems a few years ago were serious, but most companies suffer to some degree, from a shor tfall of employee engagement. Employee engagement refers to emplo yees’, emotional and cognitive (rational) motivation, their perceived ability to perform the job, their, clear understanding of the organization’s vision and their specific role in that vision, and their, belief that the y have been given the resources to get the job done. Two separate consultant, reports estimate that less than a quar ter of American employees are highly engaged, approximately 60 percent are diseng aged (they are checked out from work—putting in the time but, not the energy or passion), and approximately a fifth are “actively disengaged,” meaning that, they act out their disconnection from work through disruptive behaviors.2, Employee engagement has become the catchphrase among managers around the w orld, because it encompasses the four main f actors that contribute to employee performance. British retailer Marks & Spencer claims that a 1 percent improvement in the engagement levels of, its workforce produces a 2.9 percent increase in sales per square foot. Verizon has estimated, that a 1 percent impro vement in its emplo yee engagement inde x produces a 0.5 percent, improvement in the telecommunications compan y’s customer satisf action ratings. Other, research estimates that a 5 percent impro vement in employee engagement at a 200-person, firm will, on average, reduce employee turnover costs by $240,000 and increase prof its by, $300,000. “True employee engagement is the k ey to a w orld-class operation,” says Mark, Baroni, manager of Owens Corning’s plant in Jackson, Tennessee.3, So how can managers increase employee engagement? By applying the practices that we’ll, describe in this chapter and in Chapter 14. Managers mak e a huge dif ference in how much, employees feel engaged or disengaged, as well as their resulting beha vior and performance., Effective managers figure out what motivates employees and align their tasks to those needs., They provide challenging y et fulf illing goals and follo w up with constr uctive, suppor tive, feedback. They align re wards and reco gnition with employee performance and ensure that, those rewards are allocated f airly. They also design jobs in w hich employees e xperience, fulfillment from the work itself., Ben Salzmann and other managers at ACUITY applied these strategies, with the result that, the insurer is no longer at risk of bankr uptcy. On the contrar y, its producti vity (revenue per, employee) has doub led, making it one of the most ef ficiently run companies in the industry., Rather than losing 17 cents for every dollar received in insurance premiums, ACUITY now earns, 10 cents before investment returns. Employee engagement levels have soared, while the turnover, rate has plummeted from more than 25 percent to about 2 percent annuall y. Today ACUITY is, not just a survivor; it is a role model as one of the best-performing insurance companies and one, of the best places to work in America. In this chapter we’ll find out how they accomplished this, feat. First we will examine the four factors that influence employee performance., , // MARS Model of Individual Behavior and Results, MARS model, A model that outlines the, four factors that influence, an employee’s voluntary, behavior and resulting, performance—motivation,, ability, role perceptions,, and situational factors., motivation, The forces within a person, that affect his or her direction,, intensity, and persistence, of voluntary behavior., , hiL30123_ch13_314-345.indd 316, , Management buzzwords come and go, but employee engagement will likely be around for, a while. Why? Because the def inition of employee engagement spells out the four f actors, that directl y influence an emplo yee’s v oluntary behavior and resulting perfor mance—, motivation, ability, role perceptions, and situational factors. These four key ingredients of, behavior and performance are diagrammed in the MARS model, shown in Figure 13.1 ., Notice that “MARS” is an acronym representing the four factors in the model’s name.4, , // MOTIVATION, Motivation represents the forces within a person that affect his or her direction, intensity,, and persistence of v oluntary behavior.5 Direction refers to the path along w hich people, engage their ef fort. This sense of direction of ef fort reflects the f act that people ha ve, choices about where they put their effort. In other words, motivation is goal-directed, not, random. People are motivated to arrive at work on time, finish a project a few hours early,, or aim for man y other targets. The second element of moti vation, called intensity, is the, amount of effort allocated to the goal. For example, two employees might be motivated to, finish their project a fe w hours early (direction), but only one of them puts for th enough, , 11/1/06 4:48:28 PM

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Motivating and Rewarding Employee Performance \\ CHAPTER 13, , 317, , F I G U R E 1 3 .1, MARS Model of, Individual Behavior and, Results, , Situational, factors, , Ability, , Motivation, (effort), • Direction, • Intensity, • Persistence, , Employee, behavior and, results, , Role, perceptions, , effort (intensity) to achieve this goal. In other words, intensity is how much you push yourself to complete the task., Finally, motivation involves varying levels of persistence—that is, continuing the effort for, a certain amount of time. Employees sustain their efforts until they reach their goals or give up, beforehand. To help remember these three elements of moti vation, consider the metaphor of, driving a car in w hich the thr ust of the engine is y our effort. Direction refers to w here you, steer the car, intensity is how hard you put your foot down on the gas pedal, and persistence is, how long you drive toward that destination., , // ABILITY, Ability consists of both the natural aptitudes and learned capabilities required to successfully, complete a task. Ability is an impor tant consideration when hiring job applicants because, performing required tasks demands the right kno wledge and skills. Ability is also an, important factor in employee development. By identifying skill def iciencies, managers can, determine which training is required to improve employee performance. In addition to hiring, qualified applicants and training employees so they learn the required abilities, managers can, improve performance by redesigning the job so employees are given only tasks within their, capabilities. AT&T’s customer ser vice operations in Dallas took this approach w hen they, realized that many employees were overwhelmed by the increasing variety of products (cable,, Internet, HDTV, home theater, and so on). “Our employees just said ‘Help! This is way too, complex—we’re trained on three things and we need help!’” recalls an AT&T executive. The, company’s solution was to redesign jobs so employees could begin with one area of product, knowledge, such as video cable, and then progress to a second knowledge area when the first, product is mastered.6, , ■ Person-job matching at, AT&T., , // ROLE PERCEPTIONS, Employees who feel engaged in their jobs not only have the necessary motivation and competencies to perfor m their work but also understand the specif ic tasks assigned to them,, the relative impor tance of those tasks, and the prefer red behaviors to accomplish those, tasks. In other words, they have clear role perceptions. The most basic way to improve these, , hiL30123_ch13_314-345.indd 317, , 11/1/06 4:48:28 PM

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318, , PART 4 // Leading, , role perceptions is for staff to receive a job description and, ongoing coaching. Employees also clarify their role perceptions as they work together over time and recei ve frequent, and meaningful performance feedback., , // SITUATIONAL FACTORS, , Washington Metro Derails with Missing Pieces of, MARS The Metropolitan Area Transit Authority in, Washington, D.C., has been plagued by a series of train, derailments. According to accident investigation reports,, one cause of some derailments was that personnel in the, track department failed to maintain lubricants on the tight, curves of track; apparently no one reminded them it was, part of their job to lubricate the tracks. A second cause of, the derailments was that track walkers failed to discover, unsafe track because of poor training, lack of time, and low, motivation., © Getty Images., , With high le vels of moti vation and ability, along with clear, role perceptions, people will perform well only if the situation, also suppor ts their task goals. Situational f actors include, conditions be yond the emplo yee’s immediate control that, constrain or f acilitate his or her beha vior and perfor mance.7, Some situational characteristics—such as consumer, preferences and economic conditions—originate from the, external en vironment and consequentl y are be yond the, employee’s and or ganization’s control. Ho wever, some, situational factors—such as time, people, budget, and physical, work facilities— are controlled by others in the organization., Corporate leaders need to carefull y arrange these conditions, so employees can achieve their performance potential., , // USING MARS TO DIAGNOSE, EMPLOYEE DISENGAGEMENT, , The MARS model is a useful diagnostic tool that should be, the starting point for most problems where employee behavior, and performance may be a factor. Consider the series of train, derailments (eight of them over 20 months) that have recently plagued the Metropolitan Area, Transit Authority (Metro) in Washington, D.C.8 One problem identif ied in the investigations, was that the tracks around the tight cur ves were not lubricated, so the wheels climbed up the, rail and popped off the track. The track department was ordered to lubricate tracks around these, bends a few times each year. Yet another derailment occurred less than a year later because key, managers in the track department retired or were transferred soon after the initial order, and no, one else remembered that it was now part of their job. In this situation employees in the track, department seem to be skilled and reasonably motivated, and they possessed the tools and time, to perform the work. However, they experienced poor role perceptions: They didn’t know that, lubricating the track was part of their job., A second problem related to Metro’s three dozen “track walkers”—employees who check the, entire track system for unsafe conditions twice each week. Internal audits revealed that many of, these people failed to report unsafe tracks because they lacked sufficient training or were covering too much track (eight miles e very day) to adequately investigate potential problem spots., Also, one audit suggested that man y track walkers were “apathetic”—perhaps not sur prising, given their routine of walking the same track every week and the fact that their work often goes, unnoticed. This information shows that many track walkers score poorly on three of the four, elements in the MARS model (and consequently would have low engagement scores). They lack, motivation and sufficient resources (too much track to inspect each day), and many of them lack, the ability to detect track prob lems. At least they know what job they are supposed to perfor m, (high role perceptions)., , // Motivating Employees: A Three-Part Process, Overall, the MARS model pro vides an e xcellent diagnostic tool to f igure out the primar y, causes of employee performance problems and the reasons w hy employees feel disengaged, from their work. But MARS is just the f irst step in the process. Managers need to dig deeper, , hiL30123_ch13_314-345.indd 318, , 11/1/06 4:48:29 PM

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Motivating and Rewarding Employee Performance \\ CHAPTER 13, , 319, , F I G U R E 1 3 .2, Three Parts to, Managing Employee, Motivation, , 1. Drives, and needs, , Motivation, (effort), • Direction, • Intensity, • Persistence, , Employee, behavior and, results, , 3. Extrinsic, and intrinsic, rewards, , 2. Goals,, expectations,, and feedback, , into each of the four factors. The previous chapter explained how managers can improve employee ability through selection and training. In the remainder of this chapter we outline ways, to manage employee motivation., How well do managers motivate employees? Not very well, according to a recent survey of, 13,000 employees. Only 40 percent of those polled belie ve that management actuall y motivates its workers.9 Motivating people is not as simple as dangling a financial carrot in front of, them (even though some companies seem to rely mainly on that motivation strategy). Instead, managers need to understand the dynamics of employee motivation as a process consisting of, the three critical par ts illustrated in Figure 13.2 . The f irst part involves understanding and, guiding employee drives and needs; in other words, figuring out what energizes people. The, second part is the process in w hich managers rel y on goals, e xpectations, and feedback to, establish the direction of employee effort. The third part of the motivation process is to design, both extrinsic and intrinsic re wards that fulf ill employee drives and needs, and reinforce, behavior that is consistent with organizational objectives., , // Part 1: Managing Motivation through, Drives and Needs, Ultimately motivation begins with the employee’s own drives and needs. Drives are instinctive, tendencies to seek par ticular goals or maintain inter nal stability. Drives are hardwired in the, brain (that is, everyone has the same drives), and they most likely exist to help the species survive.10 Needs are mostly conscious def iciencies that energize or trigger behaviors to satisfy, those needs. For the most par t we are aware of our needs, w hereas drives operate under the, surface to generate our emotions and sometimes direct behavior. Needs are produced from our, innate drives, but they are also strengthened or w eakened through lear ning and social forces, such as culture and childhood upbringing. We will find out how needs and drives relate to each, other after introducing the world’s most popular motivation theory: Maslow’s needs hierarchy., , // MASLOW’S NEEDS HIERARCHY THEORY, Maslow’s needs hierarchy theory is probably the one theory in this textbook that almost, everyone has heard about. De veloped by psychologist Abraham Maslow in the 1940s, the, model has been applied in almost e very human pursuit, from mark eting products to, rehabilitating prison inmates. This incredible popularity is rather odd considering that the, theory has little research suppor t. So w hy do w e introduce y ou to Maslo w’s theory? First,, elements of the model are w orth noting for moti vating employees. Second, most managers, , hiL30123_ch13_314-345.indd 319, , drives, Instinctive tendencies to, seek particular goals or, maintain internal stability., , needs, Mostly conscious, deficiencies that energize, or trigger behaviors to, satisfy those needs., Maslow’s needs, hierarchy theory, A motivation theory of, needs arranged in a, hierarchy, whereby people, are motivated to fulfill a, higher need as a lower one, becomes gratified., , 11/1/06 4:48:30 PM

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320, , PART 4 // Leading, , Selfactualization, , Challenging tasks,, freedom to try new ideas, , Esteem, , Belongingness, , Job status, recognition,, mastering the job, Human interaction, being, accepted as team member, Job security,, y employee, benefits, safe workplace, , Safety, Work hours, nourishment,, air quality,, y temperature, Physiological, , F I GU RE 13. 3, , self-actualization, The need for selffulfillment in reaching, one’s potential., , Maslow’s Needs Hierarchy, , you meet will mention Maslow’s model, so you need to be informed about the theory—and be, able to correct your colleagues’ misperceptions about it., Maslow’s needs hierarchy organizes dozens of dif ferent needs into f ive basic categories arranged in the hierarchy shown in Figure 13.3.11 Physiological needs (for food, air, water, shelter,, and the like) are at the bottom of the hierarchy. Next are safety needs—the need for a secure and, stable environment and the absence of pain, threat, or illness. Belongingnessincludes the need for, love, affection, and interaction with other people. Esteem includes self-esteem through personal, achievement as well as social esteem through recognition and respect from others. At the top of, the hierarchy is self-actualization, which represents the need for self-fulfillment—a sense that, one’s potential has been realized. In addition to these f ive, Maslow describes the need to kno w, and need for aesthetic beauty as two needs that do not fit within the hierarchy., Needs hierarchy theory says that people are motivated by several needs at the same time,, but the strongest source is the lo west unsatisfied need. As the person satisf ies a lower-level, need, the next higher need in the hierarch y becomes the primar y motivator and remains so, even if never satisfied. Physiological needs are initially the most impor tant, and people are, motivated to satisfy them f irst. As they become gratified, safety needs emerge as the strongest motivator. As safety needs are satisf ied, belongingness needs become most impor tant,, and so forth. The exception to this need fulf illment process is self-actualization; as people, experience self-actualization, the y desire more rather than less of this g ratification. Thus, while the bottom four groups are deficiency needs because they become activated when unfulfilled, self- actualization is known as a growth need because it continues to de velop even, when fulfilled., Limitations of Maslow’s Theory As we warned earlier, the accuracy of Maslow’s needs, hierarchy theory does not live up to its popularity.12 The seven categories of needs provide, a reasonably good list for most managers to remember , but studies ha ve found that the y, don’t capture all needs. The theory assumes that need priorities shift over months or years,, whereas the importance of a particular need likely changes more quickly with the situation., But the most serious limitation of Maslow’s needs hierarchy is its assumption that everyone, has the same needs hierarchy. Research has revealed that this is a false assumption. People, actually have different needs hierarchies tied to their personal v alues. Needs are conscious, , hiL30123_ch13_314-345.indd 320, , 11/1/06 4:48:30 PM

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Motivating and Rewarding Employee Performance \\ CHAPTER 13, , 321, , deficiencies produced from innate dri ves but strengthened, or weakened through learning and social forces such as culture and childhood upbringing. As a result, some people, place belongingness at the pinnacle; others vie w status as, the most important. Furthermore, studies have reported that, the general needs hierarch y in some cultures is dif ferent, from the needs hierarchy in other cultures.13, Management Implications of Maslow’s Theory Critical, parts of Maslow’s model may have failed the reality test, but we, can take away the following recommendations from Maslow’s, writing as well as subsequent research on employee needs:, 1. Employees have different needs at different times ., Different Needs Hierarchies? These UBS Warburg, Everyone has a hierarchy of needs, but each person’s, employees in Chicago seem to be enjoying each other’s, hierarchy is different. The practical implication is that, company, suggesting that they are experiencing some, people value different things at different times. One, fulfillment of their belongingness needs. But do they all, employee might prefer time off, whereas another might, have the same needs hierarchy? Maslow’s well-known, prefer more pay. Managers need to carefully understand, theory claims they do, but evidence now suggests that, the needs of their employees and adjust rewards and other, needs hierarchies vary from one person to the next due to, performance outcomes accordingly., their different value systems. Thus to understand what, 2.Employees have several interdependent needs, not just, motivates employees, managers need to understand the, one dominant need. One of Maslow’s most important, values that employees hold dearest., breakthroughs was to emphasize that needs should be, © Ed Wheeler Photography., understood holistically, not separately. Managers must, therefore remember that employees are motivated by a, cluster of needs, not just one need. Thus managers must consider the whole person rather, than simplistically label each person in terms of one need (for example, Julie wants a, social environment, Liam is the status climber)., 3.At some point, most employees want to achieve their full potential (self-actualization)., Throughout his career, Maslow emphasized that people are naturally motivated to reach, their potential (self-actualization), and that organizations and societies need to be, structured to help people continue and develop this motivation.14 The recommendation, here is that managers must strive for Maslow’s vision of enlightened management because, the strongest and most sustained motivation tends to occur when employees try to fulfill, their need for self-actualization., 4.Employee needs are influenced by values and norms. Maslow was one of the first, motivation scholars to recognize that higher-order needs are shaped to some extent by the, norms and values of the team, organization, and society in which the individual lives., Consequently, managers can adjust employee motivation and effort by reshaping these, norms and values. For example, by encouraging more performance-oriented team norms,, managers can strengthen team members’ self-actualization needs., These principles guided some of the steps tak en by Ben Salzmann and his management, team to transform ACUITY into a high-performance organization. The opening story to this, chapter described an organization that was oppressive. Salzmann’s team removed the chimes,, introduced job sharing and fle xible work schedules, allowed food and drinks, encouraged a, casual dress code, established summer hours (Friday afternoons off), installed a fitness facility,, beefed up the company pension plan, added nursing rooms for mothers, brought in occasional, lunchtime enter tainment (including a Buddy Holl y pla y), and impro ved communication, through town hall meetings with all 800 staff members. They also created a work environment, that allowed people to self-actualize b y delegating more responsibility. For instance, several, committees representing emplo yees throughout the compan y reviewed and recommended, ways to improve the insurer. Maslow probably would have said that ACUITY has become a, model of enlightened management., , hiL30123_ch13_314-345.indd 321, , 11/1/06 4:48:31 PM

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322, , PART 4 // Leading, , // LEARNED NEEDS THEORY, Several decades ago psycholo gist David McClelland expanded on Maslow’s idea that need, strength is reinforced or weakened by personal values and social influences ( culture, norms,, and so on). Specifically, McClelland suggested that need strength is reinforced through childhood learning, parental styles, and social nor ms. He paid attention to three lear ned needs:, achievement, power, and affiliation.15, • Need for achievement (nAch): People with a strong need for achievement (nAch) want to, accomplish reasonably challenging goals through their own efforts. They prefer working, alone rather than in teams, and they choose tasks with a moderate degree of risk (neither, too easy nor impossible to complete). High nAch people also desire unambiguous feedback and recognition for their success. Successful entrepreneurs tend to have a high nAch., • Need for affiliation (nAff): Need for affiliation (nAff) refers to a desire to seek approval, from others, conform to their wishes and expectations, and avoid conflict and confrontation. People with a strong nAff try to project a favorable image of themselves and tend to, actively support others and try to smooth out workplace conflicts. Managers must have a, relatively low need for affiliation so that their choices and actions are not biased by a, personal need for approval., • Need for power (nPow): People with a high need for power (nPow) want to exercise control, over others and are concerned about maintaining their leadership positions. Those who, enjoy their power to advance personal interests have personalized power. Others mainly, have a high need for socialized power because they desire power as a means to help others., Effective leaders have a high need for socialized rather than personalized power., McClelland developed training programs that taught participants to increase their need for, achievement. Trainees practiced writing achie vement-oriented stories and eng aged in, achievement-oriented behaviors in business games. They also completed a detailed achievement plan for the ne xt two y ears and for med a reference, group with other trainees to maintain their ne, wfound, achievement motivation style.16 Some companies also create, a workplace environment that tries to strengthen the need for, achievement. Consider General Electric (GE), the conglomerate that operates everything from aircraft engine manufacturing to television programming. Under CEO Jack Welch, (and continuing under cur rent CEO Jef frey Immelt), GE, managers ha ve been re warded for f act-based bottom-line, numbers. They are g rilled on w eekly and monthl y results., Routinely the bottom 10 percent of managers are culled ,, making room for more people w ho strive for better perfor mance results.17, McClelland’s learned needs theory repeats the point that a, person’s needs can be strengthened or w eakened with experience (reinforcement) and social influences. The lesson here is, that managers can strengthen or w eaken employees’ need for, achievement, power, and affiliation, such as by supporting an, achievement-oriented culture, re warding those w ho demonGE: The Land of Achievement For more than two, strate achievement orientation, and hiring co workers who dedecades General Electric has been a company that fuels the, veloped a strong achievement orientation in their upbringing., need for achievement. The company rigorously monitors, manager performance weekly and monthly with fact-based, // FOUR-DRIVE THEORY, bottom-line numbers. Praise and financial rewards are, heaped on the top performers, whereas those in the bottom, Motivation experts have mostly abandoned needs hierarchy, 10 percent are shown the door if they don’t improve., theories. However, due to recent breakthrough discoveries in, brain research, they are paying close attention to the role of, © AP Photo/Kathy Willens, innate dri ves and ho w those dri ves shape human needs, , hiL30123_ch13_314-345.indd 322, , 11/10/06 4:41:32 AM

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Motivating and Rewarding Employee Performance \\ CHAPTER 13, , through social influences. Four-drive theory, which was recently introduced by Harvard, Business School professors Paul Lawrence and Nitin Nohria, captures many of these recent, discoveries.18 Earlier we said that drives are instinctive or innate tendencies to seek particular, goals or maintain internal stability. Based on their review of existing research, Lawrence and, Nohria identified four drives that seem to apply to everyone:, • Drive to acquire: This is the drive to seek, take, control, and retain objects and personal, experiences. The drive to acquire extends beyond basic food and water; it includes the need, for relative status and recognition in society. Thus it is the foundation of competition and, the basis of our need for esteem., • Drive to bond: This is the drive to form social relationships and develop mutual caring, commitments with others. Research indicates that people invest considerable time and, effort in forming and maintaining relationships without any special circumstances or, ulterior motives.19 The drive to bond motivates people to cooperate and consequently is a, fundamental ingredient in the success of organizations and the development of societies., • Drive to learn: This is the drive to satisfy our curiosity, to know and understand ourselves, and the environment around us. When observing something that is inconsistent with or, beyond our current knowledge, we experience a tension that motivates us to close that, information gap. The drive to learn is related to the self-actualization need described earlier., • Drive to defend: This drive creates a “fight-or-flight” response in the face of personal, danger. The drive to defend goes beyond protecting our physical self. It includes defending our relationships, our acquisitions, and our belief systems. The drive to defend is, always reactive—it is triggered by threat. In contrast, the other three drives are always, proactive—we actively seek to improve our acquisitions, relationships, and knowledge., , 323, , four-drive theory, A motivation theory based, on the innate drives to, acquire, bond, learn, and, defend that incorporates, both emotions and, rationality., , All four drives are fixed in our brains through evolution. They are also independent of each, other: One drive is not inherently inferior or superior to another drive. Four-drive theory also, states that these four drives are a complete set—no other innate dri ves are excluded from the, model. Another key feature is that all of the dri ves except the drive to defend are proacti ve,, meaning that we regularly try to fulf ill them. Thus any notion that a drive is fulf illed is temporary at best., How do these four drives motivate us? Basically, our brain uses these four drives to quickly, evaluate and assign emotions to infor mation received through our senses. Suppose y ou learn, that your boss has been promoted and an outsider has been hired to fill the vacant position. This, sort of e vent likely triggers both the emotions of w orry and curiosity. The drive to defend, generates your worry about how the new manager will affect your comfortable work routine,, whereas the drive to learn generates your curiosity about what the new boss looks and acts like., The key point here is that the four innate drives determine which emotions are triggered in each, situation., Four-drive theor y states that neither dri ves nor the emotions the y produce instincti vely, determine our motivation or behavior. Instead, as Figure 13.4 illustrates, we use our mental, skill set—our logic and intelligence—to consciousl y decide how to sor t out and act on the, emotional signals generated through our dri ves. This mental skill set relies on our social, norms, personal values, and past experience to decide the best course of action.20 For instance,, you might be curious about y our new boss, but social nor ms prevent you from being too, snoopy. You might also be w orried about changes the ne w boss will create, and y our past, experience motivates you to take specific steps to address that threat., Where do individual needs fit into this model? Need strength is produced from our drives, in the context of our personal values, social norms, and past experience. A person’s need for, status (esteem) is based on the dri ve to acquire, but the priority that people gi ve to status, depends on their v alues, as w ell as the immediate sur rounding culture and nor ms. Some, people have a strong need for status because the y were raised to value status, and because, they currently work in organizations that reward those with higher status. In other w ords,, the strongest needs are deter mined from a combination of the emotions generated and the, person’s values, social norms, and past experience., , hiL30123_ch13_314-345.indd 323, , 11/1/06 4:48:32 PM

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324, , PART 4 // Leading, , FIG UR E 1 3 .4, Four-Drive Theory of, Motivation, Source: Based on information, in P.R. Lawrence and N., Nohria, Driven: How Human, Nature Shapes Our Choices, (San Francisco: Jossey-Bass,, 2002)., , Drive to, acquire, , Social, norms, , Personal, values, , Past, experience, , Drive to, bond, Mental skill set, resolves competing, drive demands, , Goal-directed, choice and effort, , Drive to, learn, , Drive to, defend, , The mental skill set not onl y prioritizes needs but also translates and channels the, experienced emotions into effort and behavior. People have unique values, experiences, and, awareness of social nor ms, which shape how they react to their dri ve-based emotions. One, person might be very forward when curious or defensive, whereas another individual experiencing the same emotions might be more circumspect and diplomatic. Both emplo yees have, the same drives and, in this example, experience similar emotions and needs. Yet they are motivated to act differently based on their unique values, experiences, and norm expectations., Management Implications of Four-Drive Theory Lawrence and Nohria offer managers, the following advice to apply four-drive theory: Ensure that individual jobs and workplaces, provide a balanced opportunity to fulf ill the drives to acquir e, bond, learn, and def end 21, ., There are really two key recommendations here. The first is that everyone in the workplace, needs to regularly fulf ill all four dri ves, so companies with highl y motivated employees, create a workplace where all four drives can be nourished. These f irms provide sufficient, rewards, learning opportunities, social interaction, and so forth for all employees. ACUITY, (the Sheboygan, Wisconsin, insurance f irm described at the be ginning of this chapter), developed a more motivated workforce by applying this first recommendation. Specifically,, it increased opportunities for social interaction (drive to bond), expanded training programs, and lear ning oppor tunities through emplo yee involvement (drive to lear n), introduced a, more performance-oriented reward system (drive to acquire), and minimized the pre vious, risks of layoffs (drive to defend) through its increased profitability and growth., The second recommendation from four-drive theory is that these four drives must be kept in, “balance”; that is, organizations should avoid too much or too little oppor tunity to fulf ill one, drive at the e xpense of others. The reason for this advice is that the four dri ves balance each, other. An organization that energizes the drive to acquire (such as through a highly competitive, workplace) without the dri ve to bond ma y eventually suffer from organizational politics and, dysfunctional conflict. Change and novelty in the workplace will aid the drive to learn, but too, much will trigger the drive to defend to such an e xtent that employees become territorial and, resistant to change. Creating a workplace that supports the drive to bond can, at extreme levels,, undermine the diversity and constructive debate required for effective decision making., Sony’s recent woes seem to illustrate the challenges that occur w hen all four drives are, not in balance. The Japanese company, which led the electronics world a decade ago with, its Walkman and Playstation innovations, is now struggling to keep up with competitors., One reason for the cur rent dif ficulties is Son y’s h ypercompetitive culture in w hich, engineers are encouraged to outdo each other rather than w ork together. This competitive, culture feeds employees’ drive to acquire, but the lack of balance with the dri ve to bond, , hiL30123_ch13_314-345.indd 324, , 11/1/06 4:48:32 PM

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Motivating and Rewarding Employee Performance \\ CHAPTER 13, , 325, , leads to infighting and information hoarding. For instance,, competitive rivalries within Son y delayed the company’s, launch of a digital music player and online music service to, compete against Apple’s iPod and iTunes music Web site.22, Overall, four-drive theor y offers potentially valuable understanding of emplo yee moti vation as w ell as w ays to, maximize that motivation., , // Part 2: Managing, Motivation through Goals,, Expectations, and, Feedback, Four-drive theory, learned needs theor y, and Maslow’s writing collectively help managers to understand and adjust the, intensity and persistence of employee effort. People are motivated to a higher de gree and a longer time w hen managers, can understand and align emplo yee needs and underl ying, drives with or ganizational objectives. But dri ves and needs, represent just the f irst piece of the moti vation puzzle. The, second part involves directing that ef fort through goals, e xpectations, and feedback. This aspect of moti vation is best, understood through goal setting and feedback as w ell as expectancy theory., , Sony’s Internal Battles Sony led the electronics world a, decade ago with its Walkman and Playstation innovations,, but the firm is now struggling to keep up with competitors., One reason seems to be Sony’s hypercompetitive culture in, which engineers are encouraged to outdo each other rather, than work together. This competitive culture feeds, employees’ drive to acquire, but the lack of balance with the, drive to bond leads to infighting and information hoarding., © AP Photo/Shizuo Kambayashi., , // GOAL SETTING AND FEEDBACK, One important way that ACUITY, the insurance company described at the be ginning of this, chapter, dramatically improved employee motivation was by introducing a new performance, appraisal system in which employees and their supervisor mutually determine specific, achievable goals for the next six months or year. In addition, under CEO Ben Salzmann’s leadership,, ACUITY has become highl y focused on measurab le results. The company closely watches, and sets benchmark goals for the all-impor tant combined ratio (claims and e xpenses against, premiums earned), percentage of sur plus growth, premium g rowth rate, employee turnover, rate, average premium per agency, and so on., ACUITY has improved employee motivation through goal setting. Goal setting is the, process of motivating employees and clarifying their role perceptions b y establishing performance objectives. A goal is a desired future state that an or ganization or person attempts to, realize. Goal setting impro ves role perceptions and consequentl y clarif ies the direction of, employee effort. When conducted effectively, goal setting can also increase the intensity and, persistence of effort. It achieves this higher level of motivation through employee buy-in and, by raising the level of personal goal expectations., Consider recent e vents at Speedera Netw orks (now merged with Akamai). CEO Ajit, Gupta announced to all 120 emplo yees in Santa Clara, Califor nia, and Bangalore, India,, that “if we pull together to achieve our business targets [for the next quarter], then we’ll all, be on a beach in May.” Speedera would cover employee expenses as well as 50 percent of, a spouse’s or family member’s expenses for four days at a Hawaiian resort. Everyone at the, Internet applications compan y w orked fe verishly to ward the compan y’s goals, w hich, included a hefty revenue growth target. Their motivation was further fueled with constant, reminders of the Hawaiian trip. “The offices were transformed to look like tropical islands,”, says Gupta. Staff also received postcards and brochures with tempting images of the resort, and its attractions. Much to e veryone’s delight the compan y achie ved its goals; and, Speedera staff from both countries had a memorable bonding experience on the Hawaiian, beaches.23, , hiL30123_ch13_314-345.indd 325, , goal setting, The process of motivating, employees and clarifying, their role perceptions by, establishing performance, objectives., , 11/1/06 4:48:33 PM

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326, , PART 4 // Leading, , Goal setting pro vides the critical linkage betw een the, organization’s strate gic plans and indi vidual moti vation., Chapter5 described ho w strate gic plans are translated into, more precise action plans, w hich include subgoals, responsibilities, time lines, and budgets. These plans are formulated all, the way down to each w ork unit. Managers then translate the, units’ action plans into specif ic tar gets for indi viduals and, teams to achieve., Translating action plans into goals for individuals and teams, involves more than telling them to “do y our best.”24 As we described in Chapter 5, goals must be precise and measurable ;, that is, they should specify levels of change over a specific and, relatively short time frame, such as “reduce scrap rate by 7 percent over the next six months.” Notice that precise goals specify, a time period in which they should be achieved. Second, managBeach Goals Speedera Networks employees moved, ers should limit the number of goals for each employee or team, into high gear when CEO Ajit Gupta announced to all, to the most important objectives . Third, goals need to be chal120 employees in Santa Clara, California, and Bangalore,, lenging, yet r ealistic. This can be a dif ficult balancing act., India, that “if we pull together to achieve our business, Challenging goals motivate people to put for th more effort and, targets [for the next quarter], then we’ll all be on a, sometimes for a longer time. They also fulf ill a person’s sense, beach in May.” Their motivation was fueled with, of achie vement w hen the goals are achie ved. Yet employees, constant reminders of the Hawaiian trip., must be committed to the goals. 25 People are less motivated to, Courtesy of Akamai., attempt goals that are too tough., Finally, goals have little value unless employees receive associated feedback about the consequences of their behavior.26 Feedback lets people know whether, they have achieved a goal or are properly directing effort toward it. Feedback is also an essential, ingredient in motivation because self-actualization and the need for achie vement depend on, knowledge of goal attainment., As with effective goals, feedback works best when it is precise and measurable. It should, also be timely—available as soon as possible after the behavior or results so employees see a, clear association betw een their actions and the consequences. F eedback should also be, sufficiently frequent. New employees require more frequent feedback to aid their lear ning., Some jobs (lik e those of e xecutives) necessarily have less frequent feedback because the, consequences of their actions tak e longer to materialize than those of, sa y, a cashier’s job., Finally, feedback should be credible, such as from people with no v ested interest or from, reliable monitoring devices., Some companies ha ve successfully improved the feedback process through e xecutive, ■ Executive dashboards at, dashboards—real-time data sho wn on an emplo yee’s computer screen. Almost half of, Microsoft and Verizon., Microsoft employees use a dashboard to monitor project deadlines, sales, and other metrics., Microsoft CEO Steve Ballmer regularly reviews dashboard results in one-on-one meetings, with his seven business leaders. “Ev ery time I go to see Ballmer , it’s an expectation that I, bring my dashboard with me,” says Jeff Raikes, who heads the Microsoft Of fice division., Verizon CIO Sha ygan Kheradpir also appreciates the instant feedback pro vided b y his, dashboard, which is a huge plasma screen on the w all of his of fice. Called the “W all of, Shaygan,” the screen displays the status of more than 100 netw ork systems around the, country in green, yellow, or red lights. Another part of the screen shows sales, voice portal, volumes, call center results, and other business metrics.27, Goal setting represents one of the “tried and tr ue” management theories. 28 In partnership, with goal setting, feedback also has an excellent reputation for improving employee motivation, and performance. At the same time managers sometimes ha ve difficulty putting goal setting, into practice.29 One concern is that goal setting tends to focus emplo yees on a nar row subset, of measurable perfor mance indicators w hile ignoring aspects of job perfor mance that are, difficult to measure. A second prob lem is that w hen goals are tied to f inancial rewards,, employees are often motivated to set easy goals (while making the boss think they are difficult), so they have a higher probability of receiving the bonus or pay increase., , hiL30123_ch13_314-345.indd 326, , 11/1/06 4:48:34 PM

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Motivating and Rewarding Employee Performance \\ CHAPTER 13, , 327, , // EXPECTANCY THEORY OF MOTIVATION, Although goal setting and feedback are po werful tools to moti vate employees, they don’t, really explain why employees are motivated. The expectancy theory of motivation provides, the missing explanation. Expectancy theory is based on the idea that w ork effort is directed, toward behaviors that people believe will lead to desired outcomes.30 The theory also predicts, the intensity of the person’s effort. As illustrated in Figure 13.5 , an individual’s effort level, depends on three factors: effort-to-performance (E-to-P) expectancy, performance-to-outcome, (P-to-O) expectancy, and outcome v alences (V). Employee motivation is influenced b y all, three components of the e xpectancy theory model. If an y component w eakens, motivation, weakens., , expectancy theory, A motivation theory based, on the idea that work, effort is directed toward, behaviors that people, believe will lead to desired, outcomes., , • E-to-P expectancy: This refers to the individual’s perception that his or her effort will, result in a particular level of performance. In some situations employees may believe that, they can unquestionably accomplish a task (a probability of 1.0). In other situations they, expect that even their highest level of effort will not result in the desired performance, level (a probability of 0.0). In most cases the E-to-P expectancy falls somewhere between, these two extremes., • P-to-O expectancy: This is the perceived probability that a specific behavior or performance level will lead to particular outcomes. In extreme cases employees may believe, that accomplishing a particular task (performance) will definitely result in a particular, outcome (a probability of 1.0), or they may believe that this outcome will have no effect, on successful performance (a probability of 0.0). More often the P-to-O expectancy falls, somewhere between these two extremes., • Outcome valences: A valence is the anticipated satisfaction or dissatisfaction that an, individual feels toward an outcome. It ranges from negative to positive. (The actual range, doesn’t matter; it may be from –1 to +1 or from –100 to +100.) An outcome valence, represents a person’s anticipated satisfaction with the outcome.31 Outcomes have a, positive valence when they are consistent with our values and satisfy our needs; they have, a negative valence when they oppose our values and inhibit need fulfillment., To understand ho w expectancy theor y explains the direction and intensity of emplo yee, effort, consider the following situation at ACUITY, the insurance f irm described throughout, , E-to-P expectancy, (probability that, effort will result in, a specific level, of performance), , P-to-O expectancy, (probability that, performance will, result in specific, outcomes), , Outcome valence, (the outcome’s, positive or negative, value to the, employee), , Outcome 1,  or , , Effort, , Performance, , Outcome 2,  or , Outcome 3,  or , , F I G U R E 1 3 .5, Expectancy Theory of, Motivation, , hiL30123_ch13_314-345.indd 327, , 11/1/06 4:48:35 PM

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328, , PART 4 // Leading, , this chapter. Until recentl y ACUITY distributed sick lea ve credits for each month that an, employee showed up for work but not during months w hen the person took sick lea ve. This, program was supposed to moti vate people to sho w up for w ork and to tak e sick leave only, when they were sick, but that’s not what happened. Instead many people showed up for work, when they were sick; others took lengthy absences in the same month.32, The problem with ACUITY’s old sick leave plan was that the P-to-O expectancy directed, people to a void sick lea ve at some times and to tak e as much as possib le at other times., Suppose it’s the last day of the month and you wake up with the flu, complete with fever and, nausea. You should stay at home to reco ver and avoid making others sick, but being absent, from work today would cost you an entire month of sick leave credit. And given the probability, that the illness will last a few more days, you will lose next month’s sick leave credit as well., Your solution? Some folks would try to work today to receive this month’s sick leave credit. If, the illness is just as bad tomorrow, they might take several days off (even when well enough to, work) because they have already lost that month’s credits anyway! How did ACUITY resolve, this problem? It no w pays employees when they are sick, tr usting them not to abuse this, privilege., Management Implications of Expectancy Theory One of the appealing characteristics of, expectancy theory is that it identifies several ways in which managers can increase employee, motivation through each of the model’s three components (see Figure 13.6).33, E-to-P expectancies are influenced by the individual’s belief that he or she can successfully complete a task. Some companies increase this can-do attitude b y assuring employees, that they have the necessary competencies, clear role perceptions, and necessary resources to, reach the desired levels of performance. Matching employees to jobs based on their abilities, and clearly communicating the tasks required are an important part of this process. Similarly,, E-to-P expectancies are lear ned, so behavioral modeling and suppor tive feedback (positive, reinforcement) typically strengthen employee self-confidence.34, , Expectancy Theory, Component, , Objective, , Management Implications, , E→P expectancies, , Increase the belief that employees, are capable of performing the job, successfully., , P→O expectancies, , Increase the belief that good, performance will result in certain, (valued) outcomes., , Valences of outcomes, , Increase the expected value of, outcomes resulting from desired, performance., , • Select people with the required skills and, knowledge., • Provide required training and clarify job, requirements., • Provide sufficient time and resources., • Assign simpler or fewer tasks until employees, can master them., • Provide examples of similar employees who, have successfully performed the task., • Provide coaching to employees who lack selfconfidence., • Measure job performance accurately., • Clearly explain the outcomes that will result, from successful performance., • Describe how the employee’s rewards were, based on past performance., • Provide examples of other employees whose, good performance has resulted in higher, rewards., • Distribute rewards that employees value., • Individualize rewards., , FIG UR E 1 3 .6, , hiL30123_ch13_314-345.indd 328, , Management Implications of Expectancy Theory, , 11/1/06 4:48:36 PM

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Motivating and Rewarding Employee Performance \\ CHAPTER 13, , 329, , The most obvious ways to improve P-to-O expectancies are to measure employee performance accurately and distribute more v alued rewards to those with higher job perfor mance., ACUITY, described at the be ginning of this chapter , followed this advice b y introducing a, more objective performance evaluation system and more closely linking rewards to individual, and team performance. P-to-O expectancies are perceptions, so employees should believe that, higher performance will result in higher rewards. Having a performance-based reward system, is important, but this f act must be communicated. When rewards are distributed, employees, should understand how their rewards have been based on past perfor mance. More generally,, companies need to re gularly communicate the e xistence of a perfor mance-based re ward, system through examples, anecdotes, and public ceremonies., Finally, perfor mance outcomes influence w ork ef fort onl y w hen the y are v alued b y, employees. To improve the valences of outcomes, managers need to individualize rewards so, employees who perform well are offered a choice., , // Part 3: Managing Motivation through, Extrinsic and Intrinsic Rewards, The third part of the motivation puzzle considers what employees receive or experience from, their effort and accomplishments. These outcomes can generall y be divided into two types:, extrinsic rewards and intrinsic re wards. An extrinsic reward is an ything received from, another person that the recipient v alues and is contingent on his or her beha vior or results., Extrinsic rewards include pa ychecks, performance bonuses, praise, or some other for m of, recognition. Extrinsic rewards don’t occur naturally with the behavior or result; instead someone introduces these rewards. An intrinsic reward, on the other hand , is a positi ve emotional experience resulting directly and naturall y from the indi vidual’s behavior or results., This would include the enjoyment of learning a new task, a feeling of accomplishment from, performing a job well, and a sense of flow or engagement when work is performed smoothly., Notice that these emotions arise naturally from performing the task., , // Motivating Employees through, Extrinsic Rewards, Extrinsic rewards come in many forms, but pay and benef its are clearly at the top of the list., In fact, pay and benefits are ranked as two of the most important features in the employment, relationship.35 The reason for this impor tance is that a pa ycheck is more than a for m of, exchange in the employment relationship. It also conveys status, accomplishment, self-esteem,, and power. Financial rewards serve four specif ic objectives: membership and seniority, job, status, competencies, and task performance., , extrinsic reward, Anything received from, another person that the, recipient values and is, contingent on his or her, behavior or results., intrinsic reward, A positive emotional, experience resulting, directly and naturally from, the individual’s behavior or, results., , // MEMBERSHIP- AND SENIORITY-BASED, REWARDS, Membership- and seniority-based re wards (sometimes called “pa y for pulse”) represent the, largest part of most paychecks. Some employee benefits, such as free or discounted meals in, the company cafeteria, remain the same for everyone, whereas others increase with seniority., Many Asian companies distribute a “13th month” bonus that e very employee e xpects to, receive each y ear. These membership- and seniority-based re wards potentially attract job, applicants (particularly those who desire predictable income) and reduce tur nover. However,, they do not directl y moti vate job perfor mance; on the contrar y, the y discourage poor, performers from seeking work better suited to their abilities. Instead the good performers are, lured to better -paying jobs. Some of these re wards are also “golden handcuf fs” that can, undermine job performance because employees resent being held captive by high pay in a job, they dislike., , hiL30123_ch13_314-345.indd 329, , 11/1/06 4:48:36 PM

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330, , PART 4 // Leading, , Japan’s Age and Baby, Bonus Since World War II, employees in most large Japanese, companies have received pay rates, and increases determined entirely by, their age or seniority, usually topping, out at around age 45. Tough times in, the 1990s forced many Japanese, firms to introduce performance-based, pay systems in which annual pay, increases varied with the employee’s, contribution, but some companies, have not been happy with the results., Concerned that employees were, becoming too stressed over their, variable pay rates each year, Tokai, Rubber Industries Ltd. recently, reintroduced an age-based bonus pay, system. “Even during that period, [when they can’t perform as well as, expected], we raise salaries, according to their age,” says Tokai, Rubber president Akira Fujii. Some, Japanese firms also pay employees a, large bonus for each child born in, their families. For example,, employees at Daiwa House Industry, Co. in Osaka receive U.S. $9,000, every time they have a child.38, © Getty Images., , ■ Skill-based pay at Marley, Cooling Tower Co., , piece rate systems, Systems that reward, employees based on the, number of units produced., , hiL30123_ch13_314-345.indd 330, , // JOB STATUS–BASED REWARDS, Almost every organization rewards employees to some extent based on the status, of the jobs the y occupy. Job evaluation is commonl y used to rate the w orth or, status of each job, with higher pa y rates going to jobs that require more skill and, effort, have more responsibility , and ha ve more dif ficult working conditions. 36, Organizations that don’t rely on job evaluation indirectly reward job status based, on surveys estimating what other companies pay specific jobs. A senior engineer, typically earns more than, say, a purchasing clerk because the w ork performed by, the engineer is worth more to the organization. It has more value (calculated by a, job evaluation system or pay survey), so employees in that job receive more statusbased re wards in the or ganization. People in some higher -status jobs are also, rewarded with larger offices, company-paid vehicles, and exclusive dining rooms., Job status–based rewards create a re ward system that employees believe is f air., They also motivate employees to compete for promotions. Ho wever, when companies are trying to be more cost-efficient and responsive to the external environment,, job status–based re wards potentially do the opposite b y encouraging bureaucratic, hierarchy. These rewards also reinforce a status mentality, whereas Generation-X and, Generation-Y employees expect a more egalitarian workplace. Furthermore, statusbased pay potentially motivates employees to compete with each other and to raise, the value of their own jobs by exaggerating job duties and hoarding resources.37, , // COMPETENCY-BASED REWARDS, , Many f irms have shifted from job status–based re wards to competenc y reward, systems. The National Health Ser vice (NHS) in the United Kingdom is a recent, example. Every job in the NHS is now described in terms of its required skills and, knowledge. Employees receive annual pa y increases through a wide pa y band, (range from lowest to highest pa y for that job) based on ho w well they meet the, job’s skill and kno wledge requirements. 39 Skill-based pa y is a v ariation of, competency-based rewards in w hich employees are re warded for the number of, skill modules mastered and, consequently, on the number of jobs they can perform., For instance, Marle y Cooling Tower Co. in Olathe, Kansas, has about 30 skill, modules (skills required for specific jobs) in its production operations. Employees, earn the base pay rate for being able to work in one job, but they earn more as they, learn other skill modules. Two employees performing the same job would receive, different pay rates based on ho w many skill modules the y have mastered. Those, who master all 30 modules earn almost three times the base rate because they can, perform any job in the production area.40, Competency-based re wards impro ve w orkforce fle xibility b y moti vating, employees to learn a variety of skills and thereby perform a variety of jobs. Product, or ser vice quality tends to impro ve because emplo yees with multiple skills are, more lik ely to understand the w ork process and kno w ho w to impro ve it., Competency-based rewards also reward employees who continuously learn skills, that will keep them employed. One potential problem is that measuring competencies can be, subjective, particularly when described as personality traits or personal v alues. Skill-based, pay systems measure specif ic skills, so the y are usually more objective. However, they are, expensive because employees spend more time learning new tasks.41, , // PERFORMANCE-BASED REWARDS, Performance-based rewards have existed since Babylonian days in the 20th centur y BC, but, their popularity has increased dramatically over the past couple of decades.42 Real estate agents, and other salespeople typicall y ear n commissions, in w hich their pa y increases with sales, volume. Piece rate systems reward employees based on the number of units produced. For, , 11/1/06 4:48:36 PM

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hiL30123_ch13.indd Page 331 5/17/07 10:15:32 PM epg, , /Volumes/108/MHIA051/hiLch13, , Motivating and Rewarding Employee Performance \\ CHAPTER 13, , example, Eurofresh crop workers in Arizona get paid by the volume of tomatoes picked; lawn, care employees at The Lawn Mowgul in Dallas, Texas, earn a form of piece rate (called “piecemeal”) based on the number of lawns cut.43 Many employees receive pay increases or bonuses, based on a performance appraisal. Performance appraisal, which we describe in more detail later, is a systematic process of evaluating an employee’s performance., Increasingly, employees are f inding larger par ts of their total pa ychecks deter mined by, team more than individual results. Forward Media, an enter prise software consulting f irm in, Sydney, Australia, is an e xample. “We have seen indi vidual incentive programs fail,” says, James Ward, who cofounded the company with his wife and employs a few dozen people. “We, set a group revenue target for each team, then give people a bonus according to the profit their, team achieves.”44, Rather than calculating bonuses from team sales or prof it, gainsharing plans award, bonuses based on cost sa vings and productivity improvement. John Deere s witched to gainsharing a few years ago because its previous individual incentive plan discouraged cooperation, and coordination even though jobs w ere highly interdependent. Under the gainsharing plan,, each team at the f arm machiner y manuf acturer has a benchmark w ork-hour standard to, assemble a part, such as an engine or combine attachment. If the team assembles the part in less, time, it receives some of the cost savings as a bonus on top of regular wages.45 As John Deere, has learned, gainsharing plans tend to impro ve team dynamics, kno wledge sharing, and pa y, satisfaction. They also create a reasonably strong link between effort and performance because, much of the cost reduction and labor efficiency is within the team’s control., , 331, , performance, appraisal, A systematic process of, evaluating an employee’s, performance., ■, , Gainsharing at John Deere., gainsharing plan, A reward system in which, team members earn bonuses, for reducing costs and, increasing labor efficiency in, their work process., , profit-sharing plan, A reward system that pays, bonuses to employees, based on the previous, year’s level of corporate, profits., , Organizational Rewards Along with individual and team-based rewards, many firms rely, on or ganizational-level rewards to moti vate employees. Profit-sharing plans calculate, bonuses from the previous year’s level of corporate profits. ISG employees in Indiana receive, checks for each quarter that the steelmaker (part of Mittel Group) ear ns a prof it. The profitsharing plan is restricted to union members; but ISG’s managers receive stock options that, give them the right to purchase stock from the compan y at a future date at a predeter mined, stock options, price up to a fixed expiration date. If the stock rises above the predetermined price, employees, A reward system that gives, can buy the stock and reap the windf all. One senior ISG manager had an option to b uy stock, employees the right to, at $2.76 per share. The manager exercised some of that option w hen the stock rose to $30,, 46, purchase company stock at, resulting in a hefty bonus that year., a future date at a, Employee stock ownership plans (ESOPs) encourage employees to buy company stock,, predetermined price., usually at a discounted price or with a no-interest loan. Employees are subsequently rewarded, through dividends and market appreciation of those investments. Approximately 10 percent of, the private sector U.S. workforce participates in an ESOP. Sears Roebuck and UPS are two of, employee stock, the earliest companies to distribute shares to their employees., ownership plans, A fourth organizational-level reward strategy, which we briefly noted in Chapter 7, is the, (ESOPs), balanced scorecard (BSC). BSC is a goal-oriented perfor mance measurement system, Reward systems that, that rewards people (typicall y executives) for impro ving perfor mance on a composite of, encourage employees to, financial, customer, and inter nal processes, as w ell as emplo yee f actors. The better the, buy company stock., measurement improvements across these dimensions, the lar ger the bonus awarded. For, instance, KT (formerly Korea Telecom) relied on BSC to transform the former governmentowned telephone company into a more competitive business after privatization. “It guided ■ Balanced scorecard at KT in, our employees with clear direction and balanced perspectives,” says Song Young-han, KT’s Korea., executive senior vice president. “By gathering all the employees around BSC, we were able, to concentrate our foundation for the performance-oriented organization culture.”47, balanced scorecard, How effective are organizational-level rewards? ESOPs, stock options, and balanced scorecards, (BSC), tend to create an “o wnership culture” in w hich employees feel aligned with the or ganization’s, A control approach that, success. Balanced scorecards ha ve the added benef it of aligning re wards to se veral specif ic, suggests managers use, measures of organizational performance, but they are potentially more subjective and require a, several different financial, particular cor porate culture to be implemented ef fectively. Prof it sharing tends to create less, and operational metrics to, ownership culture, but it has the adv antage of automatically adjusting employee compensation, track performance and, with the f irm’s prosperity, thereby reducing the need for la yoffs or ne gotiated pay reductions, control an organization., during recessions. 48 The main problem with ESOPs, stock options, and prof it sharing (less so

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332, , PART 4 // Leading, , with balanced scorecards) is that emplo yees often percei ve a, weak connection between individual effort and corporate profits, or the v alue of compan y shares. Ev en in small f irms, the, company’s stock price or profitability is influenced by economic, conditions, competition, and other factors beyond the employee’s, immediate control. This lo w individual perfor mance-tooutcome expectancy weakens employee motivation., , // NONFINANCIAL REWARDS, Not all extrinsic rewards involve giving employees money. In, fact, many firms are discovering that some of the most valued, and effective extrinsic rewards don’t cost much money at all., “Five to 10 percent of employees leave a company because of, Yum! Recognition Yum! Brands, Inc., motivates, money,” explains Christopher Owen, CEO of Meriwest Credit, employees with a peer-recognition program in which, Union in San Jose, Califor nia. “Most of the time it’s because, employees reward coworkers with Champs cards. Champs, they don’t feel they are being recognized.” Ed Ariniello, vice, is an acronym for the six values at KFC, one of the, president of operations at G.I. Joe’s, a sports retailer in Oregon, restaurant chains owned by Yum!. Employees receive the, and Washington, goes out of his w ay to f ind opportunities to, cards for acting consistently with those values, and their, praise employees for a job w ell done. “I do a lot of w alking, names are entered into drawings for small prizes., around patting people on the back, ” says Ariniello. “When, © Getty Images., [other managers and I] do that, the employees feel great.”49, The challenge of reco gnition is to “catch” emplo yees, doing e xtraordinary things. K eyspan Cor poration chair man Bob Catell resolv es this b y, regularly asking managers for lists of “unsung heroes” at the New England gas utility. He calls, an employee every week, often spending the first few minutes convincing the listener that it is, really him. Approximately one-third of lar ge American f irms rely on peer reco gnition to, motivate employees. Among them is Yum! Brands, Inc., the parent compan y of KFC, Taco, Bell, and Pizza Hut. Yum! managers created a system in which employees reward colleagues, with “Champs” cards—an acronym for KFC’s values (cleanliness, hospitality, and so on).50, , // IMPROVING PERFORMANCE APPRAISALS, Many e xtrinsic re wards—particularly indi vidual-level perfor mance-based re wards—have, come under attack o ver the y ears for discouraging creati vity, distancing managers from, employees, distracting employees from the meaningfulness of the work itself, and being quick, fixes that ignore the tr ue causes of poor perfor mance. Although these issues have kernels of, truth under specif ic circumstances, the y do not necessaril y mean w e should abandon, performance-based rewards. On the contrary, the top-performing companies around the world, are more likely to pay for performance.51, Reward systems do moti vate most employees, but only when these systems assign higher, rewards to those with higher perfor mance. Unfortunately this simple principle seems to be, unusually difficult to appl y. In one recent lar ge-scale sur vey, fewer than half of Mala ysian, employees said they believe their company rewards high perfor mance or deals appropriatel y, with poor performers. A Gallup survey at an American telecommunications company revealed, that management’s evaluation of 5,000 customer service employees was unrelated to the performance ratings that customers gave those employees. “Whatever behaviors the managers were, evaluating were ir relevant to the customers, ” concluded Gallup e xecutives. “The managers, might as well have been rating the employees’ shoe sizes, for all the customers cared.”52, How can managers more accuratel y evaluate employee performance? Although appraisals, will always have a degree of subjectivity, there are ways to minimize this problem or get around, it altogether:, 1. Use more objective measures of performance. One of the best pieces of advice is simply, to rely on more objective indicators of employee performance than performance, , hiL30123_ch13_314-345.indd 332, , 11/1/06 4:48:37 PM

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Motivating and Rewarding Employee Performance \\ CHAPTER 13, , appraisals. Some companies have switched from traditional appraisals to output, measures such as units delivered or number of people served per hour. Objective, measures often occur at the team and organizational level, so companies pay individuals a fixed rate and award bonuses for measures of team performance or organizational, profits. This approach gets rid of the performance appraisal altogether, at least for, determining financial rewards., 2. Use anchored performance appraisal instruments. Where performance appraisals are, necessary (that is, if no objective measures are adequate or available), then managers, should use anchored appraisal methods. One form of anchor is goal setting, where, employees are expected to complete a specific set of objectives before the next, appraisal. ACUITY switched from its subjective system of rating employees to a more, objective one in which employee performance is evaluated against mutually agreed, goals. Compensation that was previously disconnected from supervisor ratings is now, tied more closely to goal achievement. The other form of anchoring is to label, performance appraisal rating forms with specific examples so raters have a better, understanding of what good or average performance means for each dimension of, performance., 3. Use multiple sources of performance information. An increasingly popular way to, improve the accuracy of performance appraisals is through 360-degree feedback., This process involves receiving information from a full circle of people around the, employee, including subordinates, bosses, coworkers, people in other departments, (internal clients), and sometimes external clients. Research suggests that 360-degree, feedback tends to provide more complete and accurate information than feedback, from a supervisor alone. It is particularly useful when the supervisor is unable to, observe the employee’s behavior or performance throughout the year. Lower-level, employees also feel a greater sense of fairness and open communication when they, are able to provide upward feedback about their boss’s performance. On the downside,, 360-degree feedback systems can be time-consuming, produce conflicting and, ambiguous information, and encourage politics as employees curry favor from people, who will rate them.53, , 333, , 360-degree feedback, Performance feedback, received from a full circle, of people around an, employee., , 4. Use performance appraisal training. To some degree, performance appraisal accuracy can, improve when managers receive various forms of training.54 Rater error training attempts, to reduce perceptual biases by raising awareness of these problems and encouraging raters, to avoid them. Performance dimension training attempts to familiarize raters with the, meaning of the performance dimensions on the rating instrument. Performance standards, training is sometimes called “frame-of-reference” training because it tries to establish a, common frame of reference among the raters. This is achieved by presenting samples of, job performance along with some indication of the level at which that performance should, be rated on the performance evaluation instrument., The more objective the method of evaluating employee performance, the stronger will be, the perfor mance-to-outcome e xpectancy, w hich in tur n increases emplo yee moti vation., More objective rewards also address another important issue: the extent to which employees, believe they are being fairly rewarded. Thus our final topic under extrinsic rewards is equity, theory., , // REWARDING EMPLOYEES EQUITABLY, Patti Anderson came from a f amily of Boeing engineers, so she w as proud to also work as a, manufacturing engineer at the aerospace company’s commercial airplane division in Renton,, Washington. But that pride evaporated when Anderson discovered that the men in her f amily, earned more than she did at Boeing for performing the same work. “My husband, brother, and, dad also perfor med the same job as me, and each w as paid more than me and consistentl y, received higher raises than I,” said Anderson in a legal statement. “I know this because I saw, their pay stubs.”55, , hiL30123_ch13_314-345.indd 333, , 11/1/06 4:48:38 PM

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334, , equity theory, A theory that explains how, people develop perceptions, of fairness in the, distribution and exchange, of resources., , PART 4 // Leading, , Patti Anderson’s feelings are explained through equity theory, which says that feelings, of equity or inequity occur w hen employees compare their own outcome/input ratios to the, outcome/input ratios of other people. 56 The outcome/input ratio is the v alue of the outcomes, you receive divided by the value of inputs you provide in the exchange relationship. Anderson, probably included her skills and le vel of responsibility as inputs. Other inputs might include, experience, status, performance, personal reputation, and amount of time w orked. Outcomes, are the things emplo yees recei ve from the organization in e xchange for the inputs. F or, Anderson, the main outcomes are the paycheck and pay raises. Some other outcomes might be, promotions, recognition, or an office with a window., Equity theory states that we compare our outcome/input ratio with a comparison other.57 In, our example, Anderson compared herself with her male family members and likely other men, who worked in the same jobs at Boeing. Ho wever, the comparison other ma y be another, person or group of people in the same job, another job, or another organization. Some research, suggests that employees frequently collect information on several referents to form a “generalized” comparison other.58 For the most part, however, the comparison other varies from one, person to the next and is not easily identifiable., Feelings of equity or inequity arise from a comparison of our own outcome/input ratio with the, comparison other’s ratio. Patti Anderson felt underreward inequity because her male counterparts, received higher outcomes (pay) for inputs that were comparable to what she contributed at Boeing. Anderson probably would have had feelings of equity if she received the same pay and other, outcomes for performing the same work. The third condition, overreward inequity, occurs when, people realize they are paid more than others with the same inputs (skills, ef fort, and the like) or, when they receive similar outcomes even though they provide lower inputs (such as getting paid, the same as someone who is far more skilled and talented than you are)., Watching Executive–Employee Pay Ratios Over the past few decades many employees, have been experiencing feelings of inequity due to the widening pay gap between staff and top, management.59 What is a f air le vel of pa y for cor porate e xecutives? Plato (the Greek, philosopher) felt that no one in a community should earn more than five times the lowest-paid, worker. In the 1970s management gur u Peter Dr ucker suggested that 20 times the lo west, worker’s earnings was more reasonable. John Pierpont Morgan, who in the 1800s founded the, financial giant now called J.P. Morgan Chase, also warned that no CEO should earn more than, 20 times an average worker’s pay. That advice didn’t stop William B. Harrison Jr., the current, CEO of J.P. Morgan Chase, from recei ving $15 million to $20 million in pa y, bonuses, and, stock options for each of the past few years. That’s more than 700 times the pay of the average, employee in the United States!, Costco Wholesale chief executive Jim Sinegal thinks such a large wage gap, is blatantly unfair and can lead to long-ter m employee motivation problems., “Having an indi vidual who is making 100 or 200 or 300 times more than the, average person working on the floor is wrong,” says Sinegal, who cofounded the, Issaquah, Washington, company. With annual salary and bonus of $550,000,, Sinegal ranks as one of the lowest-paid executives even though Costco is one of, the country’s largest retailers and its emplo yees among the highest paid in the, industry.60, , Mind the (Pay) Gap Costco, Wholesale chief executive Jim, Sinegal thinks gaps between, executive wages and those of their, employees are getting out of control, and could lead to long-term, motivation problems., Courtesy of Costco Wholesale Corporation., , hiL30123_ch13_314-345.indd 334, , How Employees Correct Inequity Feelings What happens when employees, feel inequitably rewarded? They experience an emotional tension that moti vates, them to reduce those inequities. Here are the most common ways in which people, try to reduce feelings of inequity:61, •, , •, , Change inputs: Employees either perform at a lower level or subtly ask the, better-off coworker to do a larger share of the work to justify his or her higher, pay or other outcomes., Change outcomes: Employees might increase their own outcomes by asking, for a pay increase or making unauthorized use of company resources. They, , 11/1/06 4:48:38 PM

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Motivating and Rewarding Employee Performance \\ CHAPTER 13, , 335, , might reduce the coworker’s outcomes by asking the boss to stop giving, favorable treatment to the coworker., • Change perceptions: Sometimes employees whisk away feelings of, inequity by eventually believing the coworker really is doing more, (such as working longer hours) or that the higher outcomes (perhaps, a better office) he or she receives really aren’t so much better after, all., • Leave the situation: Employees have a few ways to remove themselves, from the inequitable situation. They might quit or transfer to another, job where rewards are more equitably distributed. Those who can’t, leave might keep away from the office where the coworker is located,, take more time off work, or psychologically withdraw from the job, (make it less important in their life)., Managing the Reward Process Fairly Equity theor y is good at, predicting the perceived fairness of pay and other re wards in a v ariety of, situations, particularly if managers get to kno w their employees’ needs (as w e discussed in, Part 1 of this chapter) and k eep communication channels open so employees can complain, when they feel decisions are unfair. However, managers also need to pay attention to fairness, in the process of reward distribution.62 This process includes the mechanics of deciding ho w, to allocate v alued resources (such as pa ychecks and prefer red of fice space) and in ho w, employees are treated throughout this process., How do managers improve fairness in the process of distributing rewards and resources?63, A good place to star t is by giving employees “voice” in the process—encouraging them to, present their facts and opinions to whoever is allocating the resource. Managers also need to, remain unbiased , rel y on complete and accurate infor mation, appl y e xisting policies, consistently, and listen to the different views held by those affected by the resource allocation decision. Employees are also more likely to feel that decisions are f air if they have the, right to appeal the decision to a higher authority . Finally, people usuall y feel better w hen, managers treat them with respect and give them a full explanation of decisions. If employees, believe a decision is unf air, refusing to e xplain how the decision w as made could fur ther, inflame those feelings of inequity., Extrinsic rewards are important, but they aren’t the only thing that motivates employees., “High perfor mers don’t go for the mone y,” warns William Monahan, CEO of Oakdale,, Minnesota–based Imation Cor p. “Good people w ant to be in challenging jobs and see a, future where they can get even more responsibilities and challenges.” Raf ik O. Loutfy, a, Xerox research center director, agrees with this assessment. “Our top stars sa y they want, to make an impact—that’s the most important thing,” he says. “Feeling they are contributing and making a dif ference is highly motivational for them.”64 In other w ords, Imation,, Xerox, and other companies motivate employees mainly by designing interesting and challenging jobs., , // Motivating Employees through, Intrinsic Rewards, Throughout the f irst half of the 20th centur y, industry experts and academics spent a lot of, time figuring out how to increase employee performance by dividing work into narrower and, narrower tasks to the point w here employees completed an entire job c ycle in less than one, minute. To put this in conte xt, assembly-line employees at Chr ysler in the United States, current have a job cycle of about 64.5 seconds, which means they repeat the same set of tasks, about 58 times each hour and about 230 times before they take a meal break.65, Why would companies divide work into such tiny bits? One reason is that employees spend, less time changing activities because they have fewer tasks to juggle. They also require fewer, , hiL30123_ch13_314-345.indd 335, , 11/1/06 4:48:39 PM

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336, , PART 4 // Leading, , physical and mental skills to accomplish the assigned w ork, so less time and resources are, needed for training. A third reason is that employees practice their tasks more frequently with, shorter work c ycles, so jobs are mastered quickl y. A four th reason w hy work efficiency, increases is that employees with specific aptitudes or skills can be matched more precisely to, the jobs for which they are best suited.66, Narrowing jobs down to short cycle times does have these advantages, to a degree. But this, job design strategy can ultimately backfire because it ignores another important fact—namely, that tedious jobs don’t motivate. Although specialization might improve employee ability, the, MARS model described earlier in this chapter points out that emplo yees must also have sufficient motivation to perfor m their jobs ef fectively. Thus managers need to design jobs that, provide more intrinsic rewards, which as we described earlier are positive emotions resulting, directly and naturally from the individual’s behavior or results., , // JOB CHARACTERISTICS MODEL, job characteristics, model, A job design model that, relates the motivational, properties of jobs to, specific personal and, organizational, consequences of those, properties., , The job characteristics model is a useful template for understanding ho w to impro ve, employee motivation through the job itself. 67 According to the job characteristics model, all, jobs have some degree of the five core job dimensions shown in Figure 13.7:, • Skill variety: Skill variety refers to the use of different skills and talents to complete a variety, of work activities. For example, sales clerks who normally only serve customers might be, assigned the additional duties of stocking inventory and changing storefront displays., • Task identity: Task identity is the degree to which a job requires completion of a whole or, identifiable piece of work, such as assembling an entire computer modem rather than just, soldering in the circuitry., , Core job, characteristics, , Critical, psychological states, , Outcomes, , Work, motivation, , Skill variety, Task identity, T, Task significance, T, , Meaningfulness, , Autonomy, , Responsibility, , General, satisfaction, , Feedback from job, , Knowledge of results, , Work, effectiveness, , Growth, satisfaction, , Individual differences, • Knowledge and skill, • Context satisfaction, • Growth need strength, , FIG UR E 1 3 .7, , hiL30123_ch13_314-345.indd 336, , Job Characteristics Model, , 11/1/06 4:48:39 PM

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Motivating and Rewarding Employee Performance \\ CHAPTER 13, , 337, , • Task significance: Task significance is the degree to which the job affects the organization and society., • Autonomy: Jobs with high levels of autonomy provide freedom, independence, and, discretion in scheduling work and determining the procedures to be used to complete the, work. In autonomous jobs, employees make their own decisions rather than relying on, detailed instructions from supervisors or procedure manuals., • Job feedback: Job feedback is the degree to which employees can tell how well they are, doing based on direct sensory information from the job itself. Airline pilots can feel how, smoothly they land their aircraft; road crews can see how well they have prepared the, roadbed and laid the asphalt., The first three core job dimensions (skill variety, task identity, and task significance) have a, combined effect on a psychological state called experienced meaningfulness —the belief that, one’s work is worthwhile or important. Autonomy directly contributes to the feeling of experienced responsibility—feeling personally accountable for the outcomes of one’ s efforts. The, third critical psychological state, knowledge of results, is derived from job feedback., The job characteristics model warns that motivation from redesigning jobs increases only, when employees have the required skills and knowledge to master the more challenging work., Otherwise job redesign tends to increase stress and reduce job perfor mance. The model also, suggests that employees who are unsatisfied with their work context (working conditions, job, security) or w ho have a lo w g rowth need strength w on’t become more motivated, either., However, various studies suggest that employees might be motivated by job design no matter, how the y feel about their job conte xt or ho w high or lo w the y score on g rowth need, strength.68, , // MOTIVATING EMPLOYEES THROUGH, JOB ENRICHMENT, The job characteristics model suggests man y ways to improve employee motivation, such as, by rotating employees through different jobs each day or adding more tasks to one job . But, experts ag ree that the most ef fective strate gy is job enrichment : giving employees, responsibility for scheduling, coordinating, and planning their o wn w ork.69 One way to, increase job enrichment is by combining highly interdependent tasks into one job. By forming, natural work units, jobholders have stronger feelings of responsibility for an identifiable body, of work. They feel a sense of o wnership and therefore tend to increase job quality . Forming, natural work units increases task identity and task signif icance because employees perform a, complete product or service and can more readily see how their work affects others., A second job enrichment strategy, called establishing client relationships, involves putting, employees in direct contact with their clients rather than using the supervisor as a go-between., By being directly responsible for specif ic clients, employees have more information and can, make decisions affecting those clients. 70 Establishing client relationships also increases task, significance because employees see a connection between their work and its consequences for, customers., Forming natural task g roups and establishing client relationships are common w ays to, enrich jobs, but the hear t of the job enrichment philosoph y is to gi ve employees more, autonomy over their work. This basic idea is at the core of a popular concept kno wn as, empowerment ., , // MOTIVATING EMPLOYEES THROUGH, EMPOWERMENT, The opening stor y to this chapter describes the incredib le transfor mation of Wisconsin, insurance company ACUITY and the resulting surge in employee motivation. One reason, for the increased moti vation is that rigid control systems w ere removed and emplo yees, , hiL30123_ch13_314-345.indd 337, , job enrichment, A job design practice in, which employees are given, more responsibility for, scheduling, coordinating,, and planning their own, work., , empowerment, A psychological concept, represented by four, dimensions: selfdetermination, meaning,, competence, and impact of, the individual’s role in the, organization., , 11/1/06 4:48:40 PM

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338, , PART 4 // Leading, , were invited to actively participate in making decisions that affect the company’s strategic and operational direction. In particular, frontline employees and middle managers are rotated through, committees that ha ve top managers’ full suppor t to acti vely set, direction for technology, customer services, investments, employee relations, and most other issues. As one emplo yee recentl y, noted, “ACUITY treats their emplo yees with respect and also, empowers their employees.”71, ACUITY has created a w ork en vironment that mak es, employees feel empowered. Empowerment is a psychological, concept represented b y four dimensions: self- determination,, meaning, competence, and impact of the indi vidual’s role in the, organization:72, •, , •, •, , The Empowerment of Semco Most managers like, to say they empower their employees, but few can, reach the heights of empowerment experienced by, employees at Semco Corporation, SA. “Can an, organization let people do what they want, when they, want, and how they want?” asks Ricardo Semler, CEO, of the manufacturing and services conglomerate in, Sao Paulo, Brazil. The answer appears to be yes., Organized into small groups of 6 to 10 people, Semco, employees choose their objectives every six months,, hire their coworkers, work out their budgets, set their, own salaries, decide when to come to work, and even, elect their own bosses. This may seem radical, but, Semler says that the company is “only 50 or 60, percent where we’d like to be.” Semler believes that, replacing the head office with several satellite offices, around Sao Paulo would give employees even more, opportunity for empowerment.74, Courtesy of Semco, SA., , •, , Self-determination: Empowered employees feel that they, have freedom, independence, and discretion over their work, activities., Meaning: Employees who feel empowered care about their, work and believe that what they do is important., Competence: Empowered people are confident about their, ability to perform the work well and have a capacity to grow, with new challenges., Impact: Empowered employees view themselves as active, participants in the organization; that is, their decisions and, actions influence the company’s success., , Chances are that you have heard corporate leaders say they are, “empowering” the workforce. What these executives really mean, is that they are changing the work environment to support empowerment. To generate beliefs about self-deter mination, employees, must work in jobs with a high de gree of autonomy with minimal, bureaucratic control. To maintain a sense of meaningfulness, jobs, must have high levels of task identity and task signif icance. And, to maintain a sense of self-conf idence, jobs must pro vide sufficient feedback.73, Employees also e xperience more empo werment in or ganizations where information and other resources are easily accessible,, where emplo yee lear ning is v alued, and w here reasonab le, mistakes are viewed as a natural part of the learning process. Furthermore, empo werment requires cor porate leaders w ho tr ust, employees and are willing to tak e the risks that empo werment, creates.75, , I N CO N C LU S ION, , WH Y DOE S IT M ATTER?, , There are four cornerstones of employee behavior and performance, and motivation, is arguably the most important of these for managers on a daily basis. Two other, factors—abilities and situational factors—are fairly stable in the short term, and the, third factor—role perceptions—is typically managed within goal setting and related, motivational practices. In other words, when it comes to maximizing employee, engagement and performance, motivation is vital and probably the dominant factor, for managers to consider., , hiL30123_ch13_314-345.indd 338, , 11/1/06 4:48:40 PM

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Motivating and Rewarding Employee Performance \\ CHAPTER 13, , 339, , The quest for a motivated and engaged workforce has not been easy, however., Most managers (92 percent of them, according to one major survey) say that, motivating employees has become more challenging. Three factors seem to be, responsible for this increasing challenge. First, globalization, information technology,, corporate restructuring, and other changes have dramatically altered employment, relationships. These changes potentially undermine the levels of trust and commitment necessary to energize employees beyond minimal standards. Perhaps this, explains why approximately one-fifth of the American workforce is disengaged—, retired on the job.76, Second, in decades past, companies typically relied on armies of supervisors to, closely monitor employee behavior and performance. Even if commitment and trust, were low, employees performed their jobs with the boss watching them closely. But, most companies have reduced costs by flattening the organizational structure and, removing layers of management. Managers now supervise many more employees, so, they can’t possibly watch for laggards. This is just as well because today’s educated, workforce resents “command and control” management. Most people enjoy the, feeling of being motivated, but this requires the right conditions; so managers need to, search for more contemporary ways to motivate staff., The third challenge is that a new generation of employees has brought different, expectations to the workplace. A few years ago various writers disparaged Generation-X, and Generation-Y employees as slackers, cynics, whiners, and malcontents. Now we, know that the problem wasn’t their lack of motivational potential; it was that managers, didn’t know how to motivate them! It seems that many companies still haven’t figured, this out: According to one report more than 40 percent of employees aged 25 to 34, sometimes or frequently feel demotivated compared to 30 percent of 35- to 44-year-olds, and just 18 percent of 45- to 54-year-olds.77, This chapter has described the three foundations of employee motivation:, (1) individual drives and needs; (2) goals, expectations, and feedback; and (3) extrinsic, and intrinsic rewards. Managers play a central role throughout this process. They try to, discover what really drives employees, recognizing that people have complex needs., Then they direct effort from those drives and needs by setting achievable goals,, clarifying expectations, and offering constructive feedback along the way. Finally,, managers are responsible for configuring financial rewards, providing formal and, informal recognition, and designing jobs that exude natural intrinsic rewards. Then, with, these three parts well crafted, managers must step back and allow that context to have, the intended influence on employee motivation., , MANAGEMENT CHALLENGES, 1., , 2., , 3., , An insurance company has high levels of absenteeism among the office staff. The head, of office administration believes employees are misusing the company’s sick leave, benefits, whereas employees say otherwise. Use the MARS model to discuss some, possible reason for absenteeism here and how it might be reduced., One of the oldest questions in management is whether money motivates. In your, estimation, what is the answer to this question according to Maslow’s, needs hierarchy?, David McClelland suggests that some needs are learned or at least can be, strengthened through learning. How might a sales manager use this ability to, develop the need for achievement, affiliation, and power in the company’s, sales force?, , hiL30123_ch13_314-345.indd 339, , 11/1/06 4:48:43 PM

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340, , PART 4 // Leading, , 4., , 5., , 6., , This chapter outlines ways to increase employee motivation by altering the three, components of expectancy theory. Suppose you are the instructor of this class. Use, expectancy theory to explain how you would increase student motivation to complete, assignments to a high standard and complete readings prior to class., Think back to a recent job you have held or a volunteer task you have performed. In what, ways did your boss or task leader use goal setting and feedback to motivate you to complete, the work? How might goal setting and feedback be used more effectively in that situation?, Several service representatives are upset that a newly hired representative with no, previous experience will be paid $3,000 a year above the usual starting salary in the pay, range. The department manager explained that the new hire would not accept the entrylevel rate, so the company raised the offer by $3,000. All five reps currently earn, salaries near the top of the scale ($15,000 higher than the new recruit), although they all, started at the minimum starting salary a few years earlier. Use equity theory to explain, why the five service representatives feel inequity in this situation., , MANAGEMENT PORTFOLIO, FOR THE ORGANIZATION YOU HAVE CHOSEN TO FOLLOW:, 1., , 2., , 3., , 4., , CLOSING CASE, , Find out what you can (from the Web site, news reports, annual reports, and so on), about the company’s practices for motivating and supporting employees. Does the, organization sufficiently support each of the drives identified in four-drive theory?, Does the organization seem to keep the four drives in balance, in your opinion?, Look back at the mission, vision, values, and goals for this organization that you identified, in Chapter 5. Now document some of the performance goals this organization would most, likely assign to employees in (a) production or service jobs and (b) sales or support jobs., Organizations vary in their emphasis on the four types of rewards: membership/, seniority, job status, competencies, and performance. Based on your investigation of this, organization, which of these four categories is emphasized the most? Which category, seems to receive the least emphasis?, Do you think this organization has an empowered workforce relative to other companies, in this industry? Why or why not?, , B U D D Y ’ S S N A C K C O M PA N Y *, , Buddy’s Snack Compan y is a f amily-owned compan y, located in the Rock y Mountains. Buddy F orest star ted, the business in 1951 b y selling homemade potato, chips out of the back of his pickup tr uck. No wadays, Buddy’s is a $36 million snack food compan y that is, struggling to re gain mark et share lost to F rito-Lay and, other f ierce competitors. In the earl y 1980s Buddy, passed the business to his son Buddy Jr., who is currently, grooming his son Mark to succeed himself as head of, the company., , Six months ago Mark joined Buddy’s Snacks as a salesperson and after four months was quickly promoted to sales, manager. Mark recently graduated from a local uni versity, with an MBA in marketing, and Buddy Jr. was hoping Mark, would be able to implement strategies that could help tur n, the company around. One of Mark’s initial strategies was to, introduce a new sales performance management system. As, part of this approach, any salesperson who received a below, average performance rating would be required to attend a, mandatory coaching session with his or her super visor., , *Case written by Russell Casey, Clayton State University, and Gloria Thompson, University of Phoenix. Reprinted with permission., , hiL30123_ch13_314-345.indd 340, , 11/1/06 4:48:43 PM

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Motivating and Rewarding Employee Performance \\ CHAPTER 13, , Mark Forest hoped these coaching sessions would motivate, his employees to increase their sales. This case describes, the reaction of three salespeople who have been required to, attend a coaching session because of their low performance, over the previous quarter., LYNDA LEWIS, Lynda is a hard w orker who takes pride in her w ork ethic., She has spent a lot of time reading training material and, learning selling techniques, viewing training videos on her, own time, and accompanying top salespeople on their calls., Lynda has no problem asking for advice and doing whatever, needs to be done to learn the business. Everyone agrees that, Lynda has a cheer y attitude and is a real “team pla yer,”, giving the company 150 percent at all times. It has been a, tough quarter for Lynda due to the downturn in the economy, but she is doing her best to make sales for the company., Lynda feels that her f ailure to make quota during this past, quarter is due not to lack of effort but just to bad luck in the, economy. She is hopeful that things will tur n around in the, next quarter., Lynda is upset with Mark about ha ving to attend the, coaching session because this is the f irst time in three, years that her sales quota has not been met.Although Lynda is willing to do whatever it takes to be successful, she is, concerned that the coaching sessions will be held on a, Saturday. Doesn’t Mark realize that L ynda has to raise, three boys by herself and that w eekends are an impor tant, time for her f amily? Because L ynda is a dedicated employee, she will somehow manage to rear range the f amily’s schedule., Lynda is now very concerned about how her efforts are, being perceived by Mark. After all, she exceeded the sales, quota from the pre vious quar ter, y et she did not recei ve, thanks or praise for those efforts. The entire experience has, left Lynda unmotivated and questioning her future with the, company., MICHAEL BENJAMIN, Michael is happ y to ha ve his job at Buddy’ s Snack, Company, although he reall y doesn’t like sales work that, much. Michael accepted this position because he felt that, he wouldn’t have to work hard and would have a lot of free, time during the day. Michael was sent to coaching mainly, because his customer satisf action repor ts w ere lo w; in, fact, they were the lowest in the compan y. Michael tends, to give canned presentations and does not listen closely to, customers’ needs. Consequently he makes numerous errors, in ne w sales orders, w hich dela y shipments and lose, business and goodwill for Buddy’ s Snack Compan y., Michael doesn’t really care because most of his customers, , hiL30123_ch13_314-345.indd 341, , 341, , do not spend much money, and he doesn’t think it is worth, his while., There has been a recent change in the compan y commission structure. Instead of selling to the w arehouse stores and, possibly earning a high commission, Michael is no w forced, to sell to lo wer-volume convenience stores. In other w ords,, he will have to sell twice as much product to ear n the same, amount of mone y. Michael does not think this change in, commission is fair, and he feels that the coaching session will, be a waste of time. He believes that the other members of the, sales team are getting all of the good leads and that is w hy, they are so successful. Michael doesn’t socialize with others, in the office and attributes others’ success and promotions to, whom they know in the compan y rather than the f act that, they are hard workers. He feels that no matter how much effort is put into the job, he will never be adequately rewarded., KYLE SHERBO, For three of the past f ive years Kyle was the number one, salesperson in the division and had hopes of being promoted, to sales manager . When Mark joined the compan y, Kyle, worked closely with Buddy Jr. to help Mark lear n all facets, of the business. K yle thought this close relationship with, Buddy Jr. would ensure his upcoming promotion to the co veted position of sales manager, and he was devastated to learn, that Mark received the promotion that he thought was his., During the past quar ter there has been a noticeab le, change in Kyle’s work habits. It has become common for, Kyle to be late for appointments or miss them entirel y, as, well as not returning phone calls or following up on leads., His sales perfor mance has declined dramaticall y, which, resulted in a drastic loss of income. Although Kyle was, dedicated and fiercely loyal to Buddy Jr. and the company, for many years, he is now looking for other employment., Buddy’s Snacks is located in a r ural community, which, leaves Kyle with limited job oppor tunities. He was, however, offered a position as a sales manager with a competing company in a lar ger town, but Kyle’s wife refuses to, leave the area because of her strong f amily ties. Kyle is, bitter and resentful of his cur rent situation and now faces, a mandatory coaching session that will be conducted b y, Mark., CASE DISCUSSION QUESTIONS, 1. Apply expectancy theory or motivation and equity theory, to e xplain the le vel of moti vation in each of these, employees., 2. Apply four -drive theor y to e xplain the moti vation of, these employees as well as their reactions to the imminent coaching sessions., , 11/1/06 4:48:43 PM

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342, , PART 4 // Leading, , ENDNOTES, 1. S. Prestegard, “From Heritage to Acuity,” Marketplace Magazine, March 27, 2001,, p. 14; M. Muckian, “Ir reverent Heritage,” The Business J ournal (Milwaukee),, March 14, 2003, p. A25; R. Romell, “Sharp Focus on Employee Satisfaction Pays, Off for ACUITY,” Milwaukee Journal Sentinel, June 29, 2004, p. 3D; J . Signer,, “A Cultural Revolution Transforms ACUITY as an Employer and a Business Partner,” Journal of Organizational Excellence, Spring 2005, pp. 17–28., 2. “Gallup Study: Feeling Good Matters in the Workplace,” Gallup Management, Journal, January 12, 2006; “Employee Engagement Levels Are Focus of Global, Towers Perrin Study,” Tower Perrin Monitor, January 2006., 3. D. Ulrich and N . Smallwood, Why the Bottom Line Isn’ t (Hoboken, NJ: John, Wiley & Sons, 2003), p. 11; “Ow ens Cor ning Mak es Smar t In vestments in, Employee Training,” The Resource (Newsletter of Jackson State’s Division of, Economic and Community De velopment), Fall 2004, p. 1; P. Kershaw, “Happy, Days,” Sydney Morning Her ald, August 23, 2005, p. 6; K. Ock enden, “Inside, Story,” Utility Week, January 28, 2005, p. 26., 4. Also notice that the outcomes of the MARS model are “beha vior and results,”, resulting in the even more memorable acronym MARS BAR. The MARS model, is developed from models and writing by several sources, including E.E. Lawler, III and L.W. Porter, “Antecedent Attitudes of Effective Managerial Performance,”, Organizational Behavior and Human Performance 2, no. 2 (1967), pp. 122–42;, K.F. Kane, “Special Issue: Situational Constraints and Work P erformance,”, Human Resource Management Review 3 (Summer 1993), pp. 83–175., 5. C.C. Pinder, Work Motivation in Organizational Behavior (Upper Saddle River,, NJ: Prentice-Hall, 1998); G.P . Latham and C.C. Pinder , “Work Moti vation, Theory and Research at the Dawn of the Twenty-First Century,” Annual Review, of Psychology 56 (2005), pp. 485–516., 6. S. Brady, “Deep in the Hear t of AT&T Dallas,” Cable World, October 7, 2002,, p. 37., 7. Kane, “Special Issue: Situational Constraints and Work P erformance”; S.B ., Bacharach and P. Bamberger, “Beyond Situational Constraints: Job Resources, Inadequacy and Individual Performance at Work,” Human Resource Management, Review 5, no. 2 (1995), pp. 79-102; G. Johns, “Commentar y: In Praise of, Context,” Journal of Organizational Behavior 22 (2001), pp. 31–42., 8. J. Becker and L. Layton, “Safety Warnings Often Ignored at Metro,” Washington, Post, June 6, 2005, p. A01., 9. “Workers’ Attitudes to ward Leaders Rebounded Strongl y betw een 2002 and, 2004, Watson Wyatt Sur vey Finds,” PRNewswire news release (W ashington:, December 14, 2004)., 10. T.V. Sewards and M.A. Sewards, “Fear and Power–Dominance Drive Motivation:, Neural Representations and Pathways Mediating Sensory and Mnemonic Inputs,, and Outputs to Premotor Str uctures,” Neuroscience and Biobehavioral Reviews, 26 (2002), pp. 553-79; K.C. Ber ridge, “Moti vation Concepts in Beha vioral, Neuroscience,” Physiology & Behavior 81, no. 2 (2004), pp. 179–209., 11.A.H. Maslo w, “A Theory of Human Moti vation,” Psychological Re view 50, (1943), pp. 370–96; A.H. Maslow, Motivation and Personality (New York: Harper, & Row, 1954)., 12. D.T. Hall and K.E. Nougaim, “An Examination of Maslow’s Need Hierarchy in, an Organizational Setting,” Organizational Behavior and Human Performance 3,, no. 1 (1968), p. 12; M.A. Wahba and L.G. Bridwell, “Maslow Reconsidered: A, Review of Research on the Need Hierarch y Theory,” Organizational Behavior, and Human P erformance 15 (1976), pp. 212-40; E.L. Betz, “T wo Tests of, Maslow’s Theory of Need Fulfillment,” Journal of Vocational Behavior 24, no. 2, (1984), pp. 204–20; P.A. Corning, “Biological Adaptation in Human Societies: A, ‘Basic Needs’ Approach,” Journal of Bioeconomics 2, no. 1 (2000), pp. 41–86., 13.S. Oishi et al., “Cross-Cultural Variations in Predictors of Life Satisf action:, Perspectives from Needs and Values,” Personality and Social Psyc hological, Bulletin25, no. 8 (August 1999), pp. 980–90; J . Kickul, S.W. Lester, and E., Belgio, “Attitudinal and Behavioral Outcomes of Psychological Breach: A Cross, Cultural Comparison of the United States and Hong K ong Chinese,” International Journal of Cross Cultural Management 4, no. 2 (2004), pp. 229–52., 14.R.J. Lowry, The Journals of A.H. Maslow (Monterey, CA: Brooks/Cole, 1979);, A.H. Maslow, Maslow on Management (New York: John Wiley & Sons, 1998)., 15. D.C. McClelland, The Achieving Society (New York: Van Nostrand Reinhold ,, 1961); D.C. McClelland and D .H. Bur nham, “Power Is the Great Moti vator,”, , hiL30123_ch13_314-345.indd 342, , Harvard Business Review 73 (January–February 1995), pp. 126–39; D. Vredenburgh and Y. Brender, “The Hierarchical Abuse of Power in Work Organizations,”, Journal of Business Ethics 17 (September 1998), pp. 1337–47; S. Shane, E.A., Locke, and C.J . Collins, “Entrepreneurial Moti vation,” Human Resour ce, Management Review 13, no. 2 (2003), pp. 257–79., 16. D. Miron and D.C. McClelland, “The Impact of Achievement Motivation Training, on Small Business,” California Management Review 21 (1979), pp. 13–28., 17. D. Brady, “Will Jeff Immelt’s New Push Pay Off for GE?” BusinessWeek, October, 13, 2003, pp. 94-97; B. Morris, “The GE Mystique,” Fortune, March 6, 2006, pp., 98–102., 18. P.R. Lawrence and N. Nohria, Driven: How Human Nature Shapes Our Choices, (San Francisco: Jossey-Bass, 2002)., 19. R.E. Baumeister and M.R. Leary, “The Need to Belong: Desire for Interpersonal, Attachments as a Fundamental Human Moti vation,” Psychological Bulletin 117, (1995), pp. 497–529., 20.Lawrence and Nohria, Driven, pp. 145–47., 21.Lawrence and Nohria, Driven, Chapter 11., 22.P. Dvorak, “Out of Tune,” The Wall Street Journal, June 29, 2005, p. A1., 23. A. Prayag, “All Work and More Play,” Business Line (The Hindu), June 13, 2005,, p. 4; S. Rajagopalan, “Bangalore to Ha waii, an All-Paid Holiday,” Hindustan, Times, May 7, 2005; J.A. Singh, “Hola for Success!” Business Standard (India),, June 4, 2005., 24.G.P. Latham, “Goal Setting: A F ive-Step Approach to Beha vior Change, ”, Organizational Dynamics 32, no. 3 (2003), pp. 309–18; E.A. Lock e and, G.P. Latham, A Theory of Goal Setting and Task Performance (Englewood Cliffs,, NJ: Prentice-Hall, 1990)., 25.A. Li and A.B. Butler, “The Ef fects of P articipation in Goal Setting and Goal, Rationales on Goal Commitment: An Exploration of Justice Mediators,” Journal, of Business and Psychology 19, no. 1 (Fall 2004), pp. 37–51., 26. M. London, E.M. Mone, and J.C. Scott, “Performance Management and Assessment: Methods for Impro ved Rater Accuracy and Emplo yee Goal Setting, ”, Human Resource Management 43, no. 4 (Winter 2004), pp. 319–36; Latham and, Pinder, “Work Motivation Theory and Research at the Dawn of the Twenty-First, Century.”, 27. A. Dragoon, “Sleepless in Manhattan,” CIO, April 2005, p. 1; S.E. Ante, “Giving, the Boss the Big Picture,” BusinessWeek, February 13, 2006, p. 48., 28. J.B. Miner, “The Rated Importance, Scientific Validity, and Practical Usefulness, of Or ganizational Beha vior Theories: A Quantitati ve Re view,” Academy of, Management Learning and Education 2, no. 3 (2003), pp. 250–68. Also see C.C., Pinder, Work Motivation in Or ganizational Behavior (Upper Saddle Ri ver, NJ:, Prentice-Hall, 1997), p. 384., 29.P.M. Wright, “Goal Setting and Monetar y Incentives: Motivational Tools That, Can Work Too Well,” Compensation and Benefits Review 26 (May–June 1994),, pp. 41-49; E.A. Locke and G.P. Latham, “Building a Practically Useful Theory of, Goal Setting and Task Motivation: A 35-Year Odyssey,” American Psychologist, 57, no. 9 (2002), pp. 705–17., 30. Expectancy theory of motivation in work settings originated in V.H. Vroom, Work, and Motivation (Ne w York: Wiley, 1964). The v ersion of e xpectancy theor y, presented here w as developed by Edward Lawler. Lawler’s model pro vides a, clearer presentation of the model’s three components. P-to-O expectancy is similar to “instrumentality” in Vroom’s original expectancy theory model. The difference is that instrumentality is a correlation, whereas P-to-O expectancy is a probability. See J .P. Campbell et al., Managerial Behavior , P erformance, and, Effectiveness (New York: McGraw-Hill, 1970); E.E. La wler III, Motivation in, Work Organizations (Monterey, CA: Brooks-Cole, 1973); D.A. Nadler and E.E., Lawler, “Motivation: A Diagnostic Approach,” in Perspectives on Behavior in, Organizations, 2nd, ed., ed. J.R. Hackman, E.E. Lawler III, and L.W. Porter (New, York: McGraw-Hill, 1983), pp. 67–78., 31. M. Zeelenberg et al., “Emotional Reactions to the Outcomes of Decisions: The, Role of Counterf actual Thought in the Experience of Re gret and Disappointment,” Organizational Behavior and Human Decision Processes 75, no. 2 (1998),, pp. 117–41; B.A. Mellers, “Choice and the Relative Pleasure of Consequences,”, Psychological Bulletin 126, no. 6 (No vember 2000), pp. 910–24; R.P. Bagozzi,, , 11/1/06 4:48:43 PM

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Motivating and Rewarding Employee Performance \\ CHAPTER 13, , 343, , U.M. Dholakia, and S. Basuro y, “How Effortful Decisions Get Enacted: The, Motivating Role of Decision Processes, Desires, and Anticipated Emotions,”, Journal of Behavioral Decision Making 16, no. 4 (October 2003), pp. 273–95., , 50. D. Creelman, “Interview: Bob Catell & Kenny Moore,” HR.com, February 2005;, E. White, “Praise from P eers Goes a Long Way,” The Wall Str eet J ournal,, December 19, 2005, p. B3., , 32.Signer, “A Cultural Re volution Transforms ACUITY as an Emplo yer and a, Business Partner,” p. 21., , 51.J. Pfeffer, The Human Equation (Boston: Harvard Business School Press, 1998);, B.N. Pfau and I.T. Kay, The Human Capital Edg e (New York: McGraw-Hill,, 2002). The prob lems with perfor mance-based pa y are discussed in W.C., Hammer, “How to Ruin Moti vation with P ay,” Compensation Review 7, no. 3, (1975), pp 17–27; A. Kohn, Punished by Rewards (Boston: Houghton Mifflin,, 1993); M. O’Donnell and J. 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344, , PART 4 // Leading, , 63. J. Greenberg and E.A. Lind, “The Pursuit of Organizational Justice: From Conceptualization to Implication to Application,” in Industrial and Organizational, Psychology: Linking Theory with Pr actice, ed. C.L. Cooper and E.A. Lock e, (London: Blackwell, 2000), pp. 72–108. For recent studies of voice and injustice,, see K. Roberts and K.S. Markel, “Claiming in the Name of Fairness: Organizational Justice and the Decision to F ile for Workplace Injur y Compensation,”, Journal of Occupational Health Psychology 6 (October 2001), pp. 332–47; J.B., Olson-Buchanan and W.R. Boswell, “The Role of Employee Loyalty and Formality in Voicing Discontent,” Journal of Applied Psyc hology 87, no. 6 (2002),, pp. 1167–74., 64.“Strong Leaders Make Great Workplaces,” CityBusiness, August 28, 2000; P.M., Perry, “Holding Your Top Talent,” Research Technology Management 44 (May, 2001), pp. 26–30., 65. P. Siekman, “This Is Not a BMW Plant,” Fortune, April 18, 2005, p. 208., 66.H. Fayol, General and Industrial Management, trans. C. Storrs (London: Pitman,, 1949); Lawler III, Motivation in Work Organizations, Chapter 7., 67.J.R. Hackman and G. Oldham, Work Redesign (Reading, MA: Addison-Wesley,, 1980)., 68.J.E. Champoux, “ A Multi variate Test of the Job Characteristics Theory of, Work Motivation,” Journal of Organizational Behavior 12, no. 5 (September, 1991), pp. 431–46; R.B . Tiegs, L.E. Tetrick, and Y. F ried, “Gro wth Need, Strength and Context Satisfactions as Moderators of the Relations of the Job, Characteristics Model,” Journal of Management 18, no. 3 (September 1992),, pp. 575–93., 69.J.R. Hackman et al., “ A Ne w Strate gy for Job Enrichment, ” California, Management Review 17, no. 4 (1975), pp. 57–71; R.W. Griffin, Task Design: An, Integrative Approach (Glenview, IL: Scott Foresman, 1982)., 70.Hackman and Oldham, Work Redesign, pp. 137-38., 71. Signer, “A Cultural Revolution Transforms ACUITY as an Employer and a Business Partner.”, 72. This definition is based mostly on G.M. Spreitzer and R.E. Quinn, “A Company, of Leaders: Five Disciplines for Unleashing the Power in Your Workforce” (2001)., However, most elements of this definition appear in other discussions of empowerment. See, for e xample, R. Forrester, “Empowerment: Rejuvenating a Potent, Idea,” Academy of Management Executive 14 (August 2000), pp. 67–80; W.A., Randolph, “Re-thinking Empo werment: Why Is It So Hard to Achieve?”, , hiL30123_ch13_314-345.indd 344, , Organizational Dynamics 29 (No vember 2000), pp. 94–107; S.T . Menon,, “Employee Empowerment: An Inte grative Psychological Approach,” Applied, Psychology: An International Review 50 (2001), pp. 153–80., 73. B.J. Niehoff et al., “The Influence of Empowerment and Job Enrichment on Employee Lo yalty in a Do wnsizing En vironment,” Group and Or ganization, Management 26 (March 2001), pp. 93–113; J. Yoon, “The Role of Str ucture and, Motivation for Workplace Empo werment: The Case of K orean Emplo yees,”, Social Psyc hology Quarter ly 64 (June 2001), pp. 195–206; T.D. Wall, J .L., Cordery, and C.W. Clegg, “Empowerment, Performance, and Operational Uncertainty: A Theoretical Integration,” Applied Psychology: An International Review, 51 (2002), pp. 146–69., 74. S. Caulkin, “Who’s in Charge Here?” The Observer (London), April 27, 2003,, p. 9; D . Gardner, “A Boss Who’s Crazy about His Workers,” Sunday Herald, (Glasgow, Scotland), April 13, 2003, p. 6; S. Moss, “Portrait: ‘Idleness Is Good,’”, The Guardian (London), April 17, 2003, p. 8; R. Semler, The Seven-Day Weekend, (London: Century, 2003); “Ricardo Semler Set Them Free,” CIO Insight, April, 2004, p. 30., 75.G.M. Spreitzer , “Social Str uctural Characteristics of Psycholo gical, Empowerment,” Academy of Management Journal 39 (April 1996), pp. 483–504;, J. Godard, “High Performance and the Transformation of Work? The Implications, of Alternative Work Practices for the Experience and Outcomes of Work,”, Industrial & Labor Relations Review 54 (July 2001), pp. 776–805; P.A. Miller, P., Goddard, and H.K. Spence Laschinger , “Ev aluating Ph ysical Therapists’, Perception of Empo werment Using Kanter’ s Theory of Str uctural P ower in, Organizations,” Physical Therapy 81 (December 2001), pp. 1880–88., 76. Business Wire, “Towers Perrin Study Finds, Despite Layoffs and Slow Economy,, a New, More Complex Power Game Is Emer ging between Employers and Employees,” news release (Ne w York: August 30, 2001); Towers Perrin, Working, Today: Under standing What Drives Emplo yee Eng agement (Stamford, CT :, 2003)., 77. C. Lachnit, “The Young and the Dispirited,” Workforce 81 (August 2002), p. 18;, S.H. Applebaum, M. Serena, and B.T. Shapiro, “Generation X and the Boomers:, Organizational Myths and Literar y Realities,” Management Research News 27,, no. 11/12 (2004), pp. 1–28. Moti vation and needs across generations are also, discussed in R. Zemk e and B . Filipczak, Generations at Work: Managing the, Clash of Veterans, Boomers, Xers, and Nexter s in Your Workplace (New York:, AMACOM, 2000)., , 11/1/06 4:48:44 PM

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Motivating and Rewarding Employee Performance \\ CHAPTER 13, , 345, , NOTES, , hiL30123_ch13_314-345.indd 345, , 11/1/06 4:48:45 PM

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14, , MANAGING EMPLOYEE, ATTITUDES WELL-BEING, LEARNING OBJECTIVES, , AND, , After Reading This Chapter You Should Be Able to:, 1, , Describe the effect of emotions and attitudes on, employee behavior., , 2, , Identify four ways in which employees respond to job, dissatisfaction., , 3, , Explain how job satisfaction relates to customer service, and satisfaction., , 4, , Distinguish organizational commitment from continuance, commitment, including their effects on employee behavior., , 5, , 6, , Describe the stress experience and its consequences., , 7, , Summarize three common sources of stress in the workplace., , 8, , List five ways to manage work-related stress., , 9, , Discuss how managers can help employees improve their, work–life balance., , 10, , Identify the “Big Five” personality dimensions., , 11, , Explain how personality influences emotions, well-being,, job performance, and career satisfaction., , Discuss ways to strengthen organizational commitment., , Emotions in the Workplace, Emotions, Attitudes, and Behavior, Cognitive Dissonance, Job Satisfaction, Job Satisfaction and Work Behavior, Job Satisfaction and Performance, Job Satisfaction and Customer Satisfaction, Organizational Commitment, Watch Out for Continuance Commitment!, Building Organizational Commitment, Work-Related Stress and Its, Management, General Adaptation Syndrome, Consequences of Distress, Stressors: The Sources of Stress, Managing Work-Related Stress, Work–Life Balance, , hiL30123_ch14_346-375.indd 346, , / / / / / / / / / / / / / / /, , Personality Effects on Attitudes and, Well-Being, The Big Five Personality Dimensions, Effects of Personality on Emotions and, Attitudes, Effects of Personality on Stress and, Well-Being, Effects of Personality on Performance, Effects of Personality on Career Satisfaction, In Conclusion: Why Does It Matter?, Management Challenges, Management Portfolio, Closing Case: Rough Seas on the, LINK650, , 11/2/06 3:44:33 PM

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CXtec employees in, Syracuse, New York,, like to live up to their, company values,, which include having, fun at work., Courtesy of CXtec, , / / / / / / / / / / / / / / / / / / / / /, , alk into the offices of CXtec in Syracuse, New York, and you, might think employees are in the middle of a birthday party., Around the cubicles are colorful clusters of helium-filled balloons,, each representing a small token of the company’s appreciation for performing their work effectively. The computer networking equipment, company’s 300 staff members also enjoy a break room with billiards,, foosball, and air hockey. And if employees want a little more, enjoyment, the company sponsors miniature golf tournaments in the, office, tricycle races around the building, and “CXtec Idol” competitions. Of course all of this fits in with what the company stands for:, “Part of our core values is that work is fun,” explains Paula Miller,, CXtec’s director of employee and community relations., Fun at work? It sounds like an oxymoron. But to attract and motivate, valuable talent, companies are finding creative ways to generate positive, emotions in the workplace. They are also competing for the distinction of, being one of the best places to work. CXtec, for example, is rated as one, of the 50 best small and medium-sized companies to work for in America., W.L. Gore & Associates is one of the top five employers in America and, has been number one on a similar list in the United Kingdom over the, past three years because the manufacturer of fabrics (Gore-Tex), electronics, and industrial and medical products offers employees incredible, levels of autonomy (it has no formal bosses)., Ritz-Carlton Hotels in Shanghai, Hong Kong, and Kuala Lumpur, have dominated the list of Asia’s top eight employers, largely, , W, , hiL30123_ch14_346-375.indd 347, , because the firm recognizes employee achievements and offers, continuous career development. Vancouver City Savings Credit, Union is one the best places to work in Canada because the, financial institution helps employees manage workplace stress and, is a role model of corporate social responsibility. Pretoria Portland, Cement landed the top spot in South Africa after management, developed a clearer vision of the company’s future and handed more, responsibility over to employees to achieve that vision. Danish, toolmaker Unimerco is one of the best places to work in Europe,, partly because the company distributes earnings each day to its 300, employee–owners. “I look forward to coming to work every morning, and every day I go home happy,” says a Unimerco employee. “Isn’t, that the best life you can imagine?”, Wegmans Food Market consistently rates as one of the best, employers in America because managers treat employees as the, number 1 priority. “It’s more of you’re not part of a company, you’re part, of a family,” says Katie Southard, who works in customer service at a, Wegmans store in Rochester, New York. “You’re treated as an individual,, not just one of the 350 persons in the store.” With happy employees,, Wegmans enjoys one of the highest levels of customer loyalty and, lowest levels of employee turnover in the industry. Brenda Hidalgo, who, works at Wegmans in Buffalo, sums up the positive experience: “I’ve, worked at other places where you wake up and you say ‘Ech, I have to, go to work,’” she recalls. “Now I love to go to work.”1, , 11/10/06 4:43:00 AM

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348, , PART 4 // Leading, , emotions, Physiological, behavioral,, and psychological, episodes experienced, toward an object, person,, or event that create a state, of readiness., , previous two The, chapters examined how managers create a high-performance workforce, through staffing, training, and moti vation practices. These strategies can create a highl y, engaged, highl y skilled w orkforce focused on or ganizational objecti ves. The topics, of recr uiting, selecting, and training people, w hich were covered in Chapter 12, af fect, the individual’s ability to perfor m the assigned w ork and to ha ve clear role perceptions., The topics discussed in Chapter 13 connect directl y to emplo yee motivation. Although, both chapters refer red to emplo yee attitudes and w ell-being, these w ere secondar y, considerations., In contrast, this chapter looks at managerial practices that primaril y attempt to improve, employee emotions, attitudes, and w ell-being. These are the managerial acti vities that, helped CXtec, W.L. Gore & Associates, Ritz-Carlton, Vancouver City Savings Credit Union,, Pretoria Portland Cement, Unimerco, Wegmans, and many other f irms to become the best, employers in their countries or re gions. This chapter begins by describing the role of emotions and attitudes in the w orkplace, followed by an overview of the two most commonly, studied attitudes: job satisfaction and organizational commitment. Next we explore the significance of stress in the w orkplace, followed by specif ic strategies to minimize dysfunctional stress., Each of these topics vie ws employee attitudes and well-being as the goal. Yet as we will, point out, these practices also indirectl y influence emplo yee engagement, perfor mance,, turnover, and other performance-based outcomes. For instance, Vancouver City Savings Credit, Union (VanCity) treats its employees well because it is the right thing to do, but CEO Da vid, Mowat also points out that the financial institution’s people-first philosophy “is central to our, business case.” If employee attitudes and well-being had no effect on the organization’s bottom, line, would they still be on management’s agenda? The answer is probably yes at VanCity, but, many companies treat emplo yees w ell mainl y because of these indirect or ganizational, benefits., , // Emotions in the Workplace, , © Ted Goff., , hiL30123_ch14_346-375.indd 348, , Emotions have a profound ef fect on almost e verything we do in the w orkplace.2 This is a, strong statement—one y ou w ould rarel y f ind a decade ago in management research or, textbooks. For most of its histor y the f ield of management assumed that a person’s thoughts, and actions are go verned primaril y b y conscious reasoning (called cognitions ). But, groundbreaking neuroscience disco veries ha ve re vealed that our perceptions, attitudes,, decisions, and beha vior are influenced b y both co gnition and emotions, and that the latter, often have greater influence. By ignoring the role of emotions, we have limited our ability to, understand human behavior in the w orkplace. Today experts in management,, marketing, economics, and man y other social sciences are catching up b y, making emotions a key part of their research and theories.3, So w hat are emotions? Emotions are ph ysiological, beha vioral, and, psychological episodes e xperienced toward an object, person, or e vent that, create a state of readiness. 4 They are brief e vents that typicall y subside or, occur in waves lasting a few minutes. Emotions are directed toward someone, or something. For example, we experience joy, fear, anger, and other emotional, episodes toward tasks, customers, or a softw are program we are using. This, contrasts with moods, which are less intense emotional states that are not, directed toward anything in par ticular. Emotions are e xperiences regulating, how our body responds to the environment. When we are happy or bored, our, blood pressure, hear t rate, f acial muscles, v oice tone, and other features, change. These bodily changes relate to the fact that emotions put us in a state, of readiness. Most emotions are e xperienced unconsciousl y, but strong, emotions make us consciously aware of events that may affect our survival and, well-being.5, , 11/2/06 3:44:37 PM

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Managing Employee Attitudes and Well-Being \\ CHAPTER 14, , 349, , // E MOTIONS, ATTITUDES, AND BEHAVIOR, Emotions influence our thoughts and beha vior; but to understand ho w this w orks, we also, need to know about attitudes. Attitudes are clusters of beliefs, assessed feelings, and behavioral intentions toward a person, object, or event.6 Attitudes are judgments, whereas emotions, are experiences. In other words, attitudes involve conscious logical reasoning, whereas emotions operate as e vents, often without our a wareness. We also e xperience most emotions, briefly, whereas our attitude toward someone or something is more stable over time., Attitudes include three components: beliefs, feelings, and behavioral intentions. We’ll look, at each of them using attitude toward mergers as an illustration:, , attitudes, Clusters of beliefs,, assessed feelings, and, behavioral intentions, toward a person, object,, or event., , • Beliefs: These are established perceptions about the attitude object—what you believe to be, true. For example, you might believe that mergers reduce job security for employees in the, merged firms. Or you might believe that mergers increase the company’s competitiveness in, this era of globalization. These beliefs are perceived facts that you acquire from past, experience and other forms of learning., • Feelings: Feelings represent your positive or negative evaluations of the attitude object., Some people think mergers are good; others think they are bad. Your like or dislike of, mergers represents your assessed feelings toward the attitude object., • Behavioral intentions: These represent your motivation to engage in a particular behavior, with respect to the attitude object. You might plan to quit rather than stay with the, company during the merger. Alternatively, you might intend to e-mail the company CEO, to say that this merger was a good decision., Now we come to the important part for managers: how emotions and attitudes are connected, to each other and to beha vior. This process, w hich is illustrated in Figure 14.1 , has tw o, interrelated activities connected to cognition and emotion. On the cognitive side, your feelings, , Perceived environment, Cognitive process, , Emotional process, , Beliefs, Emotional, episodes, Attitude, , Feelings, , Behavioral, intentions, , Behavior, , F I G U R E 1 4 .1, Model of Emotions,, Attitudes, and Behavior, , hiL30123_ch14_346-375.indd 349, , 11/2/06 3:44:39 PM

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350, , PART 4 // Leading, , toward someone or something (such as a merger) are shaped by your beliefs about that person, or event. If you believe mergers threaten your career development and usually fail to improve, organizations’ competitiveness, you would likely have negative feelings toward mergers. Next,, feelings directly influence behavioral intentions.7 If you dislike mergers, you might intend to, quit or complain to the senior e xecutive team about y our company’s recently announced, merger. Whether you quit or complain depends on your personality, the current situation, and, what has worked well for you in the past., Finally, behavioral intentions are better than feelings or beliefs at predicting a person’s, behavior. Even so, beha vioral intentions do not perfectl y predict beha vior because the y, represent only the motivation to act, w hereas actual behavior is also caused b y the other, three factors in the MARS model—ability , role perceptions, and situational f actors. You, might plan to send an e-mail message to management complaining about the announced, merger, but perhaps you never get around to this task due to hea vy work obligations. You, might intend to quit y our job in reaction to the mer ger but end up sta ying because y ou, can’t find a better job., , ■ Google generates positive, emotions., , hiL30123_ch14_346-375.indd 350, , How Emotions Influence Attitudes and Behavior Now that we have outlined the cognitive explanation of how attitudes predict behavior, let’s turn to the right side ofFigure 14.1, which, shows how emotions influence our attitudes and behavior. Essentially we automatically attach, emotions to incoming infor mation when it is recei ved through our senses e ven though w e, have not consciously thought about it. 8 These are not calculated feelings; the y are automatic, and unconscious emotional responses based on thin slices of sensory information., Returning to our previous example, you might experience excitement, worry, nervousness, or happiness upon lear ning that your company intends to mer ge with a competitor., The large dots on the right side of Figure 14.1 illustrate these multiple emotional episodes, triggered by the merger announcement, subsequent thinking about the mer ger, discussion, with coworkers about the merger, and so on. These emotions are transmitted to the logical, reasoning process, where they swirl around and ultimatel y shape our conscious feelings, toward the merger.9 While you logically figure out whether the proposed merger is a good, or bad thing, y our emotions ha ve already for med an opinion, w hich then s ways y our, thoughts. If y ou e xperience e xcitement, delight, comfor t, and other positi ve emotions, whenever you think about the merger, these positive emotional episodes will tend to make, you favorably evaluate the merger.10, The effect of emotions on workplace attitudes has important management implications., When employees perform their jobs, they experience a variety of emotions that shape their, longer-term feelings toward the company, the boss, the job itself, and coworkers. The more, they experience positive emotions, the more employees form positive attitudes toward the, targets of those emotions. Thus an impor tant role of management is to create as man y, positive emotions as possible and minimize the incidence of negative emotions., The opening story of this chapter described how CXtec and several other companies inject more fun at work so employees experience plenty of positive emotional episodes each, day. Google, the company that created the ubiquitous search engine, is another sparkling, example. The company’s Googleplex (headquarters) in Mountain View, California, “resembles a glimmering playground for 20-somethings,” says one observer. The building is outfitted with lava lamps, exercise balls, casual sofas, foosball, pool tables, workout rooms, video, games, a restaurant with free gour met meals, and a small pool w here swimmers exercise, against an artificial current. Beach volleyball matches are held in the cour tyard, and roller, hockey games are pla yed in the parking lot. Goo gle executives have had to remind some, employees that making the Googleplex their permanent residence was against building code, regulations.11, An icon of the positi ve emotions movement is the Pik e Place F ish Market in Seattle,, where f ishmongers tur ned the mone y-losing, morale-draining business into a w orldfamous attraction by deciding to have fun at work, such as tossing f ish around and joking, with customers. Out of this turnaround came four Fish! principles: Play, make their day, be, there, and choose your attitude. To create an exciting workplace, employees need to lear n, , 11/2/06 7:54:59 PM

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Managing Employee Attitudes and Well-Being \\ CHAPTER 14, , 351, , how to play, just as the fishmongers toss fish and find other, ways to enjoy themselves at work. “Make their day” refers, to in volving clients and co workers so the y, too, ha ve a, positive experience. “Be there” means emplo yees need to, be focused (not mentall y in se veral places) and acti vely, engaged to ha ve fun. “Choose y our attitude” sa ys that, everyone has the po wer to choose ho w they feel at w ork., Although the environment might contribute to malaise, this, Fish! principle says that employees ultimately decide how, that environment will affect their emotions, attitudes, and, behavior.12, , // COGNITIVE DISSONANCE, Fishing for Positive Emotions Fishmongers at Pike, Up to this point w e ha ve e xplained ho w emotions and, Place Fish Market in Seattle turned the money-losing,, attitudes influence beha vior, y et there are situations in, morale-draining business into a world-famous attraction by, which the opposite occurs. A person’s actions sometimes, deciding to have fun at work. Their transformation through, influence his or her attitudes w hen they are inconsistent, positive emotions was so successful that companies around, with each other. This inconsistency potentially creates an, the world now follow the four Fish! principles: Play, make, uncomfortable tension, called cognitive dissonance,, their day, be there, and choose your attitude., that motivates people to change their attitudes so the y are, 13, © AP Photo/Elaine Thompson, more consistent with the behavior. Everyone experiences, some de gree of co gnitive dissonance from time to time., You remind your staff to show up to work on time, but you, arrive late for work a few days later. You teach your children to read class materials long, cognitive, before class, yet you hurriedly scan documents for an impor tant meeting just before the, dissonance, meeting begins., An uncomfortable tension, The extent to which people experience cognitive dissonance tension depends on how much, experienced when behavior, the behavior is public, important, and voluntary.14 First, there is usually much less tension if, is inconsistent with our, no one noticed the inconsistent beha vior. You are less lik ely to e xperience cognitive dissoattitudes., nance for being late if no one noticed, for instance, whereas dissonance might be quite strong, if the employees whom you encouraged a few days earlier to show up to work on time catch, you arriving late. The importance of the attitude and beha vior is a second f actor. You might, not feel uncomfor table about being caught ar riving late for work if lateness is considered a, minor indiscretion in your workplace. A third factor is how much control you have over the, behavior. You are more lik ely to experience cognitive dissonance if y ou could have avoided, being late for work than if the lateness is due to f actors beyond your control (such as unusually bad traffic congestion)., When people e xperience cognitive dissonance, the resulting tension moti vates them to, realign their attitudes and behavior. Because the behavior has already occurred (and is public,, so it can’t be denied), the most common way to reduce dissonance is to change the attitude. In, our example, if employees notice that y ou have shown up late for w ork, you might change, your attitude about the impor tance of arriving at work on time. In the future y ou might form, less of a negative attitude toward people who are late for work, and your new attitude about, punctuality might result in less lecturing to employees about this issue., Now that we have introduced the dynamics of emotions and work attitudes, let’s look more, closely at tw o of the most impor tant w ork attitudes: job satisf action and or ganizational, commitment., , // Job Satisfaction, Job satisfaction, a person’s evaluation of his or her job and work context, is probably the, most studied attitude in management. 15 It is an appraisal of the percei ved job, characteristics, work environment, and emotional experiences at work. Satisfied employees, , hiL30123_ch14_346-375.indd 351, , job satisfaction, A person’s evaluation of, his or her job and work, context., , 11/2/06 3:44:39 PM

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352, , PART 4 // Leading, , FIG UR E 1 4 .2 a, , Source: Gallup Organization, news releases, various years., , 100, 90, Percentage satisfied, , Is Everyone Satisfied?, This graph shows the, percentage of Americans, from 1989 to 2005 who said, they were somewhat or very, satisfied with their jobs., , 3%, 8%, , 3%, , 4%, , 10%, , 11%, , 3%, 11%, Completely, satisfied, , 80, 70, 60, , 61%, , 44%, , 51%, , 44%, , Somewhat, dissatisfied, , 50, 40, , Completely, dissatisfied, , 30, 20, , Somewhat, satisfied, , 28%, , 41%, , 35%, , 42%, , 10, 0, 1989, , 1997, , 2001, , 2005, , Year, , have a favorable evaluation of their job based on their obser vations and emotional experiences. Job satisf action is really a collection of attitudes about dif ferent aspects of the job, and work context. You might like your coworkers but be less satisf ied with your workload,, for instance., How satisf ied are emplo yees at w ork? Sur veys suggest that more than 85 percent of, Americans are satisf ied with their jobs, a f igure that has remained amazingl y consistent, over the past two decades (see Figure 14.2a). In fact, the percentage of Americans who say, they are “completel y satisf ied” has actuall y increased o ver the y ears. Around the w orld,, employees in Denmark and India are repor tedly the happiest at w ork. Most studies place, Americans in the upper quar tile of countries in ter ms of job satisf action. In contrast, job, satisfaction seems to be quite low among employees in China, South Korea, and Japan, as, indicated in Figure 14.2b.16, , // JOB SATISFACTION AND WORK BEHAVIOR, , exit–voice –loyalty–, neglect (EVLN), model, A model that outlines the, consequences of job, dissatisfaction., , hiL30123_ch14_346-375.indd 352, , In the highl y competitive fashion industry, Hugo Boss Industries commands an impressi ve, brand image and mark et share (30 percent for business suits in some mark ets). The Swiss, company’s success is due in part to a bonus plan that rewards managers based not just on return, on capital and other hard numbers but also on the soft numbers lik e employee satisfaction.17, Hugo Boss and many other firms closely monitor employee morale and reward managers who, keep morale high because attitudes and w ell-being affect employee behavior to some degree., A useful template to or ganize and understand the consequences of job dissatisf action is the, exit–voice–loyalty–neglect (EVLN) model. As the name suggests, the EVLN model, identifies four ways in which employees respond to dissatisfaction:18, • Exit refers to leaving the organization, transferring to another work unit, or at least, trying to make these exits. Employee turnover is a well-established outcome of job, dissatisfaction, particularly for employees with better job opportunities elsewhere., Conversely, companies whose employees have high job satisfaction report some of their, industries’ lowest turnover rates. For instance, when asked if she thought about working, somewhere else, Vancouver City Savings Credit Union accounts manager Lara Victoria, quickly replied, “No, they’d have to push me out. It’s worth every minute of it here.”19 An, important observation for managers is that exit usually follows specific “shock events,”, , 11/2/06 3:44:40 PM

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Managing Employee Attitudes and Well-Being \\ CHAPTER 14, , 353, , F I G U R E 1 4 .2 b, Denmark, , Is Everyone Satisfied?, (continued ), , 61, 55, , India, , Source: Based on Ipsos-Reid, survey of 9,300 employees in, 39 countries in the middle of, year 2000. See “Ipsos-Reid, Global Poll Finds Major, Differences in Employee, Satisfaction around the, World,” Ipsos-Reid news, release, January 8, 2001. A, sample of 22 countries across, the range is shown here,, including all of the topscoring countries., , 54, , Norway, 50, , United States, , 49, , Ireland, , 48, , Canada, , 48, , Germany, , 46, , Australia, , 44, , Mexico, 40, , Slovenia, , 38, , United Kingdom, Argentina, , 36, , Austria, , 36, 33, , Isreal, 28, , Brazil, 24, , France, 16, , Japan, , 14, , South Korea, 11, , China, , 11, , Czech Republic, , 10, , Ukraine, , 9, , Hungary, 0, , 10, , 20, , 30, 40, 50, Percentage very satisfied, , 60, , 70, , such as when employees believe their managers treat them unfairly.20 These shock events, generate strong emotions that energize employees to think about and search for alternative employment., • Voice refers to any attempt to change, rather than escape from, a dissatisfying situation., Voice can be a constructive response, such as recommending ways for management to, improve the situation; or it can be more confrontational, such as filing formal, grievances.21 In the extreme, some employees might engage in counterproductive, behaviors to get attention and force changes in the organization., • Loyalty has been described in different ways. The most widely held view is that “loyalists” are employees who respond to dissatisfaction by patiently waiting—some say they, “suffer in silence”—for a problem to work itself out or get resolved by others.22, • Neglect includes reducing work effort, paying less attention to quality, and increasing, absenteeism and lateness. It is generally considered a passive activity that has negative, consequences for the organization., Which of the four EVLN alternatives do employees use? It depends on the person and situation. As we have noted, people’s feelings translate into different behavioral intentions based, on their past experiences and personal preferences. Also, someone’s intention to use the exit,, voice, or other response depends on circumstances. With poor job prospects, employees are, less likely to use the e xit option. Those who identify with the or ganization are also more, likely to use their v oices rather than lea ve. Reactions to job dissatisf action also depend on, people’s personal values and personalities.23, , hiL30123_ch14_346-375.indd 353, , 11/2/06 3:44:40 PM

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354, , PART 4 // Leading, , // JOB SATISFACTION AND PERFORMANCE, One of the oldest beliefs in the business w orld is that “a happ y worker is a producti ve, worker.” At one time management e xperts said that this phrase is inaccurate. No w, based, on better research methods, the y have concluded that happ y workers actually are more, productive workers, but only to some extent. 24 There are a few reasons why this moderate, association between job satisfaction and performance isn’t stronger.25 One argument is that, general attitudes (such as job satisf action) don’t predict specif ic behaviors very well. As, we learned with the EVLN model, job dissatisf action can lead to a v ariety of outcomes, rather than lower job performance (neglect). Some employees continue to work productively, while they complain (voice), look for another job (exit), or patiently wait for a problem to, be fixed (loyalty)., A second explanation is that job performance leads to job satisfaction (rather than vice, versa), but only when performance is linked to valued rewards. Higher performers receive, more rewards and consequently are more satisfied than poorly performing employees who, receive fewer rewards. The connection betw een job satisf action and perfor mance isn’t, stronger because many organizations do not reward good performance. The third explanation is that job satisf action might influence employee motivation, but this has little influence on performance in jobs w here employees have little control o ver their job output, (such as assembly-line work). This point e xplains why the job satisf action–performance, relationship is strongest in complex jobs, where employees have more freedom to perform, their work or to slack off., , // JOB SATISFACTION AND CUSTOMER, SATISFACTION, Outback Steakhouse Inc. has become a phenomenal success stor y in America’s competitive, restaurant industry. In 1988 Outback’s four par tners opened a restaurant in Tampa, Florida,, based on popular images of casual lifestyles in the land Do wn Under. Today, Outback’s 65,000 employees work in 1,100 restaurants around the United States, and Canada. Although the Australian theme launched the compan y’s success,, Outback founder and CEO Chris Sulli van says the quality of staf f deser ves as, much credit. Specif ically, the company hires energized employees and creates a, culture that suppor ts them so the y stay with the compan y and provide excellent, service. This ser vice mak es customers happ y, w hich brings them back and, encourages them to recommend Outback to friends. The result of such customer, satisfaction is higher sales, which improve company profits.26, Outback Steakhouse is one of man y f irms w here managers belie ve that, customers are happier when employees are happier. “I realized a long time ago that, Sizzling Satisfaction at Outback, there w as a strong cor relation betw een emplo yee satisf action and customer, Restaurants The phenomenal, service,” says Gar y Pon, CEO of Pinnacol Insurance in Den ver. Virgin Group, success of Outback Restaurants is, founder Richard Branson echoes this vie w. “It just seems common sense to me, based on the employee–customer–, that if you start with a happy, well-motivated workforce, you’re much more likely, profit chain model, which says that, to have happy customers,” says Branson. Managers at Wegmans are so convinced, happy employees produce happy, that satisfied employees provide better customer service that the Rochester-based, customers, who produce happy, grocery chain’s motto is “Employees first, customers second.”27, shareholders. “Outback’s theory of, Management research generally agrees that job satisfaction enhances customer, success is that you hire the right, satisfaction.28 A few years ago Sears Roebuck & Co. calculated that a 5-point, people and take care of them,”, improvement in the retail giant’s job satisfaction survey scale increases customer, explained founder Chris Sullivan and, satisfaction ratings b y 1.3 points, w hich in tur n improves re venue g rowth b y, three colleagues in a recent journal, 0.5 percent. Mark eting experts have developed the “emplo yee–customer–profit, article., chain” model shown in Figure 14.3 , which illustrates how employee satisfaction, Courtesy of Outback Steakhouse, Inc., translates into customer satisfaction and profitability., , hiL30123_ch14_346-375.indd 354, , 11/2/06 3:44:41 PM

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Managing Employee Attitudes and Well-Being \\ CHAPTER 14, , 355, , F I G U R E 1 4 .3, Organizational, practices, , Higher revenue, and profits, , Employee satisfaction, with job and company, , • Satisfied clients, • More returning clients, • More client referrals, , • Lower turnover, • Friendly service, • Motivated staff, , Clients perceive, higher-value service, , Employee–Customer–, Profit Chain Model, , There are three reasons why happy employees tend to result in happy customers. First, as, we have mentioned, job satisfaction is related to employee performance—particularly higher, motivation to pro vide friendl y ser vice. This increased ef fort includes tr ying to ser ve, customers more effectively. Second, employees are usually in a more positi ve mood when, they feel satisf ied with their jobs and w orking conditions. Emplo yees in a good mood, display more naturall y friendly ser vice, which most customers inter pret as higher -value, service. Third, employees with higher job satisf action are less lik ely to quit their jobs, so, they have better knowledge and skills to serve clients. Lower turnover also gives customers, more consistent ser vice. There is some e vidence that customers build their lo yalty to, specific employees, not to the or ganization, so k eeping employee tur nover low tends to, build customer loyalty.29, Before lea ving this topic, w e should mention that job satisf action does more than, improve work behaviors and customer satisfaction. Job satisfaction is also an ethical issue, that influences the organization’s reputation in the community. People spend a large portion, of their time working in organizations, and many societies now expect companies to provide, work environments that are safe and enjo yable. Indeed, employees in se veral countries, closely monitor ratings of the best companies to w ork for—an indication that emplo yee, satisfaction is w orth considerable goodwill to emplo yers. This fact is apparent w hen an, organization has low job satisf action. The company tries to hide this situation, and w hen, morale problems become public, corporate leaders are usually quick to improve employee, attitudes., , // Organizational Commitment, Along with job satisf action, managers need to ensure that emplo yees have reasonably high, levels of organizational commitment. Organizational commitment refers to an employee’s emotional attachment to, identif ication with, and in volvement in a par ticular organization.30 It is the emplo yee’s pride and loyalty toward the organization. Managers need to pa y, attention to this attitude because loyal employees are less likely to quit their jobs and be absent, from work. They also tend to provide better customer service because long-tenure employees, have deeper knowledge of work practices, and clients like to do business with the same employees. Employees with g reater commitment also ha ve higher work motivation as well as, somewhat superior job perfor mance.31 Notice that w e recommended that employees should, have “fairly high” le vels of or ganizational commitment. Employees with v ery high loyalty, , hiL30123_ch14_346-375.indd 355, , organizational, commitment, An employee’s emotional, attachment to,, identification with, and, involvement in a particular, organization., , 11/2/06 3:44:41 PM

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356, , PART 4 // Leading, , tend to ha ve high confor mity, w hich results in lo wer creati vity. There are also cases of, dedicated employees w ho have violated la ws to defend the or ganization. However, most, companies suffer from too little rather than too much employee loyalty., , // WATCH OUT FOR CONTINUANCE COMMITMENT!, continuance, commitment, An employee’s calculative, attachment to an, organization, whereby an, employee is motivated to, stay only because leaving, would be costly., , ■ Smith Barney’s golden, handcuffs., , Organizational commitment is different from continuance commitment Whereas, ., organizational commitment is an emotional bond to the or ganization, continuance commitment is a calculati ve attachment .32 Employees have high continuance commitment w hen, they do not par ticularly identify with the or ganization where they work but feel bound to, remain there because it would be too costly to quit. In other words, they choose to stay because the calculated (typically financial) value of staying is higher than the value of working somewhere else. You can tell someone has high calculative commitment when she or he, says, “I hate this place but can’ t afford to quit!” This reluctance to quit ma y be due to the, risk of losing a large bonus by leaving early or because the employee is well established in, the community.33, Unfortunately managers seem to confuse or ganizational commitment with continuance, commitment. Executives often tie employees financially to the organization through low-cost, loans, stock options, defer red bonuses, and other “golden handcuf fs.” For example, several, Wall Street brokerage firms boast that fewer than 10 percent of their employees quit each year,, but one of the key reasons is that most staff participate in a deferred compensation scheme in, which performance bonuses are held back for at least tw o years. If the employee quits, every, penny of the deferred bonus is forfeited. James McCar thy is fighting to get $287,000 that he, earned as a broker at Smith Bar ney, but the company says it can refuse to pa y his bonus because he quit his job.34, Financial incentives might reduce turnover, but they also increase continuance commitment,, not employee loyalty. Research suggests that emplo yees with high le vels of continuance, commitment have lower performance ratings and are less likely to engage in or ganizational, citizenship behaviors! Furthermore, unionized employees with high continuance commitment, are more likely to use for mal grievances, whereas employees with high organizational commitment engage in more constr uctive problem solving w hen employee–employer relations, sour.35 Although some level of financial connection may be necessary, employers still need to, win employees’ hear ts (organizational commitment) be yond tying them f inancially to the, organization (continuance commitment)., , // BUILDING ORGANIZATIONAL COMMITMENT, There are almost as many ways to build organizational loyalty as topics in this te xtbook, but, the following list is most prominent in the literature:, , trust, A psychological state, comprising the intention to, accept vulnerability based, on positive expectations of, the intent or behavior of, another person., , hiL30123_ch14_346-375.indd 356, , • Justice and support: Employee loyalty is higher in organizations that fulfill their obligations to employees and abide by humanitarian values, such as fairness, courtesy, forgiveness, and moral integrity. These values relate to the recommendation in Chapter 13 that, managers need to continually pay attention to the fairness of their decisions, such as the, distribution of rewards and resources. The more justice employees perceive, the higher, their loyalty to the organization. Similarly, organizations that support employee wellbeing tend to earn higher levels of loyalty in return.36, • Shared values: The definition of organizational commitment refers to a person’s identification with the organization, and that identification is highest when employees believe, their values are congruent with the organization’s dominant values (see Chapter 10)., Values congruence makes employees feel more comfortable with corporate decisions.37, • Trust: Chapter 11 introduced the concept of trust, which is defined as a psychological, state comprising the intention to accept vulnerability based on positive expectations of the, intent or behavior of another person.38 Trust means putting faith in the other person or, , 11/2/06 3:44:41 PM

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Managing Employee Attitudes and Well-Being \\ CHAPTER 14, , 357, , group. It is also a reciprocal activity: To receive trust, you must demonstrate trust., Employees identify with and feel obliged to work for an organization only when they trust, its leaders. This explains why layoffs are one of the greatest blows to employee loyalty:, By reducing job security, companies reduce the trust employees have in their employer, and the employment relationship.39, • Organizational comprehension: Organizational commitment is a person’s identification, with the company, so it makes sense that this attitude is strengthened when employees, understand the company, including its past, present, and future. Thus loyalty tends to, increase with open and rapid communication to and from corporate leaders, as well as, with opportunities to interact with coworkers across the organization. We will discuss, organizational communication strategies in Chapter 17.40, • Employee involvement: Employees feel that they are part of the organization when they, contribute to decisions that guide the organization’s future. This employee involvement, also builds loyalty because giving this power demonstrates the company’s trust in its, employees., Organizational commitment and job satisf action represent two of the most often studied, and discussed attitudes in the workplace. Each is linked to emotional episodes and co gnitive, judgments about the w orkplace and relationships with the compan y. Emotions also pla y an, important role in another concept that is on e veryone’s mind these da ys: stress. Indeed ,, managing work-related stress is central to managing employee well-being. Over the next few, pages we will e xamine the stress process, its causes, and , most impor tant, how to improve, employee well-being by managing work-related stress., , // Work-Related Stress and Its Management, , stress, Joe Straitiff realized that his leisure life w as in trouble when his boss hung a huge neon sign, An adaptive response to a, saying “Open 24 Hours.” The former Electronic Arts (EA) software developer also received, situation that is perceived, frequent e-mail messages from the boss to the team, sa ying that he w ould see them on the, as challenging or, weekend. “You can’t work that man y hours and remain sane, ” says Straitiff. “It’s just too, threatening to a person’s, harsh.” Straitiff’s complaints were not exaggerations. Two days after joining EA’s Los Angeles, well-being., operations, video programmer Leander Hasty w as sucked into a “cr unch” period of intense, work on Lord of the Rings: The Battle for Middle Earth. Soon the entire team w as working, 13-hour da ys, se ven da ys per w eek., Exasperated, Hasty’ s f iancée, Erin, Hoffman, wrote a lengthy diatribe on the, Electronic Stress Electronic Arts (EA),, Internet describing the dire situation., the world’s largest independent video, “The love of my life comes home late at, game company, has come under pressure, night complaining of a headache that will, to ease the long hours that its employees, not go a way and a chronicall y upset, are expected to work, particularly during, stomach,” she wrote. Within two days she, “crunch time”—the months just before, received more than 1,000 sympathetic, final release of its products. EA has, messages from people at EA and other, already settled two lawsuits launched by, video game companies. This flashpoint, graphics artists claiming overtime pay., sparked several lawsuits against EA for, Leander Hasty’s financée, Erin Hoffman, unpaid overtime.41, (both shown here), wrote a lengthy, Emplo, yees at Electronic Arts and, diatribe on the Internet describing the, many other organizations are experiencdire situation. Within two days she, ing increasing levels of w ork-related, received more than 1,000 sympathetic, stress. Stress is an adaptive response, messages from people at EA and other, to a situation that is percei ved as chalvideo game companies., lenging or threatening to a person’ s, © 2002 Richard Koci Hernandez, San Jose Mercury, well-being.42 The stress response is a, News, complex emotion that produces, , hiL30123_ch14_346-375.indd 357, , 11/2/06 3:44:42 PM

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358, , PART 4 // Leading, , FIG UR E 1 4 .4, A World Full of StressedOut Employees, Sources: T. Haratani, “Job, Stress Trends in Japan,” in, Job Stress Trends in East Asia, (Proceedings of the First East, Asia Job Stress Meeting), ed., A. Tsutsumi (Tokyo: Waseda, University, January 8, 2000),, pp. 4–10; Canadian Mental, Health Association, The 2001, Canadian Mental Health, Survey (Toronto: Canadian, Mental Health Association,, 2001); “New Survey:, Americans Stressed More, Than Ever,” PR Newswire,, June 26, 2003; “Hong Kong, People Still Most Stressed in, Asia—Survey,” Reuters News,, November 2, 2004; E. Galinsky, et al., Overwork in America:, When the Way We Work, Becomes Too Much (New, York: Families and Work, Institute, March 2005);, M. Mandel, “The Real Reasons, You’re Working So Hard...and, What You Can Do about It,”, BusinessWeek, October 3,, 2005, p. 60; Mind, Stress and, Mental Health in the, Workplace (London: Mind,, May 2005); D. Passmore,, “We’re All Sick of Work,”, Sunday Mail (Brisbane),, November 27, 2005, p. 45., , • 44% of Americans say they are often or very often overworked; 26% experienced, this in the previous month., • 80% of Americans feel too much stress on the job; nearly half indicate that they, need help coping with it., • Approximately one in every four employees in the United Kingdom feels “very or, extremely stressed.”, • More than 50% of Canadians feel really stressed a few times each week; 9, percent of them feel this way all the time., • A survey of 4,700 people across Asia reported that one-third were feeling more, stress than in the recent past; stress is highest in Taiwan and lowest in Thailand., • 53% of Australian employees across all occupations feel under pressure a, significant amount of the time; one-fifth say they feel exhausted on the job., • The percentage of Japanese employees who feel “strong worry, anxiety, or, stress at work or in daily working life” has increased from 51% in 1982 to almost, two-thirds of the population today., , physiological changes to prepare us for “fight or flight”—to defend against a threat or flee, from it. Specifically our heart rates and perspiration increase, muscles tighten, and breathing speeds up. Our bodies also move more blood to our brains, release adrenaline and other, hormones, fuel our systems by releasing more glucose and fatty acids, activate systems that, sharpen our senses, and use resources that would normally go to our immune systems., We often hear about stress as a ne gative e xperience. This is distress —physiological,, psychological, and beha vioral deviation from health y functioning. Ho wever, some le vel of, stress—called eustress—is also a necessary part of life because it activates and motivates people, to achieve goals, change their environments, and succeed in life’s challenges.43 Our focus will be, on the causes and management of distress because it has become a chronic problem in many, societies. Figure 14.4 highlights the extent of work-related stress around the world., , // GENERAL ADAPTATION SYNDROME, general adaptation, syndrome, A model of the stress, experience, consisting of, three stages: alarm, reaction, resistance, and, exhaustion., , The stress experience is a physiological response called the general adaptation syndrome, that occurs through the three stages sho wn in Figure 14.5.44 The alarm reaction stage occurs, when a threat or challenge acti vates the physiological stress responses that w ere just noted., Our energy level and coping effectiveness initially decrease because we have not prepared for, the stress. The second stage, resistance, activates various biochemical, psycholo gical, and, behavioral mechanisms that give us more energy and engage coping mechanisms to overcome, or remove the source of stress. To focus energy on the source of the stress, our bodies reduce, resources to the immune system during this stage. This explains why we are more lik ely to, catch a cold or other illness when we experience prolonged stress., People have a limited resistance capacity , and if the stress persists, the y will e ventually, move into the third stage, exhaustion. Most of us are ab le to remo ve the source of stress or, remove ourselv es from that source before becoming too e xhausted. Ho wever, people w ho, frequently reach e xhaustion have increased risk of long-ter m physiological and psychological, damage.45, , // CONSEQUENCES OF DISTRESS, Stress takes its toll on the human body.46 Many people experience tension headaches, muscle, pain, and related problems due to muscle contractions from the stress response. Studies ha ve, found that high stress levels also contribute to cardiovascular disease, including heart attacks, and strokes. They also produce various psychological consequences, such as job dissatisfaction,, moodiness, depression, and lo wer or ganizational commitment. Fur thermore, v arious, , hiL30123_ch14_346-375.indd 358, , 11/2/06 3:44:43 PM

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Managing Employee Attitudes and Well-Being \\ CHAPTER 14, , 359, , F I G U R E 1 4 .5, Stage 1, Alarm reaction, , Stage 2, Resistance, , Stage 3, Exhaustion, , Ability to cope, , High, , General Adaptation, Syndrome, Source: Adapted from H., Selye, The Stress of Life, (New York: McGraw-Hill,, 1956)., , Normal, state, , Low, Time, , behavioral outcomes ha ve been link ed to high or persistent stress, including impaired job, performance, poor decision making, and more w orkplace accidents and aggressive behavior., Most people react to stress through “f ight or flight, ” so increased absenteeism is another, outcome because it is a form of flight.47, , // STRESSORS: THE SOURCES OF STRESS, The general adaptation syndrome describes the stress experience; but to manage work-related, stress, we must understand its causes. Stressors include any environmental conditions that, place a ph ysical or emotional demand on a person. 48 As you might imagine, people f ace, numerous stressors at work. In this section we highlight three of the most prevalent stressors:, harassment and incivility, workload, and lack of task control., , stressors, Any environmental, conditions that place a, physical or emotional, demand on a person., , Harassment and Incivility For almost seven years Devander Naidu took more abuse from his, boss than most of us would experience in a lifetime. The assistant security and fire control manager received ongoing v erbal abuse, racial taunts (Naidu is Indo-F ijian), threats of physical ■ Psychological harassment, violence, swearing, insults to his wife, and le wd behavior from his senior manager responsible at News Ltd., for security and f ire at News Ltd. (the Australian subsidiary of News Corp., which owns Fox, Network). The manager also forced Naidu to perfor m construction work at his home during, work hours. Naidu complained about these incidents to his manager at Group 4 Securitas, the, security firm that actually employed him, but the Group 4 manager did little to help, fearing loss, of the Ne ws Ltd. contract. Ov er time Naidu de veloped severe depression and posttraumatic, psychological, stress disorder as a result of the psychological abuse. The senior manager was sacked after News, harassment, Ltd.’s internal investigation found sufficient evidence of his behavior problems. (Naidu’s situaRepeated and hostile or, tion became known only when News Ltd. investigated claims b y female staf f that the senior, unwanted conduct, verbal, manager had sexually harassed them.) Naidu later sued and w on compensation against News, comments, actions, or, Ltd. and Group 4 for their failure to stop the senior manager’s harassment.49, gestures that affect an, Devander Naidu e xperienced e xtreme and prolonged psychological harassment., employee’s dignity or, Psychological harassment includes repeated and hostile or unwanted conduct, verbal comments,, psychological or physical, actions, or gestures that affect an employee’s dignity or psychological or physical integrity and, integrity and that result, that result in a har mful work environment for the employee. This covers a broad landscape of, in a harmful work, behaviors—from threats and bullying to subtle yet persistent forms of incivility.50, environment for the, tunately, Unfor psychological harassment exists to some degree in almost all workplaces,, employee., and much of it is caused b y managers. One study found that 40 percent of federal cour t, , hiL30123_ch14_346-375.indd 359, , 11/2/06 3:44:43 PM

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360, , sexual harassment, A type of harassment that, includes unwelcome, conduct of a sexual nature, that detrimentally affects, the work environment or, leads to adverse jobrelated consequences for, its victims., , Karoshi Takes Its Toll in, Japan Throughout Asia,, professionals are working, long work hours as a badge, of honor. For some, it’s a, short-lived honor. According, to the Japanese, government, employees, who work more than 80, hours of overtime per month, have a significantly higher, risk of karoshi—death from, overwork. Karoshi is also, becoming a serious concern, in Taiwan and China, where, it is called guolaosi., © Getty Images, , PART 4 // Leading, , employees in Michigan had experienced workplace incivility within the past f ive years. Two, large surveys reported that 9 percent of European w orkers and nearly 20 percent of British, workers suffered from workplace bullying over the previous 12 months. More than half of the, 1,800 lawyers polled in an Australian survey said that they had been bullied or intimidated on, the job . Psycholo gical harassment has become such a prob lem that some European, governments explicitly prohibit it in the w orkplace. When the province of Quebec, Canada,, recently passed the f irst workplace antiharassment legislation in Nor th America, more than, 2,500 complaints were received in the first year alone!51, Sexual harassment is a type of harassment that includes unw elcome conduct of a, sexual nature that detrimentall y affects the w ork environment or leads to adv erse jobrelated consequences for its victims. One form of sexual harassment, called quid pro quo ,, includes situations in which a person’s employment or job perfor mance is conditional on, unwanted se xual relations (for e xample, a male super visor threatens to f ire a female, employee if she does not accept his sexual advances). The second and more common form, of se xual harassment, called hostile w ork en vironment, includes se xual conduct that, interferes with an indi vidual’s work perfor mance or creates an intimidating, hostile, or, offensive w orking en vironment. The def inition of se xual harassment leads to, complications—and interpersonal stress—because men have a narrower interpretation than, do w omen of w hat constitutes hostile w ork en vironment se xual harassment. 52 Sexual, harassment sometimes escalates into psycholo gical harassment after the alle ged victim, complains about the sexual wrongdoing., Work Overload A half-century ago social scientists predicted that technolo gy would allow, employees to enjoy a 15-hour workweek at full pay by 2030. So f ar it hasn’t turned out that, way. Americans e xperience considerab le work o verload—working more hours and more, intensely during those hours than they can reasonably cope with. Surveys by the Families and, Work Institute repor t that 44 percent of Americans say they are o verworked, up from 28, percent who felt this w ay three y ears earlier. This work overload is also the main cause of, work–family conflicts because overworked employees have insufficient time to satisfy their, nonwork roles of being a parent, spouse, and so forth.53, Why do employees work such long hours? One e xplanation is the combined ef fects of, technology and globalization. “Everyone in this industry is working harder now because of, e-mail, wireless access, and globalization, ” says Christopher Lochhead , chief mark eting, officer of Mercury Interactive, a California-based consultancy with offices in 35 countries., “You can’t even get a rest on the w eekend,” he says. A second cause, according to a recent, study, is that many people are caught up in consumerism; they want to buy more goods and, services, which requires more income ear ned through longer work hours. A third reason,, called the “ideal w orker nor m,” is that professionals e xpect themselves and others to, work longer work hours. For many people, toiling away far beyond the normal workweek, is a badge of honor—a symbol of their superhuman capacity to perfor m better than, others., The ideal worker norm is particularly strong in Japan, Korea, China, and other Asian, countries, which has led to the increasing incidence of karoshi—death from overwork.54, The Japanese government records 100–200 cases each y ear, but these include only cases, in which family members receive compensation. Experts say the karoshi death toll in, Japan is probably closer to 10,000, and that up to 1 million white-collar employees, are at risk. According to the Japanese go vernment, employees who work more, than 80 hours of overtime per month have a signif icantly higher risk of karoshi., Currently more than 20 percent of male Japanese employees exceed that level of, overtime.55, Low Task Control As a private driver for an executive in Jakarta, Eddy knows, that traffic jams are a w ay of life in Indonesia’ s largest city. “Jakarta is traf fic, congestion,” he complains. “ All of the streets in the city are cro wded with, , hiL30123_ch14_346-375.indd 360, , 11/2/06 3:44:44 PM

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Managing Employee Attitudes and Well-Being \\ CHAPTER 14, , 361, , vehicles. It is impossib le to avoid this distressing f act every day.” Eddy’s boss complains, when traffic jams make him late for appointments, which makes matters even more stressful., “Even watching soccer on TV or talking to my wife doesn’t get rid of my stress. It’s driving, me mad.”56, Eddy and many other people e xperience stress due to a lack of task control. Along with, driving through congested traffic, low task control occurs where the employee’s work is paced, by a machine, the job in volves monitoring equipment, or the w ork schedule is controlled by, someone else. Computers, cell phones, and other technology also increase stress by limiting a, person’s control of time and privacy.57, The extent to which low task control is a stressor increases with the burden of responsibility, the employee must carry. Assembly-line workers have little task control, but their stress can, also be fairly minimal if their level of responsibility is also low. In contrast, sports coaches are, under immense pressure to win g ames (high responsibility) yet have little control over what, happens on the playing field (low task control). Similarly, Eddy (the Jakarta driver) is under, pressure to get his emplo yer to a par ticular destination on time (high responsibility), but he, has little control over traffic congestion (low task control)., , // MANAGING WORK-RELATED STRESS, Some degree of stress is good (eustress), but for the most part managers need to figure out, how to minimize distress among their staf f. Most stress management strate gies can be, organized into the f ive categories summarized in Figure 14.6: withdraw from the stressor,, change stress perceptions, control stress consequences, receive social support, and remove, the stressor., Withdraw from the Stressor One set of strate gies for minimizing workplace stress is to, permanently or temporarily remove employees from the stressor. Permanent withdrawal occurs, when emplo yees are transfer red to jobs that better f it their competencies and v alues., Temporarily withdrawing from stressors involves distancing oneself for a short time (perhaps, a few minutes or weeks) from the stressor. Some companies even set up workplace temporary, retreats to help employees manage stress. Online marketing firm Brann Baltimore created an, Aquarium Room complete with soothing b lue lights, b lue walls, and bubb le columns. The, room, w hich o verlooks the National Aquarium in Baltimore, e ven has a “sandbo x” so, , Stress Management Strategy, , Description, , Examples, , Withdraw from the stressor., , Temporarily moving away from the, source of stress., Improving the employee’s beliefs, about his or her ability to cope with, the stress and its sources., Improving the employee’s, physiological capacity to withstand, the effects of stress., Psychological and informational, support from friends, coworkers,, managers, and others., Removing the source of stress, from the work environment, or, moving employees to jobs with a, better fit., , Work breaks, days off, vacations, and, sabbaticals., Increasing employee confidence,, providing humor., , Change stress perceptions., , Control stress consequences., , Receive social support., , Remove the stressor., , FIG U RE 1 4 .6, , hiL30123_ch14_346-375.indd 361, , Relaxation and meditation, techniques, wellness programs., Supportive leadership, social, interaction, support groups., Reassign employees; minimize, noise, unsafe conditions,, harassment., , Workplace-Related Stress Management Practices, , 11/2/06 3:44:44 PM

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362, , PART 4 // Leading, , Singing the Stress Away Employees at Liggett-Stashower don’t have to retreat far from, the stresses of work. The Cleveland advertising firm has three theme rooms specially, designed for creativity and respite: a bowling room, Zen room, and a karaoke room (shown, here) where employees can sing their stress away., Courtesy of Liggett-Stashower Inc., , employees can dip their bare feet in sand. When employees at Liggett-Stashower Inc. need a, short break from the daily stresses of work, they retreat to one of three theme rooms specially, designed for creati vity and respite. Staf f at the Cle veland adv ertising f irm can enter the, bowling room and knock down a few pins. Or they might try out the Zen room, which serves, as a quiet, relaxing place to think. The third choice is a karaok e room where employees can, sing their stress away. “The higher the stress le vel, the more singing there is going on, ” says, Kristen Flynn, a Liggett art director.58, Days off and vacations represent somewhat longer temporary withdrawals from stressful, conditions. One study of a police and emergency response service department found that this, leisure time signif icantly improved employees’ ability to cope with work-related stress. Paid, sabbaticals are offered by several employers, including McDonald’s restaurants and accounting f irm KPMG. A four-month fully paid sabbatical is mandator y every f ive years at Ball, Janik, a law firm in Portland, Oregon.59, Change Stress Perceptions Employees often experience different levels of stress in the, same situation because the y ha ve dif ferent le vels of self-conf idence and optimism., Consequently cor porate leaders need to f ind ways to strengthen emplo yees’ conf idence, and self- esteem so that job challenges are not percei ved as threatening. A study of newly, hired accountants reported that personal goal setting and self-reinforcement can reduce the, stress people e xperience when they enter ne w work settings. 60 Humor is another w ay to, improve optimism and create positi ve emotions by taking some psychological weight off, the situation., Control the Consequences of Stress Coping with workplace stress also involves controlling its consequences. For this reason many companies have fitness centers where employees, can keep in shape. Research sho ws that physical exercise reduces the ph ysiological consequences of stress b y helping emplo yees moderate their breathing and hear t rates, muscle, tension, and stomach acidity .61 Another way to control the ph ysiological consequences of, stress is through relaxation and meditation. F or instance, emplo yees at phar maceutical, , hiL30123_ch14_346-375.indd 362, , 11/2/06 3:44:45 PM

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Managing Employee Attitudes and Well-Being \\ CHAPTER 14, , company AstraZeneca practice a form of meditation called Qi Gong during department meetings and coffee breaks. Research has found that Qi and other forms of meditation ease anxiety,, lessen blood pressure and muscle tension, and moderate breathing and hear t rates. 62 Along, with fitness and relaxation or meditation, many firms have shifted to the broader approach of, wellness programs. These programs educate and suppor t employees in better nutrition and, fitness, regular sleep, and other good health habits., Many large employers offer employee assistance programs (EAPs) —counseling, services that help employees overcome personal or or ganizational stressors and adopt more, effective coping mechanisms. Most EAPs are broad programs that assist employees with any, work or personal prob lems. Family problems often represent the lar gest percentage of EAP, referrals, although this varies with industry and location. For instance, Vancouver City Savings Credit Union, w hich was described at the be ginning of this chapter, received an award, from the American Psychological Association for the posttraumatic stress counseling program, offered to employees after a robbery.63 EAPs can be one of the most effective stress management interventions if the counseling helps emplo yees understand stressors, acquire stress, management skills, and practice those skills.64, , 363, , employee assistance, programs (EAPs), Counseling services that, help employees overcome, personal or organizational, stressors and adopt more, effective coping, mechanisms., , Receive Social Support Social suppor t from co workers, super visors, f amily members,, friends, and others is generally regarded as one of the more effective stress management practices. Social suppor t refers to a person’s interpersonal transactions with others and in volves, providing either emotional or infor mational support to buffer the stress experience. Seeking, social support is called a “tend and befriend” response to stress, and research suggests that, women often follow this route rather than the “fight or flight” alternative mentioned earlier.65, Social support reduces stress in at least three w ays.66 First, employees improve their perceptions that they are valued and worthy. This, in turn, increases resilience because they have, higher self-esteem and conf idence to cope with stressors. Second , social suppor t provides, information to help employees interpret, comprehend, and possibly remove stressors. For instance, social suppor t might reduce a ne w employee’s stress if co workers describe w ays to, handle difficult customers. Finally, emotional support from others can directly help to buffer, the stress e xperience. This last point reflects the idea that “miser y loves company.” People, seek out and benef it from the emotional suppor t of others w hen the y f ace threatening, situations.67, Social support is an important way to cope with stress that everyone can practice by maintaining friendships. This includes helping others when they need a little support in facing life, stressors. Managers can strengthen social support by providing opportunities for social interaction among employees as w ell as their f amilies. They also need to practice a suppor tive, leadership style when employees work under stressful conditions and need this social support., Mentoring relationships with more senior emplo yees may also help junior emplo yees cope, with organizational stressors., Remove the Stressor The stress management strategies described so far may keep employees “stress-fit,” but they don’t solve the fundamental causes of stress. F or this reason, some experts argue that the onl y way companies can ef fectively manage stress is b y removing the stressors that cause unnecessar y strain and job bur nout. Removing stressors, usually begins by identifying areas of high stress and determining their main causes. Managers can also reduce stress b y giving employees more control over their work and work, environment. They can also ensure that emplo yees are assigned to positions that match, their competencies., Noise and safety risks are stressful, so impro ving these conditions w ould also go a long, way to minimize stress in the workplace. Workplace harassment can be minimized by carefully, selecting employees and ha ving clear guidelines for beha vior and feedback to those w ho, violate those standards. 68 Finally, managers must f ind ways to give employees better work–, life balance, which refers to minimizing conflict betw een work and nonw ork demands., Work–life balance has become such an impor tant issue that it receives closer attention in the, next section., , hiL30123_ch14_346-375.indd 363, , work–life balance, A state of minimal conflict, between work and nonwork demands., , 11/2/06 3:44:46 PM

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364, , PART 4 // Leading, , // WORK–LIFE BALANCE, , Best Buy Flexes Its, Hours Not long ago (and, to some extent still in, some departments), Best, Buy was a 24/7 culture in, which employees were, expected to work long, hours in the office. Today, the Minneapolis-based, electronics store chain has, adopted a policy giving, employees freedom to, arrive early or late as long, as they get their work, done. The change has, improved morale, team, performance, and work–, life balance., © AP Photo/Chris Carlson, , One of the top issues facing managers in recent years is how to create a work environment that, offers employees work–life balance. Work–life balance was seldom mentioned a couple of, decades ago. Most employees assumed that they would put in long hours to ascend the corporate ladder. Asking the boss to accommodate nonwork responsibilities and interests was almost, a sign of betrayal.69 But two-income families, the increasing number of work hours over the, past decade, and Gen-X/Gen-Y e xpectations ha ve made w ork–life balance a mandator y, condition in today’s employment relationship. In f act, various surveys report that work–life, balance is one of the top f actors that job applicants consider w hen looking for work and one, of the most important indicators of career success—far ahead of salary, job responsibility, and, other factors.70, Managers can support work–life balance in many ways. To begin, they can offer flexible, work hours in w hich employees can ar range to be gin and end their w orkdays earlier or, later, depending on their personal needs or preferences. Best Buy has adopted this approach, with striking results. Not long ago the Minneapolis-based electronics store chain, encouraged a 24/7 work ethos. One manager gave out awards to the employees who turned, on the lights in the morning and turned them out at night. Darrell Owens recalls staying at, work for three straight days to write a report that was suddenly due. The Best Buy veteran, got a bonus and vacation but ended up in hospital. Today Best Buy offers a more flexible, work arrangement called ROWE: results-oriented work environment. Employees now work, when and where they like to get the job done. They can arrive early or late for work, head, home to chauffeur kids for an hour, and then resume work with cell phone or e-mail access., Employees mark on a w hiteboard whether they are in the office and, if not, whether they, are available by cell phone or e-mail during the da y. The ROWE initiative has resulted in, lower employee turnover, higher morale and team performance, and much better work–life, balance.71, Job sharing is another work–life balance initiative in which a position is split between two, people. In a typical arrangement two employees work different parts of the week with some, overlapping work time in the weekly schedule to coordinate activities.72 A third strategy is to, offer maternity, paternity, and other for ms of personal leave so employees have more time, and flexibility to raise a f amily, care for elderl y parents, or tak e advantage of a personal, experience. The U.S. Family and Medical Lea ve Act grants employees up to 12 w eeks of, unpaid job-protected leave per year for the birth and care of the newborn child. However, almost every other developed nation requires employers to provide paid maternity leave.73 Volvo is one of the more generous companies in the United States,, offering 40 weeks of paid maternity leave., Telecommuting Along with fle xible hours, job sharing, and personal lea ve,, companies are helping employees to experience more work–life balance through, telecommuting (also called teleworking). Telecommuting occurs when employees, work at home or a remote site, usuall y with a computer connection to the of fice., Consider Karen Dunn Kelley’s daily commute. She puts her school-aged children, on the bus, feeds breakfast to her 19-month-old before handing him off to a nanny,, and then takes a short walk from her house to the office over her garage. Kelley is, an executive with Houston-based AIM Management Group, yet the home office, where she oversees 40 staff and $75 billion in assets is located in Pittsburgh.74, More than a quarter of American employees consider themselves telecommuters,, and more than 20 percent work at home at least one day each month. Approximately, 10 percent of Canadian and 6 percent of Japanese emplo yees telecommute; the, Japanese government wants to increase that figure to 20 percent by 2010 as a way to, reduce traffic congestion.75 Some research suggests that telecommuting potentially, lessens emplo yee stress b y of fering better w ork–life balance and dramaticall y, trimming time lost through commuting to the of fice. Under some circumstances it, also increases productivity and job satisfaction. Nortel Networks reports that 71 percent, , hiL30123_ch14_346-375.indd 364, , 11/2/06 3:44:47 PM

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Managing Employee Attitudes and Well-Being \\ CHAPTER 14, , 365, , of its U.K. staff members feel more empowered through telecommuting. Others point out that, telecommuting reduces the cost of of fice space and impro ves the environment by cutting, pollution and traffic congestion.76, Against these potential benef its, telecommuters f ace a number of real or potential, challenges.77 Although telecommuting is usuall y introduced to impro ve work–life balance,, family relations ma y suf fer rather than impro ve if emplo yees lack suf ficient space and, resources for a home of fice. Some studies also repor t that telecommuting ma y increase the, number of people w ho work long hours, tak e time away from f amily, and increase pressure, after normal work hours. Unfulfilled social needs are another common complaint, particularly, among telecommuters who rarely visit the office. The bottom line of telecommuting is that it, can potentially improve work–life balance, but it still requires management support to ensure, that this balance occurs., , // Personality Effects on Attitudes, and Well-Being, Throughout this chapter we have emphasized that managers make a difference in helping employees feel better at work. Yet to some extent employee attitudes and well-being are also influenced by employees’ personalities. Personality, which was introduced briefly in Chapter, 12, refers to the relati vely stable pattern of behaviors and consistent inter nal states that e xplains a person’s behavioral tendencies. We say that personality explains behavioral tendencies because individuals’ actions are not perfectly consistent with their personality profiles in, every situation. As we explained in Chapter 12, personality is an abstract concept, so it isn’ t, the best information for deciding which job applicants to hire. However, it does influence how, people react to their work environments. To understand how personality is connected to attitudes and well-being, we first need to learn about the five main clusters of personality traits., , personality, The relatively stable, pattern of behaviors and, consistent internal states, that explains a person’s, behavioral tendencies., , // THE BIG FIVE PERSONALITY DIMENSIONS, Since the days of Plato, e xperts have been tr ying to develop lists of personality traits. One, approach was to catalog the thousands of words in Roget’s Thesaurus and Webster’s Dictionary that represented personality traits. Using sophisticated mathematical techniques, these, words were clustered into dozens of categories and further shrunk down to five abstract personality dimensions, known as the Big Five personality dimensions.78 These five dimensions, represented by the handy acronym CANOE, are outlined in Figure 14.7 and described here:, • Conscientiousness refers to people who are careful, dependable, and self-disciplined., Some scholars assert that this dimension also includes the will to achieve. People with, low conscientiousness tend to be careless, less thorough, more disorganized, and, irresponsible., • Agreeableness includes the traits of being courteous, good-natured, empathetic, and, caring. Some scholars prefer the label of “friendly compliance” for this dimension, with, its opposite being “hostile noncompliance.” People with low agreeableness tend to be, uncooperative, short-tempered, and irritable., • Neuroticism characterizes people with high levels of anxiety, hostility, depression, and, self-consciousness. In contrast, people with low neuroticism (high emotional stability), are poised, secure, and calm., • Openness to experience is the most complex dimension with the least agreement among, scholars. It generally refers to the extent to which people are sensitive, flexible, creative,, and curious. Those who score low on this dimension tend to be more resistant to change,, less open to new ideas, and more fixed in their ways., • Extroversion characterizes people who are outgoing, talkative, sociable, and assertive., The opposite is introversion, which refers to those who are quiet, shy, and cautious., , hiL30123_ch14_346-375.indd 365, , Big Five personality, dimensions, The five abstract, dimensions representing, most personality traits:, conscientiousness,, agreeableness,, neuroticism, openness, to experience, and, extroversion (CANOE)., , 11/2/06 3:44:48 PM

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366, , PART 4 // Leading, , FIG UR E 1 4 .7, Big Five Personality, Dimensions, , Big five dimension, Conscientiousness, , Agreeableness, , People with a high score on this dimension tend to be more:, Careful, dependable, self-disciplined, , Courteous, good-natured, empathic, caring, , Neuroticism, , Anxious, hostile, depressed, , Openness to, experience, , Sensitive, flexible, creative, curious, , Extroversion, , Outgoing, talkative, sociable, assertive, , Introverts do not necessarily lack social skills. Rather, they are inclined to direct their, interests more to ideas than to social events. Introverts feel comfortable being alone,, whereas extroverts do not., , // EFFECTS OF PERSONALITY ON EMOTIONS, AND ATTITUDES, Have you ever noticed how some people seem upbeat most of the time while others are almost, never happ y about an ything? To some e xtent people’s emotions are influenced b y their, personalities, not just by their workplace experiences.79 Some people have a natural tendency, to experience positive emotions. These people ha ve higher le vels of e xtroversion; they are, more outgoing, talkative, sociable, and assertive. They also tend to have relatively low levels, of neuroticism (high emotional stability); that is, the y are more poised, secure, and calm. In, contrast, people with high introversion (quietness, shyness, and cautiousness) and neuroticism, (anxiety, hostility, depression, and self-consciousness) tend to e xperience more ne gative, emotions at work and in other environments., To what extent do these personality traits influence emotions? Some research sho ws that, feelings about work can be predicted two years in advance from personality traits. Studies of, twins raised apart conclude that a person’s heredity influences emotions and judgments about, work. However, other evidence suggests that the actual situation in w hich people work has a, noticeably stronger influence on their attitudes and behavior.80 Overall it seems that personality traits influence workplace emotions and attitudes, but their effects are not as strong as the, work environment., resilience, The capability of, individuals to cope, successfully in the face of, significant change,, adversity, or risk., , hiL30123_ch14_346-375.indd 366, , // EFFECTS OF PERSONALITY ON STRESS, AND WELL-BEING, Because personality affects our moods and emotions, it also influences our stress reactions, to the work environment. People who are optimistic, conf ident, and often experience positive emotions tend to feel less stress. 81 This characteristic refers to an emer ging concept, known as resilience. Resilience is the capability of individuals to cope successfully in the, , 11/2/06 3:44:48 PM

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Managing Employee Attitudes and Well-Being \\ CHAPTER 14, , face of significant change, adversity, or risk. Everyone has some resilience; it occurs every, time we pull through stressful experiences. However, people with high resilience are better, able to maintain equilibrium during stress. They hold their g round, so the y don’t need to, recuperate as much.82, Personality is a major influence on the e xtent to w hich people ha ve high resilience., Specifically, resilient people are more optimistic; the y ha ve more positi ve outcome, expectancies. Optimism produces ph ysiological changes that help the body f ight stress,, whereas depression and anxiety are known to increase health risks by altering the immune, system. 83 Three personality dimensions—neuroticism, e, xtroversion, and, conscientiousness—seem to be associated with resilience and optimism. Not sur prisingly,, highly resilient people ha ve low levels of neuroticism: They experience fewer negative, emotions and can better control emotional impulses. Extroverted people tend to be more, resilient because they are comfortable in social relationships, and social support is a known, coping mechanism. Conscientiousness seems to be associated with resilience because, conscientious people demonstrate better prob lem-solving skills. Prob lem solving helps, people figure out how to remove or minimize sources of stress.84, , // EFFECTS OF PERSONALITY ON PERFORMANCE, These five personality dimensions affect work-related behavior and job performance to, varying degrees.85 People with high emotional stability tend to w ork better than others, in high-stress situations. Those with high ag reeableness tend to handle customer relations and conflict-based situations more ef fectively. However, conscientiousness has, taken center stage as the most valuable personality trait for predicting job performance, in almost every job group. Conscientious employees set higher personal goals for themselves, are more motivated, and have higher performance expectations than do employees with low levels of conscientiousness. Highly conscientious employees tend to perform tasks be yond their job description and w ork better in w orkplaces that gi ve, employees more freedom than in traditional “command and control” w orkplaces. Employees with high conscientiousness, as w ell as agreeableness and emotional stability,, also tend to provide better customer service., , // EFFECTS OF PERSONALITY ON, CAREER SATISFACTION, , 367, , Finding a Career That Fits, the Personality While, working as a Navy diver, Dan, Porzio prepared for his next, career in financial planning., But he was far from happy in, his new field, so he took a, job selling cellular phones., Still unhappy, Porzio moved, into the investment industry,, where he worked for three, years. During that time he, visited a career counselor, and discovered why he, lacked interest in his work. “I, thought those other jobs, were ones that I wanted to, do, but I found out I was, doing things that didn’t jive, with my character,” Porzio, explains. With that, knowledge in hand, Porzio, found a job that fit his, personality as captain of the, Annabelle Lee riverboat in, Richmond, Virginia.86, C. Blanchard, Richmond TimesDispatch., , One f airly successful application of personality kno wledge is in the area of vocational, choice. Vocational choice is not just about matching your skills with job requirements. It is, a complex alignment of personality , values, and competencies with the requirements of, work and characteristics of the work environment. You might be very talented at a par ticular, job, but your personality and v alues must also be aligned with w hat the job of fers. John, Holland, a career de velopment scholar, was an earl y proponent of this notion that, career success depends on the de gree of congruence between the person and his or, her work environment.87 Holland asserted that people can be classified into different, types relating to their personality and that the y seek out and are more satisf ied in, work environments that are congruent with their particular profiles. Thus congruence, refers to the extent to which someone has the same or similar personality type as the, environment in which he or she is working. Some research has found that high congruence leads to better perfor mance, satisfaction, and length of time in a career; other, studies are less supportive of the model.88, Holland’s Six Types Holland’s theor y classif ies both indi vidual personalities and, work environments into six cate gories: realistic, in vestigative, ar tistic, social,, enterprising, and conventional. Figure 14.8 defines these types of people and work, , hiL30123_ch14_346-375.indd 367, , 11/2/06 3:44:48 PM

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368, , PART 4 // Leading, , Work Environment, Characteristics, , Sample Occupations, , Work with hands,, machines, or tools; focus, on tangible results., , Assembly worker; dry, cleaner, mechanical, engineer., , Analytic, introverted,, reserved, curious,, precise, independent., , Work involves, discovering, collecting,, and analyzing; solving, problems., , Biologist, dentist,, systems analyst., , Artistic, , Creative, impulsive,, idealistic, intuitive,, emotional., , Work involves creation of, new products or ideas,, typically in an, unstructured setting., , Journalist, architect,, advertising executive., , Social, , Sociable, outgoing,, conscientious, need for, affiliation., Confident, assertive,, energetic, need for, power., , Work involves serving or, helping others; working, in teams., Work involves leading, others; achieving goals, through others in a, results-oriented setting., , Holland Type, , Personality Traits, , Realistic, , Practical, shy,, materialistic, stable., , Investigative, , Enterprising, , Conventional, , FIG UR E 1 4 .8, , Dependable, disciplined,, orderly, practical,, efficient., , Work involves systematic, manipulation of data or, information., , Social worker, nurse,, teacher, counselor., Salesperson,, stockbroker, politician., , Accountant, banker,, administrator., , Holland’s Six Types of Personalities and Work Environments, , Sources: Based on information in D.H. Montross, Z.B. Leibowitz, and C.J. Shinkman, Real People, Real Jobs (Palo Alto, CA: Davies-Black,, 1995); and J.H. Greenhaus, Career Management (Chicago,IL: Dryden, 1987)., , environments and suggests sample occupations representing those environments. Few people, fall squarely into only one of Holland’s classif ications. Instead Holland refers to a person’ s, degree of differentiation—that is, the e xtent to w hich an individual f its into one or se veral, types. A highly differentiated person is aligned with a single category, whereas most people fit, into two or more categories., Because most people f it into more than one personality type, Holland de veloped a model, shaped like a hexagon with each personality type around the points of the model. Consistency, refers to the e xtent to which a person is aligned with similar types, w hich are ne xt to each, other in the hexagon (dissimilar types are opposite). For instance, the enterprising and social, types are ne xt to each other in Holland’ s model, so indi viduals with both enter prising and, social personalities have high consistency., Holland’s vocational fit model is far from perfect. For example, the model refers to only a, few of the Big Five personality dimensions described earlier, and some “opposing” categories, in Holland’s hexagon are not really opposite to each other. Still, Holland’s model is the dominant model of career counseling today because it explains individual attitudes and behavior to, some extent.89 The main message for managers is that career de velopment isn’t just about, matching company needs with employee skills. It also about aligning employee personalities, and preferences with job characteristics. This person–job matching process produces happier, employees. And as we learned throughout this chapter , the resulting positi ve emotions and, attitudes potentially lead to superior job performance, greater customer satisfaction, and other, beneficial outcomes for the organization., , hiL30123_ch14_346-375.indd 368, , 11/2/06 9:41:23 PM

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Managing Employee Attitudes and Well-Being \\ CHAPTER 14, , IN CO N CL U SI ON, , 369, , WH Y DOE S IT M ATT E R ?, , Not long ago the concepts presented in Chapters 12 and 13 were the essence of, managing employees. The prevailing view was that staffing and motivating employees, were the main—or even the only—ways to achieve organizational success. Any, manager who takes this view today will be in deep trouble. Employee emotions,, attitudes, and well-being are indicators of an ethical imperative. Treating staff with, respect, matching their needs with organizational resources, and providing a workplace, that minimizes unnecessary stress is simply the right thing to do. Employees are, stakeholders, so a second justification is that managing attitudes and well-being is an, integral component of corporate social responsibility., Along with the ethical and corporate social responsibility implications, employee, attitudes and well-being influence a company’s ability to attract and retain talent. As labor, shortages loom and the war for talent heats up, keeping employees happy is an important, objective. As we noted in Chapter 12, companies develop a stronger employer brand when, they receive awards as great places to work, whereas low morale and high turnover are, viewed as evidence of poor treatment of employees. Ultimately a company’s public image, of how it treats employees can be a decisive factor in the quality of job applicants., Along with the ethical, corporate social responsibility, and employee retention, arguments, employee emotions, attitudes, and well-being are indirectly, but reasonably, strongly, associated with job performance and customer satisfaction. Employees won’t, achieve peak job performance just through the processes of selection, training, and, reward management. They also need to have positive work experiences and normal, levels of stress. Employees who are satisfied with their jobs generally work more, effectively, interact better with coworkers, and serve customers more helpfully and with, more positive displays of emotions. The lower turnover rates among satisfied and less, stressed employees also increase the quality of talent in the workplace., , MANAGEMENT CHALLENGES, 1., , 2., 3., , 4., , 5., 6., , After a few months on the job, Susan has experienced several emotional episodes, ranging from frustration to joy about the work she has been assigned. Explain how these, emotions affect Susan’s level of job satisfaction with the work itself., Managers need to pay attention to employee emotions and attitudes, but how can they, determine the emotions that people are experiencing on the job?, Describe the employee–customer–profit chain model; then identify conditions that, might strengthen or weaken the links along that chain. To what extent can managers, influence the elements of this model?, Although managers are supposed to help minimize workplace stressors such as harassment, they are typically identified as the main contributors to this source of stress., Discuss possible reasons why managers are the main sources of bullying and suggest, ways of minimizing this problem., “Happy employees create happy customers.” Explain why this statement might be true,, and identify conditions in which it might not be true., A senior official of a labor union stated, “All stress management does is help people, cope with poor management. [Employers] should really be into stress reduction.”, Discuss the accuracy of this statement., , hiL30123_ch14_346-375.indd 369, , 11/2/06 3:44:50 PM

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370, , PART 4 // Leading, , MANAGEMENT PORTFOLIO, FOR THE ORGANIZATION YOU HAVE CHOSEN TO FOLLOW:, 1., , 2., , 3., , CLOSING CASE, , Does this organization win awards or come close to being one of the best places to work, in the country? What other information suggests that this organization makes an effort, to generate positive emotions for employees?, This chapter highlights five ways in which companies can build a more loyal workforce., Evaluate the extent to which this organization fulfills each of these five conditions, and, provide evidence to support your evaluation., In your opinion, is this organization a relatively high- or low-stress place to work?, Explain your answer. What practices does this organization seem to use to help, employees minimize stress?, , ROUGH SEAS ON THE LINK650, , Professor Suzanne Baxter was preparing for her f irst class, of the semester when Shaun O’Neill knocked lightly on the, open door and announced himself: “Hi, Professor , I don’t, suppose you remember me?” Professor Baxter had lar ge, classes, but she did remember that Shaun w as a student in, her organizational behavior class two years earlier. Shaun, had decided to work in the oil industry for a couple of years, before returning to school to complete his diploma., “Welcome back!” Baxter said as she beck oned him into, the office. “I heard y ou were working on an oil rig up in, Canada. How was it?”, “Well, Professor,” Shaun began, “I had worked two summers in the oil f ields and m y f amily’s from Canada, so I, hoped to get a job on the LINK650. It’ s that new WestOil, drilling rig that arrived with so much fanfare in Newfoundland on Canada’s east coast tw o years ago. The LINK650, was built by LINK Inc. in Texas. A standard practice in this, industry is for the rig manufacturer to manage its day-to-day, operations, so emplo yees on the LINK650 are managed, completely by LINK managers with no in volvement from, WestOil. We all know that drilling rig jobs are dangerous,, but the y pa y w ell and of fer generous time of f. A local, newspaper said that nearl y a thousand people lined up to, complete job applications for the 50 nontechnical positions., I was lucky enough to get one of those jobs., “Everyone hired on the LINK650 w as enthusiastic and, proud. We w ere one of the chosen fe w and w ere reall y, pumped up about working on a new rig that had received so, much media attention. I w as quite impressed with the, recruiters—so were several other hires—because they really, seemed to be concer ned about our welfare out on the plat-, , hiL30123_ch14_346-375.indd 370, , form. I later disco vered that the recr uiters came from a, consulting f irm that specializes in hiring people. Come to, think of it, w e didn’t meet a single LINK manager during, that process. Ma ybe things w ould have been dif ferent if, some of those LINK supervisors had interviewed us., “Working on the LINK650 w as a real shock e ven though, most of us had some experience working in the oil f ields. I’d, say that none of the 50 nontechnical people hired w as quite, prepared for the brutal jobs on the oil rig. We did the dirtiest, jobs in the biting cold winds of the Nor th Atlantic. Still, during the first few months most of us wanted to show the company that we were dedicated to getting the job done. A couple, of the new hires quit within a few weeks, but most of the people hired with me reall y got along well—you know, just like, the ideas you mentioned in class. We formed a special bond, that helped us through the bad weather and grueling work., “The LINK650 super visors were another matter . They, were tough SOBs w ho had w orked for man y years on oil, rigs in the Gulf of Me xico or Nor th Sea. They seemed to, relish the idea of treating their employees the same way they, had been treated before becoming managers. We put up, with their abuse for the f irst few months, but things got, worse when the LINK650 w as brought into por t twice to, correct mechanical problems. These setbacks embar rassed, LINK’s managers, and they put more pressure on the supervisors to get us back on schedule., “The supervisors started to ignore equipment prob lems, and pushed us to get jobs done more quickly without regard, to safety procedures. They routinely shouted obscenities at, employees in front of others. A couple of m y work mates, were f ired, and a couple of others quit their jobs. I almost, , 11/2/06 3:44:50 PM

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Managing Employee Attitudes and Well-Being \\ CHAPTER 14, , lost my job one da y just because m y boss thought I w as, deliberately working slowly. He didn’t realize—or care—, that the f ittings I w as connecting w ere damaged. Se veral, people started finding ways to avoid the supervisors and get, as little work done as possible. Many of my coworkers developed back problems. We jokingly called it the ‘rigger’s, backache’ because some emplo yees faked their ailment to, leave the rig with paid sick leave., “On top of the lousy supervisors, we were always kept in, the dark about the problems on the rig. Supervisors said that, they didn’t know anything, which was partly true; but they, said w e shouldn’ t be so interested in things that didn’ t, concern us. But the rig’ s prob lems, as w ell as its future, contract work, were a major concern to crew members who, weren’t ready to quit. Their job security depended on the, rig’s production le vels and w hether WestOil w ould sign, contracts to drill new holes. Given the rig’s problems, most, of us were concerned that we would be laid off at any time., “Everything came to a head when Bob MacKenzie was, killed because someone secured a hoist improperl y. Not, sure if it was mentioned in the papers here, but it was big, news around this time last year. The Canadian government, inquiry concluded that the person responsib le w asn’t, properly trained and that employees were being pushed to, finish jobs without safety precautions. Anyway, while the, inquiry was going on, se veral employees decided to call, the Seafarers Inter national Union to unionize the rig. It, wasn’t long before most emplo yees on LINK650 had, signed union cards. That reall y shock ed LINK’ s, management and the entire oil industr y because it was, I, think, just the second time that a rig had e, ver been, unionized in Canada., “Since then, management has been doing e verything in, its power to get rid of the union. It sent a ‘safety of ficer’ to, , 371, , the rig, although we eventually realized that he w as a consultant the company hired to undermine union support. One, safety meeting with compulsor y attendance of all cre w, members involved watching a video describing the international union president’s association with or ganized crime., Several managers were sent to special seminars on ho w to, manage a union workforce, although one of the topics w as, how to break the union. The guys w ho initiated the, organizing drive were either fired or given undesirable jobs., LINK e ven paid one emplo yee to challenge the union, certification vote. The labor board rejected the decer tification request because it disco vered the compan y’s unionbusting tactics. Last month the labor board ordered LINK to, negotiate a first contract in good faith., “So you see, Professor, I joined LINK as an enthusiastic, employee and quit last month with no desire to lift a f inger, for them. It really bothers me because I w as always told to, do your best, no matter ho w tough the situation. It’ s been, quite an experience.”, CASE DISCUSSION QUESTIONS, 1. Use your knowledge of emotions and attitudes to explain, why the LINK650 employees were dissatisfied with their, work., 2. Identify the various ways in which employees expressed, their job dissatisfaction on the LINK650., 3. Shaun O’Neill’s commitment to the LINK or ganization, dwindled over his two years of employment. Discuss the, factors that affected his organizational commitment., Source: © Copyright Steven L. McShane. This case is based on, actual events, although names and some information have been, changed., , ENDNOTES, 1. F. Bilovsky, “Wegmans Is Named America’s No. 1 Employer,” Democrat & Chronicle (Rochester, NY), Januar y 11, 2005; D . Furlonger, “Best Compan y to Work, For,” Financial Mail (South Africa), September 30, 2005, p. 20; J . Lee, “Vancity, Employees Feel the Dif ference,” Vancouver Sun, October 29, 2005, p. E1; W.L., Lee, “Net Value: That Loving Feeling,” The Edge Daily (Kuala Lumpur), April 25,, 2005; T. Knauss, “Small Local Compan y Is a Happ y Place to Work,” Post Standard/Herald-Journal (Syracuse), March 21, 2006, p.A1; A. Maitland, “Bonds That, Keep Workers Happy,” Financial Times (London), May 18, 2006., 2. C.D. Fisher, “Mood and Emotions While Working: Missing Pieces of Job Satisfaction?” Journal of Organizational Behavior 21 (2000), pp. 185–202; M. Pergini, and R.P. Bagozzi, “The Role of Desires and Anticipated Emotions in GoalDirected Behaviors: Broadening and Deepening theTheory of Planned Behavior,”, British Journal of Social Psyc hology 40 (March 2001), pp. 79–98; J .D. Morris, et al., “The P ower of Affect: Predicting Intention,” Journal of Advertising Research 42 (May–June 2002), pp. 7–17., 3. The centrality of emotions in mark eting, economics, and sociology is discussed, in G. Loe wenstein, “Emotions in Economic Theory and Economic Beha vior,”, American Economic Re view 90, no. 2 (Ma y 2000), pp. 426–32; D .S. Massey,, “A Brief History of Human Society: The Origin and Role of Emotion in Social, , hiL30123_ch14_346-375.indd 371, , Life,” American Sociolo gical Re view 67 (F ebruary 2002), pp. 1–29;, J. O’Shaughnessy and N .J. O’Shaughnessy, The Marketing Power of Emotion, (New York: Oxford University Press, 2003)., 4. The def inition presented here is constr ucted from infor mation in the following, sources: N.M. Ashkanasy, W.J. Zerbe, and C.E.J. Hartel, “Introduction: Managing Emotions in a Changing Workplace,” in Managing Emotions in the Workplace, ed. N .M. Ashkanasy, W.J. Zerbe, and C.E.J . Hartel (Armonk, NY: M.E., Sharpe, 2002), pp. 3–18; H.M. Weiss, “Conceptual and Empirical F oundations, for the Study of Affect at Work,” in Emotions in the Workplace, ed. R.G. Lord,, R.J. Klimoski, and R. Kanfer (San F rancisco: Jossey-Bass, 2002), pp. 20–63., However, the meaning of emotions is still being debated. See, for e xample, M., Cabanac, “What Is Emotion?” Behavioural Processes 60 (2002), pp. 69–83., 5. R.B. Zajonc, “Emotions,” in Handbook of Social Psychology, ed. D.T. Gilbert, S.T., Fiske, and L. Gardner (New York: Oxford University Press, 1998), pp. 591–634., 6. A.H. Eagly and S. Chaiken, The Psychology of Attitudes (Orlando, FL: Harcourt, Brace Jovanovich, 1993); A.P. Brief, Attitudes in and ar ound Or ganizations, (Thousand Oaks, CA: Sage, 1998). There is ongoing debate about w hether attitudes represent only feelings or all three components described here. Ho wever,, those who adopt the single-factor perspective still refer to beliefs as the cognitive, , 11/2/06 7:30:11 PM

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372, , PART 4 // Leading, , component of attitudes. F or example, see I. Ajzen, “Nature and Operation of, Attitudes,” Annual Review of Psychology 52 (2001), pp. 27–58., 7. S.D. Farley and M.F. Stasson, “Relative Influences of Affect and Cognition on, Behavior: Are Feelings or Beliefs More Related to Blood Donation Intentions?”, Experimental Psychology 50, no. 1 (2003), pp. 55–62., 8. J.A. Bargh and M.J. Ferguson, “Beyond Behaviorism: On the Automaticity of, Higher Mental Processes,” Psychological Bulletin 126, no. 6 (2000), pp. 925–45;, R.H. Fazio, “On the Automatic Activation of Associated Evaluations: An Overview,” Cognition and Emotion 15, no. 2 (2001), pp. 115–41; M. Gladwell, Blink:, The Power of Thinking without Thinking (New York: Little, Brown, 2005)., 9. A.R. Damasio, Descartes’ Error: Emotion, Reason, and the Human Br ain (New, York: Putnam Sons, 1994); A. Damasio, The Feeling of What Happens (New, York: Harcourt Brace and Co., 1999); P. Ekman, “Basic Emotions,” in Handbook, of Cognition and Emotion, ed. T. Dalgleish and M. Power (San Francisco: JosseyBass, 1999), pp. 45–60; J .E. LeDoux, “Emotion Circuits in the Brain, ” Annual, Review of Neuroscience 23 (2000), pp. 155–84; R.J. Dolan, “Emotion, Cognition,, and Behavior,” Science 298, no. 5596 (November 8, 2002), pp. 1191–94., 10. H .M. Weiss and R. Cropanzano, “ Affective Ev ents Theory: A Theoretical, Discussion of the Structure, Causes, and Consequences of Affective Experiences, at Work,” Research in Organizational Behavior 18 (1996), pp. 1–74., 11. R. Basch, “Doing Well by Doing Good,” Searcher Magazine, January 2005, pp., 18–28; K. Coughlin, “Goooood Mo ve,” Star-Ledger (Ne wark, NJ), June 5,, 2005, p. 1., 12. S.C. Lundin, H. Paul, and J. Christensen, Fish!: A Remarkable Way to Boost Morale and Impr ove Results (New York: Hyperion Press, 2000); S.C. Lundin, H., Paul, and J. Christensen, Fish! Tales: Bite-Sized Stories, Unlimited Possibilities, (New York: Hyperion Press, 2002)., 13. L. Festinger, A Theory of Cognitive Dissonance (Evanston, IL: Row, Peterson,, 1957); A.D. Galinsky, J. Stone, and J. Cooper, “The Reinstatement of Dissonance, and Psychological Discomfort Following Failed Affirmation,” European Journal, of Social Psychology 30, no. 1 (2000), pp. 123–47., 14. G.R. Salancik, “Commitment and the Control of Or ganizational Behavior and, Belief,” in New Directions in Organizational Behavior, ed. B.M. Staw and G.R., Salancik (Chicago: St. Clair, 1977), pp. 1–54., 15. E.A. Lock e, “The Nature and Causes of Job Satisf action,” in Handbook of, Industrial and Or ganizational Psyc hology, ed. M. Dunnette (Chicago: Rand, McNally, 1976), pp. 1297–1350; H.M. Weiss, “Deconstructing Job Satisfaction:, Separating Evaluations, Beliefs, and Affective Experiences,” Human Resource, Management Review no. 12 (2002), pp. 173–94. Some def initions still include, emotion as an element of job satisfaction, whereas the definition presented in this, book views emotion as a cause of job satisfaction. Also, this definition views job, satisfaction as a “collection of attitudes,” not several “facets” of job satisfaction., , 23. M.J . Withey and I.R. Gellatl y, “Situational and Dispositional Deter minants of, Exit, Voice, Loyalty, and Ne glect,” Proceedings of the Administrative Sciences, Association of Canada, Or ganizational Behaviour Division , June 1998; M.J ., Withey and I.R. Gellatly, “Exit, Voice, Loyalty, and Neglect: Assessing the Influence of Prior Ef fectiveness and Personality,” Proceedings of the Administrative, Sciences Association of Canada, Organizational Behaviour Division 20 (1999),, pp. 110–19., 24. T.A. Judge et al., “The Job Satisfaction–Job Performance Relationship: A Qualitative and Quantitative Review,” Psychological Bulletin 127 (2001), pp. 376–407;, Saari and Judge, “Employee Attitudes and Job Satisfaction.”, 25. Judge et al., “The Job Satisfaction–Job Performance Relationship: A Qualitative, and Quantitative Review.”, 26. T . DeCotiis et al., “Ho w Outback Steakhouse Created a Great Place to Work,, Have Fun, and Mak e Money,” Journal of Or ganizational Excellence 23, no. 4, (Autumn 2004), pp. 23–33., 27. “ The Greatest Briton in Management and Leadership, ” Personnel Today,, February 18, 2003, p. 20; T. Monterastelli, “Pinnacol F ocuses on Respecting, Employees,” Denver Business Journal, November 19, 2004. The Wegmans motto, is mentioned in R. Le vering and M. Mosk owitz, “The Best 100 Companies to, Work For,” Fortune, January 24, 2005, pp. 90–96., 28. J.I. Heskett, W.E. Sasser, and L.A. Schlesinger, The Service Profit Chain (New, York: F ree Press, 1997); D .J. K oys, “The Ef fects of Emplo yee Satisf action,, Organizational Citizenship Behavior, and Turnover on Organizational Effectiveness: A Unit-Level, Longitudinal Study,” Personnel Psychology 54 (April 2001),, pp. 101–14; W.-C. Tsai and Y.-M. Huang, “Mechanisms Linking Employee Affective Delivery and Customer Beha vioral Intentions,” Journal of Applied Psychology 87, no. 5 (2002), pp. 1001–08; DeCotiis et al., “Ho w Outback Steakhouse Created a Great Place to Work, Have Fun, and Make Money”; G.A. Gelade, and S. Young, “Test of a Service Profit Chain Model in the Retail Banking Sector,” Journal of Occupational & Organizational Psychology 78 (2005), pp. 1–22., However, some studies have found only a weak relationship between employee, attitudes and sales outcomes., 29. P. Guenzi and O . Pelloni, “The Impact of Inter personal Relationships on Customer Satisfaction and Loyalty to the Service Provider,” International Journal of, Service Industry Management 15, no. 3–4 (2004), pp. 365–84; S.J. Bell, S. Auh,, and K. Smalle y, “Customer Relationship Dynamics: Ser vice Quality and Customer Loyalty in the Conte xt of Varying Le vels of Customer Exper tise and, Switching Costs,” Journal of the Academy of Marketing Science 33, no. 2 (Spring, 2005), pp. 169–83., 30. R.T. Mowday, L.W. Porter, and R.M. Steers, Employee Organization Linkages:, The Psychology of Commitment, Absenteeism, and Turnover (New York: Academic Press, 1982)., , 16. Ipsos-Reid, “Ipsos-Reid Global P oll F inds Major Dif ferences in Emplo yee, Satisfaction around the World,” news release (Toronto: January 8, 2001). These, results are similar to other global satisf action surveys. See International Survey, Research, Employee Satisfaction in the World’s 10 Largest Economies: Globalization or Diversity? (Chicago: International Survey Research, 2002)., , 31. F.F. Reichheld, The Lo yalty Ef fect (Boston: Har vard Business School Press,, 1996), Chapter 4; J .P. Me yer et al., “ Affective, Continuance, and Nor mative, Commitment to the Organization: A Meta-Analysis of Antecedents, Correlates,, and Consequences,” Journal of Vocational Behavior 61 (2002), pp. 20–52;, M. Rik etta, “Attitudinal Or ganizational Commitment and Job P erformance:, A Meta-Analysis,” Journal of Organizational Behavior 23 (2002), pp. 257–66., , 17. T . Lester, “P erformance at Hugo Boss, ” Executive Brief ing (Economist, Intelligence Unit), May 4, 2006, p. 1., , 32. J .P. Meyer, “Organizational Commitment,” International Review of Industrial, and Organizational Psychology 12 (1997), pp. 175–228., , 18. M.J . Withey and W.H. Cooper, “Predicting Exit, Voice, Loyalty, and Ne glect,”, Administrative Science Quarterly 34 (1989), pp. 521–39; W.H. Turnley and D.C., Feldman, “The Impact of Psychological Contract Violations on Exit, Voice, Loyalty, and Neglect,” Human Relations 52 (July 1999), pp. 895–922., , 33. R.D. Hackett, P. Bycio, and P.A. Hausdorf, “Further Assessments of Meyer and, Allen’s (1991) Three-Component Model of Organizational Commitment,” Journal of Applied Psychology 79 (1994), pp. 15–23., , 19. B . Morton, “P ositive Work En vironment K eeps Them Happ y, Staf fers Sa y,”, Vancouver Sun, October 5, 2004, p. D1., , 34. J. Churchill, “To the Bitter End,” Registered Rep., March 1, 2006, p. 59., , 21. A.A. Luchak, “What Kind of Voice Do Loyal Employees Use?” British Journal, of Industrial Relations 41 (March 2003), pp. 115–34., , 35. J.P. Meyer et al., “Organizational Commitment and Job Performance: It’s the Nature of the Commitment That Counts,” Journal of Applied Psychology 74 (1989),, pp. 152–56; A.A. Luchak and I.R. Gellatly, “What Kind of Commitment Does a, Final-Earnings Pension Plan Elicit?” Relations Industrielles 56 (Spring 2001),, pp. 394–417; Z.X. Chen and A.M. Francesco, “The Relationship betw een the, Three Components of Commitment and Employee Performance in China,” Journal of Vocational Behavior 62, no. 3 (2003), pp. 490–510; D .M. Powell and J.P., Meyer, “Side-Bet Theory and the Three-Component Model of Or ganizational, Commitment,” Journal of Vocational Behavior 65, no. 1 (2004), pp. 157–77., , 22. J.D. Hibbard, N. Kumar, and L.W. Stern, “Examining the Impact of Destr uctive, Acts in Mark eting Channel Relationships,” Journal of Mar keting Research 38, (February 2001), pp. 45–61; J. Zhou and J.M. George, “When Job Dissatisfaction, Leads to Creati vity: Encouraging the Expression of Voice,” Academy of, Management Journal 44 (August 2001), pp. 682–96., , 36. E.W. Morrison and S.L. Robinson, “When Employees Feel Betrayed: A Model of, How Psycholo gical Contract Violation De velops,” Academy of Mana gement, Review 22 (1997), pp. 226–56; J .E. F inegan, “The Impact of P erson and, Organizational Values on Organizational Commitment,” Journal of Occupational, and Organizational Psychology 73 (June 2000), pp. 149–69., , 20. T.R. Mitchell, B.C. Holtom, and T.W. Lee, “How to Keep Your Best Employees:, Developing an Effective Retention Policy,” Academy of Management Executive, 15 (November 2001), pp. 96–108; C.P. Maertz and M.A. Campion, “Prof iles of, Quitting: Integrating Process and Content Turnover Theory,” Academy of Management Journal 47, no. 4 (2004), pp. 566–82., , hiL30123_ch14_346-375.indd 372, , 11/2/06 3:44:51 PM

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Nelson, “Eustress at Work: The Relationship between Hope and, Health in Hospital Nurses,” Health Care Management Review 26, no. 4 (October, 2001), p. 7ff., 44. H. Selye, Stress without Distress (Philadelphia: J.B. Lippincott, 1974)., 45. S.E. Taylor, R.L. Repetti, and T. Seeman, “Health Psycholo gy: What Is an Unhealthy Environment and How Does It Get under the Skin?” Annual Review of, Psychology 48 (1997), pp. 411–47., 46. D. Ganster, M. Fox, and D. Dwyer, “Explaining Employees’ Health Care Costs: A, Prospective Examination of Stressful Job Demands, Personal Control, and Physiological Reactivity,” Journal of Applied Psychology 86 (May 2001), pp. 954–64;, M. Kivimaki et al., “Work Stress and Risk of Cardiovascular Mortality: Prospective Cohort Study of Industrial Employees,” British Medical Journal 325 (October 19, 2002), pp. 857–60; A. Roseng ren et al., “ Association of Psychosocial, Risk Factors with Risk of Acute My ocardial Inf arction in 11,119 Cases and, 13,648 Controls from 52 Countries (the Interheart Study): Case–Control Study,”, The Lancet 364, no. 9438 (September 11, 2004), pp. 953–62., 47. R .C. K essler, “The Ef fects of Stressful Life Ev ents on Depression, ” Annual, Review of Psyc hology 48 (1997), pp. 191–214; L. Greenbur g and J . Barling,, “Predicting Employee Aggression against Coworkers, Subordinates, and Supervisors: The Roles of Person Behaviors and Perceived Workplace Factors,” Journal, of Organizational Behavior 20 (1999), pp. 897–913; M. Jamal and V.V. Baba,, “Job Stress and Bur nout among Canadian Managers and Nurses: An Empirical, Examination,” Canadian J ournal of Pub lic Health 91, no. 6 (No vember–, December 2000), pp. 454–58; L. Tourigny, V.V. Baba, and T.R. Lituchy, “Job, Burnout among Airline Employees in Japan: A Study of the Buffering Effects of, Absence and Super visory Suppor t,” International J ournal of Cr oss Cultural, Management 5, no. 1 (April 2005), pp. 67–85., 48. K. Danna and R.W. Griffin, “Health and Well-Being in the Workplace: A Review, and Synthesis of the Literature,” Journal of Management, Spring 1999, pp. 357–84., 49. New South Wales Supreme Court, Naidu v. Group 4 Securitas Pty Ltd & Anor,, (NSWSC, June 24, 2005)., 50. This is a slight v ariation of the def inition in the Quebec antiharassment, legislation. See www.cnt.gouv.qc.ca. For related def initions and discussion of, workplace incivility, see H. Co wiea et al., “Measuring Workplace Bullying,”, Aggression and Violent Behavior 7 (2002), pp. 33–51; C.M. P earson and C.L., Porath, “On the Nature, Consequences, and Remedies of Workplace Incivility:, No Time for ‘Nice’? Think Again,” Academy of Management Executive 19, no. 1, (February 2005), pp. 7–18., 51. D . Turner, “One in F ive Staff ‘Bullied’ in P ast 12 Months, ” Financial Times, (London), October 2, 2002, p. 5; A. Garrett, “How to Cure Bull ying at Work,”, Management Today, May 2003, p. 80; T. Goldenberg, “Thousands of Workers, Intimidated on Job: Study,” Montreal Gazette, June 11, 2005, p. A9; S. Toomey,, “Bullying Alive and Kicking,” The Australian, July 16, 2005, p. 9., , hiL30123_ch14_346-375.indd 373, , 54. R . Drago, D. Black, and M. Wooden, The Persistence of Long Work Hour s,, Melbourne Institute Working Paper Series (Melbour ne: Melbourne Institute of, Applied Economic and Social Research, University of Melbourne, August 2005);, R. Konrad, “For Some Techies, an Inter minable Workday,” Associated Press, Newswires, May 10, 2005., 55. J. Ryall, “Japan Wakes Up to Fatal Work Ethic,” Scotland on Sunday , June 15,, 2003, p. 22; C.B. Meek, “The Dark Side of Japanese Management in the 1990s:, Karoshi and Ijime in the JapaneseWorkplace,” Journal of Managerial Psychology, 19, no. 3 (2004), pp. 312–31., 56. L. Wahyudi S., “Traffic Congestion Makes Me Crazy,” Jakarta Post, March 18,, 2003. The effect of traffic congestion on stress is repor ted in G.W. Evans, R.E., Wener, and D. Phillips, “The Morning Rush Hour: Predictability and Commuter, Stress,” Environment and Behavior 34 (July 2002), pp. 521–30., 57. F. Kittell et al., “Job Conditions and F ibrinogen in 14,226 Belgian Workers: The, Belstress Study,” European Heart Journal 23 (2002), pp. 1841–48; S.K. P arker,, “Longitudinal Ef fects of Lean Production on Emplo yee Outcomes and the, Mediating Role of Work Characteristics,” Journal of Applied Psychology 88,, no. 4 (2003), pp. 620–34., 58. B . Miller, “Brann Baltimore Mark eting Firm’s Office Gets a Fun Mak eover,”, Daily Record, October 3, 2002., 59. Y. Iwasaki et al., “A Short-Term Longitudinal Analysis of Leisure Coping Used, by P olice and Emer gency Response Ser vice Workers,” Journal of Leisur e, Research 34 (Jul y 2002), pp. 311–39; “Ho w Lar ge F irms Mak e P artner, Sabbaticals Both Plausib le and Appealing,” Partner’s Report f or Law F irm, Owners, June 2003, p. 1., 60. M. Waung, “The Effects of Self-Regulatory Coping Orientation on Ne wcomer, Adjustment and Job Sur vival,” Personnel Psychology 48 (1995), pp. 633–50;, A.M. Saks and B .E. Ashforth, “Proacti ve Socialization and Beha vioral, Self- Management,” Journal of Vocational Behavior 48 (1996), pp. 301–23., 61. W.M. Ensel and N . Lin, “Ph ysical Fitness and the Stress Process, ” Journal of, Community Psychology 32, no. 1 (January 2004), pp. 81–101., 62. S. Armour, “Rising Job Stress Could Affect Bottom Line,” USA Today, July, 29, 2003; V.A. Barnes, F.A. Treiber, and M.H. Johnson, “Impact of Transcendental Meditation on Ambulatory Blood Pressure in African-American Adolescents,” American Journal of Hypertension 17, no. 4 (2004), pp. 366–69;, M.S. Lee et al., “Ef fects of Qi-T raining on Anxiety and Plasma Concentrations of Cortisol, ACTH, and Aldosterone: A Randomized Placebo-Controlled, Pilot Study,” Stress and Health 20, no. 5 (2004), pp. 243–48; P. Manikonda et, al., “Influence of Non-Pharmacological Treatment (Contemplative Meditation, and Breathing Technique) on Stress Induced Hyper tension —a Randomized, Controlled Study,” American Journal of Hypertension 18, no. 5, Supplement 1, (2005), pp. A89-A90., 63. J. Newman and D. Grigg, “Vancity’s Robbery Intervention Program Wins Award,”, Vancouver Sun, October 16, 2004, p. J3., 64. T. Rotarius, A. Liberman, and J.S. Liberman, “Employee Assistance Programs: A, Prevention and Treatment Prescription for Prob lems in Health Care, Organizations,” Health Care Manager 19 (September 2000), pp. 24–31; J .J.L., van der Klink et al., “The Benef its of Inter ventions for Work-Related Stress,”, American Journal of Public Health 91 (February 2001), pp. 270–76., 65. S .E. Taylor et al., “Biobeha vioral Responses to Stress in F, emales:, Tend-and-Befriend, Not Fight-or-Flight,” Psychological Review 107, no. 3 (July, 2000), pp. 411–29; R. Eisler and D.S. Levine, “Nurture, Nature, and Caring: We, Are Not Prisoners of Our Genes,” Brain and Mind 3 (2002), pp. 9–52., 66. J .S. House, Work Stress and Social Support (Reading, MA: Addison-Wesley,, 1981)., , 11/2/06 3:44:51 PM

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374, , PART 4 // Leading, , 67. S. Schachter, The Psychology of Affiliation (Palo Alto, CA: Stanford University, Press: 1959)., 68. J.L. Howard, “Workplace Violence in Or ganizations: An Exploratory Study of, Organizational Prevention Techniques,” Employee Responsibilities and Rights, Journal 13 (June 2001), pp. 57–75., 69. W.G. Bennis and R.J. Thomas, Geeks and Geezer s (Boston: Har vard Business, School Press, 2002), pp. 74 –79; E.D.Y. Greenblatt, “Work–Life Balance: Wisdom or Whining,” Organizational Dynamics 31, no. 2 (2002), pp. 177–93., 70. Ipsos-Reid, “What Are Canadians’ Top Indicators of Career Success?” Ipsos-Reid, news release (T oronto: May 7, 2003); Catal yst, Beyond a Reasona ble Doubt:, Building the Business Case f or Flexibility (Toronto: Catal yst, April 2005);, “Seventeen Percent of Government Workers Plan to Look for a New Job in 2006,, Careerbuilder.Com Sur vey F inds,” PR Ne wswire, February 21, 2006; “W ork, Loses Out to Family,” The Mirror (London), March 18, 2006, p. 8; S. Shellenbarger, “Forget Vacation Time, New Grads Want Stability and a Good Retirement, Plan,” The Wall Street Journal, February 16, 2006, p. D1., 71. J . Thottam, “Reworking Work,” Time, July 25, 2005, pp. 50–53., 72. P. Szuchman, “The Job-Share Advantage,” Working Mother 25 (Ma y 2002),, p. 15., 73. “Dri ving Ambitions,” Employee Benefits, September 6, 2002, p. 45. More than, 100 countries ha ve paid mater nity leave. Among the industrialized countries,, only the United States, Australia, and New Zealand do not provide this support., See T. Allard and L. Glendinning, “F or Now, Aussie Mums Are Still a World, Apart,” Sydney Morning Her ald, August 16, 2001; J . Satterf ield, “U.S. Lags, Behind Other Nations on Family Leave,” Knoxville News-Sentinel, May 7, 2001,, p. A1. For discussion of the FMLA, see S. Kim, “Toward Understanding Family, Leave Policy in Public Organizations: Family Leave Use and Conceptual Framework for the F amily Lea ve Implementation Process, ” Public Productivity &, Management Review 22 (September 1998), pp. 71–87., 74. J . Gannon, “The P erfect Commute,” Post-Gazette (Pittsburgh, PA), April 24,, 2003, p. E1., 75. G. Marr, “Home Is Not Where the Office Is,” National Post, August 6, 2004, p., FP10; Australian Telework Advisory Committee (ATAC), Telework in Australia:, Paper II (Canber ra: Commonw ealth of Australia, March 2005); Australian, Telework Advisory Committee (ATAC), Telework-International Developments:, Paper III (Canberra: Commonwealth of Australia, March 2005); D. Bricker and, J. Wright, What Canadians Think about Almost Everything (Toronto: Doubleday, Canada, 2005); J. Cummings, “Masters of a Virtual World,” Network World, April, 25, 2005, pp. 76–77. These estimates exclude employees who bring work home, from the office because this practice isn’t usually considered virtual work., 76. L . Duxbury and C. Higgins, “T elecommute: A Primer for the Millennium, Introduction,” in The New World of Work: Challenges and Opportunities, ed. C.L., Cooper and R.J. Burke (Oxford: Blackwell, 2002), pp. 157 – 99; V. Illegems and, A. Verbeke, “Telework: What Does It Mean for Management?” Long Rang e, Planning 37 (2004), pp. 319–34; S. Raghuram and B . Wiesenfeld, “WorkNonwork Conflict and Job Stress among Virtual Workers,” Human Resource, Management 43, no. 2–3 (Summer–Fall 2004), pp. 259–77., , Barrick, “The Big F ive Personality Dimensions: Implications for Research and, Practice in Human Resources Management,” Research in Personnel and Human, Resources Management 13 (1995), pp. 153–200; and R.J . Schneider and L.M., Hough, “Personality and Industrial/Or ganizational Psychology,” International, Review of Industrial and Organizational Psychology 10 (1995), pp. 75–129., 79. T .A. Judge, E.A. Lock e, and C.C. Durham, “The Dispositional Causes of Job, Satisfaction: A Core Ev aluations Approach,” Research in Or ganizational, Behavior19 (1997), pp. 151–88; A.P. Brief and H.M. Weiss, “Organizational, Behavior: Affect in the Workplace,” Annual Review of Psychology 53 (2002), pp., 279–307; D.J. Ozer and V. Benet-Mar tínez, “P ersonality and the Prediction, of Consequential Outcomes, ” Annual Re view of Psyc hology 57 (2006),, pp. 401–21., 80. R.D . Arvey et al., “Genetic Differences on Job Satisf action and Work Values,”, Personality and Individual Differences 17 (1994), pp. 21–33; J. Schaubroeck, D., C. Ganster, and B. Kemmerer, “Does Trait Affect Promote Job Attitude Stability?”, Journal of Organizational Behavior 17 (1996), pp. 191–96; C. Dormann and D., Zapf, “Job Satisf action: A Meta-Analysis of Stabilities,” Journal of Organizational Behavior 22 (2001), pp. 483–504., 81. S.C. Segerstrom et al., “Optimism IsAssociated with Mood, Coping, and Immune, Change in Response to Stress,” Journal of Personality & Social Psychology 74, (June 1998), pp. 1646–55; S.M. Je x et al., “The Impact of Self-Ef ficacy on, Stressor-Strain Relations: Coping Style as an Explanatory Mechanism,” Journal, of Applied Psychology 86 (2001), pp. 401–9., 82. S.S. Luthar, D. Cicchetti, and B. Becker, “The Construct of Resilience: A Critical, Evaluation and Guidelines for Future Work,” Child Development 71, no. 3 (May–, June 2000), pp. 543 – 62; F. Luthans, “The Need for and Meaning of P ositive, Organizational Behavior,” Journal of Or ganizational Behavior 23 (2002), pp., 695–706; G.A. Bonanno, “Loss, Trauma, and Human Resilience: Have We Underestimated the Human Capacity to Thrive after Extremely Aversive Events?”, American Psychologist 59, no. 1 (2004), pp. 20–28., 83. S .E. Taylor et al., “Psycholo gical Resources, P ositive Illusions, and Health, ”, American Psychologist 55, no. 1 (January 2000), pp. 99–109., 84. K.M. Connor and J.R.T. Davidson, “Development of a Ne w Resilience Scale:, The Connor–Davidson Resilience Scale (CD-RISC), ” Depression and Anxiety, 18, no. 2 (2003), pp. 76–82; M.M. Tugade, B.L. Fredrickson, and L. F eldman, Barrett, “Psychological Resilience and Positive Emotional Granularity: Examining the Benefits of Positive Emotions on Coping and Health,” Journal of Personality 72, no. 6 (2004), p. 1161–90; L. Campbell-Sills, S.L. Cohan, and M.B ., Stein, “Relationship of Resilience to Personality, Coping, and Psychiatric Symptoms in Young Adults,” Behaviour Research and Therapy, in press (2006)., 85. T.A. Judge and R. Ilies, “Relationship of Personality to Performance Motivation:, A Meta-Analytic Review,” Journal of Applied Psychology 87, no. 4 (2002), pp., 797–807; A. Witt, L.A. Burk e, and M.R. Bar rick, “The Interacti ve Effects of, Conscientiousness and Agreeableness on Job Performance,” Journal of Applied, Psychology 87 (February 2002), pp. 164–69., 86. J. Tupponce, “Listening to Those Inner Voices,” Richmond Times-Dispatch, May, 11, 2003, p. S3., , 77. D.E. Bailey and N.B. Kurland, “A Review of Telework Research: Findings, New, Directions, and Lessons for the Study of Moder n Work,” Journal of Organizational Behavior 23 (2002), pp. 383–400; D.W. McCloskey and M. Igbaria, “Does, ‘Out of Sight’ Mean ‘Out of Mind’? An Empirical Investigation of the Career, Advancement Prospects of Telecommuters,” Information Resources Management, Journal 16 (April–June 2003), pp. 19–34; Sensis, Sensis® Insights Report:, Teleworking (Melbourne: Sensis, June 2005)., , 87. J .L. Holland, Making Vocational Choices: A Theory of Car eers (Engle wood, Cliffs, NJ: Prentice-Hall, 1973)., , 78. This historical review and the trait descriptions in this section are discussed in, J.M. Digman, “P ersonality Str ucture: Emer gence of the F ive-Factor Model,”, Annual Review of Psyc hology 41 (1990), pp. 417–40; M.K. Mount and M.R., , 89. G.D. Gottfredson, “John L. Holland’s Contributions to Vocational Psychology: A, Review and Ev aluation,” Journal of Vocational Behavior 55, no. 1 (1999),, pp. 15–40., , hiL30123_ch14_346-375.indd 374, , 88. G .D. Gottfredson and J .L. Holland, “A Longitudinal Test of the Influence of, Congruence: Job Satisf action, Competency Utilization, and Counter productive, Behavior,” Journal of Counseling Psychology 37 (1990), pp. 389–98; A. Furnham,, “Vocational Preference and P – O Fit: Reflections on Holland’s Theory of Vocational Choice,” Applied Psychology: An International Review 50 (2001), pp. 5–29., , 11/2/06 3:44:52 PM

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15, , MANAGING THROUGH POWER,, INFLUENCE, NEGOTIATION, LEARNING OBJECTIVES, , AND, , After Reading This Chapter You Should Be Able to:, 1, , Explain why power and influence are necessary to get things done in organizations., , 2, , Identify the main sources of managerial power., , 3, , Discuss the contingencies that influence the magnitude of a manager’s power., , 4, , Outline the various tactics managers can pursue to increase their influence in an organization., , 5, , Describe what a manager can do to increase the chance of negotiating effectively., , / / / / / / / / / / / / / / /, , Power in Organizations, Sources of Power, Formal Hierarchical Position, Expertise, Control over Information, Networks of Allies, Individual Attributes, Contingencies of Power, Influence, Influence Tactics, Consequences and Contingencies, , hiL30123_ch15_376-401.indd 376, , Negotiation: The Art of Conflict, Resolution, Bargaining Zone Model of Negotiations, Negotiating Effectively, In Conclusion: Why Does It Matter?, Management Challenges, Management Portfolio, Closing Case: The Rise and Fall of, Mike Sears, , 11/2/06 6:46:52 PM

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Genentech campus in, San Francisco, CA., © Getty Images, , / / / / / / / / / / / / / / / / / / / / /, , S, , usan Desmond-Hellmann, president of product development at, biotech pioneer Genentech, is regarded as one of the most, powerful women in business. For Genentech, 2004 and 2005 were, banner years—the company had four new drugs approved by the, Federal Drug Administration and positive results from five important, clinical trials. Much of the credit for this unprecedented hot streak, has been given to Hellmann. Trained as an oncologist, Hellmann, joined Genentech in 1995. When Genentech’s CEO, Arthur Levinson,, wanted the company to move into cancer drugs, Hellmann, one of, the few oncologists on staff, was put in charge of the fledging cancer, program. Levinson “promoted her very, very quickly, many times, over.” He cited her willingness to work 70- to 80-hour weeks and to, accept responsibility for success or failure, as well as her good rapport with people. Hellmann oversaw clinical trails for Avastin,, Genentech’s breakthrough anticancer drug. Although the early trials, went well, a large breast cancer trial in 2002 yielded disappointing, results. Stock analysts urged Genentech to halt the Avastin program, and “stop throwing good money after bad.” Hellmann disagreed., After rereading the results of earlier trials, she decided that Avastin, held promise in treating colon cancer and urged the company to push, , hiL30123_ch15_376-401.indd 377, , on with a large trial for this. In May 2003 Genentech announced, positive results from this trial, which showed that the drug slowed, tumor growth and prolonged patient survival. Avastin turned out to, be the most successful oncology product launch in history, generating $676 million in its first year on the market., Susan Desmond-Hellmann has accumulated considerable, power and influence at Genentech. As head of product development, she bears primary responsibility for drug development, the, lifeblood of a biotech company like Genentech. Hellmann’s is one, of the most important voices in the organization when it comes to, deciding how to allocate scarce resources—money and people—, between different drug development projects. How did she get to, this position? She did it through her expertise, hard work, people, skills, willingness to take responsibility for critical decisions, and, willingness to make tough calls—such as the decision to go ahead, with the Avastin trials in the face of external and internal opposition. These attributes have made Hellmann a very effective, manager, someone who can get remarkable things done through, other people. That she was shown to be correct in the case of, Avastin has only increased her power and influence.1, , 11/2/06 6:46:55 PM

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378, , PART 4 // Leading, , This chapter is about ho w managers get things done in or ganizations through the e xercise of, power and influence and with their ne gotiating skills. You will recall from Chapter 1 how newly, appointed frontline managers must lear n how to influence subordinates, peers, and their o wn, bosses.2 The formal power from hierarchical position is a limited source influence in or ganizations, and power and influence are often assembled through interpersonal networks of allies. Also, in Chapter 1 w e discussed how negotiation is a w ay of life for managers: They are constantly, negotiating with others inside and outside the or ganization to get things done. 3 As we will see,, negotiation skills are a vehicle by which managers can translate power into influence over others, and achieve their goals. To explore these issues, we start by discussing the sources of po wer in, organizations. Then we look at how managers can use power to exercise influence within an organization. We close with a discussion of what is required to be an effective negotiator., , // Power in Organizations, power, The potential of a person,, team, or organization to, require others to do certain, things., , countervailing power, Power that subordinates, have over their superiors., , Power derives from the potential of a person, team, or or ganization to require others to do, certain things.4 The stress on the word potential is important. People with power may not have, to exercise it to get things done. Just the fact that they have power is often sufficient to enable, them to influence others to do certain things. The most basic prerequisite of power is that one, person or group believes it is dependent on another person or g roup for something of value.5, For example, person A has power over person B by controlling something of value that person, B needs to achie ve his or her goals (see Figure 15.1 ). You might have power over others by, controlling access to resources, infor mation, or even the privilege of being associated with, you! Susan Desmond-Hellmann, for example, has power over other researchers in her organization because she controls access to the f inancial resources they need to fund drug development projects., Power is not a one-w ay street; while a manager has po wer over her subordinates, the y in, turn can have countervailing power over her. A manager needs her emplo yees to work, productively, and this gives her employees countervailing power. Subordinates have a number, of avenues through w hich they can e xercise counter vailing power. For example, they can, silently protest what they see as an unjust use of po wer by working less diligently; they can, complain about abuses to their manager’s boss; and they can quit and work elsewhere., Power is often perceptual. People can gain power over others by convincing them that they, have something of value. For example, a celebrity probably has power over noncelebrities in, her social circle because they might perceive themselves as gaining status by being associated, with the celebrity. In such cases perception is reality., , Person B, , r, we, Po, , Valuable resource, , Co, u, , nte, , rva, , ilin, gp, , ow, , er, , Person A, , Person B‘s, goals, , FIG UR E 1 5 .1, Power Dependence, , hiL30123_ch15_376-401.indd 378, , 11/2/06 6:46:56 PM

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Managing through Power, Influence, and Negotiation \\ CHAPTER 15, , Power has received a lot of bad press. In the 19th centur y Britain’s Lord Acton made the, famous statement that “power tends to corrupt; absolute power corrupts absolutely.” Americans, in particular are ambivalent about power and are often reluctant to talk about it. Sociolo gist, Rosabeth Moss Kanter has written, “P ower is America’s last dir ty word. It is easier to talk, about money—and much easier to talk about sex—than it is to talk about power. People who, have it deny it; people w ho want it do not w ant to appear to hunger for it; and people w ho, engage in its machinations do so secretly”6 Yet, Kanter concludes, power is a critical element, in effective managerial behavior. Without power, it is difficult to get things done in organizations. Management author John K otter makes a similar point. “The o verall feeling to ward, power (in America), which can easily be traced to the nation’s very birth, is negative.” Yet he, too notes that the judicious use of power is important for success in management, noting that, “from my own observations, I suspect that a large number of managers—especially the young,, well-educated ones—perform significantly below their potential because the y have not nurtured and developed the instincts needed to effectively acquire and use power.”7, Why is power so important to management effectiveness? The answer is that organizations, are fundamentall y political entities in w hich dif ferent people or units control scarce, resources—including money, employee time, and information.8 To meet her goals, a manager, has to recognize that she is dependent on others w hose cooperation is needed to get things, done. She has to work within the existing distribution of power and accumulate power of her, own so she can influence those w ho control valuable scarce resources needed for the perfor mance of her job. As a frontline manager in Genentech’s research organization, for example,, Susan Desmond-Hellmann had to persuade her superiors to allocate aluable, v, resources—money,, scientists, and lab space—to the cancer project she was overseeing. Over time, by virtue of her, hard work, expertise, and engaging people skills, she g ained the respect of the CEO , Arthur, Levinson, which increased her perceived power in the organization and improved her ability, to bargain for resources. She also g ained more power through promotions, enab ling her to, exercise greater control over Genentech’s destiny., Power itself is value-neutral: It is neither good nor bad. What is important is how power is, accumulated and used. Power should not be accumulated through unf air or dishonest means or, used in an unethical manner. However, power can be accumulated through honest and fair means,, and it can be used constructively to do good things in organizations and society in general. Hitler, and Gandhi both had power; Hitler used his power to impose terrible suffering on others, whereas Gandhi used his power to liberate an entire nation from British imperial r ule. Power did not, corrupt Hitler—he was deranged from the start. In contrast, for individuals with a strong ethical, foundation such as Gandhi, the accumulation of power may be the only way to achieve ends that, are beneficial via means that are not bad. This is not to deny that power does tend to corrupt; but, that tendency can be held in check if managers ha ve strong personal ethics and if the or ganizations within which they work promote ethical behavior (see Chapter 4 for details)., , 379, , Power Tends to, Corrupt So said Lord, Acton, the 19th-century, British historian. Many, commentators have, misinterpreted Acton’s, statement, taking it to, imply that the possession, of power always corrupts, the power holder, which is, not the case. In reality, the, judicious exercise of power, is an important skill for, managers., © Bettmann/Corbis, , // Sources of Power, If a manager is to accumulate and use po wer, he or she f irst has to understand where power, comes from. In or ganizations, power comes from for mal position within a hierarch y, from, expertise, from control over valuable information, from a network of allies, and from individual attributes.9 The degree to which these factors confer power on an individual or unit, also depends on cer tain contingencies, including substitutability, centrality, discretion,, and visibility (see Figure 15.2)., , // FORMAL HIERARCHICAL POSITION, Hierarchical rank within an organization obviously determines power. A CEO has, more power than a functional vice president, and a vice president has more po wer, than a frontline manager . Hierarchical po wer comes from a number of sources:, legitimate power, power over rewards and sanctions, and power over the allocation, of scarce resources., , hiL30123_ch15_376-401.indd 379, , 11/2/06 6:46:58 PM

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380, , PART 4 // Leading, , FIG UR E 1 5 .2, Sources and, Contingencies of Power, , Sources of power:, • Hierarchical position, • Expertise, • Control over information, • Network of allies, • Individual attributes, , Influence over, organizational, outcomes, , Contingencies of power, • Substitutability, • Centrality, • Discretion, • Visibility, , legitimate power, Power deriving from an, implicit agreement that, people higher in a, hierarchy can request, certain behaviors of their, subordinates., , ■ Overstepping power at, Merrill Lynch., , hiL30123_ch15_376-401.indd 380, , Legitimate Power Legitimate power derives from an implicit agreement among organization members that people higher up in a hierarchy can ask certain behaviors of their subordinates. A frontline manager, for example, can request that employees under his supervision, work overtime if conditions w arrant. Similarly, a mark eting manager at Microsoft will no, doubt accept the le gitimate power that the CEO, Steve Ballmer, has to send him to meet an, important customer in Beijing. For the most part, legitimate power comes not from formal job, descriptions, but from the well-understood social norm that those higher up in an organization, have the right to direct their subordinates., However, legitimate power is bounded b y laws, for mal company r ules, and estab lished, norms, as well as by managers’ need to get subordinates to accept their legitimacy. Laws limit, what managers can do. It is ille gal, for example, for a manager to instr uct a subordinate to, alter accounting statements to hide a compan y’s debt from in vestors. Company r ules and, norms similarly constrain power. Thus a company may have negotiated certain work agreements with labor unions, and those agreements might restrict the tasks a manager can assign., Similarly, company norms may forbid a manager from telling emplo yees how they should, dress. The need for subordinates to accept managers’legitimacy is also a strong factor limiting, managerial power. If leaders act outside of what is implicitly accepted by their subordinates as, legitimate, subordinates can e xercise their counter vailing po wer b y refusing to compl y,, appealing to a higher authority for redress, w orking slowly, walking away from the job, or, staging a strike., Power over Rewards and Sanctions Hierarchical rank lets managers shape the incentive and control systems within an organization and administer rewards and sanctions. Managers can reward behavior that they deem consistent with company goals and punish those, whose perfor mance is belo w par. Rewards can tak e the for m of pa y increases, bonuses,, promotions, and other benef its. Punishments include den ying the same, and perhaps, dismissal., Like legitimate power, power over rewards and sanctions is often bounded by laws, norms,, and a need to maintain le gitimacy. Terminated emplo yees can sue managers for unf air, dismissal if they believe the managers ha ve overstepped their power. In 2006, for e xample,, three former brokers at Mer rill Lynch won a total of $14 million in damages after a cour t, decided that the company had overstepped its power when firing them in the wake of a trading, scandal. The brokers had been helping a client to trade mutual funds after a 4 p.m. deadline, established by the company; but according to them, Mer rill knew what they were doing and, applied sanctions only when the government started to investigate the practice. They were, in, the words of one, “sacrificial lambs.” The court apparently agreed.10, , 11/2/06 6:46:58 PM

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Managing through Power, Influence, and Negotiation \\ CHAPTER 15, , 381, , More generally, if the administration of rewards and sanctions is seen as unjust or biased in, some way, the administrating managers can lose their le gitimacy. To ensure that reward and, sanction systems are fair and do not involve bias, favoritism, or coercion, many firms now use, 360-degree performance evaluation systems in which subordinates review the performance of, their bosses, giving them some countervailing power., Power over Scarce Resources The allocation of scarce resources can be an impor tant, source of hierarchical power. Scarce resources include, but are not limited to, capital, people,, plant, equipment, and work space. The CEO of a multibusiness company such as United Technology, for example, derives considerable power from the ability to allocate capital betw een, competing requests of different divisions. Similarly, as head of product de velopment at Genentech, Susan Desmond-Hellmann must allocate scarce scientif ic and f inancial resources, between drug development projects, which gives her considerable power to shape the dr ug, development pipeline at Genentech., The power that comes from control over scarce resources has been summarized in what is, termed the “new golden rule”—he who has the gold makes the rules.11 Of course it is not that, simple. The need to maintain le gitimacy and resulting counter vailing power remains an important constraint on management action. If Hellmann were to allocate money to projects that, had shown poor results in clinical trails, she w ould soon lose legitimacy among other scientists at Genentech, and that would quickly undermine her power., , // EXPERTISE, Knowledge is power as the saying goes, and this is certainly true in organizations. Expertise in, a particular area can gi ve a person considerab le power. Susan Desmond-Hellmann star ted to, gain power within Genentech because she was one of the few people with oncology expertise, in the organization when Arthur Levinson decided to push the company toward cancer research., In another example, the CFO of WorldCom, Scott Sullivan, wielded enormous personal power, in that organization. Sullivan’s power came from more than his hierarchical rank. It also came, from his expertise in arcane accounting regulations and complex financial transactions. Sullivan, was considered a “whiz kid” who had won a prestigious “CFO Excellence Award.” Thus when, Sullivan asked accounting staff to make questionable entries, they assumed Sullivan had found, an innovative—and le gal—accounting loophole. Unfor tunately Sullivan, along with CEO, Bernie Ebbers, w as engaging in an $11 billion accounting, fraud to inflate WorldCom’s earnings and boost the company’s, stock price (from w hich Sullivan and Ebbers prof ited handsomely). When the fraud was uncovered, WorldCom collapsed, into bankruptcy. Ebbers and Sullivan ended up in jail.12, Management writer P eter Dr ucker has theorized that as, our society moves from industry toward a knowledge-based, economy, more employees are gaining expert power.13 In industries from biotechnology to computer software, employee, knowledge is becoming the pivotal factor of production. This, knowledge is ultimatel y outside the control of those w ho, manage the company, making them more dependent on powerful expert employees to achieve their corporate objectives., , // CONTROL OVER INFORMATION, It is often said that infor mation is power.14 This phrase is increasingly relevant in a kno wledge-based economy because, information is the basis of kno wledge. Power, however, derives not so much from information per se as from the ability, to control the flo w of infor mation within an or ganization., People who are located at a central node in a communication, , hiL30123_ch15_376-401.indd 381, , ■, , Expert power at WorldCom., , Countervailing Power Former WorldCom CEO Scott, Sullivan is shown in handcuffs. Sullivan, whose expert, power propelled him to the CFO post, ultimately served jail, time for abusing that power and helping to mastermind the, largest accounting fraud in U.S. history., © Getty Images, , 11/2/06 6:46:59 PM

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382, , PART 4 // Leading, , ■ Information and Power, at SAP., , network are in a particularly powerful position. They can act as information gatekeepers, scanning and selectively releasing information in a manner that is consistent with attaining their, goals. In the language of politics, they can “spin” the information. They can also use preferential access to infor mation to increase their knowledge and argue more persuasively for policies, programs, or strategies they advocate. Information also helps an organization cope better, with change and uncer tainty in the external environment, and those who control such information may enjoy significant power.15 For example, a marketing researcher who understands, changes in consumer preferences and future demand trends may be able to leverage that information to gain power and influence within the or ganization. Information thus confers an advantage to those that have it. Consistent with this vie w, management researchers have found, that centrality in a communication network is positively correlated with an enhanced chance, of being promoted, an increase in that person’s reputation for power within an organization,, and higher pay.16, In an interesting e xample of the value of centrality, a few years ago SAP, the Ger man, business software company, introduced innovative ways for employees to receive the latest, company ne ws through their car radios, e-mail ne wsletters, and intranet sites. SAP, employees appreciated this direct communication, but the compan y’s middle managers, objected because it undermined their power as the gatekeepers of company information.17, Previously SAP’s middle managers had distributed , regulated, and f iltered infor mation, throughout the or ganizational hierarchy. They derived power from this central position,, and their po wer w as diminished b y the adoption of ne w methods for infor mation, dissemination., The right to control information flow is a form of legitimate power and is most common in, highly bureaucratic firms. The wheel formation in Figure 15.3 depicts this highly centralized, control over infor mation flow. In this communication str ucture, employees depend on the, information gatekeeper in the middle of this conf iguration—such as the middle managers at, SAP—to provide the information they require. However, in today’s knowledge-based economy, the problem facing information gatekeepers is that a centralized information control structure, may be incompatible with knowledge management and high-performance work teams. Consequently, SAP and other organizations are encouraging more knowledge sharing by moving, toward an all-channel communication structure (see Figure 15.3) in which all employees enjoy, relatively equal access to infor mation. This str ucture democratizes infor mation, allowing, , Wheel formation, (centralized information flow), , FIG UR E 1 5 .3, , All-channel formation, (decentralized information flow), , High, information, control, , Power through, Information Control, , hiL30123_ch15_376-401.indd 382, , 11/2/06 6:46:59 PM

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Managing through Power, Influence, and Negotiation \\ CHAPTER 15, , 383, , employees and self-directed work teams to make better decisions while reducing the power of, information gatek eepers. In its purest for m, however, the all-channel netw ork may seem, chaotic, so lar ge organizations with bureaucratic cultures tend to slip back into the w heel, pattern. The wheel pattern also reemerges because, as we saw at SAP, it confers more power, on those who distribute the information.18, , // NETWORKS OF ALLIES, It is not only what you know that matters, it is also whom you know. An important source of, power in or ganizations is a netw ork of allies, or suppor ters, who can help y ou get things, done.19 You may recall from Chapter 1 how first-year managers discovered that building an, interpersonal network was an important prerequisite for mastering the job. Skilled managers put together coalitions of supporters who work collectively to pursue a particular objective, such as the adoption of a strate gy or process. A key to building and maintaining a, network of allies is reciprocity. Put simpl y, to get somebody to help y ou, you have to be, prepared to help him or her in some w ay. Reciprocal social exchanges help build and hold, together a network of allies.20, For example, as a young political staffer, former U.S. President Lyndon Johnson apparently, went out of his way to cultivate a network of powerful friends. These included Sam Rayburn,, one of the most powerful congressional representatives of the 20th century. Rayburn, a fellow, Texan and a bachelor, was a lonely man. The Johnsons frequently invited him to their home., Through his connection with Rayburn, Johnson participated in informal gatherings of powerful figures in Washington, which opened doors for the ambitious y oung Texan. Johnson also, derived power from his association with Ra yburn: As a friend of Ra yburn, Johnson was not, somebody to take lightly.21, , // INDIVIDUAL ATTRIBUTES, There is no doubt that individual attributes are an important source of personal power (see, Figure 15.4). Several attributes have been identif ied as important for acquiring and holding power in an organization:, 1. Energy, endurance, and physical stamina., 2. The ability to focus one’s energy and avoid wasted effort., 3. Empathy, which makes it possible to read and understand others., 4. Flexibility, particularly with respect to selecting various means to achieve one’s goals., 5. The willingness, when necessary, to engage in conflict and confrontation., 6. Eloquence—the ability to make points in a logical and evocative fashion., 7. Integrity.22, Consider again Susan Desmond-Hellmann. In addition to her e xpertise, her rise within, Genentech was in part due to her willingness to w ork long hours—requiring energy, endurance, and physical stamina. Similarly, the young Lyndon Johnson displayed enormous energy, and endurance. He got to work earlier than other congressional staffers, did not stop for lunch,, and often worked past eight in the evening., The ability to discern what is important and focus time and effort on that is another critical, skill. In a study of successful general managers, John Kotter found that those who had focused, on one industry, and in one company, tended to be more successful.23, Empathy—the ability to understand the beliefs, desires, and moti ves of others—can be a, particularly impor tant attribute w hen it comes to assemb ling a netw ork of allies. L yndon, Johnson’s empathy toward Sam Rayburn allowed him to recr uit the older man as a v aluable, ally. Similarly, the rappor t Susan Desmond-Hellmann enjo ys with other people is probab ly, due to empathy., Flexibility is the opposite of stubbornness. Flexibility is the ability to recognize that there are, multiple ways to achieve a goal and that if one method is f ailing, it may be better to try another, , hiL30123_ch15_376-401.indd 383, , 11/10/06 4:44:24 AM

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384, , PART 4 // Leading, , FIG UR E 1 5 .4, Individual Attributes as, Sources of Power, Empathy, , Energy, , Flexibility, , Personal, Power, Focus, , Eloquence, , Ability, to tolerate, conflict, , Integrity, , route. Susan Desmond-Hellmann demonstrated flexibility when Genentech’s Avastin failed in a, late-stage clinical trial for treating breast cancer. After reviewing data, she pushed Avastin ahead, in another clinical trial for treating colon cancer, which ultimately produced strong results., A willingness to eng age in conflict w hen necessary—to be tough—can be an impor tant, source of personal power. This does not mean you should be habitually difficult, stubborn, or, argumentative. Rather, it implies a need to take a stand on important issues, particularly when, the facts are on your side. If you shy away from conflict, you are not likely to get your way;, you may be pushed around by individuals who are more assertive; and your power will be diminished. Lyndon Johnson did not avoid conflict when it was necessary; and by signaling to, others that he w as willing to f ight for cer tain things, Johnson deter red others from mo ving, against him because they feared the consequences., The ability to communicate in an eloquent f ashion is impor tant because it helps mak e, people listen to you—and people who are listened to ha ve power. The expert who mumbles, incoherently and does not e xplain his position in a precise and lo gical fashion is unlikely to, accumulate much power and influence in an or ganization, no matter how valuable his expertise. Conversely, an eloquent expert can become uniquely powerful. Such people can use their, knowledge, and the po wer of words, to influence the destin y of an or ganization. The great, physicist Richard Feynman was a powerful f igure in e very organization he w as associated, with—from Los Alamos, where he worked on the Manhattan Project, to the independent commission looking at the failure of the Challenger space shuttle. His power derived not just from, his expertise, which was considerable, but also from his eloquent ability to use w ords to, capture the attention of others.24, Finally, integrity can be a source of po wer, particularly when coupled with other sources, of power such as expertise. People with integrity gain the respect and tr ust of others. They, build a reputation for being just, reasonab le, and incorruptible, which increases their social, capital. People with integrity can better build a netw ork of allies, because people are more, likely to enter reciprocal exchanges with somebody who has a reputation for integrity. Moreover, the opinions of people who have a reputation for behaving with integrity will be given, greater weight than those with a reputation for duplicity, whose opinions may be perceived as, self-serving., , hiL30123_ch15_376-401.indd 384, , 11/2/06 6:47:00 PM

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Managing through Power, Influence, and Negotiation \\ CHAPTER 15, , 385, , The Eloquent Expert Richard Feynman was placed on the commission that looked into the Challenger disaster not just, because of his expertise, but also because of his eloquence, which had brought him to national attention. As a member of that, commission, he famously demonstrated how failure of an O-ring had caused the disaster, and showed how management at, NASA had massively underestimated the probability of O-ring failure., © Time Life Pictures/Getty Images., , © AP Photo/Bruce Weaver, , // Contingencies of Power, Imagine that you have expert power by virtue of your ability to forecast and possibly even prevent dramatic changes in the organization’s environment. Does this expertise mean that you are, influential? Not necessarily! Power is translated into influence o ver organizational outcomes, only under cer tain conditions. Called the contingencies of po wer, these four conditions are, substitutability, centrality, discretion, and visibility.25 These contingencies are not sources of, power; rather they determine the extent to which people can leverage the power they have to, make things happen within organizations. You may have lots of expert power, but you will not, be able to influence others with this power base if the contingency factors are not in place., Substitutability refers to the availability of alternatives. Power is strongest when someone has a monopol y over an impor tant resource that has no substitutes. Con versely, power, decreases as the number of alternative sources of the critical resource increases. If you are the, only person in an organization with expertise on an issue, you will be more powerful than if, several other people in your company possess this expertise. Substitutability refers not only to, other sources that offer the same resource, but also to substitutes for the resource itself. F or, instance, the power of labor unions is diminished when companies introduce technologies that, replace the need for their union members. At one time a strike by telephone employees would, have shut down operations in a telephone company; but computerized systems and other technological innovations that have reduced the need for telephone operators and other personnel, let telephone companies continue of fering service during labor strikes. Technology can be a, substitute for employees and consequently can reduce union power., Centrality refers to the degree and nature of interdependence betw een the power holder, and others. 26 Public transportation workers have high centrality in cities that rel y on public, transportation (such as New York) because their actions affect many people quickly. If they go, on strike, they can shut do wn a city. Think about your own centrality for a moment: If y ou, decided not to show up for work or school tomorrow, how many people would be affected, and, how much time would pass before they were affected? If you have high centrality, many people in the organization would be affected adversely and immediately by your absence. If you, have very low centrality, no one would be affected., Discretion refers to the freedom to exercise judgment—to make decisions without referring, to a specif ic rule or receiving permission from someone else. Discretion, or autonom y, is another important contingency of power in organizations. Consider the plight of f irstline supervisors. It ma y seem that the y have hierarchical po wer over employees, but this po wer can be, , hiL30123_ch15_376-401.indd 385, , substitutability, The availability of, alternative resources., , centrality, The degree and nature of, interdependence between, the power holder and, others., discretion, The freedom to exercise, judgment—to make, decisions without referring, to a specific rule or, receiving permission from, someone else., , 11/2/06 6:47:01 PM

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386, , visibility, The extent to which a, power holder is known, or, visible, to others., , PART 4 // Leading, , curtailed by specific rules. Such lack of discretion reduces the power of supervisors, even though, they may have access to some of the power bases described earlier in this chapter. “Middle managers are very much ‘piggy-in-the-middle,’” complains a middle manager at Britain’s National, Health System. “They have little power, only what senior managers give them.”27, Visibility refers to the e xtent to w hich a po wer holder is kno wn, or visib le, to others., People with expert power who are not visible within the organization may not have much influence; they may not be able to leverage their power to influence organizational outcomes., For example, several years ago as a junior cop ywriter at an adv ertising agency, Mimi Cook, submitted an idea for a potential client to her boss, w ho then presented it to the agenc y’s, founder, Jay Chiat. Chiat was thrilled with the concept, but Cook’s boss “never mentioned the, idea came from me,” recalls Cook. Cook confronted her boss, who claimed the oversight was, unintentional. However, when a similar incident occur red a few months later, Cook left the, agency for another f irm.28 Cook’s problem was that she was not visible within the organization. Cook, w ho has since pro gressed to become associate creati ve director at another ad, agency, knows that power does not flow to unknown people in the or ganization. Those who, control valued resources or knowledge can use that power only when others are aware of them,, which requires visibility. One way to increase visibility is to tak e people-oriented jobs and, work on projects that require frequent interaction with senior e xecutives. “You can take visibility in steps,” advises a pharmaceutical executive. “You can start by making yourself visible, in a small g roup, such as a staf f meeting. Then when you’re comfortable with that, seek out, larger arenas.”29, , // Influence, Power gives a person, team, or unit the opportunity to exert influence over organizational outcomes. Influence is power in action. Exerting influence means using power to shape the attitudes, behavior, and decisions of others within and outside the organization.30 Here we look at, the various steps managers take to accumulate power and influence others to get things done, in organizations. We start with a review of influence tactics, and then w e discuss the consequences of applying different influence tactics, looking at preferred tactics., , // INFLUENCE TACTICS, influence tactics, Steps that people can take, to exert influence over, others in an organization., , ■ Influence tactics at Charles, Schwab., , hiL30123_ch15_376-401.indd 386, , Influence tactics are the steps that people can take to exert influence over others in an organization, thereby achieving their goals. If successfull y applied, influence tactics can enab le, even junior managers who lack substantial sources of power to have an impact on the behavior, and decisions of others within their organization, including the CEO. They can shape organizational outcomes., For example, consider the actions of a young software engineer, William Pearson, who was, working in the marketing department of discount broker Charles Schwab in the mid-1990s. At, the time the World Wide Web was just emerging as a communication platform for the Internet., Pearson quickly saw the transformational power of the Web and realized that it w ould make, obsolete the clunky proprietary software that Schwab’s customers were using to access their, accounts online. Using the Web as their platfor m, discount brok ers such as E*T rade were, growing rapidly and of fering their clients the ability to e xecute trades online—something, Schwab’s customers could not do. P earson thought such companies would soon take market, share from Schwab unless Schwab also moved its online business to the Web. Try as he might,, however, Pearson could not get his supervisor at Schwab interested. Frustrated, he mentioned, his ideas to other managers, but they too took no action. The basic problem was that Pearson, had no power within the or ganization. Even though his vision of the future w as correct, he, could not influence Schwab’s strategy., Then Pearson contacted a former Schwab manager, Anne Hennegar, who now worked as a, consultant to the company. He asked Hennegar for help. She suggested meeting with an executive vice president, Tom Seip, who was known for his aversion to Schwab’s bureaucracy. Hennegar contacted Seip, who quickly agreed to the meeting and asked if he could include a couple, , 11/2/06 6:47:02 PM

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Managing through Power, Influence, and Negotiation \\ CHAPTER 15, , 387, , of “friends.” When Hennegar and Pearson turned up for the meeting, the y were surprised to, find that in addition to Seip, CEO Charles Schwab and COO David Pottruck were there. Pearson demonstrated a Web-based interface for what he called E-Schwab to the assembled senior, executives. Within an hour Charles Schw ab decided to estab lish a Web-based platfor m for, Schwab that would let customers trade stocks online. P earson had succeeded in shifting the, strategy of Schw ab. He had done this b y resorting to a classic influence tactic: appeal to a, higher authority. He went outside the normal chain of command and appealed to a senior manager with power and influence who was known for his maverick views, Tom Seip.31, Appealing to a higher authority is one of se veral influence tactics. Others include silent, authority, assertiveness, network building, e xchange, coalition for mation, ingratiation, impression management, persuasion, and information control.32 These influence tactics are both, a way of accumulating more power within an organization, and a way of using the power that, a person has to shape or ganizational outcomes. Moreover, with the right influence tactics,, even people with limited power can have an impact, as William Pearson did at Schwab., Silent Authority The silent application of authority (w hat we call silent authority oc), curs when someone complies with a request because of the requester’s legitimate hierarchical, power as well as the target person’s role expectations. We often refer to this condition as deference to authority.33 This deference occurs when you comply with your boss’s request to complete a particular task. If the task is within your job scope and your boss has the right to make, this request, then this influence strate gy operates without negotiation, threats, persuasion, or, other tactics., Silent authority is often overlooked as an influence strategy. However, it is a common form, of influence in many cultures. Japanese culture, for example, teaches that those lower down in, a hierarchy should accept the authority of their superiors. Employees comply with supervisor, requests without question because they respect the supervisor’s higher authority in the organization.34 Silent authority can also work through role modeling when a manager tries to influence the action of a subordinate by modeling desired behaviors. One study reported that Japanese managers typicall y influence subordinates b y engaging in the beha viors the y w ant, employees to mimic.35, , silent authority, Occurs when someone, complies with a request, because of role, expectations and the, requester’s legitimate, hierarchical power., , Assertiveness In contrast to silent authority , assertiveness might be called “v ocal authority” because it involves actively applying hierarchical power to influence others. Assertiveness includes persistently reminding subordinates of their obligations, frequently checking, their work, confronting them, and using threats of sanctions to force compliance. A manager, using assertiveness typically applies or threatens to appl y punishment if a subordinate does, not comply with requests. Explicit or implicit threats range from job loss to losing f ace by, letting down the team. Extreme forms of assertiveness include blackmailing colleagues, such, as by threatening to reveal previously unknown failures unless a person complies with y our, request. As you might imagine, assertiveness is a rather blunt and unappealing influence tactic, and it can backfire, producing resistance from subordinates., , assertiveness, Applying hierarchical, power to influence others., , Network Building We have already discussed ho w networks of allies can be a source of, power and help managers get things done within an or ganization. As an influence tactic,, network building involves actively seeking out and establishing relationships with people, who may prove useful in the future. We have seen how the young Lyndon Johnson went out of, his way to build a network that included powerful people, such as Sam Ra yburn, who could, help him in the future. Active network builders understand the impor tance of social relationships. They spend time culti vating people w ho may be useful, such as b y going to e vents, where they are likely to encounter others whom they can incorporate into their network. Good, network builders recognize and accept that networking is a two-way street and that nor ms of, reciprocity are impor tant in building and maintaining netw orks. If you want people to help, you, you must be prepared to help them in retur n—you must engage in exchanges. If you do, not, you will be seen as selfish, your reputation will suffer, and the network you have built will, dissolve., , hiL30123_ch15_376-401.indd 387, , network building, Actively seeking and, establishing relationships, with people who may, prove useful in the future., , 11/2/06 6:47:02 PM

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388, , exchange, The promise of benefits or, resources in exchange for, another party’s compliance, with your request., , coalition, A group of people that, comes together to, cooperate in attaining a, certain goal., ■ American Idol: The use of, influence tactics., , Rubbish! That is what, several American TV, networks apparently, thought of the idea for the, hit TV show American Idol, when the show’s cocreator,, Simon Cowell, pitched it to, them. It took the clever use, of influence tactics to get, the Fox network to sign the, show., © Getty Images, , hiL30123_ch15_376-401.indd 388, , PART 4 // Leading, , Exchange As an influence tactic, exchange involves the promise of benef its or resources, in exchange for another par ty’s compliance with your request. Exchange is often embedded, within networks, and this is how people maintain and use the networks they have built to exert, influence. Exchange can involve proactively helping someone in the expectation that the favor, will be returned or reminding people of past benef its or favors with the expectation that they, will now make up for that debt. Clearly the norm of reciprocity is a central and explicit theme, in exchange strategies., Negotiation, which we discuss more full y later in this chapter , is also an inte gral part of, exchange influence tactics. For instance, you might negotiate with your boss for a day off in, return for working a less desirab le shift at a future date. Here y ou are using ne gotiation to, agree on the terms of an exchange. Thus you might propose, “If you give me Friday off, I will, work the graveyard shift next week.”, Coalition Formation A coalition is a group of people that comes together to cooperate in, attaining a cer tain goal. Coalition for mation is closel y related to netw ork building and e xchange. When people lack sufficient power on their own to influence others in the or ganization, they might form a coalition of allies who support a proposed change. Often that coalition, is drawn from a manager’s network, and it ma y be held to gether by prior e xchanges or the, expectation of future exchanges (that is, by norms of reciprocity)., A coalition is influential in three w ays.36 First, it pools the po wer and resources of man y, people to gain influence. Second , if lar ge enough, the coalition’ s mere e xistence can be a, source of power by symbolizing the legitimacy of an issue. In other words, a coalition creates, a sense that an issue deserves attention because it has broad support. Third, coalitions can create social cohesion among par ticipants who emotionally identify with it. As such, conditions, can become potent forces for changes in norms and behaviors. If a coalition has a broad-based, membership drawn from v arious par ts of an or ganization, it can be par ticularly effective., Other employees are more likely to identify with a broad-based g roup and consequently accept the coalition’s ideas., Appeal to a Higher Authority Appeal to a higher authority in volves trying to exert influence by passing over your immediate superior and appealing to someone higher in the organization. This is a risky but potentially effective influence tactic. As we saw, a frustrated William, Pearson adopted this tactic at Schwab. It is risky because your boss may not appreciate being, circumvented and could punish y ou for this. Before y ou pursue the strate gy, therefore, you, should be sure you have a strong case and that attempts to influence outcomes through regular, hierarchical channels are not working., An interesting recent example of the value of appealing to a higher authority concer ns, the TV show American Idol, which was based on a hit British TV show, Pop Idol. In 2001, the two promoters behind Pop Idol, Simon Co well and Simon Fuller , tried to persuade, American TV networks to license a version of the show. They hired Creative Artists Agency, (CAA) to help them pitch Pop Idol to American TV networks. In meeting after meeting, they met silence and b lank looks. Executives at ABC and UPN passed. F inally executives at the Fox TV network in Los Angeles showed some interest, but progress, toward signing a deal w as slow. To push things along, e xecutives from CAA exploited a connection the agency had with Elisabeth Murdoch, daughter of Rupert, Murdoch, the founder and CEO of News Corp., which owns Fox. Elisabeth Murdoch runs a News Corp. subsidiary in Britain, the BSk yB satellite channel. She, knew how successful Pop Idol had been in Britain. When she heard that e xecutives at Fox were dragging their feet, she quickly called her father, urging him to, buy the rights. In tur n, Rupert Murdoch called the senior F ox executive in Los, Angeles and asked how the deal to sign Pop Idol was going. He replied, “We’re, still looking at it.” Murdoch shot back, “Don’t look at it. Buy it! Right now.” The, show, American Idol, went on to become a huge ratings success for Fox. The decision to sign it at F ox, however, was made onl y after indirect appeal to a higher, authority—in this case CEO Ruper t Murdoch—through a contact that had been, , 11/2/06 6:47:02 PM

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Managing through Power, Influence, and Negotiation \\ CHAPTER 15, , 389, , made via networking: his daughter, Elisabeth Murdoch. Managers at CAA had cleverly hit, on the right influence tactic.37, Ingratiation Appeals to a higher authority, assertiveness, and coalitions are forceful ways to, influence other people. At the opposite extreme is a “soft” influence tactic calledingratiation,, which involves any attempt to increase the e xtent to which someone likes you.38 Ingratiation, is a useful influence tactic because as a rule, most people prefer to comply with requests from, people they know and lik e. Flattering y our boss in front of others, helping co workers with, their work, exhibiting similar attitudes (such as agreeing with your boss’s proposal to change, company policies), and seeking the other person’s counsel (asking for his or her advice) are all, examples of ingratiation. Research has shown that collectively, ingratiation behaviors are better than most other for ms of influence at predicting career success as measured b y performance appraisal feedback, salaries, and promotions.39, Psychologically, ingratiation works by increasing the perceived similarity between a person, and the target of the ing ratiation effort, which causes the tar get (your boss for e xample) to, form a more f avorable opinion of y ou. However, it is not quite this simple. P eople who are, obvious in their ingratiation efforts risk losing influence because their behaviors may be considered insincere and self-ser ving. The ter ms “apple polishing” and “bro wn-nosing” are, applied to those who ingratiate to excess or in ways that suggest selfish motives for the ingratiation. Research conf irms that people who engage in high levels of explicit ingratiation are, less influential and less likely to be promoted.40 There is, in other words, an inverted U-shaped, relationship between ingratiation efforts and influence (see Figure 15.5). Moderate ingratiation efforts can increase influence, but e xcessive ingratiation reduces influence. So ing ratiation should be subtle and genuine, not obvious and overdone., Impression Management Ingratiation is par t of an influence tactic kno wn as impression management, which is the process of acti vely shaping our public images.41 These, public images might be crafted as being impor tant, vulnerable, threatening, hardworking, rational, critical, or pleasant. For the most part employees routinely engage in pleasant impression management tactics to satisfy the basic norms of social behavior. Thus they may dress in, accordance with established norms, ask others how they are doing, express concerns over bad, , ingratiation, Attempts to increase the, extent to which someone, likes you., , impression, management, The process of actively, shaping one’s public, image., , Influence, , High, , Moderate, levels of, ingratiation, produce the, most influence., , High ingratiation efforts, produce resistance, and declining, influence., , Low, Low, , High, Extent of ingratiation, , hiL30123_ch15_376-401.indd 389, , F I G U R E 1 5 .5, Ingratiation and, Influence, , 11/2/06 6:47:03 PM

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390, , PART 4 // Leading, , personal news, offer to help colleagues and customers solv e problems, and, so on. Impression management is a common strate gy for people tr ying to, get ahead in the w orkplace. An extreme example of impression management occurs when people pad their résumés., As with ingratiation, employees who use too much impression management tend to be less influential because their behaviors are viewed as insincere.42 Impression management can also backf ire if it in volves exaggeration, as in the case of résumé padding. In a recent e xample, Fox News, Channel thought it had found an asset w hen it hired a gruff, barrel-chested, former military man as a consultant to help in its co verage of f ighting in, Afghanistan. Joseph Caf asso claimed that he had w on the Silv er Star for, bravery, had served in Vietnam, and was part of the secret failed mission to, rescue hostages in Iran in 1980. Moreo ver, Cafasso had an impressive network of contacts in militar y and political circles that he had built up o ver, the years, including a stint as an organizer for the presidential campaign of, Pat Buchanan. Ho wever, after more than four months, during w hich he, appeared on Fox News numerous times, he was suddenly dropped from the, channel. It had been disco vered that his credentials, w hich people at F ox, and elsewhere had taken at face value, were false. Records indicated that his, total military experience consisted of 44 da ys in boot camp in 1976, after, which he was honorably discharged as a private, first class!43 Cafasso’s fall, proves that honesty is best in impression management., Persuasion Along with ingratiation, persuasion is one of the most effective influence tactics for career success. The ability to present facts, logical, arguments, and emotional appeals to change another person’s attitudes and, behavior is not just an acceptable way to influence others; in many societies, this is a noble art and a quality of effective leaders. The literature on influence tactics has typicall y described persuasion as the use of reason, through factual evidence and lo gical arguments. However, recent studies, have begun to adopt a “dual process” perspective in which persuasion is an, attempt to influence somebody both b y the use of reason and b y appeals, that evoke an emotional response that leads the listener to identify with the goals of the speaker.44 The ability to tap into the emotions of others has been sho wn through histor y to be a, particularly powerful persuasion tactic. Hitler used it, as did Gandhi. President John .FKennedy, encapsulated American foreign policy and evoked an emotional response from the people of, Berlin with the phrase “Ich bin ein Berliner,” and Martin Luther King moved a nation with his, famous “I have a dream” speech. Eloquent words are a source of power and influence not just, because they appeal to our rational side, but also because the y elicit an emotional response, that involves identification with what the speaker is trying to achieve., The effectiveness of persuasion as an influence tactic depends on characteristics of the, persuader, message content, communication medium, and the audience being persuaded. 45, What makes one person more persuasive than another? One f actor is the perceived expertise, of the speak er. Persuasion attempts are more successful w hen listeners believe the speak er, knows the topic. The ability of the speaker to use eloquent language in an engaging manner is, also critically important, as so many great speakers have demonstrated., Message content can be as important as the messenger is when the issue is important to the, audience. Persuasive message content ackno wledges several competing points of vie w and, carefully assembles arguments against those that are at v ariance with the speaker’s position., Such an approach elicits more credibility than one that simpl y ignores competing points of, view.46 The message should also be limited to a fe w strong arguments, which are repeated a, few times but not too frequentl y. The message content should use emotional appeals (for, example, by graphically showing the unfortunate consequences of a bad decision), but only in, combination with lo gical arguments so the audience doesn’ t feel manipulated. Moreo ver,, emotional appeals directed at a threat should al, ways be accompanied with specif ic, , I Have a Dream Martin Luther King’s, power to influence the civil rights movement, in America came from his ability to shape, the attitudes of people through eloquent, words that appealed to both reason and, emotions., © AP Photo, , ■ Joseph Cafasso: Too much, impression management., , persuasion, The use of reason through, factual evidence and, logical arguments., , hiL30123_ch15_376-401.indd 390, , 11/2/06 6:47:04 PM

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Managing through Power, Influence, and Negotiation \\ CHAPTER 15, , recommendations to overcome the threat. It’s not enough, for example, for a manager to state,, “This new technology could put us out of business.” The manager also needs to show how a, project he is proposing could avert this fate. Finally, message content is more persuasive when, the audience is warned about opposing arguments. This inoculation effect causes listeners, to generate counterarguments to the anticipated opposition, which makes any subsequent persuasion attempt by the opposition less effective.47, Two other considerations in persuading people are the medium of communication and, characteristics of the audience. Generally persuasion works best in face-to-face situations and, through other media-rich communication channels. The personal nature of face-to-face communication increases the persuader’ s credibility, and the richness of this channel pro vides, faster feedback about w hether the influence strate gy is w orking. With respect to audience, characteristics, it is more difficult to persuade people who have high self-esteem and intelligence, and it is v ery difficult to change people’s attitudes and behaviors if they are strongly, connected to their self-images.48, , 391, , inoculation effect, Warning an audience you, are trying to influence, about opposing arguments., , Information Control Persuasion typicall y in volves selecti vely presenting infor mation,, whereas information control involves explicitly manipulating others’ access to information in, order to change their attitudes or beha vior. People often tr umpet information that presents, them in a good light w hile suppressing infor mation that raises questions about their perfor mance. An example would be the CEO w ho presents a f avorable picture of the compan y’s, performance to the board of directors w hile failing to infor m them about ne gative developments in the business.49 The problem with this kind of influence tactic is that it can backfire if, those who have been denied access to impor tant information discover that the y have been, deliberately kept in the dark. CEOs, for e xample, have been f ired by boards that discovered, they were being misled about the true state of their companies., , // CONSEQUENCES AND CONTINGENCIES, Now that we have reviewed the main tactics used to influence people, y ou are probably wondering which influence tactics are the most useful. The best way to answer this question is to, identify the three ways in which people react when others try to influence them: resistance,, compliance, or commitment. 50 Resistance occurs when people or work units object to the, behavior that somebody with po wer is requiring of them and refuse to engage in it, ar gue, about it, or try to delay engaging in the behavior. Compliance occurs when people comply, with a request, but onl y because the y have to, and the y exert the minimum le vel of ef fort, required. They do w hat they are ask ed, but that is all. Commitment occurs when people, identify with the request of somebody tr ying to influence them and inter nalize that request,, adopting it as their o wn. Commitment is associated with g reater motivation to work toward, the ends requested by the influencer. Commitment is thus the strongest consequence of influence and is what the influencer should aim for., As noted, moderate ingratiation and impression management efforts can produce commitment. However, excessive ingratiation and impression management efforts can produce resistance or at best compliance. Be yond this, in general commitment is more lik ely when the, influencer uses “soft” tactics such as persuasion, network building, and exchange to get things, done. “Hard” influence tactics such as asser tiveness and appeal to a higher authority might, produce compliance but not commitment, and in the w orst case they can lead to resistance., For example, research has shown that coalitions are often successful, but their ef fect may be, limited to compliance rather than commitment when the coalition is assertive and threatening, in its approach.51, This does not mean that hard tactics should not be used; but the evidence suggests that they, should be adopted onl y when soft tactics ha ve failed to produce the desired result, and the, issue is impor tant enough to risk resistance. The problem with hard tactics is that the y can, undermine trust, which can hur t future attempts to get things done through influence. F or, example, a manager who appeals over the head of her boss directly to the CEO to get backing, for a proposal that her boss tur ned down might get her w ay; but her immediate boss might, , hiL30123_ch15_376-401.indd 391, , resistance, Refusing to perform or, delaying engagement in a, required behavior., compliance, Occurs when people, comply with a request, but, only because they have to., commitment, Occurs when people, identify with the request of, somebody trying to, influence them and, internalize that request,, adopting it as their own., , 11/2/06 6:47:04 PM

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392, , conflict, A situation that arises, when one party perceives, that its interests are being, opposed or negatively, influenced by another, party., , PART 4 // Leading, , now feel that his authority has been undermined and view that manager with suspicion going, forward. Apparently this is what occurred to William Pearson at Schwab. Although Pearson, was successful in drawing the attention of top management to the threat posed b y the World, Wide Web, the meeting with Schw ab w as the high point of his career . In subsequent, performance appraisals Pearson’s manager, whose authority had been circumv ented, stated, that Pearson was “not a team player.”52, Aside from a general preference for softer influence tactics, a number of contingencies affect the choice of influence tactic. One contingency is the influencer’s power base. Those with, expertise tend to be more successful at influence w hen using persuasion, whereas those with, a strong hierarchical power base are usually more successful in applying silent authority.53, Another important contingency concerns where the target of influence activities is located, within the organization. Somebody trying to influence peers should probab ly focus more on, persuasion, network building, exchange, and coalition formation, and less on assertiveness or, appeal to a higher authority, both of which might generate resentment among peers. Assertiveness, appeal to a higher authority, and information control are particularly risky tactics when, applied to a superior in a hierarch y. But it is more acceptab le for superiors to influence their, subordinates through information control., Another contingency of some signif icance is the personal values of the target, which may, be determined by sociocultural factors.54 A general trend in Nor th America, for example, is, toward softer influence tactics because younger employees tend to have more egalitarian values than those nearing retirement. As such, silent authority and assertiveness are tolerated less, than a few decades ago. Acceptance of influence tactics also varies across cultures. Canadian, and American managers and subordinates alik e often rel y on persuasion and moderate, ingratiation because these techniques minimize conflict and support a trusting relationship. In, contrast, managers in Hong K ong rely less on ing ratiation, possibly because this tactic disrupts the more distant roles that managers and emplo yees expect in these cultures. Instead, influence through exchange tends to be more common and accepted in Asian cultures than in, the United States, perhaps due to the long tradition of reciprocity in these cultures., A final contingency relates to gender. Men and women seem to differ in their use of influence tactics. Men seem more lik ely than women to rel y on direct impression management, tactics. Men tend to advertise their achievements and take personal credit for successes of others reporting to them, whereas women are more reluctant to force the spotlight on themselves,, often preferring to share the credit with others. At the same time w omen are more lik ely to, apologize (personally take blame) even for problems not caused by them. Men are more likely, to assign blame and less likely to assume it.55, Some research also suggests that women generally have difficulty exerting some forms, of influence in organizations, and this has limited their promotional oppor tunities. In particular, women are viewed as less (not more) influential when they try to influence others by, exerting their authority or e xpertise. In job inter views, for e xample, direct and asser tive, female job applicants are less lik ely to be hired than male applicants using the same influence tactics. Similarly, women who directly disagree in conversations are less influential, than women who agree with the speak er.56 These f indings suggest that w omen may face, problems applying hard influence tactics such as asser tiveness. Instead, until stereotypes, change, w omen need to rel y on softer and more indirect influence strate gies, such as, ingratiation., , // Negotiation: The Art of Conflict Resolution, Conflict is a fact of organizational life. Conflict is a situation that arises when one party perceives that its interests are being opposed or negatively influenced by another party.57 Exercising power and influence within an or ganization can bring a manager into conflict with other, managers who perceive their own goals to be negatively impacted by the action the manager, is advocating. Conflicts often arise because resources are limited in organizations, and different people, teams, or units ha ve different views about how scarce resources should be used., Employee preferences for higher pay can conflict with the CEO’s desire to reduce costs and, , hiL30123_ch15_376-401.indd 392, , 11/2/06 6:47:05 PM

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Managing through Power, Influence, and Negotiation \\ CHAPTER 15, , boost profits. The wish of the marketing department to spend more on advertising and promotion can conflict with the desire of manufacturing to increase capital investments in new plants, and equipment. The desire of a product development team to spend more on accelerating development can conflict with the desire of another team to keep its project on track., Conflicts can also arise between a f irm and other organizations with which it interacts. A, firm can f ind itself in conflict with suppliers and customers o ver prices and delivery terms,, with the government over appropriate re gulations, and with labor unions o ver employment, conditions., Managers spend a lot of time resolving conflicts. They do this through negotiation,, which is an interpersonal decision-making process by which two or more parties try to reach, an agreement over an issue that is being disputed, such as the allocation of scarce resources.58, For example, through negotiation a marketing department may agree to reduce its request for, marketing spending this y ear, thereby enabling the manuf acturing depar tment to purchase, new equipment, with the understanding that mark eting spending will be increased in the following year. Similarly, through ne gotiation a f irm and its suppliers ma y ag ree on pricing, terms and delivery schedules., You will recall from Chapter I that negotiation is one of the crucial roles of management.59, Negotiating is a way of life for managers.60 They negotiate with suppliers and customers over, prices, with peers over the allocation of shared resources and about cooperati ve efforts, with, their superiors for access to scarce resources such as capital, and with subordinates to assign, employees to tasks. How do they do this?, , 393, , negotiation, An interpersonal decisionmaking process by which, two or more parties try to, reach an agreement over, an issue that is being, disputed, such as the, allocation of scarce, resources., , // BARGAINING ZONE MODEL OF NEGOTIATIONS, One way of thinking about negotiations is called the bargaining zone model, shown in Figure, 15.6 61, . This linear diagram illustrates a win–lose situation: One side’s gain will be the other’s, loss. However, the bargaining zone model can also be applied to situations in which both sides, potentially gain from the negotiations. In win–win situations the negotiation revolves around, the allocation of gains from the deal being negotiated., As illustrated in the bargaining zone model, the parties typically establish three main negotiating points. The initial offer point is the opening offer to the other party. The target point is, the manager’s realistic goal or e xpectation for a f inal agreement. The resistance point is the, point beyond which the manager will make no further concessions., The parties begin negotiations by describing their initial offer points for each item on the, agenda. In most cases the par ticipants know that this is only a starting point that will change, , Your, initial offer, point, , Your, target, point, , Your, resistance, point, , Area of, potential, agreement, , Opponent’s, resistance, point, , hiL30123_ch15_376-401.indd 393, , Opponent’s, target, point, , Opponent’s, initial offer, point, , F I G U R E 1 5 .6, Bargaining Zone Model, of Negotiation, , 11/2/06 6:47:05 PM

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394, , PART 4 // Leading, , as both sides of fer concessions. In win–lose situations neither the tar get nor the resistance, point is re vealed to the other par ty. Ho wever, people tr y to disco ver the other side’ s, resistance point because this knowledge helps them determine how much they can gain without breaking off negotiations. Put differently, they try to identify an area of potential ag reement. When the parties have a win–win orientation, on the other hand, the objective is to find, a creative solution that keeps everyone close to their initial offer points. They hope to find an, arrangement by which each side loses relatively little value on some issues and gains significantly more on other issues., , // NEGOTIATING EFFECTIVELY, The effectiveness of negotiating depends on the situation, the relative power the parties bring to, the negotiating table, and the behaviors of the negotiators. By getting the situation right, accumulating and using power, and engaging in the right behaviors, managers can increase the probability that they will come out of a negotiation with a deal that is close to their target point., Situational Factors Four of the most impor tant situational f actors are location, ph ysical, setting, time, and audience. F irst, it is easier to ne gotiate on your own turf because y ou are, familiar with the negotiating environment and can maintain comfortable routines.62 Moreover,, there is no need to cope with travel-related stress or depend on others for resources during the, negotiation. Of course you can’t walk out of negotiations easily at your own location, but this, is usually a minor issue. Considering the strate gic benef its of home turf, man y negotiators, agree to neutral territory. Telephones, videoconferences, and other forms of information technology potentially avoid ter ritorial issues, but skilled ne gotiators usually prefer the media, richness of face-to-face meetings.63, The physical distance between the parties and formality of the setting can influence their, orientation toward each other and the disputed issues. So can the seating arrangements. People, who sit face-to-face are more likely to develop a win–lose orientation toward the conflict situation. In contrast, some negotiation groups deliberately intersperse participants around a table, to convey a win–win orientation. Others arrange the seating so that both parties face a whiteboard, reflecting the notion that both parties face the same problem or issue., The more time people in vest in ne gotiations, the stronger their commitment becomes to, reaching an agreement. However, the more time put into negotiations, the stronger the tendency, to make unwarranted concessions so that the negotiations do not fail. Deadlines may be useful, to the extent that they motivate the parties to complete negotiations. However, time pressures, are usually a liability in negotiations.64 One problem is that deadlines give the parties less time, to exchange information or present flexible offers. Negotiators under time pressure also process information less effectively, so they have less creative ability to discover a win–win solution to the conflict. There is also anecdotal e vidence that negotiators make excessive concessions and soften their demands more than they should as a deadline approaches., Finally, most negotiators have audiences—anyone with a stak e in the ne gotiation outcomes, such as executives, other team members, or the public. Negotiators tend to act differently when their audience observes the negotiation or has detailed information about the, process, compared to situations in w hich the audience sees onl y the end results. 65 When, the audience has direct sur veillance over the proceedings, ne gotiators tend to be more, competitive, less willing to mak e concessions, and more lik ely to engage in political tactics against the other party. This “hard-line” behavior shows the audience that the negotiator is working for their interests. With their audience watching, negotiators also have more, interest in saving face., Wal-Mart and Procter &, Gamble: Power and, negotiation., ■, , hiL30123_ch15_376-401.indd 394, , Power and Negotiation The relative distribution of power is an important factor in negotiation. When managers from Wal-Mart and Procter & Gamb le sit down to negotiate the price, that Wal-Mart will pay for disposable diapers, they are not working as equals. Wal-Mart has, more power because it does not need to stock P&G diapers—it can instead sell products from, rival companies. P&G, on the other hand, needs Wal-Mart because the company is the largest, retailer in the United States, and not selling through Wal-Mart would undoubtedly hurt P&G., , 11/2/06 6:47:06 PM

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Managing through Power, Influence, and Negotiation \\ CHAPTER 15, , 395, , P&G is more dependent on Wal-Mart than Wal-Mart is on P&G, so Wal-Mart has more power, and hence has the upper hand in negotiations., The relative power that two parties bring to the negotiating table has long been recognized, as an important predictor of the outcome of a ne gotiation.66 In general, the more po wer you, have, the better y ou will do in ne gotiation. Recognizing this, par ties to a ne gotiation often, pursue tactics designed to increase their power relative to that of the other party. For example,, to increase his power when negotiating with his boss for a pay raise, a manager might seek a, job offer from another organization. Because the manager is less dependent on his or ganization for employment, he can drive a harder bargain. Increasing your options going into a negotiation, and thereby being less dependent on the outcome of the issue under ne gotiation, is, a classic tactic for increasing negotiating power. Other tactics include trying to gain information advantage over the other party, using experts to increase power, or building a coalition of, allies that support a negotiating position., The perception of po wer can be just as impor tant as actual po wer in ne gotiations, so a, skilled negotiator might try to create the perception that she has more po wer than is actually, the case. A negotiator can bluff, for example, by threatening action that will damage the other, party unless the other party agrees to the negotiator’s demands. If the other party believes the, bluff, this increases the power of the bluffer to drive a hard bargain. Thus in a salary negotiation a manager might threaten to look for another job unless her emplo yer agrees to certain, terms. This may be a bluff, but if the employer believes the threat to be credible, the perceived, power of the manager has increased., Behavioral Factors Managers can adopt a number of different behaviors in negotiations to, increase their probability of success. F irst, research has consistentl y repor ted that people, have more favorable negotiation results when they prepare for the negotiation and set goals.67, In particular, negotiators should carefully think through their initial of fer, target, and resistance points. They also need to consider alternative strategies in case the negotiation fails., Second, it is impor tant to g ather as much infor mation as possible about what the other, party wants from the negotiation—to develop an understanding of their goals and lik ely negotiating tactics. Managers should spend time listening closely to the other party and asking, for details. 68 One w ay to impro ve the infor mation-gathering process is to ha ve a team of, people participate in negotiations. With more people involved in the process, some people, can specialize in listening to the ne gotiation and trying to understand the other par ty, while, others actively par ticipate in the bar gaining process. Asian companies tend to ha ve large, negotiation teams for this pur pose.69 With more information about the opponent’s interests, and needs, negotiators are better able to discover low-cost concessions or proposals that will, satisfy the other side., Third, skilled ne gotiators communicate in a w ay that maintains ef fective relationships, between the par ties. Specif ically, they minimize socioemotional conflict b y focusing on, issues rather than people. Ef fective negotiators also a void ir ritating statements such as “I, think you’ll agree that this is a generous of fer.” Effective negotiators are often masters of, persuasion. They structure the content of their message so that it is not merel y understood, but also accepted by others.70, Finally, effective negotiators understand the tactical value of making concessions. Concessions are important because they (1) enable the parties to move toward the area of potential, agreement, (2) symbolize each par ty’s motivation to bar gain in good f aith, and (3) tell the, other party about the relative importance of the negotiating items. 71 How many concessions, should you make? This varies with the other party’s expectations and the level of trust between, you. For instance, many Chinese ne gotiators are wary of people w ho change their position, during the early stages of negotiations. Similarly, some writers warn that Russian negotiators, tend to view concessions as a sign of weakness rather than a sign of trust.72 Generally the best, strategy is to be moderately tough and give just enough concessions to communicate sincerity, and motivation to resolve the conflict.73 Being too tough can undermine relations between the, parties; giving too many concessions implies weakness and encourages the other party to push, harder for a favorable deal., , hiL30123_ch15_376-401.indd 395, , 11/2/06 6:47:06 PM

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396, , PART 4 // Leading, , I N CONC L U S IO N, , W H Y D O E S IT M ATTER?, , Why should you be concerned about issues of power, influence, and negotiation in, organizations? All organizations are political entities in which power and influence are, important. Your ability as a manager to obtain the scarce resources required to get, things done is determined by your ability to accumulate power, influence others, and, negotiate for the resources you need. Without power and influence you will find it more, difficult to negotiate for access to resources, to persuade your peers to work cooperatively with you for mutual gain, and to persuade your subordinates to work productively., Without power and influence you will have little impact on organizational goals, strategies, or outcomes—and you will not be effective as a manager., At the same time, remember that power and influence are double-edged swords., Used judiciously and ethically, power and influence can help somebody with integrity to, achieve great things in organizations. However, power does tend to corrupt. Power can, be and has been abused by skilled managers who have used their power unethically to, the detriment of others—and often themselves., , MANAGEMENT CHALLENGES, 1., 2., 3., 4., 5., , The exercise of what kind of power is likely to produce the most resistance in an, organization? What kind of power is likely to produce the least resistance?, Why does power tend to corrupt? What can you do to make sure power does not corrupt, you?, Is the accumulation and exercise of power necessary for success in management?, What do we mean when we say that organizations are political entities? How does, organizational politics influence organizational outcomes?, What tactics could you adopt to increase the probability that you will be able to negotiate effectively for what you want?, , MANAGEMENT PORTFOLIO, FOR THE ORGANIZATION YOU HAVE CHOSEN TO FOLLOW:, 1., 2., 3., , 4., 5., , hiL30123_ch15_376-401.indd 396, , Where does the power of the chief executive officer come from?, What sources of countervailing power limit his or her power?, Can you find any examples of middle to lower-level managers accumulating power,, exercising influence, and impacting the goals, strategy, actions, or operations of the, organization? How did the managers accumulate power? How did they exercise influence?, Is there any evidence of political behavior and conflict within the organization? If so,, give an example and explain how it was resolved., Try to find an example of a negotiation between the organization and an external party, (such as a supplier, a customer, or the government). What was the negotiation about?, Who had the most power in the negotiation? What was the outcome? Which party was, the better negotiator?, , 11/2/06 6:47:06 PM

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Managing through Power, Influence, and Negotiation \\ CHAPTER 15, , CLOSING CASE, , 397, , T H E R I S E A N D FA L L O F M I K E S E A R S, , Mike Sears w as a prodigy of Har ry, media and in vestors—roles that w ere, Stonecipher, the b lunt-talking, hardnormally the prero gative of the CEO ., driving aerospace e xecutive w ho beSears also took control of Boeing’ s incame CEO first of McDonnell Douglas, house leadership center at St. Louis., and then Boeing. Picked by Stonecipher, Banished from the sessions w ere Alto lead the F-18 Hornet fighter program, baugh and Mulall y. With almost an y, at McDonnell Douglas in the earl y, important executive passing through the, 1990s, Sears ear ned a reputation as a, center, control gave Sears unprecedentskilled manager who restlessly cut costs, ed exposure within Boeing’s f ar-flung, and boosted producti vity, building a, organization., program that was below costs and ahead, Sears’s stock rose fur ther in midof schedule. Stonecipher admired, 2003 when leaks to the media implied, Sears’s effectiveness at assembling and, that Albaugh had withheld infor mation, managing cross-functional product defrom Sears about a $1.2 billion char ge, velopment teams, estab lishing closer, against earnings that Boeing was forced, ties with suppliers, and improving conto take due to write-downs in its defense, trols within his or ganization. When, business. Sears was in charge of public, Corrupted by Power Boeing, McDonnell Douglas w as acquired b y, relations at the time, and many suspectCFO Mike Sears and Pentagon, Boeing in 1996, Sears went with Stoneed that the leak was part of a deliberate, procurement executive Darleen, cipher to the acquiring company, where, smear campaign. In an inter nal Boeing, Druyun both pleaded guilty and went, Stonecipher became president until his, memo later leaked to the press, Albaugh, to jail for their role in a Pentagon, retirement in 2002. Sears was appointed, said that “the ef forts to cast the writeprocurement scandal. Sears offered, as chief financial officer., down as the result of me withholding, Druyun a job at Boeing (which she, It was soon clear, however, that Sears, information—surprising w orld headaccepted) while she was still, was after the top spot. As CFO he w as, quarters—is not suppor ted b y the, negotiating a $22 billion tanker, one of the obvious candidates in line to, facts . . . . If Mik e (Sears) is intent on, contract with Boeing., succeed Boeing CEO Phil Condit. Othdiscrediting me, he does a disser vice, er contenders included Alan Mulall y,, not only to me, but also to thecompany.”, © AFP/Getty Images., head of Boeing’s commercial aerospace, By this time it w as becoming apparent, group, and James Albaugh, who ran Boeing’s defense systo many that Sears was anxious to succeed Phil Condit, “to, tems business. According to company insiders, Sears began, the extent that it got pretty disgusting” according to a, to take steps to amass a power base at his rivals’ expense., Boeing board member., In 2002 Sears heard that Darleen Dr uyun, the top Air, The summer of 2003 tur ned out to be the high point in, Force procurement of ficer, was looking to mo ve into the, Mike Sears’s career. In No vember 2003 the go vernment, private sector. Druyun was quite possibly the most soughtaccused Sears of “communicating directl y and indirectl y, after e xecutive-to-be in the entire aerospace industr y., with Darleen Dr uyun about future emplo yment when she, Because of her kno wledge of the P entagon procurement, had not disqualified herself from acting in her official govprocess and her contacts, Boeing and other aerospace comernment capacity on matters in volving Boeing.” The govpanies tried hard to land her . James Albaugh had talked to, ernment went on to state that the pair had attempted to conher at least once but came up dry. Sears, however, somehow, ceal this infraction from company lawyers investigating the, managed to persuade her to join the compan y. The coup, matter. It w as also alle ged that Dr uyun broke the la w by, gave Sears a huge adv antage over Albaugh and Mulally. It, telling Boeing emplo yees conf idential infor mation about, also had the potential to e xpand his power base by making, how Airbus had priced its bid for the tank er contract. BoeDruyun an ally. Unknown to others at the time, Sears had, ing f ired Mike Sears immediatel y, and ultimatel y both he, clinched the deal by promising Druyun a top job at Boeing, and Dr uyun pleaded guilty to criminal wrongdoing and, while she was still in the middle of negotiating a $22 billion, faced jail time., military contract with Boeing for a fleet of jet tank ers,, Ironically the f iring of Sears raised questions about the, which Boeing was ultimately awarded., ethics of management at Boeing under Phil Condit, the man, In 2003 Sears pushed things fur ther. He repor tedly, Sears had wanted to replace as CEO. Within a month Condit, waged an all-out war with CEO Phil Condit, taking over all, had resigned from the CEO position, a victim of the fallout, public relations responsibilities and controlling access to the, from the scandal, which resulted in the loss of the militar y, , hiL30123_ch15_376-401.indd 397, , 11/2/06 6:47:06 PM

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398, , PART 4 // Leading, , tanker contract. Condit was replaced by Harry Stonecipher,, who came out of retirement to take the CEO position. However, in another disturbing po wer play at Boeing, Stonecipher was himself forced to step down after a leaked e-mail, message revealed that he had initiated an extramarital affair, with an employee at Boeing. F earing that Boeing w as becoming mired in scandal after scandal, the board of directors asked for Stonecipher’s resignation. He w as replaced, by Jim McNeary, the CEO of 3M.74, CASE DISCUSSION QUESTIONS, 1. From a po wer perspective, what do y ou think e xplains, the rise of Mik e Sears to the CFO position at Boeing?, What were the sources of his power?, , 2. Once he became CFO , what did Mike Sears do to consolidate his po wer base at Boeing? What sources of, power was he trying to accumulate? What was he trying, to do with this power?, 3. What do y ou think about the ethics of Sears’ s actions?, Does the f all of Mik e Sears pro ve that po wer tends to, corrupt?, 4. What does the case tell y ou about the nature of inter nal, organizational politics at Boeing during this period? As, incoming CEO, would you see this as a prob lem? If so,, how would you deal with it?, 5. Do you think that power is more important in an organization lik e Boeing than in one that has less politics?, Why?, , ENDNOTES, 1. A. Pollack, “She’s Winning Her Drug War,” The New York Times, May 7, 2005,, p. 1; D . Hamilton, “W omen to Watch: Susan Desmond-Hillmann, ” The Wall, Street Journal, October 31, 2005, p. R6., 2. L.A. Hill, Becoming a Manager (Boston: Harvard Business School Press, 1992)., 3. H. Mintzber g, “Managerial Work: Analysis from Obser vation,” Management, Science 18 (1971), pp. B97–B110., 4. For a discussion of the def inition of po wer, see H. Mintzber g, Power in and, around Organizations (Englewood Cliffs, NJ: Prentice-Hall, 1983), Chapter 1;, J. Pfeffer, Managing with Power (Boston: Har vard Business Uni versity Press,, 1992), pp. 17, 30; J. Pfeffer, New Directions in Organizational Theory (New York:, Oxford University Press, 1997), Chapter 6; J .M. Whitmeyer, “Power through, Appointment,” Social Science Research 29 (2000), pp. 535–55., 5. R.A. Dahl, “The Concept of P ower,” Behavioral Science 2 (1957), pp. 201–18;, R.M. Emerson, “Power–Dependence Relations,” American Sociological Review, 27 (1962), pp. 31–41; A.M. Pettigrew, The Politics of Organizational Decision, Making (London: Tavistock, 1973); T. Casciaro and M.J . Pisk orski, “P ower, Imbalance, Mutual Dependence, and Constraint Absorption,” Administrative, ScienceQuarterly 50 (2005), pp. 167–90., 6. R. Kanter, “Power Failure in Management Circuits,” Harvard Business Review 57, (July–August 1979), pp. 65–75., 7. J.P. Kotter, “Power, Dependence, and Effective Management,” Harvard Business, Review, July–August 1977, pp. 50–62., 8. G. Morgan, Images of Organization (Beverley Hills: Sage, 1985)., 9. J.R.P. French and B. Raven, “The Bases of Social P ower,” in Studies in Social, Power, ed. D . Car twright (Ann Arbor: Uni versity of Michigan Press, 1959),, pp. 150–67; P. Podsakoff and C. Schreisheim, “F ield Studies of F rench and, Raven’s Bases of P ower: Critique, Analysis, and Suggestions for Future, Research,” Psychological Bulletin 97 (1985), pp. 387–411; S. Finkelstein, “Power, in Top Management Teams: Dimensions, Measurement, and Validation,”, Academy of Management Journal 35 (1992), pp. 505–38; P.P. Carson and K.D., Carson, “Social Power Bases: A Meta-Analytic Examination of Interrelationships, and Outcomes,” Journal of Applied Social Psychology 23 (1993), pp. 1150–69;, Pfeffer, Managing with Power., 10. S. Craig, “Mer rill Brokers Fired in Scandal Win $14 Million,” The Wall Street, Journal, January 6, 2006, p. C1., 11. Pfef fer, Managing with Power., 12. S. Pulliam and A. Latour, “Lost Connection,” The Wall Street Journal, January, 12, 2005, p. A1; S. Rosenbush, “Five Lessons of the WorldCom Debacle,” Business Week Online, March 16, 2005., 13. P.F. Drucker, “The Ne w Workforce,” The Economist, No vember 3, 2001,, pp. 8–12., 14. G. Yukl and C.M. Falbe, “Importance of Different Power Sources in Downward, , hiL30123_ch15_376-401.indd 398, , and Lateral Relations,” Journal of Applied Psychology 76 (1991), pp. 416–23;, B.H. Raven, “Kurt Lewin Address: Influence, Power, Religion, and the Mechanisms of Social Control, ” Journal of Social Issues 55 (Spring 1999),, pp. 161–86., 15. C.R. Hinings et al., “Structural Conditions of Intraorganizational Power,” Administrative Science Quarterly 19 (1974), pp. 22–44. Also see C.S. Saunders, “The, Strategic Contingency Theory of Power: Multiple Perspectives,” The Journal of, Management Studies 27 (1990), pp. 1–21., 16. D.J. Brass, “Being in the Right Place: A Structural Analysis of Individual Influence in an Or ganization,” Administrative Science Quarter ly 29 (1984),, pp. 518–39; D. Krackhardt, “Assessing the Political Landscape: Structure, Cognition, and Power in Organizations,” Administrative Science Quarterly 35 (1990),, pp. 342–69; J. Pfeffer and A. Konrad, “The Effect of Individual Power on Earnings,” Work and Occupations, 1991., 17. “Corporate Culture Instilled Online,” The Economist, November 11, 2000., 18. P.L. Dawes, D.Y. Lee, and G.R. Dowling, “Information Control and Influence in, Emergent Buying Centers,” Journal of Marketing 62, no. 3 (July 1998), 55–68;, D.J. Brass et al., “T aking Stock of Netw orks and Or ganizations: A Multilevel, Perspective,” Academy of Mana gement J ournal 47, no. 6 (December 2004),, pp. 795–817., 19. E.J. Zajac and J.D. Westphal, “Director Reputation, CEO–Board Power, and the, Dynamics of Board Interlocks, ” Administrative Science Quarter ly 41 (1996),, pp. 507–30., 20. A. W. Gouldner, “The Norm of Reciprocity: A Preliminary Statement,” American, Sociological Review 25 (1960), 161–78., 21. R.A. Caro, The Path to Power: The Early Years of Lyndon Johnson (New York:, Alfred A. Knopf, 1982)., 22. Pfef fer, Managing with Power, p. 166., 23. J . Kotter, The General Managers (New York, Free Press, 1982)., 24. J . Gleick, Genius: The Life and Science of Richard Feynman (New York: Vintage, Books, 1992)., 25. D .J. Hickson et al., “A Strategic Contingencies’ Theory of Intraor ganizational, Power,” Administrative Science Quarter ly 16 (1971), 216–27; Hinings et al.,, “Structural Conditions of Intraorganizational Power”; Kanter, “Power Failure in, Management Circuits.”, 26. Hickson et al., “A Strategic Contingencies’ Theory of Intraorganizational Power”;, J.D. Hackman, “Power and Centrality in the Allocation of Resources in Colleges, and Universities,” Administrative Science Quarterly 30 (1985), pp. 61–77., 27. Kanter, “Power Failure in Management Circuits” ; B .E. Ashforth, “The Experience of Powerlessness in Organizations,” Organizational Behavior and Human, Decision Processes 43 (1989), pp. 207–42; L. Holden, “European Managers:, HRM and an Evolving Role,” European Business Review 12 (2000)., , 11/2/06 6:47:07 PM

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Managing through Power, Influence, and Negotiation \\ CHAPTER 15, , 28. J. Voight, “When Credit Is Not Due,” Adweek, March 1, 2004, p. 24., 29. R . Madell, “Ground Floor ,” Pharmaceutical Executive (W omen in Pharma, Supplement),June 2000, pp. 24–31., 30. K. Atuahene-Gima and H. Li, “Mark eting’s Influence Tactics in Ne w Product, Development: A Study of High-Technology Firms in China,” Journal of Product, Innovation Mana gement 17 (2000), pp. 451–70; A. Somech and A. DrachZahavy, “Relative Power and Influence Strate gy: The Effects of Agent/Target, Organizational Power on Superiors’ Choices of Influence Strategies,” Journal of, Organizational Behavior 23 (2002), pp. 167–79., 31. J . Kador, Charles Schwab (New York: Wiley, 2002)., 32. D. Kipnis, S.M. Schmidt, and I. Wilkinson, “Intraorganizational Influence Tactics: Explorations in Getting One’ s Way,” Journal of Applied Psyc hology 65, (1980), 440–52. Also see C. Schriesheim and T. Hinkin, “Influence Tactics Used, by Subordinates: A Theoretical and Empirical Analysis and Ref inement of the, Kipnis, Schmidt, and Wilkinson Subscales,” Journal of Applied Psychology 75, (1990), 246–57; W.A. Hochwarter et al., “A Reexamination of Schriesheim and, Hinkin’s (1990) Measure of Upward Influence,” Educational and Psychological, Measurement 60 (October 2000), pp. 755–71., 33. R.B. Cialdini and N.J. Goldstein, “Social Influence: Compliance and Conformity,”, Annual Review of Psychology 55 (2004), 591–621., 34. Rao and Hashimoto, “Universal and Culturally Specific Aspects of Managerial, Influence.” Silent authority as an influence tactic in non-Western cultures is also, discussed in S.F. Pasa, “Leadership Influence in a High Power Distance and Collectivist Culture,” Leadership & Organization Development Journal 21 (2000),, pp. 414–26., 35. Rao and Hashimoto, “Universal and Culturally Specific Aspects of Managerial, Influence”; Pasa, “Leadership Influence in a High Power Distance and Collectivist, Culture.”, 36. A.T . Cobb, “Toward the Study of Or ganizational Coalitions: P articipant Concerns and Activities in a Simulated Organizational Setting,” Human Relations 44, (1991), pp. 1057–79; E.A. Mannix, “Or ganizations as Resource Dilemmas: The, Effects of Power Balance on Coalition F ormation in Small Groups,” Organizational Behavior and Human Decision Pr ocesses 55 (1993), 1–22; D .J. Terry,, M.A. Hogg, and K.M. White, “The Theory of Planned Beha vior: Self-Identity,, Social Identity, and Group Nor ms,” British Journal of Social Psyc hology 38, (September 1999), pp. 225–44., 37. B . Carter, “How a Hit Almost Failed Its Own Audition,” The New York Times,, April 30, 2006, Section 3, pp. C1, C9., 38. D . Strutton and L.E. 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Ellis et al., “The Use of Impression Management Tactics in Str uctured, Interviews: A Function of Question Type?” Journal of Applied Psychology 87, (December 2002), pp. 1200–8; M.C. Bolino and W.H. Tunley, “More Than One, Way to Mak e an Impression: Exploring Prof iles of Impression Management, ”, Journal of Management 29 (2003), pp. 141–60; S. Zi vnuska et al., “Interacti ve, Effects of Impression Management and Or ganizational P olitics on Job, Performance,” Journal of Organizational Behavior 25 (2004), pp. 627–41., 43. J .Rutenberg, “At Fox News, The Colonel Who Wasn’t,” The New York Times,, April 29, 2002, p. 1., 44. J.Dillard and E. Peck, “Persuasion and the Structure of Affect: Dual Systems and, Discrete Emotions as Complementar y Models, ” Human Communication, Research 27 (2000), pp. 38–68; S. F ox and Y. Amichai-Hamburger, “The Power, of Emotional Appeals in Promoting Organizational Change Programs,” Academy, of Management Executive 15 (November 2001), pp. 84–94; E.H.H.J. 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Mintzberg, “The Manager’s Job: Folklore and Fact,” Harvard Business Review,, July–August 1975, pp. 49–61., 60. L. Hill, Becoming a Mana ger: How New Managers Master the Challeng es of, Leadership (Boston: Harvard Business School Press, 2003), pp. 41–42., 61. R. Stagner and H. Rosen, Psychology of Union–Management Relations (Belmont,, CA: Wadsworth, 1965), pp. 95–96, 108–10; R.E. Walton and R.B. McKersie, A, Behavioral Theory of La bor Negotiations: An Analysis of a Social Inter action, System (New York: McGraw-Hill, 1965), pp. 41–46; Thompson, The Mind and, Heart of the Negotiator, Chapter 2., 62. J.W. Salacuse and J.Z. Rubin, “Your Place or Mine? Site Location and Ne gotiation,” Negotiation Journal 6 (January 1990), pp. 5–10; J. Mayfield et al., “How, Location Impacts Inter national Business Ne gotiations,” Review of Business 19, (December 1998), pp. 21–24., , 11/2/06 6:47:07 PM

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400, , PART PART, 4 // 4Leading, // Leading, , 63. F or a full discussion of the adv antages and disadv antages of f ace-to-face and, alternative negotiation situations, see M.H. Bazer man et al., “Negotiation,” Annual Review of Psychology 51 (2000), pp. 279–314., 64. A.F. Stuhlmacher, T.L. Gillespie, and M.V. Champagne, “The Impact of Time, Pressure in Ne gotiation: A Meta-Analysis,” International Journal of Conflict, Management 9, no. 2 (April 1998), pp. 97–116; C.K.W. De Dreu, “Time Pressure, and Closing of the Mind in Ne gotiation,” Organizational Behavior and Human, Decision Processes 91 (July 2003), pp. 280–95. Ho wever, one recent study reported that speeding up these concessions leads to better ne gotiated outcomes., See D.A. Moore, “Myopic Prediction, Self-Destr uctive Secrecy, and the Une xpected Benef its of Re vealing Final Deadlines in Ne gotiation,” Organizational, Behavior and Human Decision Processes 94, no. 2 (2004), pp. 125–39., 65. Lewicki et al., Negotiation, pp. 298–322., 66. P.H. Kim, R.L. Pinkle y, and A.R. Fragale, “Power Dynamics in Ne gotiation,”, Academy of Management Review 30 (2005), pp. 799–822., 67. S . Doctoroff, “Reengineering Ne gotiations,” Sloan Mana gement Re view 39, (March 1998), pp. 63–71; D .C. Zetik and A.F. Stuhlmacher, “Goal Setting and, Negotiation Performance: A Meta-Analysis,” Group Processes & Intergroup Relations 5 (January 2002), pp. 35–52., 68. L.L. Thompson, “Information Exchange in Negotiation,” Journal of Experimental, Social Psychology 27 (1991), pp. 161–79., , hiL30123_ch15_376-401.indd 400, , 69. L. Thompson, E. Peterson, and S.E. Brodt, “Team Negotiation: An Examination, of Integrative and Distributi ve Bargaining,” Journal of Personality and Social, Psychology 70 (1996), pp. 66–78; Y. Paik and R.L. Tung, “Negotiating with East, Asians: How to Attain ‘Win–Win’ Outcomes,” Management International Review, 39 (1999), pp. 103–22., 70. O’K eefe, Persuasion: Theory and Research., 71. Lewicki et al., Negotiation, pp. 90–96; S. Kwon and L.R. Weingart, “Unilateral, Concessions from the Other P arty: Concession Beha vior, Attributions, and, Negotiation Judgments,” Journal of Applied Psyc hology 89, no. 2 (2004),, pp. 263–78., 72. J .J. Zhao, “The Chinese Approach to Inter national Business Ne gotiation,”, Journal of Business Communication, Jul y 2000, pp. 209–37; N . Cr undwell,, “U.S.–Russian Ne gotiating Strate gies,” BISNIS Bulletin, October 2003,, pp. 5–6., 73. J.Z. Rubin and B.R. Brown, The Social Psychology of Bargaining and Negotiation (New York: Academic Press, 1976), Chapter 9., 74. S ources: S. Holmes, “Wh y Boeing’s Culture Breeds Turmoil,” BusinessWeek,, March 21, 2005, pp. 34–36; R. Stodghill, “Combat Ready at McDonnell, ”, BusinessWeek, April 29, 1996, pp. 39–41; J.C. Anselmo, “After Harry,” Aviation, Week, March 14, 2005, pp. 22–26., , 11/2/06 6:47:07 PM

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Managing through Power, Influence, and Negotiation \\ CHAPTER 15, , 401, , NOTES, , hiL30123_ch15_376-401.indd 401, , 11/2/06 6:47:08 PM

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16, LEARNING OBJECTIVES, , EFFECTIVE LEADERSHIP, After Reading This Chapter You Should Be Able to:, 1, , Explain why good leadership is critical for success as a manager., , 2, , Summarize the main theoretical approaches to leadership., , 3, , Identify the behaviors and skills that are commonly associated with effective leadership., , 4, , Explain how the right approach to leadership might be influenced by important contingencies., , 5, , Discuss the difference between transformational and transactional leadership., , / / / / / / / / / / / / / / /, , Managing and Leading, What Makes an Effective Leader?, The Power–Influence Perspective, The Competency (Trait) Perspective, Strategic Thinking, Achievement Motivation, Power Motivation, Charisma, Emotional Intelligence, Limitations and Implications, The Behavior Perspective, , Path–Goal Theory, Leadership Substitutes, Transformational Leadership, Elements of Transformational Leadership, Evaluating Transformational Leadership, Gender Differences in Leadership, In Conclusion: Why Does It Matter?, Management Challenges, Management Portfolio, Closing Case: A.G. Lafley, , The Contingency Perspective, Fiedler’s Contingency Theory, , hiL30123_ch16_402-425.indd 402, , 11/2/06 10:16:41 PM

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Effective Leadership \\ CHAPTER 16, , 403, , Gordon Bethune of, Continental, Airlines., Courtesy of Continental, Airlines, , / / / / / / / / / / / / / / / / / / / / /, , W, , hen Gordon Bethune arrived at Continental Airlines in 1994, the company was in dreadful shape., The airline was flirting with bankruptcy, ranked last in, customer satisfaction, and was embroiled in severe conflict between management and employees. This was, nothing new for Continental; it had gone bankrupt twice, since 1983. Ten CEOs had tried running the company in, as many years. Bethune’s diagnosis of Continental’s problems was simple: In their fervor to reduce costs, previous, managers had destroyed the capacity of the airline to deliver what customers wanted—flights that departed and, arrived on time (only 61 percent of Continental’s flights, arrived on time in early 1994). Bethune moved quickly to, shut down unprofitable routes; but what really caught, everyone’s attention was the way he persuaded, employees at Continental to join him in a campaign to, improve the company’s on-time performance. Bethune’s, , hiL30123_ch16_402-425.indd 403, , analysis indicated that late and canceled flights were, costing Continental $6 million a month; so he stated that, if employees could help him improve Continental’s performance and get the company into the top five airlines, measured by on-time performance, he would split the, $6 million with them, which translated into $65 a month, for each employee. By the end of 1995 Bethune had paid, out this sum six times, and the airline’s planes arrived on, time over 80 percent of the time. To drive home the message, Bethune personally went around to major Continental hubs, where he delivered the checks along with a, speech to employees pitched with the fervor of an evangelical preacher, urging them to “make reliability a, reality” and to “work together” for the good of the airline, and everyone associated with it. By the end of the decade, Continental was profitable and ranked first in the industry, for customer service.1, , 11/2/06 10:16:42 PM

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404, , leadership, The process of motivating,, influencing, and directing, others in the organization to, work productively in pursuit, of organization goals., , PART 4 // Leading, , Gordon Bethune was a transformational leader. He was able to do what his predecessors could, not: transform Continental from a perennially troubled airline into a standout perfor mer. He, did this by articulating a clear strategic vision and then persuading employees through a combination of bonus pa y and e vangelism to join him on a mission to impro ve Continental’s, customer service. This tour de force landed Bethune on se veral lists of the most impor tant, business leaders of the decade., You will recall from Chapter 1 that leadership is one of the central functions of management. What often distinguishes great managers from merely good ones is that great managers, excel in leadership. By leadership we mean the process of motivating, influencing, and directing others in the organization to work productively in pursuit of organization goals.2 Great, managers are able to work through other people to achieve remarkable transformations in the, performance of an or ganization. Ex emplary leaders of the last decade include Gordon, Bethune; Louis Gerstner , who transfor med IBM from a mone y-losing computer hardw are, enterprise into a computer ser vices powerhouse; Meg Whitman, whose visionary leadership, helped make eBay a dominant Internet company; Larry Bossidy, who transformed AlliedSignal, from a poorly performing industrial conglomerate into a te xtbook example of superior productivity; and Steve Jobs, whose vision and technology evangelism helped turn Pixar into the, dominant animation film studio and injected new energy into the company he founded, Apple, Computer, with its iPod. In this chapter we discuss what it takes to be an effective leader. We, start by looking more closely at leadership as a function of management., , // Managing and Leading, It has become fashionable to draw a sharp distinction between leaders and managers. The influential business author Warren Bennis, for e xample, has stated that leaders are concer ned, with “doing the right things,” whereas managers are concerned with “doing things right.”3 He, sees leaders as focusing on vision, mission, and goals, whereas managers focus on efficiency, and effectiveness. He depicts managers as preservers of the status quo; leaders see themselves, as promoters of change and challengers of the status quo. Bennis ar gues that American organizations are “overmanaged and underled.” Harvard’s John Kotter makes a similar point. Management, according to K otter, is about coping with comple xity. Leadership, b y contrast, is, about coping with change. 4 In the view of Bennis and Kotter, important as they are to the efficient functioning of organizations, managers are somehow lesser mortals than leaders., Both Bennis and Kotter are writing for effect; but their comparisons between managers and, leaders are misleading. The reason is simple: All managers are also leaders, and as we said in, Chapter 1, they must perform the leadership function effectively to excel at the other management functions—strategizing, planning, organizing, controlling, and developing employees., This is true not just of the CEO of a cor poration but also of lower-level managers, who must, lead their divisions, functions, units, and teams effectively to achieve their goals. Management, and leadership are not two different tasks that require different skills; they are the same thing., To be effective, whatever their position in the or ganization hierarchy, managers must lead. 5, Where Bennis and Kotter may be right is in asserting that too many managers have not grasped, the basic truth that leading is a critical component of their job., How important is good leadership to the perfor mance of an organization? One stream of research looks at the impact of CEO succession on firm performance and argues that if leadership, is important, a change in CEOs should e xplain some of the subsequent v ariance in enter prise, profitability (with good leaders boosting performance and bad leaders depressing performance).6, A widely quoted classic study found that CEO succession e xplained about 15.2 percent of a, company’s prof it margin variance after one y ear and 31.7 percent of the v ariance after three, years.7 Another more recent study suggested that on a verage, the impact of CEO succession, explained roughly 15 percent of the subsequent variance in company performance, after controlling for general economic conditions, industry factors, and unique company attributes.8 This was, about the same impact on perfor mance as the industry in which an enterprise competed. These, are not trivial findings; they suggest that leadership changes at the top of an or ganization can, have a substantial impact on the subsequent performance of an enterprise.9, , hiL30123_ch16_402-425.indd 404, , 11/2/06 10:16:43 PM

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Effective Leadership \\ CHAPTER 16, , 405, , Moreover, numerous case studies suggest that these a veraged figures disguise the signif icant impact that good or bad leaders can have on an organization in specific situations. There, is little doubt that Gordon Bethune had a major impact on the perfor mance of Continental, Airlines. After having cycled through 10 CEOs in as man y years, Continental was desperate, for strong leadership. In contrast, bad leaders have often destroyed significant economic value, at the enterprises unlucky enough to have them. Al Dunlap, for example, who was known as, “Chainsaw Al” for his tough approach to cost cutting, is blamed for rapidly driving small appliance maker Sunbeam into bankruptcy due to poor leadership during his two-year tenure as, CEO of that company.10 In short, leaders matter., , // What Makes an Effective Leader?, Leadership may be one of the most discussed management topics. Walk into any bookstore’s, management section and y ou will see dozens of titles all claiming to e xplain the secrets of, effective leadership. Effective leadership means the ability of a leader to get high perfor mance from his or her subordinates. In the case of a CEO or general manager of a selfcontained product di vision, ef fective leadership should translate into sustained high, performance for the entire company or division. Literally thousands of academic studies have, tried to discern the difference between effective and ineffective leadership. Despite this large, body of work, there is a lack of consensus about w hat makes an effective leader. However,, five different perspectives on leadership have emerged over the years, each of which teaches, us something about the nature of effective leadership (see Figure 16.1).11, One perspective, the power–influence approach, attempts to explain leadership effectiveness in ter ms of the amount of po wer possessed by a leader, the type of po wer possessed,, and how that power is used to influence others within the organization. Another perspective,, called the trait or competency perspective, has tried to identify the traits and competencies, of effective leaders. A third approach, the behavior perspective, asserts that certain behaviors are related to leadership ef fectiveness. The contingency perspective argues that the, appropriate behaviors for a leader to adopt depend on context, and that what works in some, situations will not in others. F inally, the last tw o decades ha ve seen the rise of w ork on, what is called the transformational per spective on leadership. The transfor mational, perspective suggests that effective leaders “transform” organizations through their vision,, , effective leadership, The ability of a leader to, get high performance from, his or her subordinates., , Trait, (competency), perspective, , Power–, influence, perspective, , Effective, leadership, , Contingency, perspective, , Behavior, perspective, Transformational, perspective, , F I G U R E 1 6 .1, Perspectives on, Leadership, , hiL30123_ch16_402-425.indd 405, , 11/2/06 10:16:43 PM

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406, , PART 4 // Leading, , communication, and ability to build commitment to that vision among emplo yees. Gordon, Bethune is an example of a transformational leader. He transformed Continental by articulating a different vision for the airline, relentlessly communicating that vision to all employees, rewarding employees for improving performance, and empowering them to take actions, that were consistent with the vision., These different perspectives are not mutuall y exclusive. For example, to be ef fective a, transformational leader may require certain competencies, have to engage in certain behaviors,, and need to accumulate and use po wer to achie ve his or her transfor mational goals. Each, perspective tells us something important about the nature of leadership. Together the five perspectives give us as complete a portrait as we have of what it takes to be an effective leader. In, the remainder of this chapter we tour through the five perspectives to see what we can learn., , // The Power–Influence Perspective, Leaders, by definition, have legitimate power that comes from their hierarchical position,, as well as power over the distribution of rewards and sanctions and over the allocation of, scarce resources (see Chapter 15). However, research on the use of different forms of power suggests that effective leaders rely as much on the personal po wer that flows from expertise, a netw ork of allies, and indi vidual attributes as the y do on po wer flowing from, their formal position. 12 The power that flows from hierarchical position is a b lunt instrument that does not necessarily build commitment from employees to a vision. As CEO of, Continental Airlines Gordon Bethune enjo yed signif icant hierarchical po wer, which allowed him to manipulate the reward structure at Continental to improve customer service., However, his effectiveness as a leader also came from his power as an expert in the indus■ Leadership at the NYPD., try (Bethune had a long career in aerospace) and indi vidual attributes such as his eloquence, energy, focus, and integrity, all of which earned him the respect of employees and, helped him influence their behavior., For another illustration of the nuanced position that leaders, must adopt with re gard to the accumulation and application, of power, consider William Bratton, w ho gained signif icant, credit for reducing the crime rate in New York first as leader of, the New York Transit Police and then as commissioner of the, New York Police Department. Bratton advocated zero-tolerance, policing. This included prosecution for “quality of life” crimes, such as panhandling and vandalism. His push was opposed by, the city’s courts, which feared the policy would swamp the court, system with small crime cases. To get past the opposition of the, courts, Bratton elicited the help of a po werful ally, New York, Mayor Rudolph Giuliani. Giuliani e xplained that although, zero-tolerance policing would initially increase the workload of, the courts, over time this would decline as the crime rate fell in, New York. The courts were not convinced. They appealed to the, city council, advocating legislation to exempt them from handling minor crime cases. Bratton and Giuliani responded b y, The Reformer After a highly successful tenure as, holding a series of press conferences and placing their case, commissioner of the New York Police Department, during, beforeThe New York Times, the city’s most influential newspawhich the overall crime rate fell by 17 percent, felony crimes, per,, arguing that if the courts did not help crack down on quality, by 39 percent, and murders by 50 percent, William Bratton, of, life, crimes, the city’s crime rate would not improve. Bratton’s, become head of the Los Angeles Police Department. In a 30alliance, with the mayor and then The New York Times isolated, year police career, Bratton has been credited with leading a, the, courts,, which dropped their opposition. As it turned out, the, reform movement in policing that significantly reduced crime, application, of zero-tolerance policing did initiall y result in a, wherever he had leadership responsibility., spike, in, court, cases. However, eventually the crime rate and the, © AP Photo/Lee Celano, number of court cases tumbled.13, , hiL30123_ch16_402-425.indd 406, , 11/2/06 10:16:43 PM

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Effective Leadership \\ CHAPTER 16, , 407, , The story of William Bratton illustrates how a network of allies can be a significant source, of power enabling a leader to push through a policy or program against substantial opposition, from an important constituency, in this case the Ne w York City court system. What we learn, from the e xperiences of Gordon Bethune and William Bratton is that to get things done in, organizations, effective leaders rely on more than their le gitimate hierarchical power. They, play the power game with skill, combining their hierarchical power, their expertise, a network, of allies, and personal po wer to achie ve their goals. Ef fective leaders are skilled or ganizational politicians. They know how to use power to win over important constituencies to their, cause and to remove or neutralize obstacles to their strategies., , // The Competency (Trait) Perspective, People have always been interested in personal characteristics, or traits, that distinguish great, leaders from the rest of us. The “great person” theory of leadership assumes that leaders are, “born, not made” and that leaders are gifted with traits such as tireless ener gy, penetrating, intuition, uncanny foresight, and ir resistible persuasive powers.14 During the 1930s and, 1940s hundreds of trait studies were conducted in an effort to identify the traits that marked, people for greatness. Although this mass of literature yielded endless lists of traits, a lack of, consistency across studies led to widespread disillusionment with the trait approach to leadership. By the 1970s research on the personality traits of leaders seemed to ha ve reached a, dead end.15, However, as so often happens with the history of ideas, the notion that some universal traits, are associated with effective leaders reemerged. Reexamination of earlier studies suggested, that certain personality traits—such as intelligence, moti vation, drive, self-conf idence, and, desire for power—might be associated with ef fective leadership. 16 Subsequent research has, suggested that several traits might be impor tant predictors of effective leadership, including, strategic thinking ability, achievement motivation, power motivation, charismatic traits, and, emotional intelligence. Some of these traits have been renamed “competencies,” implying that, they can be acquired through learning. However, despite a vast supply of literature there is still, no agreement about which of these traits are important or necessary., , // STRATEGIC THINKING, Strategic thinking refers to the co gnitive ability to anal yze a complex situation, abstract, from it, and draw conclusions about the best strategy for the firm to follow. Strategic thinking, requires a combination of intelligence and reasoning skills. People with a talent for big picture, strategic thinking can cut straight through a lot of messy data and get to the heart of an issue., They are skilled at analyzing an industry, understanding competitive dynamics, and discerning, what is important for the f irm. They are the opposite of people w ho cannot see the forest for, the trees—they see the entire forest with great clarity., It has been argued that many great leaders have had this visionary competency. Winston, Churchill, Britain’s leader during World War II, understood in the early 1930s that the rise of, Nazi Germany was a profound threat to peace in Europe. He sa w the big strate gic picture, and repeatedly warned the British government about it in the y ears before the outbreak of, war, but to no avail. Only after Germany invaded Poland in 1939 did the political majority in, Britain concede that he had been cor rect and turn to him to lead the countr y. In May 1945, Churchill ag ain demonstrated his strate gic thinking abilities w hen we warned President, Harry Truman that the So viets were erecting an “Iron Cur tain” across Europe. Churchill, urged Truman not to authorize the withdra wal of American forces from par ts of Easter n, Germany, arguing that the U.S. presence would be replaced by Soviet control. Truman did, not heed Churchill’s warning, and an Iron Cur tain dropped across Central Europe and remained there for the next 40 years., Bill Gates is another example of a leader who has demonstrated strategic thinking. A few, years ago this author had the oppor tunity to inter view Gates about Microsoft’s strategy.17, Gates was still CEO of Microsoft and w as very much the chief strate gist. I ar rived at the, , hiL30123_ch16_402-425.indd 407, , strategic thinking, The cognitive ability to, analyze a complex, situation, abstract from it,, and draw conclusions, about the best strategy for, the firm to follow., , ■ Bill Gates: Strategic, thinking., , 11/2/06 10:16:45 PM

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408, , PART 4 // Leading, , We Will Never, Surrender! Britain’s, leader during World War II,, Winston Churchill, was, named man of the year by, Time magazine in 1941., Churchill had great, strategic thinking skills, that allowed him to, perceive threats others did, not see. He was also a, gifted orator, who used his, speaking skills to rally the, British people in defense, of the island nation., , interview with a long list of questions for Gates about changes taking place in the computer, and communications industries and about Microsoft’s strategy. As it turned out, there was no, need to ask any of the questions. Gates knew I was interested in learning more about Microsoft’s strategy, and he immediatel y launched into a high-le vel summary of changes taking, place in the environment, how they were impacting Microsoft and might in the future, w hat, competitors were doing, and what Microsoft’s strategy would be. It was a brilliant intellectual, performance. When he had finished, Gates had ans wered every single question on the list, without a single one being asked, providing a compelling and coherent summery of Microsoft’s, strategy., Leaders like Bill Gates and Winston Churchill embody the cognitive ability to see the big, picture. Both individuals were naturally endowed with high intelligence and superior reasoning ability, letting them see what others could not—constructing mental maps to navigate the, terrain they confronted. Although intelligence is a natural gift, some people belie ve that reasoning ability can to some e xtent be acquired. With appropriate education, aspiring leaders, can be taught how to look at the big picture. Indeed, many of the models for strategic analysis, that are taught in business schools, such as Porter’s competitive forces model (see Chapter 2),, are designed to do just that., , © Hulton-Deutsch Collection/, Corbis, , // ACHIEVEMENT MOTIVATION, , achievement, motivation, The unconscious concern, for achieving excellence in, accomplishments through, one’s individual efforts., , power motivation, The unconscious drive to, acquire status and power, and to have an impact on, others., , hiL30123_ch16_402-425.indd 408, , Achievement motivation is the unconscious concer n for achie ving excellence in accomplishments through one’s individual efforts. Achievement-motivated individuals set, challenging goals for themselves, assume personal responsibility for goal accomplishment,, are persistent in pursuing those goals, take calculated risks to achieve their goals, and actively use information for feedback, adjusting their efforts as necessary.18 In other words,, achievement-motivated individuals have a high degree of intrinsic drive. They are goaldriven. They know what they want to achieve, work hard toward that end, will take risks, when necessary, and do not blame others if they fail to attain their goals., U.S. President Lyndon Johnson was an ambitious individual who had his sights, set from youth on attaining high political office. Johnson was driven and worked, long and hard to attain his goals. As such, he embodied achievement motivation., The same can be said of Bill Gates. F rom an early age Gates wanted to be a successful entrepreneur. As teenagers he and Microsoft cofounder P aul Allen would, look through issues of Forbes magazine, asking ho w people got onto the Forbes, list of the richest people in America. Gates wanted to be one of them. Like Johnson, he was, also a risk taker. When he saw an opportunity to profit from the emergence of the personal, computer, he dropped out of Har vard to star t his own company (Microsoft)—something, most people would never do., , // POWER MOTIVATION, Power motivation is def ined as the unconscious drive to acquire status and power and to, have an impact on others. Psycholo gist David McClelland argues that effective leaders want, to accumulate power so they can influence others, and that they do this because it gives them, intrinsic satisfaction.19 The power motivation is necessar y for leadership ef fectiveness, according to McClelland, because getting things done in or ganizations requires individuals to, accumulate power and use it to influence others., However, McClelland stresses that ef fective leaders also demonstrate a high concer n for, the moral exercise of power. Effective leaders act with integrity. Employees will not follo w, leaders willingly unless they trust them, and trust is derived from integrity. Leadership effectiveness, therefore, requires more than po wer motivation: It requires an ability to use that, power in a just fashion that earns the respect and commitment of followers. Interestingly, several large-scale studies have reported that integrity or honesty is the most important leadership, characteristic. Employees want honest leaders whom they can trust.20, , 11/2/06 10:16:46 PM

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Effective Leadership \\ CHAPTER 16, , 409, , // CHARISMA, Robert House has proposed that charisma is also an impor tant trait of effective leaders. 21, Charisma refers to the ability that some people ha ve to charm or influence others. Charismatic individuals are often said to have “magnetic” personalities that are lar ger than life and, that draw others toward them. Charismatic leaders ha ve exceptionally high self-conf idence,, strength of conviction, and assertiveness or social dominance, and they are often superb communicators. Former U.S. President Bill Clinton is generally viewed as quite charismatic, even, by those w ho disag ree with his politics. Ste ve Jobs, the CEO of Apple computer, is also, regarded as charismatic, as w as Sam Walton, the founder of Wal-Mart. Charismatic leaders, are able to command the loyalty of their followers, and this can make them particularly effective. Unfortunately some charismatic leaders have used their charisma to do harm. Jim Jones,, the charismatic leader of the Peoples Temple religious cult, used his charisma first to persuade, the 1,000 or so members of his church to move from San Francisco to Guyana with him, and, then in 1978 to convince them to participate in a mass suicide that left 914 people dead., Management writer Jim Collins has recently argued that although charismatic leaders can be, effective, charisma can also work against effective leadership.22 In Collins’s view, leaders with, charismatic personalities can use their charm to get people to do things that defy rational logic, (witness Jim Jones). Leaders who lack charisma, however, have to rely on logic, fact, reason,, and data to win arguments—and that can produce better decisions. Collins points to Walgreen, CEO Charles R. Walgreen, w ho lack ed charisma but built a g reat compan y nonetheless., Another example would be David Glass, who succeeded Sam Walton as CEO of Wal-Mart and, helped to build Wal-Mart into the dominant enterprise it is today. Glass lacked charisma, but no, one would disagree that he was an effective leader., , charisma, The ability of some people, to charm or influence, others., , // EMOTIONAL INTELLIGENCE, A contro versial contributor to the trait approach to leadership is a perspecti, ve called, emotional intelligence, which refers to the ability to monitor one’s own and others’ feelings and emotions, to discriminate among them, and to use this infor mation to guide one’s, thinking and actions. 23 The concept has been popularized b y writer and consultant Daniel, Goleman, who argues that emotional intelligence is a bundle of related competencies that, many effective leaders e xhibit.24 According to Goleman, the k ey components of emotional, intelligence are these:, • Self-awareness—the ability to understand one’s own moods, emotions, and drives, as well, •, •, •, •, , as their effect on others., Self-regulation—the ability to control or redirect disruptive impulses or moods and to, think before acting., Motivation—a passion for work that goes beyond money or status, and a propensity to, pursue goals with energy and persistence., Empathy—understanding the feelings and viewpoints of subordinates, and taking those, into account when making decisions., Social skills—friendliness with a purpose., , emotional, intelligence, The ability to monitor, one’s own and others’, feelings and emotions, to, discriminate among them,, and to use this information, to guide one’s thinking and, actions., , Goleman asserts that leaders who possess these attributes—who exhibit a high degree of, emotional intelligence—tend to be more effective than those who lack them. Their self-awareness, and self-regulation elicit the trust and confidence of subordinates. In Goleman’s view, people, respect leaders who, because they are self-aware, recognize their own limitations and, because, they are self-regulating, consider decisions carefully. Goleman also argues that self-aware and, self-regulating individuals tend to be more self-confident and therefore are better able to cope, with ambiguity and are more open to change. Strong motivation exhibited in a passion for work, can also be infectious, helping to persuade others to join in pursuit of a common goal or or ganizational mission. Finally, strong empathy and social skills can help leaders ear n the loyalty, of subordinates. Empathetic and sociall y adept indi viduals tend to be skilled at managing, , hiL30123_ch16_402-425.indd 409, , 11/2/06 10:16:48 PM

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410, , PART 4 // Leading, , disputes, can find common ground and purpose among diverse constituencies, and can move, people in a desired direction. They can also build a network of allies., Goleman cites some limited data to suppor t the emotional intelligence vie w. In a 1996, study of a food and be verage company, David McClelland found that when senior managers, had a critical mass of emotional intelligence competencies, their divisions outperformed yearly earnings goals by 20 percent. Meanw hile divisional leaders without that critical mass of, competencies underperformed their goals by almost the same amount. Goleman states that his, own research suggests that although intelligence and cognitive skills such as big picture thinking predict leadership effectiveness, nearly 90 percent of the difference between star performers and average performers in senior leadership positions can be attributed to emotional intelligence factors. (Interestingly, Goleman’s own research has not been pub lished, so we do not, know how robust his findings and research methodology actually are.), The emotional intelligence perspective has some appeal and has certainly generated considerable interest, but several writers have attacked it for being defined so broadly that it lacks any real, discriminating power. In a stinging critique, the highl y regarded management scholar Ed Locke, states that the definition of emotional intelligence is “preposterously all-encompassing.”25 Critics, such as Locke also point out that the evidence in favor of emotional intelligence is sketchy at best, and is derived from unpublished studies and proprietary data sets that others cannot see. He also, notes that those who argue that emotional intelligence is an impor tant construct are academics, turned consultants who have made a fortune out of the concept and have a stake in promoting it., Is Locke correct? It is difficult to say. Resolution of the increasingly vitriolic debate about, emotional intelligence awaits detailed research either confirming or falsifying the main proposition of the emotional intelligence perspective on competencies: that the self-re gulation of, emotions contributes to leadership effectiveness., , // LIMITATIONS AND IMPLICATIONS, A naive reading of the trait (or competency) perspective on leadership might lead one to believe, that all of the traits just discussed are needed for effective leadership, but this is not the case. Not, all the traits are equally important, and there are certainly examples of effective leaders who do, not possess all of these traits. Perhaps some traits are more critical in certain situations than others are. For example, charisma may be par ticularly valuable when a leader needs to con vince, employees to commit to a widespread program of organizational change, rejecting the status quo, and moving toward a new configuration of strategy and organization architecture. The importance of different traits for effective leadership, therefore, is context dependent. What works in, one situation might not in another.26 Moreover, as we saw in the case of emotional intelligence, and charisma, there is still a lack of agreement over the validity and importance of some of these, traits—both as coherent constructs and as predictors of leadership effectiveness., Although the trait perspective seems to suggest that ef fective leaders are bor n, not made,, again this is not strictly true. We are all gifted with a cer tain level of intelligence, drive, and, reasoning ability; some competencies can be acquired, or at least improved, through learning., Goleman, for example, argues that although emotional intelligence is par tly innate, leaders, can enhance their emotional intelligence through training. They can lear n to become more, self-regulating and self-aware, to put themselves in the shoes of others and develop empathy., To the extent that they are successful, this may improve their effectiveness as leaders. Moreover, as stated already , leaders can impro ve their strate gic thinking ability b y using frameworks such as Porter’s competitive forces model that help them see the big picture., , // The Behavior Perspective, The behavior perspective on leadership tries to link effectiveness of leaders with their behavior toward subordinates. The assumption is that cer tain leadership behaviors result in, greater commitment on the par t of subordinates and hence higher perfor mance in pursuit, of organization goals. Various empirical studies ha ve distilled two clusters of leadership, behaviors, or styles, from literally thousands of leadership behavior items.27, , hiL30123_ch16_402-425.indd 410, , 11/2/06 10:16:48 PM

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Effective Leadership \\ CHAPTER 16, , One cluster represents people-oriented behavior, which is a leadership style that, includes sho wing mutual tr ust and respect for subordinates, demonstrating a genuine, concern for their needs, and ha ving a desire to look out for their w elfare. Leaders with a, strong people-oriented style listen to emplo yee suggestions, do personal f avors for employees, support their interests when required, and treat employees as equals. (One might, argue that leaders w ho engage in people-oriented beha viors have a high de gree of emotional intelligence.), The other cluster represents task-oriented behaviors and includes behaviors that define and, structure work roles. The style of leaders who engage in task-oriented behavior is to assign employees to specif ic tasks, clarify their w ork duties and procedures, ensure that the y, follow company r ules, and push them to reach their perfor mance capacity. Task-oriented, leaders establish stretch goals and challenge employees to push beyond those high standards., Should leaders be task-oriented or people-oriented? This is a difficult question to answer, because each style has advantages and disadvantages. Research suggests that both styles are, positively associated with leader ef fectiveness, but dif ferences are often apparent onl y for, leaders who score either v ery high or v ery low on a par ticular style. Generally measures of, subordinate performance such as absenteeism, g rievances, turnover, and job dissatisf action, are worse among employees who work with super visors with very low levels of peopleoriented leadership, suggesting that leaders w ho lack a people orientation are inef fective., However, job performance is also lower among employees who work for leaders who do not, engage in task-oriented behaviors.28, In general, however, this research has failed to show clear patterns linking these different, behaviors to leadership effectiveness. One problem may be that the two clusters are not mutually e xclusive. Ef fective leaders ma y displa y both people-oriented and task-oriented, behavior. Jack Welch, the for mer CEO of General Electric, routinel y used both types of, behaviors. He w as a v ery task-oriented leader , setting goals and holding subordinates, accountable for attaining those goals. But he could also be v ery people-oriented, sending, handwritten notes to managers, inquiring about their personal li ves, and of fering to help, managers in trouble. A second problem with the behavioral leadership perspective is that the, two categories are broad generalizations that mask specif ic behaviors within each category,, and the specific behaviors may be more important than the broad form. A final problem with, the perspective is that the appropriate behaviors may be context dependent.29 Different situations may require leaders to emphasize dif ferent styles—sometimes it ma y be best to be, task-oriented, other times people-oriented. The contingency perspective on leadership tries, to address this issue., , 411, , people-oriented, behavior, A leadership style that, includes showing mutual, trust and respect for, subordinates,, demonstrating genuine, concern for their needs,, and having a desire to look, out for their welfare., task-oriented, behavior, The style of leaders who, assign employees to, specific tasks, clarify their, work duties and, procedures, ensure that, they follow company rules,, and push them to reach, their performance capacity., , ■ Leadership style at General, Electric., , // The Contingency Perspective, At the hear t of the contingenc y perspective is a simple proposition: The best leadership, behavior to adopt depends on the context.30 There are a number of different contingency theories of leadership, and there is little agreement among leadership researchers about their validity. Here we briefly review three important contingency perspectives to see what we can learn, about the elusive topic of leadership ef fectiveness. These perspectives are F iedler’s contingency theory, path–goal theory, and the leadership substitutes theory., , // FIEDLER’S CONTINGENCY THEORY, In the 1960s psychologist Fred Fiedler introduced his contingency theory of leadership in an, attempt to move the field of leadership research away from an obsession with leadership and, behaviors. Fiedler’s basic assumption was that it was difficult if not impossible for people to, change their leadership style. F iedler accepted the tw o basic leadership styles w e have just, discussed (task-oriented and people-oriented) although he came up with his own way of measuring those styles. He believed that the effectiveness of a leader should be measured by how, the team, g roup, or organization under the leader perfor med. His research suggests that the, , hiL30123_ch16_402-425.indd 411, , 11/2/06 10:16:48 PM

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412, , PART 4 // Leading, , FIG UR E 1 6 .2, Fiedler’s Leadership, Theory, , Contingencies, • Leader–member relations, • Task structure, • Position power, , Leadership style, • People-oriented, • Task-oriented, , leader–member, relations, How well followers, respect, trust, and like, their leaders., task structure, The degree to which the, jobs of subordinates are, highly structured with clear, work responsibilities, welldefined tasks, explicit, goals, and specific, procedures., position power, The power that derives, from formal hierarchical, power over subordinates,, including the legitimate, power to hire, fire, reward,, and punish subordinates., , Outcomes, • Team, unit, or, organization, performance, , effectiveness of the two basic leadership styles depends on three main situational f actors or, contingencies (see Figure 16.2)., The first contingency is leader–member relations, which refers to how well followers, respect, trust, and like their leaders. When leader–member relations are good, subordinates respect, trust, and like their leaders. The second contingency is task structure which, ,, refers to, the degree to which the jobs of subordinates are highly structured with clear work responsibilities,, well-defined tasks, explicit goals, and specif ic procedures. The jobs of assembly-line workers,, for example, have a high degree of task str ucture. The job is clearly structured, and responsibilities, goals, and procedures are well understood. In contrast, creative jobs from fashion design, to R&D tend to ha ve a lo w de gree of task str ucture b y nature. The f inal contingenc y is, position power, which is the power that derives from formal hierarchical power over subordinates and includes the legitimate power to hire, fire, reward, and punish subordinates., Fiedler argued that the situational f actors (contingencies) w ere favorable when leader–, member relations were good, task structure was clearly defined and understood, and position, power was high. Situational f actors were unfavorable when leader–member relations w ere, poor, task str ucture was ill-def ined, and the position po wer of the leader w as low. Fiedler’s, research showed that task-oriented leaders did w ell in tw o situations: w hen the situational, factors were unfavorable or v ery favorable. Conversely, people-oriented leaders did better, when the situational factors were moderately favorable (see Figure 16.3)., , Task-oriented, leaders, Leadership effectiveness, , Good, , Peopleoriented, leaders, , Poor, , FIG UR E 1 6 .3, Predictions of Fiedler’s, Theory, , hiL30123_ch16_402-425.indd 412, , Favorable, situation, , Moderately favorable, situation, , Unfavorable, situation, , 11/2/06 10:16:48 PM

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Effective Leadership \\ CHAPTER 16, , Task-oriented leaders seem to do w ell in very favorable situations because everyone gets, along, the task is clear, and the leader has the po wer needed to take charge and set the direction. According to Fiedler, task-oriented leaders also do well when situational factors are unfavorable because they can establish goals and impose structure on the tasks of subordinates,, giving them direction, e ven if the leaders are not personall y liked or tr usted. In moderately, favorable situations, a leader with good people skills (a people-oriented leader) can create a, positive atmosphere in his or her g roup that improves interpersonal relationships, clarif ies, task structure, and helps the leader influence subordinates., The implication of F iedler’s theor y is that leaders must be matched to situations. It, would not work, for example, to appoint a people-oriented leader in an unf avorable turnaround situation—a task-oriented leader w ould be better . People-oriented leaders, w ho, focus on building trusting relationships, might not be the best match w hen hard decisions, have to be made: In F iedler’s view a people-oriented leader would simply be incapable of, imposing the required structure and goals. Anecdotal evidence supports this. For example,, in 2001 Merrill Lynch appointed Stan O’Neal as CEO of the troubled financial institution., At the time Merrill’s profits were down, it was losing market share, and outside observers, believed that the compan y had a b loated bureaucrac y and f ar too man y stockbrok ers., O’Neal is a classic task-oriented leader. Described as cold, calculating, aloof, and ruthless,, O’Neal cut costs with zeal, la ying off 24,000 emplo yees, closing more than 300 f ield, offices, and firing dozens of veteran managers, including some of his closest subordinates, in 2003 after they went behind his back and tried to lobb y the board to replace him. Ne vertheless O’Neal engineered an impressive turnaround at Merrill Lynch with net earnings, surging to a record $5.2 billion in 2005, up from $2.5 billion in 2002.31, The great virtue of Fiedler’s theory is that it advocates matching the leader to the situation, which has some intuitive appeal. A weakness with this theory is that it seems simplistic. Like the behavioral theories, which it extends, classifying leadership behavior into two, broad types seems an unw arranted generalization. Moreover, the division of leaders into, people-oriented and task-oriented styles ignores the f act that sometimes the same leader, can exhibit elements of both styles. F iedler’s theory also suggests that a leader w ho succeeds in changing the situation (as Stan O’Neal has done at Merrill Lynch) should perhaps, be replaced by another leader more suited to the ne w situation. However, it seems unrealistic to “reward” an effective leader like O’Neal by removing him because he has done his, job so well that an unf avorable situation has become more f avorable. Finally, Fiedler assumes that leaders cannot change their style, but not e veryone agrees with this. The next, perspective we look at, path–goal theor y, asser ts that leaders can change their style to, match the situation., , 413, , ■ Leadership style at Merrill, Lynch., , Unlovable but, Unperturbed Stan, O’Neal is a task-oriented, leader who gets low points, for his people skills., Described as a cold, aloof,, ruthless bean counter,, O’Neal nevertheless, engineered an impressive, turnaround at Merrill, Lynch, cutting costs and, boosting profits to record, levels between 2001 and, 2005. O’Neal has, reportedly stated that, “ruthless isn’t always that, bad.”, © Getty Images, , // PATH–GOAL THEORY, Path–goal theor y is the most comple x leadership theor y we review here. Lik e Fiedler’s, theory, path–goal theor y is a contingenc y theor y. It states that the best leadership style, depends on the situation. Unlike Fiedler’s theory, path–goal theory is based on the assumption that leaders can change their style to match the situation. P ath–goal theor y would, state, for example, that having engineered an impressive turnaround at Mer rill Lynch,, Stan O’Neal can continue to be an ef fective leader by adopting different behaviors,, including a more people-oriented style., Effective Leadership The core proposition of path–goal theor y is that leaders can, increase the performance of their subordinates by clarifying and clearing the “path”, that subordinates have to follow to attain their goals, and by identifying and offering, rewards that motivate subordinates to work toward their goals. Clarifying the path, means leaders work with subordinates to help them identify and lear n behaviors, that will lead to goal attainment. In other w ords, they mentor and coach subordinates. Clearing the path means leaders tr y to tak e care of prob lems and remove, , hiL30123_ch16_402-425.indd 413, , 11/2/06 10:16:49 PM

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414, , PART 4 // Leading, , directive leadership, Occurs when leaders tell, subordinates exactly what, they are supposed to do,, giving them goals, specific, tasks, guidelines for, performing those tasks,, and the like., , obstacles that make it difficult for subordinates to attain their goals. For example, they might, remove unnecessary tasks, such as e xcessive meetings, so subordinates can focus on impor tant work. Identifying and offering rewards means leaders identify w hat will motivate their, subordinates to work toward goals attainment, and then put the appropriate rewards in place., As the chair of an academic department, the current author once had to lead some 23 other, faculty members (a dif ficult proposition even in the best of times)! Clarifying the path involved helping other f aculty members understand w hat was required both for them to get a, good performance review and for the business school to improve its standing in the academic, community as measured by rankings. What was stressed continually was the need to publish, research in the best academic journals and to get excellent teaching evaluations for their classroom performance. Time was also spent in coaching junior f aculty members to help them, improve both their research and teaching perfor mance. Clearing the path involved removing, obstacles impeding work to attain these goals b y, for example, reducing the number of committees faculty members had to serve on. Identifying and offering rewards meant finding and, using the right incentives—including pay raises, promotions, and awards—to motivate faculty, members to work harder toward goal attainment., , supportive, leadership, A leadership style in which, the leader is approachable, and friendly, shows, concern for the welfare of, subordinates, and treats, them as equals., participative, leadership, A leadership style in which, the leader consults with, his or her subordinates,, asking for their opinions, before making a decision., achievementoriented leadership, Occurs when a leader sets, high goals for subordinates,, has high expectations for, their performance, and, displays confidence in, subordinates, encouraging, and helping them to take, on greater responsibilities., , Leadership Styles Path–goal theory describes four different leadership styles (see Figure 16.4 ).32 First there is directive leadership, which occurs w hen leaders tell subordinates exactly what they are supposed to do, gi ving them goals, specif ic tasks, guidelines for, performing those tasks, and the lik e. Directive leadership is essentially the same as the taskoriented leadership concept discussed earlier. A second leadership style is supportive leadership, which can be def ined as a leadership style in w hich the leader is approachab le and, friendly, shows concern for the welfare of subordinates, and treats them as equals. Supportive, leadership is similar to people-oriented leadership., A third leadership style is kno wn as participative leadership, in which a leader consults with his or her subordinates, asking for their opinions before making a decision. The, participative leader encourages subordinates to mak e suggestions and to of fer input into the, decision-making process. The f inal leadership style, kno wn as achievement-oriented, leadership, occurs when a leader sets high goals for subordinates, has high expectations for, their performance, and displays confidence in subordinates, encouraging and helping them to, take on greater responsibilities., , Personal, characteristics, of subordinates, • Skills, • Needs, • Motivations, , Leadership styles, • Directive, • Supportive, • Participative, • Achievementoriented, , Nature of work, environment, • Task structure, • Team dynamics, • Formal power, , Clarify path, Clear path, Offer rewards, , Employee, goals, , Path to goal attainment, , Outcomes, (goal attainment), , FIG UR E 1 6 .4, Path–Goal Theory, , hiL30123_ch16_402-425.indd 414, , 11/2/06 10:16:52 PM

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Effective Leadership \\ CHAPTER 16, , 415, , Contingencies Path–goal theor y argues that a leader can change his or her leadership, style, and that tw o impor tant contingencies dictate the best choice of leadership style:, (1) the personal characteristics of subordinates and (2) the nature of the w ork environment, (see Figure 16.4 ). The personal characteristics of subordinates include f actors such as the, abilities, skills, needs, and moti vations of employees. For example, academics are skilled, and self-motivated individuals with a high sense of their o wn self-worth. As such, they respond poorly to directive leadership (they resent being told w hat to do). Conversely, they, are generally open to a participative leadership style that recognizes that they have substantial expertise and experience and much advice to of fer the leader. The same can be said of, most professional employees, such as lawyers, doctors, and research scientists., The nature of the work environment refers to the task structure (is the task well-defined, and standardized or complex and varied?), the dynamics of the work group or team (is the, team cohesive or fragmented?), and the formal power in the or ganization (is it strong or, weak?). Assembly-line work, for e xample, is well-defined, standardized, and predictable., Such work can be dull, leading to apath y and boredom among employees. To counter this,, path–goal theor y suggests achie vement-oriented leadership, w here the leader moti vates, subordinates by setting challenging goals and expressing confidence in subordinates’ ability, to attain those goals., Path–goal theor y mak es a number of k ey predictions. F irst, the theor y states that if, followers lack confidence, supportive leadership will increase subordinates’ confidence that, they can achieve goals, which raises performance. If the task of subordinates is ambiguous,, directive leadership may be preferred because this helps clarify the path subordinates must, follow, which again increases perfor mance. If the task of subordinates is standardized and, dull, achievement-oriented leadership can moti vate subordinates by setting high goals and, expressing confidence in their abilities. If the re wards offered to employees are inappropriate, participative leadership may allow the leader to clarify the needs of subordinates and, change rewards to improve performance., Contributions and Limitations A virtue of path–goal theor y is that it reco gnizes a wider, diversity of leadership styles than either behavioral theory or Fiedler’s theory. The recognition, that in addition to directi ve (task-oriented) and suppor tive (people-oriented) styles leaders, can adopt achievement-oriented and participative leadership styles adds richness to an y discussion of what effective leadership entails. Some might see another virtue in the assumption, that leaders can match their style to the situation they confront. This implies that leaders are at, least in part made, not born, which is an encouraging message for managers trying to improve, their leadership capabilities. In addition, path–goal theor y tries to predict w hat style is best, suited to what situation, which might be useful information for managers trying to determine, how they should lead., On the other hand, path–goal theory has weaknesses. First, the implicit assumption that, a leader can adopt onl y one style at a time seems simplistic. A leader might de velop a, successful individual style that combines elements of the styles discussed here. A leader, can direct subordinates to perform certain tasks while still being approachable and friendly (suppor tive leadership), setting high goals (achie vement-oriented leadership), and, consulting with emplo yees about ho w to impro ve the w ork environment (par ticipative, leadership). Second, despite significant research, there is still no strong empirical consensus that path–goal theor y does a good job of e xplaining what is required for ef fective, leadership.33 Many of the propositions of path–goal theor y are difficult to test, and the y, remain unexplored., Finally, and perhaps most seriousl y, path–goal theory has a nar row def inition of leadership effectiveness. The theor y focuses on w hat a leader can do to increase subordinates’, motivation by clarifying and clearing the path toward a goal and putting appropriate rewards, in place. What is ignored are other potentially important factors in the leadership process—, such as the central role of leaders in crafting a strate gic vision, the need for leaders to interact with e xternal stak eholders, the ability of the leader to ener gize employees through, eloquent words, the impor tance of personality characteristics such as charisma, and the, , hiL30123_ch16_402-425.indd 415, , 11/2/06 10:16:53 PM

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416, , PART 4 // Leading, , significance of leading by example. Thus as insightful as path–goal theory is, it too seems to, provide only a partial definition of effective leadership., , // LEADERSHIP SUBSTITUTES, leadership, substitutes, Contingencies that may act, as substitutes for a, leadership style., , transformational, leader, A leader who is an agent, of strategic and, organizational change., , Unlike path–goal leadership, w hich recommends dif ferent leadership styles in v arious, situations, the leadership substitutes approach identif ies contingencies that ma y be, “substitutes” for a leadership style. 34 A substitute is a situational variable (a contingency), that makes a leadership style unnecessary. The theory identifies several contingencies that, substitute for task-oriented and people-oriented leadership styles. For example, it is argued, that highly professional subordinates who know how to do their tasks, such as la wyers or, doctors, do not need a task-oriented leader w ho structures their work and tells them what, to do. Moreover, because such professional subordinates derive substantial intrinsic satisfaction from their work and have a high sense of self-w orth, a people-oriented leadership, style is also less necessar y. Professionalism on the par t of subordinates, in other w ords,, substitutes for both task- and people-oriented leadership styles. Leaders of or ganizations, with a highly professional workforce, therefore, are often considered “first among equals,”, and their own leadership focuses on providing strategic direction for the organization and, interacting with stakeholders., More generally, any situational variable that results in emplo yees managing their own, behavior and directing themselves toward the attainment of goals (what we might call selfleadership) reduces the need for proacti ve task-oriented and people-oriented leadership, styles. For example, performance-based reward systems can k eep employees directed toward organizational goals, so they might replace or reduce the need for task-oriented leadership. Similarly, cohesive self-managing work teams can be a substitute for both task- and, people-oriented leadership. In a cohesive team coworkers can become substitutes for hierarchical leadership. 35 Coworkers can direct ne w employees, explaining to them ho w the, team works and what the tasks entail. Coworkers can also provide the social suppor t that, might otherwise be provided by a people-oriented leader. Moreover, when bonus pay for a, team is linked to team performance, peer control within the team can act as a substitute for, achievement-oriented leadership, with team members stretching themselves to attain team, goals and encouraging each other to w ork hard to ward that end. 36 Such conditions are, found within companies such as Toyota, 3M, and Nucor Steel, all of which group employees into self-managing teams that tak e on direct responsibility for a por tion of the w ork, process. In these enterprises team self-management substitutes for hierarchical leadership,, enabling the firms to operate with flatter organizational structures that have fewer management layers and wider spans of control (see Chapter 8)., The idea of leadership substitutes has intuitive appeal, but the empirical evidence so far, is mixed. Some studies show that a few substitutes do replace the need for task- or peopleoriented leadership, but others do not. The messiness of statistically testing for leadership, substitutes may account for some problems. However, other writers contend that the limited support is evidence that leadership pla ys a critical role re gardless of the situation. 37, Probably at best w e can conclude that a fe w contingencies such as self-managing w ork, teams, self-leadership, and appropriate re ward systems might reduce the impor tance of, proactive leadership., , // Transformational Leadership, We opened this chapter with the stor y of how Gordon Bethune transfor med Continental, Airlines. Bethune was a transformational leader: He initiated radical change in Continental, Airlines that improved the performance of that organization. Like Bethune, transformational leaders are agents of strate gic and or ganizational change. 38 Transformational, leaders reenergize troubled organizations, pushing them in ne w strategic directions and, , hiL30123_ch16_402-425.indd 416, , 11/2/06 10:16:53 PM

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Effective Leadership \\ CHAPTER 16, , engineering wholesale changes in operational processes, or ganization architecture, and, culture. Some of the most admired business leaders of our time—people like General Electric’s Jack Welch, Gordon Bethune, Lou Gerstner at IBM, and William Bratton at the New, York Police Department—are described as transformational leaders., In recent decades leadership experts have come to recognize the importance of transformational leadership. In a world where the only constant is change, long-established organizations, periodically find their competitive position under attack from new rivals who are utilizing new, technology and new business models to g ain market share. If established organizations confronting such challenges are to sur vive, they must make substantial changes in their strategy,, organization, and operations, and this requires transfor mational leadership. Thus IBM, once, the world’s most profitable enterprise, found itself losing billions of dollars in the early 1990s, as the center of g ravity in the computer industr y shifted away from its mainframe computers, toward personal computers, a business dominated b y scrappy new rivals such as Dell Computer, Microsoft, and Intel. It took a transfor mational leader, Lou Gerstner , to implement, much-needed changes at IBM. Gerstner remade IBM, building a big ser vice business where, none existed and replacing IBM’ s bureaucratic, consensus-dri ven culture with a more dynamic and entrepreneurial ideology., To drive home the importance of transformational leaders, a comparison is often made, between them and transactional leaders. A transactional leader helps an organization, achieve its current objectives.39 He or she tries to run the ship as efficiently as possible but, does not try to change the organization’s course. The contingency and behavioral theories, described earlier adopt the transactional perspecti ve: They focus on leader behaviors that, improve employee performance and satisfaction within a given context. In contrast, transformational leadership is about changing the organization’s context, altering strategies and, culture to f it better with the sur rounding environment.40 Transformational leaders are, change agents w ho energize and direct emplo yees to a ne w set of cor porate values and, behaviors., , 417, , ■ Transformational, leadership at IBM., , transactional leader, A leader who helps an, organization achieve its, current objectives., , // ELEMENTS OF TRANSFORMATIONAL, LEADERSHIP, What does it take to be a transformational leader? Writers on the topic have identified a number of behaviors that transformational leaders seem to share (see Figure 16.5).41 First, transformational leaders envision a different future for the organizations they are leading. This new, vision often embraces changes in both strate gy and the architecture of the or ganization, including the culture of the or ganization as captured b y values and nor ms. Gordon Bethune, envisioned a different strategic future for Continental Airlines: one where planes arrived and, left on schedule and customers were satisfied., Second, transformational leaders persistently communicate this new vision to employees., They use every opportunity to state what the vision is and what values employees must adopt, to execute that vision. Again, Bethune used every opportunity he could to communicate his, message to Continental employees. Transformational leaders frame messages around a grand, purpose with emotional appeal that capti vates employees and other cor porate stakeholders., Such framing helps transfor mational leaders establish a shared mental model that subordinates can adopt as their o wn.42 Transformational leaders bring their visions to life through, symbols, metaphors, stories, and other vehicles that transcend plain language. Metaphors borrow images of other experiences, thereby creating richer meaning in the vision that has not yet, been experienced., Third, transformational leaders model desired behaviors. They recognize that to succeed,, they must lead by example. They live by the values they espouse. They know that unless they, do this, employees will not take them seriously, and any transformational change effort will, fail. In one of the g reat historical stories of transfor mational leadership, when Lee Iacocca, took over the CEO position at Chrysler, which at the time was teetering on the brink of bankruptcy, he famously announced that he would take only $1 a year in salary until the company, , hiL30123_ch16_402-425.indd 417, , 11/2/06 10:16:53 PM

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418, , PART 4 // Leading, , FIG UR E 1 6 .5, Behaviors of, Transformational, Leaders, , Envisioning, a new future, Creating an, enduring, organization, , Communicating, persistently, , Transformational, leadership, Leading with, integrity, , Meaningful, changes in, strategy and, organization, , ■ Transformational, leadership at Continental, Airlines., , hiL30123_ch16_402-425.indd 418, , Modeling, desired, behaviors, , Empowering, employees, , became profitable. This symbolic act sent a v ery strong message to employees: We are all in, this together, and we suffer and prosper together., Fourth, transformational leaders empower employees to implement the g rand strategic visions they have articulated. At Continental Airlines Gordon Bethune did this b y asking employees to help him impro ve Continental’s perfor mance and b y splitting the benef its with, them. At General Electric Jack Welch empowered employees by introducing a methodology, known as “workout,” where during a three-da y event employees could suggest process improvements to their bosses, w ho had to sa y yes or no to proposals on the spot. Welch went, further, tying the bonus pa y of managers to their success at implementing process impro vements that came out of workout sessions., Fifth, transformational leaders make meaningful changes in the activities and architecture of an organization. They move quickly to show that they are serious, changing organizational str ucture, controls, and incenti ve systems to promote the beha viors they see as, necessary to implement their strate gic vision. Transformational leaders reco gnize that, without concrete actions, emplo yees will soon lose f aith in change ef forts. They understand that to get employees’ support for organizational change efforts, they need to show, immediately that the y mean w hat they say. Gordon Bethune did this b y tying emplo yee, bonuses to improvements in Continental’s customer service., Sixth, transformational leaders lead with integrity. They recognize that people will not follow someone they do not trust, and that a reputation for fairness and candor is among the most, important assets a leader can have. People respect leaders who tell them the truth (even if that, truth is sometimes hard) and who manage in an ethical manner. This does not mean that transformational leaders are not tough, but the y are tough in a f air way. If the y have to la y off, employees, they do so in an open and honest w ay, explaining why they have to mak e this, difficult choice. Thus although Stan O’Neal is re garded as a tough leader w ho did not flinch, from announcing significant job cuts when he took over the helm of Merrill Lynch, he is also, regarded as having integrity., , 11/2/06 10:16:53 PM

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Effective Leadership \\ CHAPTER 16, , 419, , Finally, transformational leaders create an enduring organization that continues to operate efficiently and effectively long after they are gone. They do not lead through a cult of, personality; rather they reengineer the organization to create a new system that will persist, and produce benef its for y ears. Although Jack Welch stepped do wn as CEO of General, Electric in 2001, GE is still v ery much the or ganization that Welch built. Similarl y, the, changes William Bratton introduced in the New York Police Department persist today even, though he left in the 1990s. Great transfor mational leaders make themselves redundant by, building an organization and by developing people who can continue their work once they, have moved on., Note that we have not said transformational leaders are charismatic. They may be charismatic, but they do not have to be. Charisma is a personality trait that gives a leader power and, influence over followers, whereas transformational leadership is a set of beha viors that managers use to lead a change process.43 Charismatic leaders are born, but the aspects of transformational leadership can be lear ned. However, transformational leaders certainly require high, intelligence and superior reasoning ability to envision a different strategic future for the organization, and intelligence at least is a trait. Man y successful transfor mational leaders were, effective but not charismatic. Although Lee Iacocca and Jack Welch were charismatic, Lou, Gerstner and William Bratton w ere not, but the y all engineered signif icant and persistent, changes in the organizations they led., , // EVALUATING TRANSFORMATIONAL, LEADERSHIP, The concept of transfor mational leadership has wide appeal, and it is probab ly the most, popular perspective on leadership today. Moreover, research suggests that transformational, leaders make a difference. Subordinates are more satisf ied and have greater commitment, to their organizations under transformational leaders. They also perform better, engage in, more or ganizational citizenship beha viors, and tend to mak e decisions that are more, creative.44 However, the concept of transfor mational leadership f aces a number of challenges., One problem is that some writers use circular logic by defining transformational leadership, in terms of the leader’s success. 45 They suggest that leaders are transfor mational when they, successfully bring about change, rather than w hen they engage in cer tain behaviors that we, call transformational. Another concern is that some writers present transfor mational leadership as a uni versal rather than a contingenc y-oriented approach. However, recently writers, have begun to explore the idea that transfor mational leadership may be more appropriate in, some situations than in others. 46 Transformational leadership seems most appropriate w hen, organizations are in trouble and need to improve their performance and adapt to a changing, environment. For an organization based in a stable environment that is performing well, transactional leadership may be just f ine. Indeed, a transformational leader who tries to change a, well-oiled machine might do more harm than good., , // Gender Differences in Leadership, The last three decades have seen a dramatic rise in the number of women found in leadership, roles within organizations. In 1972 women filled 18 percent of administrative positions in the, United States according to the Bureau of Labor Statistics; by 2002 this figure had increased to, 46 percent. 47 It should be pointed out, ho wever, that w omen are still unrepresented at the, highest levels in organizations—only 16 percent of senior management positions inAmerican, industry were held by women in 2003.48, The steady rise of women in the workplace raises an important question: Do women lead differently than men? Several writers think so. They suggest that women have an interactive style, that includes more people-oriented and participative leadership.49 They also believe that women, are more relationship-oriented, cooperative, nurturing, and emotional in their leadership roles., , hiL30123_ch16_402-425.indd 419, , 11/2/06 10:16:54 PM

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420, , PART 4 // Leading, , They further assert that these qualities make women particularly well suited to leadership roles, when companies are adopting a stronger emphasis on teams and emplo yee involvement. These, arguments are consistent with sex role stereotypes—namely that men tend to be more task-oriented whereas women are more people-oriented., Are these stereotypes true? Do women adopt more people-oriented and participative leadership styles? The answers are no and y es, respectively. Leadership studies in w ork settings, have generally found that male and female leaders do not differ in their levels of task-oriented, or people-oriented leadership. The main e xplanation is that real-w orld jobs require similar, behavior from male and female job incumbents.50, However, women do adopt a participative leadership style more readily than their male, counterparts. One possib le reason is that, compared to bo ys, girls are often raised to be, more e galitarian and less status-oriented , w hich is consistent with being par ticipative., There is also some evidence that women have better interpersonal skills than men, which, translates into their relatively greater use of the par ticipative leadership style. A third explanation is that subordinates e xpect female leaders to be more par ticipative, based on, their own sex role stereotypes, so female leaders compl y with follo wer expectations to, some extent., Several recent surveys report that women are rated higher than men on leadership qualities, such as coaching, teamw ork, and empowering employees.51 Yet research also suggests that, women are e valuated negatively when they try to appl y the full range of leadership styles,, particularly more directive and autocratic approaches. Thus, ironically, women may be well, suited to contemporar y leadership roles, y et they continue to f ace limitations on leadership, through the gender stereotypes and stereotypes of leaders held b y followers.52 Overall, both, male and female leaders must be sensiti ve to the fact that followers have expectations about, how leaders should act, and leaders w ho deviate from those e xpectations may get ne gative, evaluations from their subordinates., , I N CO N C LU S ION, , WH Y DOE S IT M ATTER?, , Why is the study of leadership important for aspiring managers? First, as we noted, in the opening chapter of this book, leadership is the pivotal function of management., To be effective, managers have to lead. Subordinates expect their managers to lead;, and if managers are to strategize, plan, control, organize, and develop employees, they, must meet these exceptions. Moreover, advancement within organizations requires, leadership skills. You do not get to run an organization or one of its subunits unless you, have demonstrated that you can lead subordinates., Second, it is important to learn what makes an effective leader. We have seen that, leaders are skilled at using power to influence subordinates and other important, constituencies, as well as to get things done. Although personality traits such as, intelligence and charisma may define some successful leaders, many of the characteristics of effective leaders are behaviors that can be learned and improved through, practice. It is possible to learn how to lead; competencies that can be learned, such, as strategic thinking and emotional intelligence, are potentially important predictors, of leadership success. We have also seen that it may pay managers to vary their, leadership styles, matching them to the situations. Some situations call for more, task-oriented leadership, others for more people-oriented leadership; if path–goal, theory is correct, managers can learn the skills associated with these various leadership styles and tailor their use of them to match the circumstances they face. Finally,, we have seen what it takes to be a transformational leader—to alter the strategy and, organization architecture of the company or subunit that a manager leads. This, requires a set of behaviors that can be learned and honed through experience. The, central message of this chapter is that you can learn how to improve your effectiveness as a leader., , hiL30123_ch16_402-425.indd 420, , 11/2/06 10:16:54 PM

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Effective Leadership \\ CHAPTER 16, , 421, , MANAGEMENT CHALLENGES, 1., 2., 3., 4., 5., 6., , Is an understanding of power and influence critical for leadership success? If so, how?, In this chapter we discussed Stan O’Neal, the CEO of Merrill Lynch. What makes Stan, O’Neal an effective leader?, Is it possible to be both a people-oriented and a task-oriented leader?, How would you characterize the leadership style of Gordon Bethune, the former CEO, of Continental Airlines who was profiled in this chapter?, Are great leaders born that way, or is it possible to learn how to be a great leader?, In February 2005 Carly Fiorina, the CEO of Hewlett-Packard, was ousted by HP’s board, of directors. Through research, try to find out something about Fiorina’s leadership style, (several articles published at the time discussed her tenure at HP). How would you, characterize it? Was she an effective leader? Why do you think she was asked to resign?, , MANAGEMENT PORTFOLIO, FOR THE ORGANIZATION YOU HAVE CHOSEN TO FOLLOW:, 1., 2., 3., , What can you find out about the leadership style of the chief executive officer? How, would you characterize his or her leadership style?, Does the leadership style he or she has adopted match the situation confronting the, organization?, Would you characterize the CEO as an effective leader? How would you explain his or, her success or lack thereof?, , CLOSING CASE, , A.G. LAFLEY, , On the da y that A.G. Lafle y took the helm at consumer, products giant Procter & Gamble in 2000, the stock dropped, by $4. The financial markets were unimpressed with Lafley’s, rise to the CEO spot. Lafle y, who star ted out at P&G in, 1977 as a brand assistant for Joy dishwashing liquid, did not, seem to ha ve the stuf f of w hich CEO le gends are made., Quiet, understated, and unassuming, with a shock of w hite, hair, wire-rimmed glasses, and the demeanor of Mr. Rodgers,, he looks more lik e a thoughtful colle ge professor than the, stereotype of a visionary and dynamic CEO. In a prof ile, a, Fortune reporter described Lafley as “a listener, not a storyteller. He’s likable, not awe-inspiring. He’s the type of guy, who gets excited in the mop aisle of a grocery store. . . . He, has rallied his troops not with big speeches and dazzling, promises, but by hearing them out, one at a time. It’s a little, dull perhaps.”53, , hiL30123_ch16_402-425.indd 421, , Dull or not, Lafley had his work cut out for him. His predecessor, Durk Jager, had lasted just 17 months after failing, to impro ve P&G’s lackluster perfor mance. F or a decade, P&G had struggled to introduce new brands, considered by, many to be the lifeblood of a large consumer products company. Worse still, half of P&G’s 15 top brands w ere losing, market share, and employee morale was at an all-time low., Lafley realized that he had to mo ve fast: “I had to move, quickly to get people focused. I didn’t want everyone sitting, around worrying that the stock price had dropped in half.”54, One of Lafle y’s f irst acts w as to issue a manifesto of, “10 things I belie ve in.” At the top of the list w as “lead, change,” followed by “the consumer is boss. ” Lafley also, signaled that it w as time for P&G to look outside its o wn, organization for ne w product ideas—something the company had long resisted., , 11/2/06 11:52:21 PM

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422, , PART 4 // Leading, , As Lafley saw it, P&G did not need, Another goal of Lafle y’s w as to, a radical mak eover; it just needed to, break down the bar riers within P&G,, focus on selling more of its basic, getting employees from different divibrands, such as Tide and Pampers. He, sions to e xchange ideas. He emphachose P&G’s 10 best-selling brands,, sized that R&D and mark eting people, each of w hich generated more than, from different divisions should talk to, $1 billion in sales, and he told his, each other, which they had not tradimanagers to focus on selling more., tionally done. To give the idea teeth,, These brands w ould get the bulk of, he rewarded business units that shared, P&G’s resources. It was a message evtheir ideas with others. To drive home, eryone could understand. Selling more, the impor tance of remo ving bar riers, Tide was easier than inventing the next, between units, Lafle y embarked on a, great brand. For years P&G had been, highly visib le symbolic redesign of, struggling to invent new brands, but it, the fabled 11th-floor e xecutive suites, The Un-CEO A big listener, A.G., had not introduced a ne w blockbuster, at P&G’s head office. The oak-paneled, Lafley lacks the charismatic big, since 1983 when it had a huge hit with, walls were torn down; the 19th-centupersonality of many star CEOs. But, Always (feminine protection pads)., ry paintings that once decorated ofhe has been an effective leader for, Now, Lafle y told his managers, the, fices were donated to a local ar t muProcter & Gamble, helping to drive, number one task w as to sell more of, seum; and the CEO and other top, the company to improve its, what they had., executives were assigned to cubicles, operating performance after a, Lafley w ent fur ther, pushing his, on half the floor . The other half w as, decade of stagnation., managers to add value to P&G’s estabtransformed into a center for employee, lished brands b y listening closel y to, learning., Courtesy of Procter & Gamble, what consumers wanted. This approach, Lafley also ar ticulated the need to, worked. F or e xample, b y w atching, “reach outside for ideas.” His goal is to, consumers use its diapers, P&G learned that mothers were, get half of P&G’s new products from external sources—up, frustrated by how long it took to toilet train their children;, from 20 percent w hen he took o ver. P&G has star ted, so P&G developed a new line of its best-selling P ampers, entering alliances with other companies to de velop new, brand—Feel n Lear n Advanced Trainers, which stay wet, products, including competitor Clorox, with which it codefor two minutes to aler t toddlers to tr y tinkling in the toiveloped Glad Press and Seal—a product that o vertook S., let. He also told managers to focus on telling customers, C. Johnson’s Saran Wrap to become the top-selling food, what the brand could do for them rather than the attributes, wrap in the United States., of the product; so the mission for P ampers changed from, The results of Lafle y’s leadership ha ve been impres“making the driest diapers” to “helping moms with babies’, sive. P&G’s core brands ha ve been gaining impetus. In, development.” The result: P ampers gained market share, 2005, 19 out of P&G’s top-selling 20 brands gained maragainst longtime rival Kimberly-Clark., ket share. Costs ha ve f allen, and sales and prof its have, At the same time Lafle y moved to cut costs. Within, advanced strongly. In 2000 P&G ear ned $5.53 billion on, months he had eliminated some 9,600 jobs, closing do wn, sales of $40 billion. In 2005 it ear ned $10.4 billion on, several new product development projects that were consales of $57 billion. The stock price doub led o ver the, suming resources and pulling new products from the marsame period.56, ket that had not generated signif icant sales. He also sold, off products he did not see as strate gic f its, including Jif, CASE DISCUSSION QUESTIONS, and Crisco brands. It was a classic case of triage: Focus on, what is selling, pour resources into those brands, and cut, 1. How would you characterize the leadership style of A.G., the rest., Lafley—people-oriented or task-oriented?, Commenting on Lafle y’s cost cutting, one of P&G’ s, 2. What leadership competencies does A.G. Lafley have?, board members noted , “He kno ws how to la y down the, What competencies often associated with strong leaders, rules when he needs to. Quiet people tend to be the toughdoes he seem to lack?, est.” Indeed, in a culture traditionally characterized by collegiality, Lafley has not been shy about pushing his man3. How did Lafle y go about shifting the strate gy and culagers to impro ve their perfor mance. Each quar ter at a, ture of P&G? Would you characterize Lafley as a transmeeting with top managers, Lafle y re veals e veryone’s, formational leader or a transactional leader?, financial results. He notes, “It moti vates people who are, 4. What does the story of A.G. Lafley tell you about the atperformance oriented. F or the people that it doesn’ t, tributes and style of effective leaders?, motivate, we are probably not the right place for them.”55, , hiL30123_ch16_402-425.indd 422, , 11/2/06 10:16:54 PM

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Effective Leadership \\ CHAPTER 16, , 423, , ENDNOTES, . G.1 Bethune, “From Worst to First,” Fortune, Ma y 25, 1998, pp. 185–89;, B. O’Reilly, “The Mechanic Who Fixed Continental,” Fortune, December 20,, 1999, pp. 176–83., 2. G. Yukl and R. Lepsinger, “Why Integrating the Leading and Managing Roles Is, Essential for Organizational Effectiveness,” Organizational Dynamics 34, no. 4, (2005), pp. 361–75., 3.W. Bennis, Why Leaders Can’t Lead (San Francisco: Jossey-Bass, 1989)., 4. J.P. K otter, “What Leaders Reall y Do,” Harvard Business Re view 68, no. 3, (1990), pp. 103–12., 5. Yukl and Lepsinger, “Why Integrating the Leading and Managing Roles Is Essential for Organizational Effectiveness.”, 6. D.V. Day and R.G. Lord, “Executive Leadership and Organizational Performance:, Suggestions for a Ne w Theory and Methodolo gy,” Journal of Mana gement 14, (1988), pp. 453–64., 7. S. Lieberson and J .F. O’Conner, “Leadership and Or ganizational Performance:, A Study of Lar ge Cor porations,” American Sociolo gical Re view 37 (1972),, pp. 91–109., . 8N., Wasserman, B. Anand, and N. Nohira, When Does Leader ship Matter?, Harvard Business School Working Paper 01–063, 2001., 9. Some academics say that these results show that leadership does not matter much, because the percentage of variance in profit rates is in their view relatively small., However, a 15 percent variance in profit rates is large when you consider that if a, good leader follo ws a good leader , as is often the case, w e would expect no, variance at all., 10. Staff reporter, “Exit Bad Guy,” The Economist, June 20, 1998, p. 70., 11. R.N. Kanungo, “Leadership in Or ganizations: Looking Ahead to the 21st Century,” Canadian Psychology 39 (Spring 1998), pp. 71–82; G.A. Yukl, Leadership, in Organizations, 6th ed. (Upper Saddle Ri ver, NJ: Pearson Education, 2006);, G.A. Yukl, “Managerial Leadership: A Review of Theory and Research,” Journal, of Management 15 (1989), pp. 251–89., 12. Yukl, “Managerial Leadership: A Review of Theory and Research.”, 13.W.C. Kim and Maubor gne, “T ipping P oint Leadership, ” Harvard Business, Review 81, no. 4 (2003), pp. 60–71., 14. Yukl, “Managerial Leadership: A Review of Theory and Research.”, 15.R.M. Sto gdill, Handbook of Leader ship (Ne w York: The F ree Press, 1974),, Chapter5., 16.R.J. House and R.N . Aditya, “The Social Scientif ic Study of Leadership: Quo, Vadis?” Journal of Management 23 (1997), pp. 409–73., 17. The interview was to gather information for an executive course the author was, teaching at Microsoft., 18. House and Aditya, “The Social Scientific Study of Leadership: Quo Vadis?”, 19.D.C. McClelland, Power: The Inner Experience (New York: Irvington, 1975)., 20.D.R. May et al., “The Moral Component of Authentic Leadership,” Organizational Dynamics 32 (August 2003), pp. 247–60. The large-scale studies are reported in C. Savoye, “Workers Say Honesty Is Best Company Policy,” Christian, Science Monitor, June 15, 2000; J .M. Kouzes and B.Z. Posner, The Leadership, Challenge, 3rd ed. (San F rancisco: Jossey-Bass, 2002), Chapter 2; J . Schettler,, “Leadership in Corporate America,” Training & Development, September 2002,, pp. 66–73., 21. R.J. House et al., “P ersonality and Charisma in the U .S. Presidency: A Psychological Theory of Leadership Ef fectiveness,” Administrative Science Quarterly, 36 (1991), pp. 364–96., 22.E.M. Heffes, “Follow These Leaders,” Financial Executive, April 2005, pp. 20–24;, J. Collins, From Good to Great (New York: Harper Collins, 2001)., 23. P. Salovey, and J. Mayer, “Emotional Intelligence,” Imagination, Cognition, and, Personality 9 (1990), pp. 185–211. See also J.M. George, “Emotions and Leadership: The Role of Emotional Intelligence,” Human Relations 53 (August 2000),, pp. 1027–45., 24. The term was first coined by Salovey and Mayer in 1990. See Salovey and Mayer,, “Emotional Intelligence”; D. Goleman, “What Makes a Leader?” Harvard Business Review, November–December 1998, pp. 92–105., , hiL30123_ch16_402-425.indd 423, , 25.E.A. Locke, “Why Emotional Intelligence Is an In valid Concept,” Journal of, Organizational Behavior 26 (2005), pp. 425–31., 26.R. Jacobs, “Using Human Resource Functions to Enhance Emotional, Intelligence,” in The Emotionally Intelligent Workplace, ed. C. Cher niss and, D. Goleman (San Francisco: Jossey-Bass, 2001), pp. 161–63., 27.P.G. Northouse, Leadership: Theory and Practice, 3rd ed. (Thousand Oaks, CA:, Sage, 2004), Chapter 4; Yukl, Leadership in Organizations, Chapter 3., 28. A.K. Korman, “Consideration, Initiating Structure, and Organizational Criteria—a, Review,” Personnel Psychology 19 (1966), pp. 349–62; E.A. Fleishman, “Twenty, Years of Consideration and Str ucture,” in Current Developments in the Study of, Leadership, ed. E.A. Fleishman and J.C. Hunt (Carbondale, IL: Southern Illinois, University Press, 1973), pp. 1–40; T.A. Judge, R.F. Piccolo, and R. Ilies, “The, Forgotten Ones? The Validity of Consideration and Initiating Str ucture in, Leadership Research,” Journal of Applied Psychology 89, no. 1 (2004), pp. 36–51;, Yukl, Leadership in Organizations, pp. 62–75., 29. S. Kerr et al., “Toward a Contingency Theory of Leadership Based upon the Consideration and Initiating Str ucture Literature,” Organizational Behavior and, Human Performance 12 (1974), pp. 62–82; L.L. Larson, J .G. Hunt, and R.N ., Osbom, “The Great Hi–Hi Leader Beha vior Myth: A Lesson from Occam’ s, Razor,” Academy of Management Journal 19 (1976), pp. 628–41., 30.House and Aditya, “The Social Scientif ic Study of Leadership: Quo Vadis?”;, Yukl, “Managerial Leadership: A Review of Theory and Research.”, 31.D. Rynecki, “Putting the Muscle Back into the Bull, ” Fortune, April 5, 2004,, pp. 162–67., 32. R.J. House, “Path–Goal Theory of Leadership: Lessons, Legacy, and a Reformulated Theory,” Leadership Quarterly 7 (1996), pp. 323–52., 33.J. Indvik, “P ath–Goal Theory of Leadership: A Meta-Analysis,” Academy of, Management Pr oceedings, 1986, pp. 189–92; J .C. Wofford and L.Z. Liska,, “Path–Goal Theories of Leadership: A Meta-Analysis,” Journal of Management, 19 (1993), pp. 857–76; House and Aditya, “The Social Scientif ic Study of, Leadership:Quo Vadis?”, 34.S. Keer and J .M. Jer mier, “Substitutes for Leadership: Their Meaning and, Measurement,” Organizational Behavior and Human P erformance 22 (1978),, pp. 375–403., 35.D.F. Elloy and A. Randolph, “The Ef fect of Superleader Beha vior on Autonomous Work Groups in a Go vernment Operated Rail way Ser vice,” Public, Personnel Management 26 (Summer 1997), pp. 257–72; C.C. Manz and H., Sims Jr ., The Ne w SuperLeader ship: Leading Other s to Lead Themselves, (San Francisco: Berrett-Koehler, 2001)., 36.M.L. Loughry, “Coworkers Are Watching: Performance Implications of P eer, Monitoring,” Academy of Management Proceedings, 2002, pp. O1–O6., 37. P.M. Podsakoff and S.B. MacKenzie, “Kerr and Jermier’s Substitutes for Leadership Model: Backg round, Empirical Assessment, and Suggestions for Future, Research,” Leadership Quarter ly 8 (1997), pp. 117–32; S.D . Dionne et al.,, “Neutralizing Substitutes for Leadership Theory: Leadership Ef fects and, Common-Source Bias,” Journal of Applied Psychology 87, no. 3 (June 2002),, pp. 454–64; J.R. Villa et al., “Problems with Detecting Moderators in Leadership, Research Using Moderated Multiple Re gression,” Leadership Quarter ly 14,, no. 1 (February 2003), pp. 3–23; S.D. Dionne et al., “Substitutes for Leadership,, or Not,” The Leadership Quarterly 16, no. 1 (2005), pp. 169–93., 38.B.M. Bass, “From Transactional to Transformational Leadership,” Organizational, Dynamics, Winter 1990, pp. 19–32., 39.V.L. Goodwin, J.C. Wofford, and J.L. Whittington “A Theoretical and Empirical, Extension to the Transformational Leadership Construct,” Journal of Organizational Behavior 22 (November 2001), pp. 759–74., 40.A. Zaleznik, “Managers and Leaders: Are They Different?” Harvard Business, Review 55, no. 5 (1977), pp. 67–78; W. Bennis and B. Nanus, Leaders: The Strategies for Taking Charge (New York: Harper & Row, 1985); R.H.G. Field, “Leadership Def ined: Web Images Re veal the Dif ferences between Leadership and, Management,” in Annual Conference of the Administrative Sciences Association, of Canada, Or ganizational Behavior Division, ed. P . Mudrack (W innipeg,, Manitoba, May 25–28, 2002), p. 93., , 11/2/06 10:16:59 PM

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424, , PART 4 // Leading, , 41.J.M. Bur ns, Leadership (Ne w York: Har per & Ro w, 1978); B .M. Bass,, Transformational Leader ship: Industrial, Military , and Educational Impact, (Hillsdale, NJ: Erlbaum, 1998); B.J. Avolio and F.J. Yammarino, eds., Transformational and Charismatic Leadership: The Road Ahead (Greenwich, CT: JAI, Press, 2002)., 42.J.A. Conger, “Inspiring Others: The Language of Leadership, ” Academy of, Management Executive 5 (F ebruary 1991), pp. 31–45; G.T . F airhurst and, R.A. Sar r, The Art of F raming: Mana ging the Langua ge of Leader ship (San, Francisco: Jossey–Bass, 1996); A.E. Rafferty and M.A. Griffin, “Dimensions of, Transformational Leadership: Conceptual and Empirical Extensions,” Leadership, Quarterly 15, no. 3 (2004), pp. 329–54., 43.J. Barbuto, J.E., “Taking the Charisma out of Transformational Leadership,”, Journal of Social Behavior & Personality 12 (September 1997), pp. 689–97;Y.A., Nur, “Charisma and Managerial Leadership: The Gift That Never Was,” Business, Horizons 41 (July 1998), pp. 19–26; M.D. Mumford and J.R. Van Doorn, “The, Leadership of Pragmatism—Reconsidering F ranklin in the Age of Charisma,”, Leadership Quarterly 12, no. 3 (Fall 2001), pp. 279–309., 44.J. Barling, T. Weber, and E.K. Kelloway, “Effects of Transformational Leadership, Training on Attitudinal and Financial Outcomes: A Field Experiment,” Journal of, Applied Psychology 81 (1996), pp. 827–32., 45. A. Bryman, “Leadership in Organizations,” in Handbook of Organization Studies,, ed. S.R. Clegg, C. Hardy, and W.R. Nord (Thousand Oaks, CA: Sage, 1996), pp., 276–92., 46. B.S. Pawar and K.K. Eastman, “The Nature and Implications of Contextual Influences on Transformational Leadership: A Conceptual Examination,” Academy of, Management Review 22 (1997), pp. 80–109; C.P. Egri and S. Herman, “Leadership in the Nor th American Environmental Sector: Values, Leadership Styles,, and Contexts of Environmental Leaders and Their Organizations,” Academy of, Management Journal 43, no. 4 (2000), pp. 571–604., 47.J. Porterfiled and B .H. Kleiner, “A New Era: Women and Leadership,” Equal, OpportunitiesInternational 24, no. 5 (2005), pp. 49–56., 48. S.L. Bellar, M. Helms, and D.E. Arfken, “The Glacial Change: Women on Corporate Boards,” Business Perspectives 16, no. 2 (2004), pp. 30–38., , hiL30123_ch16_402-425.indd 424, , 49.J.B. Rosener, “Ways Women Lead,” Harvard Business Re view 68 (No vember–, December 1990), pp. 119–25; S.H. Appelbaum and B.T. Shaprio, “Why Can’t Men, Lead Like Women?” Leadership and Organization Development Journal 14 (1993),, pp. 28–34; N. Wood, “Venus Rules,” Incentive 172 (February 1998), pp. 22–27., 50. G.N. Powell, “One More Time: Do Female and Male Managers Differ?” Academy, of Mana gement Executive 4 (1990), pp. 68–75; M.L. v an Engen and T.M., Willemsen, “Sex and Leadership Styles: A Meta-Analysis of Research Published, in the 1990s,” Psychological Reports 94, no. 1 (February 2004), pp. 3–18., 51.R. Sharpe, “As Leaders, Women Rule,” BusinessWeek, November 20, 2000,, p. 74; M. Sappenfield, “Women, It Seems, Are Better Bosses,” Christian Science, Monitor, January 16, 2001; A.H. Eagly and L.L. Carli, “The Female Leadership, Advantage: An Evaluation of the Evidence,” The Leadership Quarterly 14, no. 6, (December 2003), pp. 807–34; A.H. Eagly, M.C. Johannesen-Schmidt, and M.L., van Engen, “T ransformational, Transactional, and Laissez-F aire Leadership, Styles: A Meta-Analysis Comparing Women and Men,” Psychological Bulletin, 129 (July 2003), pp. 569–91., 52. A.H. Eagly, S.J. Karau, and M.G. Makhijani, “Gender and the Ef fectiveness of, Leaders: A Meta-Analysis,” Psychological Bulletin 117 (1995), pp. 125–45; J.G., Oakley, “Gender-Based Barriers to Senior Management Positions: Understanding, the Scarcity of F emale CEOs, ” Journal of Business Ethics 27 (2000),, pp. 821–34; N .Z. Stelter, “Gender Dif ferences in Leadership: Cur rent Social, Issues and Future Organizational Implications,” Journal of Leadership Studies 8, (2002), pp. 88–99; M.E. Heilman et al., “P enalties for Success: Reactions to, Women Who Succeed at Male Gender -Typed Tasks,” Journal of Applied, Psychology 89, no. 3 (2004), pp. 416–27; A.H. Eagly, “Achieving Relational, Authenticity in Leadership: Does Gender Matter?” The Leadership Quarterly 16,, no. 3 (June 2005), pp. 459–74., 53.K. Brooker, “The Un-CEO,” Fortune, September 16, 2002, pp. 88–93., 54.Brooker, “The Un-CEO.”, 55.Brooker, “The Un-CEO.”, 56. Sources: Brooker, “The Un-CEO”; P. Sellers, “Teaching an Old Dog New Tricks,”, Fortune, May 31, 2004, pp. 166–73; T. Wasserman, “Seizing the Moment of, Truth,” Brandweek, October 10, 2005, pp. M8–M13., , 11/2/06 10:16:59 PM

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17, LEARNING OBJECTIVES, , COMMUNICATION, After Reading This Chapter You Should Be Able to:, 1, , Outline the main elements of a communication system., , 2, , Explain why it is important to match media to a message., , 3, , Discuss the formal and informal channels through which information flows in organizations., , 4, , Identify the sources of noise that lead to miscommunication within organizations., , 5, , Discuss the steps managers can take to counteract noise and improve communication within their, organizations., , / / / / / / / / / / / / / / /, , The Communication Process, Communication Channels, Verbal Communication, Nonverbal Communication, Selecting the Best Communication Channel, Organizational Communication, Formal Communication Channels, Informal Communication Channels, Communication Barriers and, Breakdowns (Noise), Perceptions, Filtering, Language Barriers, Information Overload, Cultural Differences, Gender Differences, , hiL30123_ch17_426-451.indd 426, , Improving Communication, Match Media to Messages, Reduce Information Overload, Get Your Message Across, Engage in Active Listening, Proactively Use the Grapevine, Communicate Directly with Employees, Facilitate Communication through, Workspace Design, In Conclusion: Why Does It Matter?, Management Challenges, Management Portfolio, Closing Case: The Challenger Disaster, , 11/4/06 9:13:32 PM

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Communication \\ CHAPTER 17, , 427, , This cartoon by Jen, Sorensen nicely, captures the, response of many, to Larry Summers’s, statements on the, intrinsic aptitudes, of women. Source:, http://www., slowpokecomics., com, © Jen Sorensen/Slowpoke, Comics, , / / / / / / / / / / / / / / / / / / / / /, , n February 21, 2006, Lawrence Summers, the, former U.S. Treasury secretary, resigned as, president of Harvard University. Summers’s problems, began in 2001, shortly after his appointment, when in, a face-to-face meeting with noted African American, scholar Cornell West, Summers apparently berated, him for teaching a course on hip hop and skipping, classes to help in political campaigns. West, who, apparently felt Summers was criticizing his teaching, and scholarship, promptly left Harvard for Princeton., Next Summers caused a stir on campus when he, labeled as “anti-Semitic in their effect if not their, intent” the efforts of a group of students and faculty, to persuade Harvard to divest its holdings in companies, that do business in Israel as a protest against the, , O, , hiL30123_ch17_426-451.indd 427, , treatment of Palestinians. Some of the faculty who, supported the initiative thought Summers’s use of the, term “anti-Semitic” was inflammatory, and feelings, against him began to harden. Then in February 2005, Summers suggested that differences in “intrinsic, aptitude” might explain why fewer women succeed in, science and math. His comments were greeted by a, firestorm of protests and accusations of gender bias., It didn’t help that during Summers’s presidency the, proportion of Harvard tenure offers that went to, women had fallen from 37 percent to 11 percent., Summers apologized for his poor communication skills, and tried to make amends by allocating $50 million to, efforts by Harvard to get more women into the, sciences, but the damage had been done.1, , 11/4/06 9:13:33 PM

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428, , PART 4 // Leading, , ■ Poor communication at, Harvard., , The fall of La wrence Summers from the top leadership position at Har vard illustrates the, important role communication skills pla y in the success or f ailure of a manager . Many at, Harvard thought Summers was doing a great job of shaking up the university’s stodgy culture, and pushing for needed changes, but his constant communication gaf fes detracted from his, efforts. In the words of writer Richard Bradley, author of the book Harvard Rules, Summers, “seems to have a knack for putting things in a w ay that annoys his audience. He is constitutionally incapable of being inoffensive.”2 In fact, the brilliant but brash Summers had a long, history of shooting from the hip. As president of the World Bank in the early 1990s he created, an outcry for suggesting in a memo that toxic waste could be exported to third world countries, (he later called the notion a “whopper” of a mistake)., In this chapter we look closely at the important role played by communication in the work, of managers. Communication is the process b y w hich infor mation is e xchanged and, understood between people. We emphasize the w ord understood because transmitting the, sender’s intended meaning is the essence of good communication. Communication is an, important par t of a manager’ s job . Henr y Mintzber g’s research on managerial w ork, (discussed in Chapter 1) suggests that managers spend 80 percent of e very working day, communicating with others—in f ace-to-face settings, on the telephone, via e-mail, in, speeches, or via written memos and reports.3, Managers influence others through communication. They use communication to, , communication, The process by which, information is exchanged, and understood between, people., , • Transmit information about their goals, strategies, expectations, management philosophy,, , and values., • Build commitment among subordinates to their programs and policies, convince allies in, their network to support them, persuade their bosses that they are performing well, and, influence stakeholders., • Achieve coordination between different units within an organization, such as R&D,, marketing, and production., • Help shape the image of themselves that they present to the world (something Larry, Summers did not do well)., , As Lawrence Summers amply illustrated, effective communication is a major challenge for, managers. To be good communicators, they must use the right media. They must decide whether, a face-to-face meeting, e-mail, a video broadcast, or some other medium is appropriate for transmitting a message. They must craft their message carefully, paying close attention to the information content. They must decide what to communicate and what to keep private. They must deliver, their message in a way that will have maximum effect, selecting language to convey the correct, information and elicit the desired response. Moreo ver, managers must also use the infor mation, communicated to them by others both inside and outside the or ganization. They must be able to, separate the infor mation content of a message from noise, and the y must be ab le to accurately, process the information they are receiving, discern its true meaning, and employ it rationally., We start our discussion of management communication by reviewing a simple but powerful model of the communication process. Ne xt we discuss dif ferent media, or channels,, through which information can be communicated, and we consider how to match channels to, messages. This is followed by a review of communication within organizations. We move on, to discuss communication bar riers and breakdowns, including information overload and perceptual biases that lead listeners to misinterpret messages. We close the Chapter with a discussion of what managers can do to improve communication., , // The Communication Process, The communication model presented in Figure 17.1 illustrates the standard w ay researchers, think about the communication process.4 According to this model, communication flows through, channels between the sender and recei ver. The sender for ms a message and encodes it into, words, gestures, v oice intonation, and other symbols or signs. Ne xt the sender transmits the, encoded message to the intended receiver through one or more communication channels (media)., , hiL30123_ch17_426-451.indd 428, , 11/4/06 3:43:37 PM

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Communication \\ CHAPTER 17, , 429, , F I G U R E 1 7 .1, Sender, , Form, message, , Transmit, message, Encode, message, , Receiver, Receive, encoded, message, , Decode, message, , Encode, feedback, , Form, feedback, , A Model of the, Communication Process, , Noise, , Decode, feedback, , Receive, encoded, feedback, Transmit, feedback, , The receiver senses the incoming message and decodes it into something meaningful. Ideally the, decoded meaning is what the sender intended (although this does not always occur)., In most situations the sender looks for e vidence that the other person recei ved and, understood the transmitted message. This feedback may be a formal acknowledgment, such as, “Yes, I know what you mean,” or indirect e vidence from the recei ver’s subsequent actions., Notice that feedback repeats the communication process. Intended feedback is encoded, transmitted from the receiver to the sender of the original message, received, and decoded., This model recognizes that the communication of meaning from one person to another can, be and often is altered by noise—the psychological, social, and structural barriers that distort, and obscure the sender’ s intended message. If an y par t of the communication process is, distorted or brok en, the sender and recei ver will not ha ve a common understanding of the, message. The results of noise can be serious. DeborahTannen, a linguist who studies miscommunication between senders and receivers, tells the story of Judy Scott, who was applying for, a job as office manager at the headquarters of an ice cream distributor, a position she was well, qualified for.5 Although her last job title w as “administrative assistant,” she actually ran the, entire office and did it w ell. However, at the inter view she never had the chance to e xplain, this. The interviewer did all the talking; she left feeling fr ustrated and f ailed to get the job ., Scott ran into a common str uctural bar rier that distor ted the message she w as tr ying to, transmit: The intended recei ver, the inter viewer, did not listen. Lar ry Summers might also, have suffered the consequences of noise. When meeting f ace-to-face with Cor nell West, he, probably did not intend to denig rate the scholarship and teaching of one of the most f amous, African American academics, but Cornell West perceived the message that way. The noise that, led to miscommunication ma y have been created in par t by Summers’s failure to cor rectly, frame the message—and in part by West’s unfavorable perception of Summers going into the, interview and his psychological predisposition to interpret messages from the brash and blunt, economist in a negative light., , noise, The psychological, social,, and structural barriers, that distort and obscure a, sender’s intended, message., , // Communication Channels, A critical part of the communication model is the channel or medium through which information is transmitted. There are tw o main types of channels: v erbal and non verbal. Verbal, communication includes an y oral or written means of transmitting meaning through w ords,, , hiL30123_ch17_426-451.indd 429, , 11/4/06 9:27:37 PM

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430, , PART 4 // Leading, , including face-to-face meetings, telephone conversations, written memos, and e-mail messages., Nonverbal communication is an y part of communication that does not use w ords. Here w e, review verbal and nonverbal communication channels and discuss the best channel to use., , // VERBAL COMMUNICATION, media richness, The volume and variety of, information that a sender, and receiver can transmit, during a specific time., , flaming, The act of sending an, emotionally charged, message to others., , hiL30123_ch17_426-451.indd 430, , Face-to-face communication is one of the richest media channels for exchanging information., Media richness refers to the data-carrying capacity of a c hannel—to the v olume and, variety of information a sender and receiver can transmit during a specific time.6 Face-to-face, communication is a media-rich channel because oral communication is suppor ted by important nonverbal cues such as v oice intonation, f acial expressions (raised e yebrows, smiles,, frowns), the use of silence, posture, and the lik e. Furthermore, face-to-face interaction gives, the sender immediate feedback from the receiver and the opportunity to adjust the emotional, tone of the message and tailor content accordingly., Telephone conversations are a step down in media richness. Although many nonverbal, cues are missing from telephone con versations, such as f acial expressions and posture,, voice intonation can still car ry an enor mous amount of infor mation. An emerging communication channel, videoconferencing over the Internet, may offer an improvement over, the telephone by allowing communicators to obser ve some nonverbal cues, such as f acial, expressions. This technology, however, is still not widely used, although that may change, in the future., Electronic mail (e-mail) is no w widely used to e xchange information that at one time, was transmitted o ver the telephone. E-mail has re volutionized how we communicate in, organizational settings. It has become the medium of choice in most w orkplaces because, messages are quickly formed, edited, and stored. Infor mation can be appended and transmitted to many people easily. E-mail has become the prefer red medium for coordinating, work (such as c onfirming a coworker’s production schedule or ar ranging a meeting) and, for sending well-defined information for decision making. It often increases the volume of, communication and signif icantly alters the flo w of that infor mation within g roups and, throughout the organization.7 Most notab ly, it reduces some f ace-to-face and telephone, communication but increases communication between people at different levels in an organization hierarchy. Some social and organizational status differences still exist with e-mail,, but they are less apparent than in f ace-to-face communication. E-mail also reduces man y, unconscious perceptual biases because it hides our age, race, w eight, and other features, that are observable in face-to-face meetings and that unfortunately introduce noise into the, communication process., E-mail is not as media-rich as f ace-to-face meetings and telephone conversations. E-mail, lacks visual and verbal cues, so there is a greater chance of misinterpreting a message. Another, problem with e-mail is that it seems to reduce our politeness and respect for others, w hich is, mostly evident through the increased frequency of flaming—the act of sending anemotionally, charged message to others. There are two explanations for this lack of diplomacy. First, people, can quickly write and post e-mail messages before their emotions subside, w hereas cooler, thoughts might prevail before traditional memos or letters are sent. Second , e-mail is an impersonal medium, allowing employees to write things the y would never say in f ace-to-face, conversation. Fortunately, research has found that politeness and respect increase as people, get to kno w each other and w hen companies estab lish explicit nor ms and r ules governing, e-mail communication.8, Another problem with e-mail is that it is an inef ficient medium for communicating in, ambiguous, complex, and novel situations. The communicating parties lack mutual mental, models, so the y need to transmit man y messages to share enough infor mation. Two-way, face-to-face communication is a much more ef fective medium under these circumstances,, but many employees are reluctant to break out of the e-mail habit. A f inal problem with, e-mail is that it contributes to information overload (which we discuss later in this chapter)., Hundreds of messages can o verwhelm e-mail users each w eek, many of which are either, unnecessary or ir relevant to the receivers. Using e-mails, somebody can easil y create and, , 11/4/06 3:43:38 PM

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Communication \\ CHAPTER 17, , copy a message to thousands of people through g roup mailbox systems, which exacerbates, information overload., Instant messaging (IM) is another for m of computer -mediated infor mation exchange, that has gained popularity in some or ganizations. In some ways IM is more efficient than, e-mail because messages are brief (usuall y just a sentence or tw o with acron yms and, sound-alike letters for words), appear on the receiver’s screen as soon as they are sent, and, allow real-time feedback; and several people can engage simultaneously in an IM conversation. Another advantage is that emplo yees soon de velop the capability of car rying on, several IM conversations at the same time. “No matter how good you are on the phone, the, best you can do is car ry on two conversations at once,” says one New York City brok er., “With IM, I can have six going at once. . . . That allows me to get my job done and ser ve, clients better.”9 Like e-mail, however, IM lacks the media richness of f ace-to-face or telephone conversations., Lower still in media richness are written letters, memos, and repor ts. Such media convey, only the cues that are written on paper (the y are now often appended to e-mail, but the y lack, the immediacy of direct e-mail communications). The lack of richness of this media can be an, advantage in some situations. Carefull y crafted written statements might clarify a message, while helping the sender a void the noise associated with perceptual biases, inappropriate, nonverbal cues, and the like., Web logs (blogs), which are in ef fect online diaries, ha ve started to emerge as a no vel, way by which executives can communicate with man y employees using the written w ord., Executives at Google, for example, regularly post information of value to other employees, and customers on the “official” Google blog site (which can be found at http://googleblog., blogspot.com). In media richness blogs are similar to written letters, repor ts, and memos., The big difference is that whereas executives normally have specific targets for written letters and memos, b logs are open to all to visit, and people elect to be recei vers by visiting, the Web site., , 431, , nonverbal, communication, Messages sent through, human actions and, behavior rather than, words., , // NONVERBAL COMMUNICATION, Nonverbal communication refers to messages sent through human actions and, behaviors rather than w ords.10 As noted pre viously, non verbal communication, includes facial gestures, v oice intonation, posture, ph ysical distance, and silence., Nonverbal communication occurs most in f ace-to-face situations, although v oice, intonation is detectable over the telephone. In face-to-face communication, research, indicates that nonverbal cues have a greater impact on message inter pretation than, actual spoken words.11 For example, how would you feel if during a meeting with, your boss he kept gazing out the window? How would you feel if he looked directly, at you the entire time with an interested expression on his face? The words might be, the same, but the nonverbal cues would result in a very different perception on your, part of ho w successful the meeting w as. Rather lik e a parallel con versation,, nonverbal cues signal subtle infor mation to both par ties that colors the w ords, communicated, placing them in a richer context.12, Nonverbal communication differs from verbal communication in a number of, ways. First, it is less r ule-bound than verbal communication. We receive a lot of, formal training in ho w to understand spok en words but little in understanding, nonverbal signals. On the f ace of it, this ma y mean that non verbal cues are, generally more ambiguous and susceptib le to misinter pretation. However, many, facial e xpressions (such as smiling or raising e yebrows) are hardwired and, universal, thereby providing the onl y reliable means of communicating across, cultures.13 In addition, many other nonverbal cues are common to a culture—so if, you are from that culture, y ou are socialized into understanding them at an, early age., Another difference between verbal and non verbal communication is that the, former is typically conscious, whereas most nonverbal communication is automatic, , hiL30123_ch17_426-451.indd 431, , Read My Body Language,, Maggot! If you think the officer, in this picture is aggressively, correcting the enlisted man, you, are right. His body posture is, enough to illustrate his strong, disapproval., © Royalty-Free/Corbis, , 11/4/06 3:43:38 PM

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432, , emotional contagion, The automatic process of, “catching” or sharing, another person’s emotions, by mimicking that person’s, facial expressions and, other nonverbal behavior., , PART 4 // Leading, , and unconscious. We normally plan the w ords we say or write, but w e cannot plan e very, blink, smile, or other gesture during a conversation. Often we involuntarily send out strong, nonverbal cues, such as b y blushing at an embar rassing moment; these can influence the, perception that receivers might have of any message we are trying to convey., One of the most f ascinating effects of emotions on non verbal communication is the, phenomenon called emotional contagion, which is the automatic process of “catching”, or sharing another person’ s emotions b y mimicking that person’ s f acial expressions and, other nonverbal behavior. Consider w hat happens w hen you see a co worker accidentally, bang his or her head against a filing cabinet. You probably wince and put your hand on your, own head as if y ou had hit the cabinet. Similarl y, while listening to someone describe a, positive event, you tend to smile and e xhibit other emotional displays of happiness. While, some of our nonverbal communication is planned, emotional contagion represents unconscious behavior—we automatically mimic and synchronize our non verbal behaviors with, those of other people.14, Emotional contagion ser ves three pur poses. First, mimicr y provides continuous feedback, communicating that w e understand and empathize with the sender . To consider the, significance of this, imagine employees remaining expressionless after watching a coworker, bang his or her head! The lack of parallel beha vior conveys a lack of understanding or, caring. Second, mimicking the non verbal behavior of other people seems to be a w ay of, receiving emotional meaning from those people. If a co worker is angry with a client, your, tendency to frown and show anger while listening helps you share that emotion more fully., In other w ords, we receive meaning b y e xpressing the sender’s emotions as w ell as b y, listening to the sender’s words. The third function of emotional contagion is to fulf ill the, drive to bond with our coworkers. Through nonverbal expressions of emotional contagion,, we see others share the emotions w e feel. This can strengthen team cohesi veness b y, providing evidence of member similarity.15, , // SELECTING THE BEST, COMMUNICATION CHANNEL, Each communication channel has adv antages and disadv antages. The best channel to use, depends on the situation. We have already described how the media richness of different channels varies, with face-to-face communication having the greatest media richness and written, reports the least. Media richness is actually determined by three factors:, 1. Rich media simultaneously use multiple communication methods. For instance,, face-to-face communication scores high on media richness because it includes both, verbal and nonverbal information exchange, whereas written reports rely on just verbal, information., 2. Rich media such as face-to-face communication allow immediate feedback from, receiver to sender, whereas feedback in lean media, such as written reports, is delayed or, nonexistent., 3. Rich media let the sender customize the message to the receiver. Most face-to-face, conversations are developed specifically for one or a few people (speeches being an, exception to this rule). Financial reports, in contrast, have low media richness because, one size fits all—everyone gets the same information., F, igure 17.2 shows that rich media are better than lean media when the communication situation is nonroutine or ambiguous. In nonroutine situations (such as an une xpected and unusual emergency) the sender and recei ver have little common e xperience, so the y need to, transmit a large volume of infor mation and receive immediate feedback. Ambiguous situations also require rich media because the parties must share large amounts of information with, immediate feedback to resolve multiple and conflicting inter pretations of their obser vations, and experiences. In contrast, lean media w ork well in routine situations because the sender, and receiver have common expectations through shared mental models.16, , hiL30123_ch17_426-451.indd 432, , 11/4/06 3:43:39 PM

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Communication \\ CHAPTER 17, , Rich, medium, , Overloaded zone, (medium provides too much, data-carrying capacity), , 433, , Face-to-face, Vid, deo, conference, Tele, ephone, , In, nstant, messsagin, ng, , Richness of the, communication, medium, , E-mail, Web-lo, ogs, Newsle, etters, , Oversimplified zone, (medium provides too little, data-carrying capacity), , Fin, nancia, al, state, ement, Lean, medium, Routine/, clear, , FIGURE 17.2, , Communication situation, , Nonroutine/, ambiguous, , Matching Media to the Situation, , Source: Based on R. Lengel, and R. Daft, “The Selection of Communication Media as an Executive Skill,”, Academy of Management Executive, 2(3), 1988, p. 226., , What happens when we choose the wrong level of media richness for the situation? When, the situation is routine or clear, using a rich medium—such as holding a special f ace-to-face, meeting—would seem like a waste of time. On the other hand, if a unique or ambiguous issue, is handled through a written repor t or some other lean medium, then issues tak e longer to, resolve and misunderstandings are more likely to occur., For example, consider an emer gency situation, such as w hat occurred in February 2006, when Vice President Dick Cheney, while hunting in Texas, accidentally shot one of his hunting companions, Harry Whittington (Whittington spent several days in the hospital). Cheney, and his staff kept the incident secret for 24 hours. When information about the incident was, released, it was through a statement by the owner of the ranch where the accident occurred to, a local Texas newspaper (this could be characterized as a lean medium). Within hours the, news was all over the national press. Commentators w ere demanding to kno w why Cheney, was being so secretive and how the accident happened. The news coverage quickly spiraled, out of control, and press repor ts were criticizing Cheney for his secrec y. After four days of, front-page coverage, during which Cheney said nothing, President Bush apparently persuaded, Cheney to go on national television, explain the incident to an interviewer, and accept responsibility, which he did. After that the controversy died down., Cheney and his staf f had f ailed to recognize that the shooting incident w as a nonroutine, and ambiguous incident that required face-to-face communication. A third-party news release,, followed by days of silence, was too simple a media response for the situation. When Cheney, finally engaged in face-to-face communication with a news interviewer he was matching the, medium to the situation; this pushed the incident off the front page.17, A factor to consider in matching media to situations is the communicator’s previous experience with the recei ver. When people share mental models, less infor mation exchange is required to communicate new meaning. People who know each other may have similar mental, , hiL30123_ch17_426-451.indd 433, , ■ Failure to match media to, message: Dick Cheney’s, hunting accident., , 11/4/06 9:13:34 PM

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434, , PART 4 // Leading, , models, so the sender can communicate with fe wer words or, other symbols and doesn’t need to check as closel y that the, message has been understood. When a shared mental model, is lacking, the sender needs to add redundanc y (such as saying the same thing in tw o different ways). This requires the, detailed feedback of rich media to make sure the receiver has, understood the message., Another f actor to bear in mind w, hen choosing, communication media concer ns the f amous statement b y, communication gur u Marshall McLuhan: “The medium is, the message.”18 This means that the channel of communication, has social consequences as impor tant as (or perhaps more, significant than) the content that passes through that medium., McLuhan was referring mainly to the influence of television, and other “new media” on society; but this concept applies, Damage Control Vice President Dick Cheney explains to, equally well to how the symbolic meaning of a communication, Fox News interviewer Brit Hume why he kept quiet for four, medium influences our inter pretation of a message and the, days while controversy swirled over his accidental shooting, relationship between sender and receiver., of a hunting partner. Cheney’s reluctant decision to engage, The medium-as-message principle w as apparent w hen, in face-to-face communication quickly defused a situation, the, consulting, firm KPMG sent layoff notices to hundreds of, that was spiraling out of control., its, British, employees, via e-mail. The public swiftly criticized, © HO/Reuters/Corbis., KPMG—not because of the content of the message but because of the medium through w hich it was transmitted. Ironically KPMG delivered the bad, ■ Failure to match medium to, news by e-mail because most employees had specif ically asked for this method. Yet even the, message at KPMG., KPMG executives who sent the la yoff notices were hesitant. “I w as horrified about telling, staff via e-mail as I knew it would make us look callous,” admitted one executive.19 The point, here is that w e need to be sensiti ve to the symbolic meanings of communication media to, ensure that they amplify rather than distort the meaning of messages., , // Organizational Communication, formal channels, Systems of officially, sanctioned channels within, an organization that are, used regularly to, communicate information., informal channels, Unofficial communication, channels not formally, established by managers., downward, communication, Occurs when information, flows from higher levels, within an organization, hierarchy., , hiL30123_ch17_426-451.indd 434, , So far we have discussed communication in general ter ms. Let us now look more closely at, the nature of communication within an organization. Communication flows through two main, channels in an organization: formal channels and informal channels. Formal channels are, systems of of ficially sanctioned channels within an or ganization that are used re gularly to, communicate information. Formal channels tend to follo w the str ucture of an or ganization,, with information transmitted up and down a management hierarchy and horizontally between, subunits. Informal channels are unofficial channels that have not been formally established, by managers. Infor mal channels typicall y do not follo w the str ucture of an or ganization., Informal channels include communication that flo ws through the personal netw orks of, employees (that is, gossip networks)., , // FORMAL COMMUNICATION CHANNELS, Within the for mal communication channels of an or ganization, information flows in three, directions: downward, upward, and horizontally. Downward communication occurs when, information flows from higher to lo wer levels within an or ganization hierarchy. Downward, communication includes infor mation about the or ganization’s mission, goals, v alues,, strategies, processes, procedures, task responsibilities, and o verall or ganizational perfor mance, along with feedback re garding the perfor mance of lo wer levels within a hierarch y., When considering downward communication, managers have to decide what to communicate,, what media to use, and ho w to minimize noise in the system so that the recei vers get the, intended message. We discuss these issues in more depth later in the Chapter when we look at, barriers to communication. For now note that managers need to be careful not to communicate, too much infor mation downward. To minimize the chance of o verloading subordinates with, , 11/4/06 9:13:35 PM

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Communication \\ CHAPTER 17, , information, they should focus on communicating only what is important. They also need to, match media to their messages., Upward communication occurs w hen infor mation flows from lo wer to higher le vels, within an organization. Upward communication includes routine performance reports; feedback, to higher-level managers about success in implementing strate gies, policies, and procedures;, suggestions for improving operations or strate gies; alerts about unanticipated e vents or problems; and g rievances and complaints. As with do wnward communication, senior executives, have to decide what information they want communicated up to them regularly. They too do not, want to be overloaded with information, so they normally install systems to ensure the re gular, upward communication of selected financial, accounting, operational, and market data. You will, recall from Chapter 9 that many firms now use the balanced scorecards to help decide what information they want communicated upward.20 In addition, managers must mak e sure that systems are in place so emplo yees can make suggestions and aler t senior managers to emer ging, problems, opportunities, and g rievances or complaints. These systems can include emplo yee, suggestion boxes, regular scheduled face-to-face meetings between senior managers and lowerlevel employees, and other procedures for allowing employees to suggest new business ideas., An interesting e xample of a for mal upward communication channel can be found at, Google, the f ast-growing Web search compan y. P art of the management philosoph y at, Google is that employees should spend 10 percent of their work time on “far-out ideas” that, might one day become a business opportunity for Google. Google founders Sergey Brin and, Larry Page hold regular sessions with employees working on projects that come out of this, innovation time. Emplo yees don’t get to present their ideas to Brin and P age, however,, until they have f irst been v etted by Marissa Ma yer, the compan y’s director of consumer, Web products. Anyone can post a proposal. Mayer then meets with employee groups, helping them to develop their ideas, and decides when they are ready to present before Brin and, Page—something they don’t get to do until the pitch has been well developed and there are, hard data to back up the proposals. Then employees get just 20 minutes before Brin and, Page. Ideas that ha ve come out of this process include gmail (Goo gle’s e-mail program),, Google Talk, an initiative to offer free wi-f i connections to the Inter net in San F rancisco,, and Google Earth., Horizontal communication occurs among emplo yees and units that are at the same, hierarchical level in an organization. Horizontal communication is essential to coordinate the, activities of employees and units and to solve any problems that might arise without involving, higher levels of management. F or example, developing a ne w product often requires close, coordination betw een R&D, mark eting, and manuf acturing to ensure that R&D designs, products for which there is adequate demand and that can be manuf actured efficiently. Such, coordination requires rich communication between R&D, manufacturing, and marketing. To, achieve this, firms often establish cross-functional teams, which allow face-to-face communication between personnel from dif ferent depar tments (see Chapter 8 for details). In other, words, the teams become the communication channel. As we saw in Chapter 8 when we, discussed organization structure, other communication channels for achie ving coordination, between different units include regular direct contact between managers from different units,, liaison roles, and full matrix structures., , 435, , upward, communication, Occurs when information, flows from lower to higher, levels within an, organization hierarchy., ■ Formal communication, channels at Google., , horizontal, communication, Occurs among employees, and units that are at the, same hierarchical level in, an organization., personal networks, Relationships between, individuals., , Tell Me Your, Idea Google founders, Larry Page and Sergey Brin, have established a formal, upward communication, channel at Google that, allows employees to pitch, ideas for new businesses, to Page and Brin. To get to, present before Brin and, Page, however, they have, to go through a gatekeeper,, Marissa Mayer, who helps, employees develop tight, presentations., © Courtesy of Google Inc., , // INFORMAL COMMUNICATION CHANNELS, As noted, infor mal channels do not follo w the str ucture of an or ganization, and the y are, often based on personal networks (relationships between individuals). Personal communication networks can be a valuable source of information about what is going on in an, organization and a conduit for the e xchange of ideas. Smar t managers often proacti vely, build a personal network precisely for this reason—it helps them discover important information. For example, in Chapter 9 we discussed how Jim Donald, CEO of Starbucks, drops, into his local Starbucks store e very morning on the w ay to work. The store employees, know him well, and in ef fect Donald has added them to his personal netw ork. As, such they can be a useful source of infor mation about the compan y that Donald, , hiL30123_ch17_426-451.indd 435, , 11/4/06 3:43:40 PM

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436, , grapevine, The spread of, unsanctioned information, (rumor and gossip) through, personal networks., , PART 4 // Leading, , might not get from for mal channels. Howard Schultz, the cur rent chairman and former CEO, of Starbucks, does the same, and it was through one of these contacts that Schultz f irst heard, the idea that Starbucks should sell music—something that is no w a big push at the compan y, (we discussed the incident in Chapter 1)., Personal networks can also function as conduits for r umor and gossip about w hat is, going on in an organization. The grapevine can spread unsanctioned information (rumor, and gossip) rapidly through personal netw orks.21 Grapevines always exist in or ganizations, often becoming the dominant force for transmitting information about what is going, on—particularly in highl y uncer tain situations w hen infor mation has not been released, through formal channels. For example, if a firm is in financial trouble and managers have, indicated that they will take “concrete steps” to cut costs but ha ve not released any information through for mal channels, the r umor mill often generates signif icant gossip about, what managers intend. Gossip, in other w ords, arises to f ill an infor mation vacuum, and, the flow of gossip through the grapevine will be par ticularly high in an ambiguous and, uncertain situation., The interesting thing about g rapevines is how much communication goes through them, and how accurate it often is. One study estimated that as much as 70 percent of all communication in an or ganization flows through the g rapevine; another suggested that as much as, 70–90 percent of all infor mation passed through the g rapevine is at least par tly accurate. 22, Some managers might like to squash the grapevine because some of the information flowing, through it can be inaccurate and because it is outside their control. However, such an approach, is unrealistic. People love to gossip. A better tactic might involve listening to the grapevine for, valuable feedback about w hat employees are thinking and cor recting misperceptions b y, releasing information through formal channels., , // Communication Barriers and Breakdowns (Noise), As we noted earlier in the chapter, communication is often distorted by noise. Despite the best, intentions of sender and recei ver to communicate, se veral barriers can inhibit the ef fective, exchange of information. As author George Bernard Shaw wrote, “The greatest problem with, communication is the illusion that it has been accomplished. ” Pervasive communication, barriers that cause noise are perceptions, f iltering, language, infor mation overload, cultural, differences, and gender differences. The amount of noise in a communication systemincreases, if the communicator does not match the medium to the message. For example, Vice President, Dick Cheney’s decision to use lean media to communicate about his hunting accident injected, noise into the communication system., , // PERCEPTIONS, perception, The process of attending, to, interpreting, and, organizing information., , selective perception, The tendency to notice, and attend to information, that is consistent with our, values, beliefs, and, expectations while, ignoring or screening out, information that is, inconsistent with these., , hiL30123_ch17_426-451.indd 436, , Perception is the process of attending to, inter preting, and organizing information. Perceptions influence what information we notice, how we interpret that information, and how we, organize it. Our perceptions are themselv es shaped by our mental models of ho w the world, works. These models are the product of our psycholo gy and our experiences. They influence, what we attend to, w hat we ignore, ho w we inter pret incoming infor mation, and ho w we, organize it., If we didn’t have mental models to guide our perceptions, w e would drown in the sea of, information that is constantl y bombarding us. But although mental models are generall y, beneficial, their presence can also cause problems. We are all prone toselective perception—, the tendency to notice and attend to information that is consistent with our values, beliefs, and, expectations while ignoring or screening out infor mation that is inconsistent with these. We, already encountered this phenomenon in Chapter 5 when we discussed decision-making biases. There we referred to the prior hypothesis bias, which asserts that decision makers attend, to information that is consistent with strongly held prior beliefs while ignoring or downplaying, disconfirming evidence. The prior hypothesis bias is the result of selective perception. Within, the context of communication, selective perception implies that we attend to only a portion of, , 11/4/06 3:43:43 PM

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Communication \\ CHAPTER 17, , 437, , the infor mation within a communication system—, most notably information that is consistent with our, prior values, beliefs, and expectations., Another prob lem concer ns stereotyping: the, process of assigning traits to people based on their membership in a social category.23 Stereotypes influence how, we inter pret incoming information. W e stereotype, people based on factors such as their age, gender , race,, accent, looks, and the like. Stereotyping can lead to poor, judgments. For example, there is growing evidence that, white males receive better health care from doctors than, black males and that this is reflected in a higherincidence, of untreated hear t disease among b lack males. This, situation occurs because doctors stereotype their patients, based on race, tend to discount the infor mation they receive from black males in the clinic, make inappropriate, assumptions about lifestyles that influence the treatment, Don’t Judge Me on My Looks Attractive people tend to elicit, options given, and pay closer attention to the information, more positive feedback from others., they receive from white males.24, Another example of stereotyping is that based on, (left) © Liquidlibrary/Dynamic Graphics/Jupiter images. (right) © Comstock/, PictureQuest, looks. There is evidence that attractive people command an income premium in the labor mark et of, 5–10 percent over the incomes of a verage-looking people; the incomes of unattracti ve, stereotyping, people are 5–10 percent below average. Called the beauty premium, the higher earnings of, attractive people have been attributed to their ability to elicit more f avorable perceptions, The process of assigning, from others due to their looks, and seem unrelated to their actual abilities. 25 The existence, traits to people based on, of this stereotype implies that w e probably pay more attention to communication from, their membership in a, good-looking people and tend to interpret it favorably. In other words, looks are a perceptual, social category., source of noise in the communication process., A third perceptual problem is the attribution process —decidingwhether an observed, attribution process, event is caused primarily by external or internal factors. Internal factors originate within a, Deciding whether an, person and concern an individual’s ability or motivation. External factors originate from the, observed event is caused, environment and concern things such as availability of resources, the impact of other people,, primarily by external or, and luck. For an e xample of how this process w orks, consider an emplo yee who does not, internal factors., perform well. An internal attribution arises w hen we believe that the poor perfor mance is, due to a lack of ability or motivation. An external attribution would occur if we believed that, the employee’s poor performance was due to a lack of resources., Psychologists have discovered that we tend to attribute the behavior of other people more, to internal than external factors.26 If an employee is late for work, for example, observers are, more likely to conclude that this is because he overslept than to think external factors such as, unusually heavy traffic might have caused him to be late. The tendency to blame people rather, fundamental, than the environment for poor performance is called the fundamental attribution error,, attribution error, and it seems to be a par ticular problem when there is limited infor mation about situational, The tendency to blame, factors affecting people’s performance., people rather than the, The fundamental attribution error implies that senior managers tend to blame people, rather, environment for poor, than e xternal f actors outside their control, for poor perfor mance. In other w ords, the y, performance., misinterpret the infor mation in a communication system and mak e an incor rect attribution., This can and often does lead to the f iring of managers w hen the units for w hich they are, responsible do not perform well. For example, in August 2004 when Hewlett-Packard reported, self-serving bias, earnings below Wall Street’s expectations, CEO Carl y Fiorina responded b y f iring three, The tendency to attribute, senior executives on the spot. F iorina had attributed the compan y’s poor perfor mance to, our favorable outcomes to, these executives, but many observers felt that it had more to do with tough competition from, internal factors and our, rivals Dell and IBM and He wlett-Packard’s own struggles to mer ge the assets of Compaq, failures to external factors., Computer with HP—a merger Fiorina had championed.27, Another attribution er ror is the self-serving bias—the tendency to attribute f avorable ■ Fundamental attribution, outcomes to internal factors and our failures to external factors. Simply put, we take credit error at Hewlett-Packard., , hiL30123_ch17_426-451.indd 437, , 11/10/06 4:46:29 AM

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438, , recency effect, Occurs when the most, recent data dominate, perceptions., , PART 4 // Leading, , for our successes and blame others or the environment for our mistakes. The existence of this, bias has been w ell documented. In one recent e xample a study found that 90 percent of, employees who received lower than e xpected perfor mance ratings b lamed them on their, supervisor, the organization, the appraisal system, or other e xternal causes. Only a handful, blamed themselves for the unexpected results. 28 The self-serving bias can lead managers to, misinterpret infor mation and assume that their ef forts, rather than e xternal causes, are, responsible for improvements in the perfor mance of the or ganization. The converse also, holds: They may attribute poor performance to external factors when their management of, the organization is really at fault., A f inal perceptual bias to consider is the recency effect, which occurs when the most, recent data dominate our perception of others. 29 The recency effect often occurs in perfor mance appraisals, for which supervisors must recall everyone’s performance over the preceding year. The most recent performance information tends to dominate the evaluation because, it is the easiest to recall. People who know this sometimes try to game a performance evaluation system, submitting impor tant infor mation to their super visor that presents them in a, favorable light just before their annual performance evaluation., , // FILTERING, filtering, The tendency to alter, information in some way,, or fail to pass it on at all,, as it moves through a, communication system., , ■, , Filtering at NASA., , A major source of noise in communication systems is filtering, which is the tendency to alter, information in some way, or fail to pass it on at all, as it moves through a communication system. Filtering may involve deleting or delaying negative information, using less harsh language, to present bad e vents in a more f avorable light, or distor ting infor mation in other w ays to, achieve a personal goal.30 Employees and managers may filter communication to create a good, impression of themselves to superiors, to build suppor t for a program or policy they favor, or, to foster opposition to a program or policy with which they disagree. Filtering occurs because, organizations are fundamentally political entities and because (as w e saw in Chapter 15) the, control and manipulation of infor mation is a source of po wer and influence within or ganizations. Filtering tends to be most common w here organizations reward employees who communicate mainly positive information and punish those who convey bad news., An example of f iltering occur red in 2006 w hen NASA scientists accused a 24-y ear-old, political appointee at N ASA, William Deutsch, of censoring repor ts. Deutsch was a public, affairs official; he was able to shape communications issued b y NASA in a way he thought, favorable to his political masters. Deutsch used his position to limit media access to James, Hanson, a prominent NASA scientist who was urging swift action by the U.S. government to, reduce the g reenhouse gas emissions that contribute to global w arming (in Deutsch’s view,, Hanson’s position was contrary to administration policy). In addition Hanson was required to, submit for review any lectures, Internet statements, and requests for interviews from journalists. Unfortunately for Deutsch his f iltering efforts backf ired. Hanson publicly complained, about the censorship; a blizzard of news reports followed; and an embarrassed NASA denied, that it had ever tried to censor government scientists. Deutsch himself resigned from N ASA, when a journalist discovered that he had padded his résumé (another example of filtering) and, did not graduate from Texas A&M University as he had claimed.31, , // LANGUAGE BARRIERS, Language problems can be a huge source of communication noise. Recall from Figure 17.1, that the sender encodes the message and the recei ver decodes it. To make this process work,, both parties need to have the same “codebook” or mutual understanding of what the words or, other symbols being sent mean. Even when both people speak the same language, they might, interpret words and phrases differently. If someone says “Would you like to check the figures, again?” he or she ma y be politely telling you to double-check the f igures or may be merely, asking if you want to do this., Language ambiguity isn’t always dysfunctional noise.32 Corporate leaders sometimes rely on, metaphors and other vague language to describe partially formed or complex ideas. Ambiguity, , hiL30123_ch17_426-451.indd 438, , 11/4/06 3:43:43 PM

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Communication \\ CHAPTER 17, , is also used to avoid conveying or creating undesirable emotions. For example, one recent study, reported that people rely on ambiguous language w hen communicating with people w ho have, different values and beliefs. In these situations ambiguity minimizes the risk of conflict., Along with ambiguity, people who generally speak the same language might not under stand specific jargon within that language. Jargon consists of technical language and acronyms as w ell as reco gnized words with specialized meaning in specif ic organizations or, social g roups. For example, engineers at Microsoft commonl y use the acron ym “Win 36, API” when discussing the design of their products.The term actually means “Windows 36-bit, application protocol interface”—still a somewhat jargon-filled term that refers to “hooks” in, the Windows program that interf ace with softw are applications, allo wing them to r un on, Windows., Some jar gon can impro ve communication ef ficiency w hen both sender and recei ver, understand this specialized language. Ho wever, technical e xperts (including uni versity, professors) sometimes use jargon without realizing that listeners don’ t have the codebook, to translate those special w ords. A recent sur vey found that people react ne gatively to, unnecessary jargon, which is probably contrary to many senders’ intention to look “cool”, by using the latest buzzwords.33, Another language problem that can distort information, creating noise, concerns the phenomenon known as drop-off. Drop-off occurs when the content of a message gets distor ted, as it is passed through a communication system due to the f ailure of people in the system to, accurately decode a message and accuratel y encode it as they pass it on to the ne xt person.34, We already discussed this phenomenon in Chapter 8 when we talked about the accidental, distortions that occur when information is transmitted through dif ferent layers in a management hierarchy. There we likened the process to the children’s game of telephone, in which a, message is passed through a communication chain of children, with each child whispering the, message to the next person in the chain. The message that emerges at the end of the chain is, very different from the one that started out., In a tragic example of the consequences of drop-off, during the Vietnam War a journalist, witnessed U.S. troops burning down a Vietnamese hamlet. Subsequent investigations found, that headquarters staff had ordered the troops not to burn down any hamlets, but the message, had been distorted as it passed through the communication chain so that troops thought that, was what they were supposed to do. The original message from headquar ters to the brigade, was “On no occasion must hamlets be burned down.” The brigade then radioed the battalion, commander and said, “Do not bur n down any hamlets, unless you are absolutely convinced, that the Viet Cong are in them.” The battalion radioed the infantry company at the scene and, said, “If you think there are any Viet Cong in the hamlet, burn it down.” The company commander then ordered his troops to burn the hamlet.35, , 439, , jargon, Technical language and, acronyms as well as, recognized words with, specialized meaning in, specific organizations or, social groups., , drop-off, Distortion in the content, of a message as it passes, through a communication, system., , // INFORMATION OVERLOAD, We live in an infor mation-rich world. Many of us feel continually besieged by information,, and there is good reason for this. One estimate suggests that the amount of information in the, world is cur rently doubling every 72 da ys. The Librar y of Cong ress catalogs 7,000 ne w, items every day. More than 2,000 ne w Web sites go online e very day. At least 2,000 ne w, books are published every day.36 To this we can add the explosion of e-mail communication, within organizations that has occurred over the last decade. Some managers receive as many, as 300 e-mail messages a day.37 If you also include voice mail, mobile phone text messages,, Web site scanning, PDF file downloads, hard copy documents, and other sources of incoming, information, you have a perfect recipe for information overload.38 Information overload, occurs when the volume of information received exceeds a person’s capacity to get through, it. Employees have a cer tain information processing capacity —the amount of infor mation, they can process in a f ixed unit of time. At the same time jobs ha ve a varying information, load—the amount of information to be processed per unit of time.39 As Figure 17.3 illustrates,, information overload occurs w henever the job’s information load e xceeds the indi vidual’s, information processing capacity., , hiL30123_ch17_426-451.indd 439, , information, overload, Occurs when the volume, of information received, exceeds a person’s, capacity to get through it., , 11/4/06 3:43:44 PM

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440, , PART 4 // Leading, , FIGURE 1 7 .3, Information Overload, , Employee's, information, processing, capacity, , Information load, , Episodes of, information, overload, , T, Time, , Information overload creates noise in a communication system because infor mation gets, overlooked or misinterpreted when people can’t process it fast enough. It has also become a, common cause of w orkplace stress. These problems can be minimized b y increasing our, information processing capacity, reducing a job’s information load, or a combination of both., Information processing capacity increases when we learn to read faster, scan documents more, efficiently, and remove distractions that slow information processing speed. Time management, also increases infor mation processing capacity . When infor mation overload is temporar y,, information processing capacity can be increased by working longer hours., , // CULTURAL DIFFERENCES, In a w orld of increasing globalization and cultural di versity, or ganizations f ace ne w, opportunities as well as communication challenges.40 Language is the most obvious crosscultural communication challenge. Words are easily misunderstood in verbal communication if the receiver has a limited vocabulary or the sender’s accent distorts the usual sound, of some words. The issue is further complicated in global organizations, where employees, from non–English-speaking countries often rely on English as the common business language. The problem of ambiguous language is amplif ied when communication is taking, place across cultures. For example, a French executive might call an event a “catastrophe”, as a casual exaggeration, whereas someone in Ger many usually interprets this word literally as an earth-shaking event.41, Mastering the same language impro ves one dimension of cross-cultural communication,, but problems may still occur w hen interpreting voice intonation. Middle Easter ners tend to, speak loudly to show sincerity and interest in the discussion, w hereas Japanese people tend, to speak softl y to communicate politeness or humility . These dif ferent cultural nor ms, regarding vocal volume may cause one person to misinterpret the other., Cultural differences in nonverbal communication can also lead to noise when people from, different cultures tr y to communicate with each other . Nonverbal communication is more, important in some cultures than in others. For example, people in Japan interpret much of a, message’s meaning from non verbal cues. To avoid offending or embar rassing the receiver, , hiL30123_ch17_426-451.indd 440, , 11/4/06 3:43:44 PM

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Communication \\ CHAPTER 17, , 441, , (particularly outsiders), Japanese people will often say what the other person wants, to hear (called tatemae) but send subtle nonverbal cues indicating the sender’s true, feelings (called honne). A Japanese colleague might politely reject your business, proposal by saying “I will think about that” w hile sending nonverbal signals that, he or she is not interested. “In Japan, the y have seven ways to say no; they never, want to of fend,” advises Rick Da vidson, global CIO at Manpo wer, Inc. “Sometimes they nod their head, and you think you have an ag reement, but they’re just, saying, ‘I hear you.’”42, Many unconscious or involuntary nonverbal cues (such as smiling) have the same, meaning around the w orld, but deliberate gestures often ha ve different interpretations, and this can lead to misunderstanding. For example, most of us shake our head, from side to side to say “no,” but a variation of head shaking means “I understand”, to many people in India. F ilipinos raise their eyebrows to give an affirmative answer, yet Arabs inter pret this expression (along with clicking one’ s tongue) as a, negative response. Most Westerners are taught to maintain e ye contact with the, speaker to show interest and respect, yet Australian Aborigines (and people in some, other cultures) learn at an early age to show respect by looking down when an older, or more senior person is talking to them.43, Even the common handshak e communicates dif ferent meaning across cultures. Westerners appreciate a f irm handshake as a sign of strength and w armth, Reciprocal Bowing! In Japan it, in a friendship or business relationship. In contrast, many Asians and Middle, is customary to bow when you, Easterners favor a loose g rip and regard a f irm clench as agg ressive. Germans, meet someone. It is a sign of, prefer one good handshake stroke, whereas anything less than five or six strokes, respect., may symbolize a lack of tr ust in Spain. If this isn’ t confusing enough, people, © Ryan McVay/Getty Images, from some cultures vie w any touching in pub lic—including handshakes—as a, sign of rudeness., Communication also includes silence, but its use and meaning varies from one, culture to another.44 A recent study estimated that silence and pauses represented 30 percent, of conversation time between Japanese doctors and patients, compared to only 8 percent of, the time betw een American doctors and patients. Why is there more silence in Japanese, conversations? In Japan silence symbolizes respect and indicates that the listener is thoughtfully contemplating what has just been said. 45 Empathy is also important in Japan, and this, shared understanding is demonstrated without using words. In contrast, most people in Australia, India, and man y other cultures vie w silence as a lack of communication and often, interpret long breaks as a sign of disagreement., Conversational overlaps also send different messages in different cultures. Japanese people, usually stop talking when they are interrupted, whereas talking over another person’s speech is, more common in Brazil and some other countries.This difference in communication behavior, is due to interpretations. Talking while someone is speaking to you is considered quite rude in, Japan, whereas Brazilians are more likely to interpret this as a person’s interest and involvement, in the conversation., , // GENDER DIFFERENCES, After reading popular books about how men and women communicate, such as the best- selling, Men Are from Mars and Women Are from Venus, you might come to the conclusion that the y, are completely different life forms.46 In reality men and women have similar communication, practices, but subtle distinctions can occasionally inject noise into communication systems, and lead to misunderstanding and conflict. One distinction is that men are more lik ely than, women to view conversations as negotiations of relative status and power. They assert their, power by directly giving advice to others (“You should do the following”) and using combative, language. There is also e vidence that men dominate the talking time in con versations with, women, as well as interrupting more and adjusting their speaking styles less than women.47, Men also engage in more “report talk,” in which the primary function of the conversation, is impersonal and ef ficient information exchange. Women also use repor t talk, par ticularly, , hiL30123_ch17_426-451.indd 441, , 11/4/06 3:43:44 PM

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442, , PART 4 // Leading, , when conversing with men; but con versations among w omen have a higher incidence of, relationship building through “rapport talk.” Rather than asserting status, women use indirect, requests such as “Ha ve you considered . . . ?” Similarl y, women apologize more often and, seek advice from others more quickl y than men. F inally, research indicates that w omen are, more sensitive than men to nonverbal cues in face-to-face meetings.48, Men and women usually understand each other, but these subtle differences are occasional, irritants. For instance, female scientists ha ve complained that adversarial interaction among, male scientists makes it difficult for women to participate in meaningful dialogue.49 Another, irritant occurs w hen w omen seek empath y but recei ve male dominance in response., Specifically, women sometimes discuss their personal e xperiences and problems to develop, closeness with the receiver. However, when men hear problems, they quickly suggest solutions, because this asserts their control over the situation. As well as frustrating a woman’s need for, common understanding, the advice actuall y says, “You and I are dif ferent; y ou have the, problem and I ha ve the ans wer.” Meanw hile men become fr ustrated because the y can’t, understand why women don’t appreciate their advice., , // Improving Communication, Now that we understand some sources of noise that lead to distortions and misinterpretations, in communication it is time to look at w hat managers can do to improve communication and, limit noise. Communication can be improved (and noise reduced) if managers match media to, messages; take steps to reduce infor mation overload; think about ho w best to get messages, across; engage in acti ve listening w hen decoding incoming messages; proacti vely use the, grapevine to gather and disseminate infor mation; engage in direct communication with, employees; and design workspaces to facilitate communication., , // MATCH MEDIA TO MESSAGES, We have already discussed the impor tance of matching media to messages. As illustrated, in Figure 17.2, lean media work well when the message to be communicated is routine and, clear because the sender and recei ver have common expectations through shared mental, models. Ambiguous and nonroutine situations require rich media because the parties must, share more information with immediate feedback to resolve multiple and conflicting interpretations of their obser vations and experiences. Put differently, ambiguous and nonroutine situations enhance the chances of noise. Limiting this noise requires the use of rich, media., , // REDUCE INFORMATION OVERLOAD, Bill Gates: Strategies for, managing information, overload., ■, , hiL30123_ch17_426-451.indd 442, , Matching media to messages can also help reduce infor mation overload. Rich media are, information-intensive, and heavy use of rich media can e xacerbate information overload., If managers use lean media in routine nonambiguous circumstances, this can reduce the, total volume of information flowing through a communication system and hence cut information overload. Managers should also be careful not to communicate too much tri vial, routine information. They must use their judgment to focus on communicating onl y what, is important., Beyond this, three strate gies can help recei vers manage infor mation overload: buffering,, omitting, and summarizing.50 Consider Bill Gates at Microsoft. Gates receives approximately, 300 e-mail messages daily from Microsoft addresses that are outside a core g roup of people;, these messages are buffered—routed to an assistant who reads each and sends Gates only the, 30 or so messages considered essential reading. Gates also applies the omitting strate gy by, using software rules to redirect e-mails from distribution lists, nonessential sources, and junk, mail (spam). These messages are dumped into preassigned folders to be read later , if ever., Gates likely also relies on the summarizing strate gy by reading executive summaries rather, than entire reports on some issues., , 11/4/06 3:43:45 PM

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Communication \\ CHAPTER 17, , 443, , // GET YOUR MESSAGE ACROSS, As noted early in the chapter, effective communication occurs when the other person receives, and understands the message. To accomplish this dif ficult task, the sender must lear n to, empathize with the receiver, repeat the message, choose an appropriate time for the conversation, and be descriptive rather than evaluative., Empathy refers to a person’s ability to understand and be sensitive to the feelings, thoughts,, and situation of others. Empathizing with the receiver involves putting yourself in the receiver’s, shoes when encoding the message. For instance, be sensitive to words that may be ambiguous, or trigger the wrong emotional response., It is also important to rephrase key points a few times. The saying “Tell them what you’re, going to tell them; tell them; then tell them w hat you’ve told them!” reflects this need for, redundancy. Redundancy is important because it emphasizes and drives home the critical message. Many leaders have learned the importance of repeating their core message, and will do, this repeatedly until it sinks in. In the last chapter, for example, we discussed how the CEO of, Continental Airlines, Gordon Bethune, in his communication constantly repeated the need for, the airline to “mak e reliability a reality .” This was his core message to emplo yees, and he, communicated it relentlessly., Choosing an appropriate time to deliver your message is important because the receiver is, more likely to listen at some times than others. Your message has to compete with other messages and with noise, so it is impor tant to f ind a time w hen the receiver is less lik ely to be, distracted. Finally, it is important to be descriptive—to focus on the problem, not the person,, when you have negative information to convey. People stop listening when information attacks, their self-esteem. Suggest things the recei ver can do to improve, rather than point to him or, her as a problem., , ■ Getting the message across, on Continental Airlines., , // ENGAGE IN ACTIVE LISTENING, There is an old saying: “Nature gave people two ears but only one tongue, which is a gentle, hint that they should listen more than they talk.”51 To follow this advice, we need to recognize, that listening is a process of actively sensing the sender’s signals, evaluating them accurately,, and responding appropriately. These three components of listening—sensing, evaluating, and, responding—reflect the listener’s side of the communication model described at the beginning, of this chapter. Active listeners receive the sender’s signals, decode them as intended, and, provide appropriate and timely feedback to the sender (see Figure 17. 4). Active listeners constantly cycle through sensing, evaluating, and responding during the conversation and engage, in various activities to improve these processes.52 Most people are actually poor listeners who, fail to retain or understand much of what they hear. Poor listeners frequently interrupt others,, jump to conclusions about what people will say before they have said it, hurry speakers along,, don’t pay attention to what people are saying, and often let their perceptual biases shape the, way they process information. In contrast, active listeners are better able to keep their perceptual biases in check., Sensing Sensing is the process of receiving signals from a sender and paying attention, to them. These signals include the words spoken, the nature of the sounds (speed of speech,, tone of voice, and so on), and non verbal cues. Active listeners improve sensing by postponing evaluation, avoiding interruptions, and maintaining interest. Postponing evaluation, is important to avoid becoming a victim of f irst impressions and stereotyping. Active listeners try to stay as open-minded as possible by delaying evaluation of the message until, the speaker has finished. Avoiding interruptions matters because interrupting a speaker in, midstream can have two negative effects. First, it disr upts the speak er’s idea, so the listener does not receive the entire message. Second, interruptions tend to second-guess what, the speaker is tr ying to say, which contributes to the prob lem of evaluating the speaker’s, ideas too earl y. Maintaining interest is impor tant because acti ve listening requires conscious engagement. Too often we close our minds soon after a conversation begins because, , hiL30123_ch17_426-451.indd 443, , active listeners, Listeners who receive a, sender’s signals, decode, them as intended, and, provide appropriate and, timely feedback to the, sender., , sensing, The process of receiving, signals from a sender and, paying attention to them., , 11/4/06 3:43:45 PM

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444, , PART 4 // Leading, , FIG UR E 1 7 .4, Active Listening, , Sensing, • Postpone evaluation, •A, Avoid interruptions, • Maintain interest, , Active, listening, Responding, • Show interest, • Clarify the message, , Evaluating, • Empathize, • Organize information, , the subject is boring. Instead active listeners maintain interest by taking the view—probably, an accurate one—that there is always something of value in a conversation; it’s just a matter, of actively looking for it., Evaluating The e valuating component of listening includes understanding a message’ s, meaning, evaluating the message, and remembering it. To improve their e valuation of the, conversation, active listeners empathize with the speak er and organize information received, during the conversation. Active listeners try to understand and remain sensitive to the speaker’s, feelings, thoughts, and situation. Such empathy is a crucial skill in active listening because it, helps the listener interpret accurately the verbal and nonverbal cues in a conversation from the, other person’s point of vie w. As for or ganizing information, it is w orth noting that human, beings can, on average, process information three times faster than the average rate of speech, (450 words per minute v ersus 125 words per minute), so the y are easil y distracted. Active, listeners use this spare brainpower to organize the information into key points. In f act, it’s a, good idea to imagine that y ou must summarize what people have said after they are f inished, speaking. This can make you a better active listener., Responding Responding, the third component of listening, gi ves feedback to the sender ,, which motivates and directs the speak er’s communication. Active listeners do this b y showing interest and clarifying the message. Active listeners show interest by maintaining sufficient eye contact and sending backchannel signals such as “Oh, reall y!” and “I see” during, appropriate breaks in the conversation. To clarify the message, active listeners provide feedback by rephrasing the speaker’s ideas at appropriate breaks (“So y ou’re saying that . . . ?”)., This further demonstrates interest in the conversation and helps the speaker determine whether, the listener understands the message., , // PROACTIVELY USE THE GRAPEVINE, Earlier in this chapter we discussed how important personal networks are for communicating infor mation within an or ganization. Infor mation can flo w very quickly through the, grapevine. We noted that rather than tr ying to shut down the grapevine, managers should, , hiL30123_ch17_426-451.indd 444, , 11/4/06 3:43:45 PM

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Communication \\ CHAPTER 17, , use it as a source of information about what concerns people. Skilled managers build personal netw orks that gi ve, them information that cannot be obtained through for mal, communication channels. They use these netw orks to tap, into the g rapevine and lear n what is going on, and to see, whether critical information is being filtered out of formal, communication systems., By quick action, such as releasing clarifying information, through formal channels, managers can forestall the spread, of inaccurate r umors through the g rapevine. Moreo ver,, managers can use the g rapevine to test ideas. For example,, they may propose an idea for consideration (often called a, “trial balloon”) and then listen to the grapevine for feedback, about the idea. Politicians do this often—either hinting that, they are thinking about a polic y or releasing infor mation, through an “unnamed source” and then gauging the response, before deciding whether to commit themselves formally to, the policy. Similarly, there is e vidence that managers and, investment bank ers sometimes plant r umors that tw o, companies are eng aged in mer ger talks to see ho w the, market will respond.53, , 445, , Fielding Questions President Bush answers unscripted, questions from the audience about his strategy for winning, the war of terror at a town hall meeting held in early 2006., Through town hall meetings like this leaders can learn about, concerns that might be filtered out through formal, communication channels., © AP Photo/Evan Vucci, , // COMMUNICATE DIRECTLY WITH EMPLOYEES, Skilled managers recognize the importance of nontraditional channels that enable them to communicate directly with employees. They get out of their of fices and interact with employees, lower down in the organization. Nearly 40 years ago people at Hewlett-Packard coined a phrase, for this communication strategy: management by walking around.54 Herb Kelleher, the, founder and longtime CEO of Southw est Airlines, practiced this communication strategy. He, could frequently be found on Southw est flights, talking to flight attendants or the pilots and, helping to hand out refreshments to customers. Similarl y, Wal-Mart founder Sam Walton, would often drop in on his stores unannounced, engaging employees in conversations about the, business. This strategy is an effective way of counteracting filtering, and it can teach the manager things that might not be transmitted upward through formal channels., One recent trend, popularized initially by politicians, has been for executives to directly, communicate with employees via “town hall meetings.” In these meetings large groups of, employees hear about a mer ger or other special ne ws directl y from the k ey decision, makers. An important element of a town hall meeting is that e xecutives open the meeting, to questions and respond on the spot to issues raised. Other e xecutives attend employee, roundtable for ums to hear opinions from a small representation of staf f about v arious, issues. All of these direct communication strategies potentially minimize filtering because, executives listen directl y to emplo yees. They also help e xecutives acquire a deeper, meaning and quicker understanding of internal organizational problems. A third benefit of, direct communication is that emplo yees might ha ve more empath y for decisions made, further up the corporate hierarchy., , // FACILITATE COMMUNICATION THROUGH, WORKSPACE DESIGN, The ability and motivation to communicate is to some extent influenced by the physical space, in which employees work. The location and design of hall ways, offices, cubicles, and communal areas (such as cafeterias and elevators) all shape whom we speak to as well as the frequency of that communication. Pixar Animation Studios designed its campus near, , hiL30123_ch17_426-451.indd 445, , 11/4/06 3:43:46 PM

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446, , PART 4 // Leading, , Open Space, Open Communication This office uses an, open space designed to facilitate interaction and communication between employees, © AP Photo/John Cogill, , ■ Designing, , for, communication at Pixar., , San Francisco, California, to let employees share knowledge, through chance interactions with people on other teams.Pixar, executives call this the “bathroom effect” because team members must leave their isolated pods to fetch their mail, ha ve, lunch, or visit the restroom. “It promotes that chance encounter,” says Pixar creative director John Lasseter. “You run into, people constantly. It worked from the minute we arrived. We, just blossomed here.”55, Another increasingl y popular w orkspace strate gy is to, replace traditional offices with open space ar rangements in, which all employees (including managers) work in the same, open area. Anecdotal evidence suggests that people communicate more often with fewer walls between them. However,, research also suggests that open of fice design potentiall y, increases employee stress due to the loss of pri vacy and personal space. According to an anal ysis of 13,000 emplo yee, surveys in 40 major or ganizations, the most impor tant, function of workspace is to provide a place to concentrate on, work without distraction. The second most important function, is to suppor t informal communication with co workers.56 In, other words, workspace design needs to balance privacy with, opportunities for social interaction., , I N CO N C LU S IO N, , W H Y D O E S IT MATTER?, , To get things done through people, managers need accurate, timely, and reliable, information. In theory that information is provided to them by formal and informal, communication channels within their organizations. However, as we have seen, the, information that flows through these channels is often distorted by noise. As a result,, managers may make decisions based on incorrect, incomplete, or biased information., In addition, to influence others, managers need to be able to communicate in an, effective way; but here too messages might be distorted by the noise in a communication system, and the receivers might not get the intended message., To avoid this, thus improving their ability to make decisions and influence others, through communication, managers need to understand the communication processes, in their organizations. They need to understand how information flows through communication channels and what the barriers are to the accurate transmission of information., Managers need to understand how important it is to improve the efficacy of communication within their organizations. They must know how to separate information from, noise and limit the amount of noise in communication. When communicating, they need, to match media to their messages. They should remember that information may be, filtered by other people in a communication network. They need to know how best, to encode and deliver a message so that it is understood by receivers, and they need to, become active listeners to counteract perceptual biases and accurately decode the, messages sent to them. Moreover, they should develop informal communication, channels to supplement formal communication. They need to understand the value of, the grapevine and use it proactively; and they should interact directly with employees, whenever possible, using such opportunities both to communicate and to gather, information that might not be flowing through formal channels. If they can do all of this,, managers will be far more effective., , hiL30123_ch17_426-451.indd 446, , 11/4/06 3:43:47 PM

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Communication \\ CHAPTER 17, , 447, , MANAGEMENT CHALLENGES, 1., 2., , 3., , 4., , 5., , Explain how noise in a communication system might lead to misallocation of financial, resources in an organization., Stereotypes are pervasive in our society. Can you think of some common stereotypes?, As a manager, what steps might you take to ensure that your perception of a message is, not biased by unconscious stereotyping of the sender?, Information overload is an endemic problem in organizations. Can you think of some, strategies you might adopt, as a receiver, to manage the flow of information and reduce, information overload? What can you do as a sender to make sure your receivers are not, overloaded?, Your company is the target of a hostile takeover bid from another enterprise. The, bidding company is run by a CEO who has a reputation as a tough cost cutter. As a, senior manager you have to explain to your employees what this takeover might mean, for them. What communication media might you want to use? Why?, You are the communications director for a company that has just appointed a new CEO., The CEO was a senior executive at another company. The grapevine in your company is, buzzing with speculation about what she might do. She is known as a charismatic, change agent, and it is known that the board of directors has asked her to increase the, performance of the company, which has lagged that of rivals in recent years. As communications director, what would you advise her to do? Why?, , MANAGEMENT PORTFOLIO, FOR THE ORGANIZATION YOU HAVE CHOSEN TO FOLLOW:, 1., 2., 3., 4., , How is the strategy of the organization communicated? Is this communication, appropriate?Why?, Can you find any evidence of communication problems or breakdowns?, What media does the CEO use to communicate to employees and shareholders? Is the, choice of media appropriate given the content of his or her messages?, What media are used in the company to facilitate horizontal communication? Are these, media sufficient given the strategy of the company?, , CLOSING CASE, , THE CHALLENGER DISASTER, , On January 28, 1986, the space shuttle Challenger took off, from Kennedy Space Center in Florida into clear blue skies., Seventy-three seconds later Challenger exploded, killing all, seven people on board. In the in vestigation that follo wed,, attention soon focused on tw o factors: the O-ring seals on, the rocket boosters and record cold prelaunch temperatures., , The O-ring seals on the rock et boosters were designed to, keep the rock et’s superhot gases from escaping out of the, joints in the boosters and flaming, like a blow torch, onto the, hull of the space shuttle. The investigation revealed that as, early as October 1982, there had been concer n that the, O-rings might fail. In July 1985 a NASA analyst had warned, , 447, hiL30123_ch17_426-451.indd 447, , 11/4/06 3:43:48 PM

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448, , PART 4 // Leading, , in an internal memo that unless the O-rings w ere improved,, “catastrophic” f ailure might follo w. Similar concer ns had, been aired b y engineers at Mor ton Thiokol, w hich, manufactured the rocket boosters. Also in mid-1985 Thiokol’s, top expert on O-ring design had sent a memo to his superiors, warning that the O-rings could f ail and that the result w ould, be “a catastrophe of the highest order—loss of human life. ”, One month later y et another Thiokol engineer ur ged his, company to tell NASA to suspend all shuttle flights until the, seal problem was f ixed. However, while work continued on, redesign of the seals, the shuttle continued to fly., Then there was the weather. On January 27, 1986, a cold, front hit Florida, and forecasts called for temperatures at the, launch site to fall to as low as 18°F. This concerned executives, at Rockwell, the company that made the shuttle. They were, worried that icicles that had for med on the shuttle tower, might break of f and damage the heat tiles on the shuttle., At 8:45 a.m. on the mor ning of January 28, the president of, the Rockw ell unit that made the space shuttle called the, company’s representati ve at the K ennedy Space Center ,, Robert Gla ysher, and told him that Rockw ell “couldn’ t, recommend a launch because of concer ns about ice on the, launch site.” At 9:00 a.m. Glaysher met with NASA officials, and “stated more than once . . . that Rockw ell’s position was, that it couldn’t assure that it was safe to fly.”, According to NASA officers at the meeting, the Rockwell executives did not mak e themselves clear. Arnold Aldrich, the ranking NASA official at this meeting, later stated, to investigators that although Rockwell officials expressed, concerns about possible ice damage to the shuttle, he didn’t, understand them to mean that there w as a serious threat to, safety. Aldrich stated that Rockwell officials “didn’t ask or, insist that we not launch.” Richard Smith, the director of the, Kennedy Space Center , w ho attended par t of the launch, meeting, suppor ted Aldrich’s inter pretation of e vents. He, stated to investigators, “I left that meeting feeling fully that, everybody had signed up for launch.”, Rockwell officials were not the only ones worried about, the cold temperatures. The night before, engineers at Mor ton Thiokol in Utah, alarmed by reports of low temperatures, in Florida, had called their representati ves at the K ennedy, Space Center and ur ged them to re view the launch risks., The engineers w ere worried that in the e xtreme low temperatures the O-rings might f ail. Fueling their worries was, evidence from prior flights that at temperatures as high as, , 53°F the O-rings had sho wn evidence of erosion from hot, gases. At 8:45 p.m. on Januar y 27, se veral Thiokol engineers and managers had a teleconference with N ASA officials. The highest-ranking Thiokol engineer on the call, stated flatl y that unless the temperature reached at least, 53°F, the launch should be called off., The two top NASA officials on the conference call, Mulloy, and Hardy, resisted this. Hardy stated that he w as “appalled”, by the no-fly stance of Thiokol, insisting that there was no established link betw een temperature and O-ring erosion., Mulloy complained that Thiokol had not estab lished minimum launch temperatures for the boosters, and they were now, trying to change the flight criteria the night before a mission., The implication was that this was unreasonable. Mulloy then, apparently said, “My God Thiokol, when do you want me to, launch, next April?” After two hours of debate, the Thiokol, personnel on the call took a break to consider N ASA’s objections. While the engineers in Utah remained opposed to the, launch, the senior Thiokol manager on the call, Jerald Mason,, declared, “We have to make a management decision.” In front, of the sur prised engineers, he then polled onl y the management officials, getting them to join him in gi ving NASA a, recommendation from Thiokol to launch. Thiokol then, brought the NASA officials back onto the call to deli ver the, news that Thiokol no longer opposed the launch., In the subsequent investigation, both Hardy and Mulloy, insisted that the y had e xerted no pressure on Thiokol by, their tough questioning of the engineers. They also stated, that after Thiokol officials announced that the flight should, go ahead, they had no idea that the engineers at Thiokol, had remained unanimously opposed to this position., Ultimately it w as deter mined that the e xtreme cold, temperatures resulted in f ailure of an O-ring on one of the, solid rocket boosters, causing the e xplosion that doomed, Challenger.57, CASE DISCUSSION QUESTIONS, 1.Could the Challenger disaster have been prevented?, 2. What communication prob lems contributed to the, Challenger disaster? In par ticular, w hat bar riers to, communication distor ted the flo w of infor mation, between Rockwell, Thiokol, and NASA?, 3. How might the communication system between Thiokol,, Rockwell, and NASA have been improved?, , ENDNOTES, 1. A. Findler, P. Healy, and K. Zernike, “President of Har vard Resigns, Ending, Stormy 5-Year Tenure,” The New York Times, February 22, 2006, pp. A1, A19., 2. Quoted in R. Winters, “Harvard’s Crimson Face,” Time, January 31, 2005, p. 52., 3.H. Mintzberg, The Nature of Managerial Work (New York: Harper & Row, 1973)., .4 C.E. Shannon and W. Weaver, The Mathematical Theory of Communication, (Urbana: Uni versity of Illinois Press, 1949); K.J . Krone, F .M. Jab lin, and L., , hiL30123_ch17_426-451.indd 448, , L. Putnam, “Communication Theory and Organizational Communication: Multiple, Perspectives,” in Handbook of Organizational Communication: An Interdisciplinary, Perspective, ed. F.M. Jablin et al. (Newbury Park, CA: Sage, 1987), pp. 18–40., 5.D. Tannen, That’s Not What I Meant! (New York: Ballantine, 1987)., 6. R.L. Daft and R.H. Lengel, “Information Richness: A New Approach to Managerial Behavior and Or ganization Design,” Research in Organizational Behavior, , 11/4/06 3:43:48 PM

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Communication \\ CHAPTER 17, , 6 (1984), pp. 191–233; R.H. Lengel and R.L. Daft, “The Selection of Communication Media as an Ex ecutive Skill,” Academy of Mana gement Executive 2, (1988), pp. 225–32., 7. W. Lucas, “Ef fects of E-Mail on the Or ganization,” European Mana gement, Journal 16, no. 1 (February 1998), pp. 18–30; D.A. Owens, M.A. Neale, and R., I. Sutton, “Technologies of Status Management Status Dynamics in E-Mail, Communications,” Research on Mana ging Gr oups and Teams 3 (2000),, pp. 205–30; N. Ducheneaut and L.A. Watts, “In Search of Coherence: A, Review of E-Mail Research, ” Human– Computer Interaction 20, no. 1–2, (2005), pp. 11–48., 8. G. Hertel, S. Geister, and U. Konradt, “Managing Virtual Teams: A Review of, Current Empirical Research,” Human Resource Management Review 15 (2005),, pp. 69–95; H. Lee, “Behavioral Strategies for Dealing with Flaming in an Online, Forum,” The Sociological Quarterly 46, no. 2 (2005), pp. 385–403., 9. D. Robb, “Ready or Not . . . Instant Messaging Has, Arrived as a F inancial, PlanningTool,” Journal of Financial Planning, July 2001, pp. 12–14; J. Black,, “Why Offices Are No w Open Secrets, ” BusinessWeek, September 17, 2003;, A.F. Cameron and J. Webster, “Unintended Consequences of Emerging Communication Technologies: Instant Messaging in the Workplace,” Computers in Human Behavior 21, no. 1 (2005), pp. 85–103., 10.L.Z. Tiedens and A.R. Fragale, “Power Moves: Complementarity in Dominant, and Submissi ve Non verbal Beha vior,” Journal of P ersonality and Social, Psychology 84, no. 3 (2003), pp. 558–68., 11.A. Mehrabian, Silent Messages (Belmont, CA: Wadsworth, 1971)., 12.L.Z. Tiedens and A.R. Fragale, “Power Moves: Complementarity in Dominant and Submissive Nonverbal Behavior,” Journal of Personality and Social, Psychology 84, no. 3 (2003), pp. 558–68., 13. P. Ekman and E. Rosenberg, What the Face Reveals: Basic and Applied Studies of, Spontaneous Expression Using the Facial Action Coding System (Oxford, England:, Oxford University Press, 1997); P . Winkielman and K.C. Berridge, “Unconscious, Emotion,” Current Directions in Psychological Science 13, no. 3 (2004), pp. 120–23., 14.E. Hatfield, J.T. Cacioppo, and R.L. Rapson, Emotional Contagion (Cambridge,, England: Cambridge University Press, 1993); S.G. Barsade, “The Ripple Effect:, Emotional Contagion and Its Influence on Group Beha vior,” Administrative, Science Quarterly 47 (December 2002), pp. 644–75; M. Sonnby-Borgstrom,, P. Jonsson, and O. Svensson, “Emotional Empathy as Related to Mimicr y Reactions at Dif ferent Le vels of Infor mation Processing,” Journal of Non verbal, Behavior27 (Spring 2003), pp. 3–23., 15.J.R. Kelly and S.G. Barsade, “Mood and Emotions in Small Groups and Work, Teams,” Organizational Behavior and Human Decision Processes 86 (September, 2001), pp. 99–130., 16. R.E. Rice, “Task Analyzability, Use of New Media, and Effectiveness: A Multi-Site, Exploration of Media Richness,” Organization Science 3 (1992), pp. 475–500., 17.G. Hitt and J .D. McKinnon, “Cheney Takes Blame for Shooting but Defends, How It Was Disclosed,” The Wall Street Journal, February 16, 2006, p. A4., , 449, , 26. J.M. Feldman “Beyond Attribution Theory: Cognitive Processes in Performance, Appraisal,” Journal of Applied Psychology 66 (1981), pp. 127–48; H.H. Kelley,, “The Process of Causal Attribution,” American Psyc hologist 28 (1973),, pp. 107–28., 27.“Exit Carly,” The Economist, February 10, 2005, p. 1., 28. P.J. Taylor and J.L. Pierce, “Effects of Introducing a P erformance Management, System and Emplo yees’ Subsequent Attitudes and Ef forts,” Public Personnel, Management 28 (Fall 1999), pp. 423–52., 29.D.D. Steiner and J .S. Rain, “Immediate and Dela yed Primac y and Recenc y, Effects in Performance Evaluation,” Journal of Applied Psychology 74 (1989),, pp. 136–42., 30.D. Goleman, R. Boyatzis, and A. McKee, Primal Leader s (Boston: Harvard, Business School Press, 2002), pp. 92–95., 31.“Gagged Prophet,” Houston Chronicle, February 5, 2006, p. 2., 32. L.L. Putnam, N. Phillips, and P. Chapman, “Metaphors of Communication and, Organization,” in Handbook of Organization Studies, ed. S.R. Clegg, C. Hardy,, and W.R. Nord (London: Sage, 1996), pp. 373–408; G. Morgan, Images of, Organization, 2nd ed. (Thousand Oaks, CA: Sage, 1997); M. Rubini and, H. Sigall, “Taking the Edge Off of Disag reement: Linguistic Abstractness and, Self-Presentation to a Hetero geneous Audience,” European J ournal of Social, Psychology 32 (2002), pp. 343–51., 33. K.M. Jackson, “Buzzword Backlash Looks to Purge Jibba-Jabba from CorporateSpeak,” Boston Globe, April 17, 2005, p. G1., 34.R.D. McPhee, “Vertical Communication Chains,” Management Communication, 1, no. 4 (1988), pp. 455–86., 35.J.G. Miller, “Living Systems: The Organization,” Behavioral Science 17 (1972),, pp. 69–80., 36.J. Davidson, “Fighting Information Overload,” Office Solutions 23, no. 1 (2006),, p. 49., 37.D. Stonehouse, “E-mail,” Sun Herald (Sydney), June 26, 2005, p. 26., 38. T. Koski, “Reflections on Infor mation Glut and Other Issues in Kno wledge, Productivity,” Futures 33 (August 2001), pp. 483–95; D.D. Dawley and W.P. Anthony,, “User Perceptions of E-Mail at Work,” Journal of Business and Technical Communication 17, no. 2 (April 2003), pp. 170–200; “E-mail Brings Costs and F atigue,”, Western News (University of Western Ontario–London, Ontario), July 9, 2004., 39.A.G. Schick, L.A. Gordon, and S. Haka, “Infor mation Overload: A Temporal, Approach,” Accounting, Or ganizations & Society 15 (1990), pp. 199–220;, A. Edmunds and A. Morris, “The Problem of Information Overload in Business, Organizations: A Review of the Literature,” International Journal of Information, Management 20 (2000), pp. 17–28., 40.D.C. Thomas and K. Inkson, Cultural Intelligence: People Skills for Global Business (San Francisco: Berrett-Koehler, 2004), Chapter 6; D. Welch, L. Welch, and, R. Piekkari, “Speaking in Tongues,” International Studies of Mana gement &, Organization 35, no. 1 (Spring 2005), pp. 10–27., , (New York:, , 41. D. Woodruff, “Crossing Culture Di vide Early Clears Merger Paths,” The Asian, Wall Street Journal, May 28, 2001, p. 9., , 19.K. Griffiths, “KPMG Sacks 670 Emplo yees b y E-Mail, ” The Independent, (London), November 5, 2002, p. 19; P. Nelson, “Work Practices,” Personnel, Today, November 12, 2002, p. 2., , 42.M. Brandel, “Global CIO,” Computerworld, November 21, 2005, pp. 39–41. Tatamae and hone are discussed in H. Yamada, American and J apanese Business, Discourse: A Comparison of Inter action Styles (Norwood, NJ: Ablex, 1992),, p. 34; R.M. March, Reading the Japanese Mind (Tokyo: Kodansha International,, 1996), Chapter 1., , 18.M. McLuhan, Understanding Media: The Extensions of Man, M-Graw-Hill, 1964)., , 20.R.S. Kaplan and D.P. Norton, The Balanced Scorecard: Translating Strategy into, Action (Boston: Harvard Business School Press, 1996)., 21. N.B. Kurland and L.H. Pelled, “Passing the Word: Toward a Model of Gossip and P ower in the Workplace,” Academy of Mana gement Re view 24, (2000), pp. 428–38. See also G. Michelson and V.S. Mouly, “‘You Didn’t, Hear It from Us But . . .’: Toward an Understanding of Rumor and Gossip in, Organizations,” Australian Journal of Management 27 (2002), pp. 57–67., 22. S.M. Crampton, J.W. Hodge, and J.M. Mishra, “The Information Communication, Network Factors Influencing Grape vine Activity,” Public Personnel Management 27 no. 4 (1998), pp. 569–84. D.B. Simmons, “The Nature of the Organizational Grapevine,” Supervisory Management, November 1985, pp. 39–45., 23.C.N. Macrae and G.V. Bodenhausen, “Social Cognition: Thinking Categorically, about Others,” Annual Review of Psychology 51 (2000), pp. 93–120., 24.A. Balsa and T.G. McGuire, “Prejudice, Clinical Uncertainty, and Stereotyping, as Sources of Health Disparities, ” Journal of Health Economics 22 (Januar y, 2003), pp. 89–100., 25.D. Hamermesh and J .E. Biddle, “Beauty and the Labor Mark et,” American, EconomicReview 84 (1994), pp. 1174–94., , hiL30123_ch17_426-451.indd 449, , 43.P. Harris and R. Moran, Managing Cultural Differences (Houston: Gulf, 1987);, H. Blagg, “A Just Measure of Shame?” British J ournal of Criminolo gy 37, (Autumn 1997), pp. 481–501; R.E. Axtell, Gestures: The Do’s and Taboos of, Body Language around the World, rev. ed. (New York: Wiley, 1998)., 44. S. Ohtaki, T. Ohtaki, and M.D. Fetters, “Doctor–Patient Communication: A Comparison of the USA and Japan, ” Family Practice 20 (June 2003), pp. 276–82;, M. Fujio, “Silence during Intercultural Communication: A Case Study,” Corporate Communications 9, no. 4 (2004), pp. 331–39., 45.D.C. Barnlund, Communication Styles of J apanese and Americans: Images and, Realities(Belmont, CA: Wadsworth, 1988); Yamada, American and Japanese Business Discourse: A Comparison of Interaction Styles, Chapter 2; H. Yamada, Different, Games, Different Rules (New York: Oxford University Press, 1997), pp. 76–79., 46.This stereotypic notion is pre valent throughout J . Gray, Men Are from Mars,, Women Are from Venus (New York: Harper Collins, 1992). For a critique of this, view see J.T. Wood, “A Critical Response to John Gra y’s Mars and Venus Portrayals of Men and Women,” Southern Communication J ournal 67 (W inter, 2002), pp. 201–10., , 11/4/06 3:43:48 PM

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450, , PART 4 // Leading, , 47.D. Tannen, You Just Don’t Understand: Men and Women in Conversation (New, York: Ballantine, 1990); D. Tannen, Talking from 9 to 5 (New York: Avon, 1994);, M. Crawford, Talking Difference: On Gender and Langua ge (Thousand Oaks,, CA: Sage, 1995), pp. 41–44; L.L. Namy, L.C. Nygaard, and D . Sauerteig,, “Gender Differences in Vocal Accommodation: The Role of Perception,” Journal, of Language and Social Psychology 21, no. 4 (December 2002), pp. 422–32., 48. A. Mulac et al., “‘Uh-Huh. What’s That All About?’ Differing Interpretations of, Conversational Backchannels and Questions as Sources of Miscommunication, across Gender Boundaries, ” Communication Research 25 (December 1998),, pp. 641–68; N.M. Sussman and D.H. Tyson, “Sex and Power: Gender Differences, in Computer-Mediated Interactions,” Computers in Human Behavior 16 (2000),, pp. 381–94; D.R. Caruso and P. Salovey, The Emotionally Intelligent Manager, (San Francisco: Jossey-Bass, 2004), p. 23., 49.P. Tripp-Knowles, “A Re view of the Literature on Bar riers Encountered b y, Women in Science Academia,” Resources for Feminist Research 24 (Spring/, Summer 1995), pp. 28–34., 50.D. Kirkpatrick, “Gates and Ozzie: How to Escape E-Mail Hell, ” Fortune, June, 27, 2005, pp. 169–71., 51. Cited in K. Davis and J.W. Newstrom, Human Behavior at Work: Organizational, Behavior, 7th ed. (New York: McGraw-Hill, 1985), p. 438., 52.The three components of listening discussed here are based on se veral recent, studies in the field of marketing, including S.B. Castleberry, C.D. Shepherd, and, R. Ridnour, “Ef fective Inter personal Listening in the P ersonal Selling, , hiL30123_ch17_426-451.indd 450, , Environment: Conceptualization, Measurement, and Nomolo gical Validity,”, Journal of Mar keting Theory and Pr actice 7 (W inter 1999), pp. 30–38; L., B. Comer and T. Drollinger, “Active Empathetic Listening and Selling Success:, A Conceptual Framework,” Journal of Personal Selling & Sales Management 19, (Winter 1999), pp. 15–29; and K. de Ruyter and M.G.M. Wetzels, “The Impact, of Perceived Listening Behavior in Voice-to-Voice Service Encounters,” Journal, of Service Research 2 (February 2000), pp. 276–84., 53.J.V. Bommel, “Rumors,” Journal of Finance 58 (2003), pp. 1499–1520., 54.The original ter m is “management b y wandering around,” but this has been, replaced with “w alking” over the y ears. See W. Ouchi, Theory Z (New York:, Avon Books, 1981), pp. 176–77; T. Peters and R. Waterman, In Search of Excellence (New York: Harper and Row, 1982), p. 122., 55. S.P. Means, “Playing at Pixar,” Salt Lake Tribune (Utah), May 30, 2003, p. D1;, G. Whipp, “Swimming ag ainst the Tide,” Daily News of Los Angeles, May 30,, 2003, p. U6., 56. G. Evans and D. Johnson, “Stress and Open-Of fice Noise,” Journal of Applied, Psychology 85 (2000), pp. 779–83; F. Russo, “My Kingdom for a Door ,” Time, Magazine, October 23, 2000, p. B1., 57.Sources: I. Austen, “Blemishes on NASA’s Shining Image,” Maclean’s, March, 10, 1986, p. 60; E. Magnuson, “A Serious Def iciency,” Time, March 10, 1986,, pp. 38–41; L. McGinley and E.T. Pound, “Rockwell International Aids Tell Panel, They Warned NASA Launch Was Unsafe,” The Wall Street Journal, February 28,, 1986, p. 1., , 11/10/06 4:46:30 AM

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18, LEARNING OBJECTIVES, , MANAGING, INNOVATION, , // PART 5, Change, , AND, , CHANGE, , After Reading This Chapter You Should Be Able to:, 1, , Explain how paradigm shifts occur and discuss their consequences., , 2, , Identify the major sources of organizational inertia., , 3, , Outline what is required to change the strategy and organization of an established enterprise., , 4, , Explain why many organizational change efforts fail, and identify what managers can do to avoid, failure., , 5, , Discuss what managers can do to increase the ability of their organization to produce commercially, successful innovations., , / / / / / / / / / / / / / / /, , Paradigm Shifts, Natural Limits to Technology, Disruptive Technology, New Business Model, Punctuated Equilibrium, Organizational Inertia, Cognitive Schemata, Internal Political Constraints, Organizational Culture, Commitments and Capabilities, External Institutional, Constraints, , Failed Change Efforts and, the Secret of Success, Driving Innovation, New Product Failures, Generating Successful, Innovations, In Conclusion: Why Does It, Matter?, Management Challenges, Management Portfolio, Closing Case: Transforming, Reuters, , Organizational Change, Leadership Committed to, Change, Unfreezing the Organization, Moving the Organization, Refreezing the Organization, , hiL30123_ch18_452-477.indd 452, , 11/4/06 5:23:23 PM

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Going Digital Kodak, is rapidly moving to, digital photographing, in order to stay in, business as its, traditional film, business dies., © Getty Images, , / / / / / / / / / / / / / / / / / / / / /, , F, , or the best part of a century Kodak dominated the, photographic business. The company’s business, model was simple: Sell cameras cheaply and then, make money by selling and processing the film. It, worked flawlessly until the 1990s when digital cameras started to appear on the scene. Suddenly consumers, didn’t need film, and Kodak’s managers found, themselves staring into an abyss. Recognizing the, threat, Kodak started an aggressive program to produce, digital cameras. By 2005 Kodak was the market leader,, selling 22 percent of all digital cameras in the United, States. However, this was little cause for celebration., The digital camera business was fiercely competitive,, and profit margins were low. In the old days Kodak had, , hiL30123_ch18_452-477.indd 453, , sold over half the film processed in the United States, and enjoyed fat margins. That business was now, declining three times faster than top managers had, predicted just two years earlier, contributing to a, $1.4 billion loss in 2005. As its traditional business, imploded, Kodak scrambled to downsize its film, business, closing down factories and laying off, employees. Antonio Perez, the company’s CEO, noted, that the company “was in the worst possible place” as, it tried to shift from traditional photography to digital, imaging. Nevertheless, he predicted that by 2008, things would be improving: 80 percent of revenues, would then come from digital imaging, and the, company would be growing at double-digit rates.1, , 11/4/06 5:23:41 PM

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454, , ■ Paradigm shifts in the, computer industry., , PART 5 // Change, , The wrenching changes that Kodak is going through are the result of a technolo gical paradigm, shift in the photography market. Kodak is not the f irst business to confront a dramatic paradigm, shift. Eventually most businesses find the market moving away from them due to the emergence, of a new technology and the rise of ne w competitors who exploit that technology. In the 1980s, and 1990s IBM faced a similar challenge as its traditional mainframe computer business shrank, in the face of new competition from the companies that were driving the personal computer revolution, including Microsoft, Intel, and Dell. IBM sur vived by reinventing itself as a computer, services company, just as K odak is tr ying to sur vive by reinventing itself as a digital imaging, company. Encyclopedia Britannica is another business that saw a paradigm shift and survived by, remaking itself. For over 200 years Encyclopedia Britannica’s business involved selling books. In, the 1990s this market collapsed as consumers switched to first CDs and then online encyclopedias such as Microsoft’s Encarta and Wikipedia, both new competitors. To survive Encyclopedia, Britannica had to shut down its traditional business and move to an online format., Although companies like IBM and Encyclopedia Britannica were able to survive paradigm, shifts, albeit only after a dif ficult transition, many long-established businesses do not. 2 The, advent of word processing software and personal computers decimated demand for typewriters, and in the late 1990s Smith Corona, one of the w orld’s great typewriter companies, went, bankrupt. Similarly Wang Computers, one of the technology growth companies of the 1970s,, built a significant business selling word processing software for use on midrange computers., It too ultimately went bankrupt when word processing software for PCs destroyed its market., In the steel industr y enterprises such as Nucor Steel ha ve used minimill technolo gy to take, market share from estab lished steelmaking enter prises, many of which, such as Bethlehem, Steel, have now gone bankrupt., In this f inal chapter we look at the nature of paradigm shifts. We discuss how the emergence of a ne w paradigm often re volutionizes competition, putting estab lished incumbent, companies on the defensi ve. We look at the iner tia forces within or ganizations that make it, difficult for incumbent companies to respond to a new paradigm, and we discuss how managers can implement major changes in their strate gy and organization architecture to survive a, paradigm shift. The chapter closes with a discussion of ho w managers can de velop innovations that might initiate a paradigm shift., , // Paradigm Shifts, A paradigm shift occurs when a new technology or business model comes along that dramatically alters the nature of demand and competition. Faced with paradigm shifts, incumbent, enterprises have to adopt new strategies to survive. Paradigm shifts appear to be more lik ely, in an industry when one or more of the following conditions are in place.3 First, the established, , Performance/functionality, of desired attributes, , paradigm shift, Occurs when a new, technology or business, model comes along that, dramatically alters the, nature of demand and, competition., , FIG UR E 1 8 .1, , Natural limit of technology, , Probability of, paradigm shift, increases as, technology, approaches natural, limit., , Diminishing returns, Inflection point, Increasing returns, , Accumulated R&D effort, , Technology S-Curves, , hiL30123_ch18_452-477.indd 454, , 11/4/06 5:23:50 PM

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Managing Innovation and Change \\ CHAPTER 18, , 455, , technology in the industr y is mature and approaching or at its natural limit. Second , a new, disruptive technology has entered the marketplace and is taking root in market niches that are, poorly served by incumbent companies that use the established technology. Third, a company, develops a new business model that is radicall y different from that used by competitors, enabling it to capture more demand and put its rivals on the defensive., , // NATURAL LIMITS TO TECHNOLOGY, Richard Foster has for malized the relationship betw een the perfor mance of a technolo gy and, time in what he calls the technology S-curve (see Figure 18.1).4 This curve shows the relationship over time between cumulative investments in R&D and the perfor mance (or functionality), of a gi ven technology. Early in its e volution, R&D in vestments in a ne w technology tend to, yield rapid impro vements in perfor mance as basic engineering prob lems are solv ed. After a, while diminishing returns to cumulative R&D begin to set in, the rate of improvement in performance slows, and the technology starts to approach its natural limit where further advances are, not possible. For example, one can argue that there was more improvement in the first 50 years, of the commercial aerospace business follo wing the pioneering flight b y the Wright Brothers, than there has been in the second 50 years. The first 50 years took us from Kitty Hawk to the jet, age—from slow propeller-driven planes made of wood, wire, and cloth to the Boeing 707, the, world’s f irst successful commercial jetliner. Today’s commercial jetliners, such as the Boeing, 787, although far more efficient than the 707, are recognizable as direct descendants of the 707., In commercial aerospace we are now in the region of diminishing returns and may be approaching the natural limit to improvements in the technology of jetliners., What does this have to do with paradigm shifts? According to Foster, when a technology ■ Natural limits to, approaches its natural limit, research attention tur ns to possib le alter native technologies. technological progress in, Eventually one of those alter natives might be commercialized and replace the estab lished aerospace., technology. That is, the probability that a paradigm shift will occur increases. Thus sometime, in the next decade or two another paradigm shift might shake the foundations of the computer, industry as a ne w computing technolo gy replaces silicon-based computing. If histor y is a, guide, when this happens many of the incumbents in toda y’s computer industry will go into, decline and new enterprises will rise to dominance., Foster pushes this point further, noting that initially the contenders for the replacement technology are not as effective as the established technology in producing the attributes and features, consumers demand in a product. For example, in the early years, of the 20th centur y, automobiles were just star ting to be produced. They were valued for their ability to move people from, place to place, but so w ere the horse and car t (the established, technology). When automobiles originally appeared, the horse, and cart were still quite a bit better than the automobile at doing, this (see Figure 18.2). The first cars were slow, noisy, and prone, to breakdo wns. Moreover, the y needed a netw ork of pa ved, roads and gas stations to be useful, and that netw ork didn’t exist. Thus for most applications the horse and car t were still the, preferred mode of transportation—and cheaper., However, in the earl y 20th centur y automobile technology, was at the very start of its S-curve and was about to experience, dramatic improvements in perfor mance as major engineering, problems were solved (and those paved roads and gas stations, Highly Evolved Technology After some 3,000 years, were built). In contrast, after 3,000 y ears of continuous imof development the horse and cart are high on their, provement and refinement, the horse and cart were definitely at, technology S-curve, and few improvements are likely. The, the end of their technolo gy S-cur ve. The result w as that the, maturity of this technology made it vulnerable to a, rapidly improving automobile soon replaced the horse and car t, paradigm shift, which occurred when Henry Ford started, as the preferred mode of transportation. At time T1 in Figure 18.2, to mass-produce automobiles., the horse and cart were still superior to the automobile. By time, © Royalty-Free/Corbis, T2 the automobile had surpassed the horse and cart., , hiL30123_ch18_452-477.indd 455, , 11/4/06 5:23:57 PM

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456, , PART 5 // Change, , FIG UR E 1 8 .2, Paradigm shift, , Performance/functionality, of desired attributes, , Established and, Successor Technologies, Established, technology:, horse and, cart, , Successor technology:, automobiles, , Time, T1, , T, T2, , Foster notes that because the successor technology is initially less efficient than the established technology, established companies and their customers often mak e the mistak e of, dismissing it, only to be caught off guard by its rapid performance improvement. A final point, here is that often there is not one potential successor technolo gy but a s warm of potential, successor technologies, only one of which might ultimately rise to the fore (see Figure 18.3)., When this is the case, incumbent enterprises are at a disadvantage. Even if they recognize that, a paradigm shift is imminent, the y may not have the resources to in vest in all the potential, replacement technologies. If they invest in the wrong one—something that is easy to do given, the uncer tainty that sur rounds the entire process—the y may be lock ed out of subsequent, development., , // DISRUPTIVE TECHNOLOGY, disruptive, technology, A new technology that, gets its start away from, the mainstream of a, market and then, as its, functionality improves,, invades the main market., , hiL30123_ch18_452-477.indd 456, , Clayton Christensen has built on Foster’s insights and his own research to develop an influential theory of disruptive technology.5 Christensen uses the ter m disruptive technology to, refer to a new technology that gets its start away from the mainstream of a market and then, as, its functionality improves, invades the main market. Such technologies are disruptive because, they revolutionize industry structure and competition, often causing the decline of established, organizations. They cause a technological paradigm shift., Christensen’s g reatest insight is that estab lished companies are often a ware of the ne w, technology but do not invest in it because they listen to their customers, and their customers, do not want it. Of course this occurs because the ne w technology is early in its development, and thus only at the be ginning of its technolo gy S-curve. Once the perfor mance of the ne w, technology improves, customers want it; but b y this time, it is ne w entrants, as opposed to, established companies, that ha ve accumulated the kno wledge required to bring the ne w, technology into the mass market., Christensen supports his view with several detailed historical case studies. One concerns the, story of how disruptive technology revolutionized the market for excavation equipment. Excavators are used to dig foundations for buildings and trenches to la y pipes for sewers and the like., Before the 1940s the dominant technology used to manipulate the bucket on a mechanical excavator was based on a system of cables and pulleys. These mechanical systems, known as “steam, shovels,” could lift lar ge buckets of ear th; but the e xcavators themselves were large, cumbersome, and expensive. Thus they were rarely used to dig small trenches for house foundations,, irrigation ditches for farmers, and the like. In most cases small trenches were dug by hand., , 11/4/06 5:24:05 PM

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Managing Innovation and Change \\ CHAPTER 18, , 457, , Discontinuity, , Performance/functionality, of desired attributes, , F I G U R E 1 8 .3, Swarm of, successor, technologies, , Swarm of Successor, Technologies, , Time, , In the 1940s a ne w technology appeared: h ydraulics. In theor y hydraulic systems had, advantages over the established cable and pulley systems. Most important, their energy efficiency was higher: For a given bucket size, a smaller engine w ould be required using a, hydraulic system. However, the initial hydraulic systems also had drawbacks. The seals on, hydraulic cylinders leaked under high pressure, effectively limiting the size of buck et that, could be lifted using hydraulics. Notwithstanding this drawback, when hydraulics first appeared, many of the incumbent f irms in the mechanical excavation industry took the technology seriously enough to ask their primary customers whether they would be interested in, products based on hydraulics. Because the primary customers of incumbents needed e xcavators with large buckets to dig the foundations for large buildings and trenches, their reply, was negative. For this customer set, the hydraulic systems of the 1940s were not reliable or, powerful enough. Consequentl y, after consulting with their customers, these estab lished, companies in the industr y made the strate gic decision not to in vest in hydraulics. Instead, they continued to produce e xcavation equipment based on the dominant cab le and pulley, technology., It was left to a number of ne w entrants, including J.I. Case, John Deere, J.C. Bamford,, and Caterpillar, to pioneer hydraulic excavation equipment. Because of the limits on bucket size imposed by the seal problem, these companies initially focused on a poorly served, niche in the market that could use small buckets: residential contractors and farmers. Over, time these new entrants solved the engineering problems associated with weak hydraulic, seals; and as the y did this the y manufactured excavators with larger buckets. Ultimately, they invaded the market niches served by the old-line companies: general contractors that, dug the foundations for lar ge buildings, se wers, and so on. At this point Case, Deere,, Caterpillar, and their kin rose to dominance in the industry, whereas the majority of established companies from the prior era lost mark et share. Of the 30 or so manufacturers of, cable-actuated equipment in the United States in the late 1930s, onl y four survived to the, 1950s., In addition to listening too closel y to their customers, as the manuf acturers of cab leactivated excavators did, Christensen identifies a number of other factors that make it difficult, for established companies to adopt a ne w disruptive technology. He notes that man y established companies have declined to invest in new disruptive technologies because initially these, technologies served such small mark et niches that the y seemed unlik ely to affect company, revenues and prof its. As the new technologies started to improve in functionality and invade, the main mark et, companies’ investment was often hindered b y the f act that e xploiting the, new technology required a new business model different from the established model, which, was thus difficult to implement., , hiL30123_ch18_452-477.indd 457, , ■ Disruptive technology in, the excavation industry., , 11/4/06 5:24:06 PM

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458, , PART 5 // Change, , Victim of Disruption The steam shovel was the dominant, excavation technology until hydraulics came along. Despite, the advantages of hydraulic systems, most steam shovel, companies did not invest in this new technology, and most, ultimately went out of business., © Corbis, , Both of these points can be illustrated by reference to one, more example: the rise of online discount stockbrokers during, the 1990s such as Ameritrade and E*Trade. The enterprises, used a new technology, the Internet, to allow individual investors to trade stocks for a v ery lo w commission fee; at, full-service stockbrokers, such as Merrill Lynch, orders had to, be placed through a stockbrok er w ho ear ned a lar ger, commission for performing the transaction., Christensen also notes that a ne w network of suppliers, and distributors typically grows up around the new entrants., Not only do established companies initially ignore disruptive, technology, but so do their suppliers and distributors. This, creates an oppor tunity for new suppliers and distributors to, enter the mark et to ser ve the ne w entrants. As the ne w entrants g row, so does the associated netw ork. Ultimatel y,, Christensen suggests, the new entrants and their network may, replace not onl y established enter prises, but also the entire, network of suppliers and distributors associated with established companies. Taken to its logical extreme, this view suggests that disruptive technologies may kill entire networks of, enterprises., , // NEW BUSINESS MODEL, business model, The way in which an, enterprise intends to make, money., , ■ New business models:, Google, Dell, and Southwest, Airlines., , hiL30123_ch18_452-477.indd 458, , The term business model refers to the way in which an enterprise intends to make money., For example, the business model of Hewlett-Packard’s printer division has been to sell printers at cost and then make money by selling replacement ink cartridges at a price far in excess, of their cost of production. This is known as the razor and razor blades business model because it was pioneered by Gillette, which would sell razors at cost and then sell replacement, blades for a substantial premium. Another example of a business model is the search-based, paid advertising model popularized b y Google. Google offers free Web-based search products, but it makes money from the advertising associated with each search—par ticularly the, “sponsored links” that pop up whenever anyone enters a search term into Google. Advertisers, pay Google a small fee e very time someone clicks on one of the sponsored links and is directed to the sponsor’s Web site. Advertisers bid against each other to appear high on the list,, with the advertiser featured on the top of the list paying the most., The development of a new business model can radically alter the competitive playing field,, disrupting competition by capturing demand from established enterprises. In other words, the, development of a ne w business model can cause a paradigm shift. Goo gle’s search-based, advertising model, for example, is creating problems for traditional media (from television to, print magazines) as they see advertising dollars diverted toward Google and its competitors, (Yahoo and Microsoft’s MSN). Similarly, Southwest Airlines created a ne w business model, in the airline industry that has seriously disrupted competition. Southwest decided to bypass, hubs and fly “point to point” betw een cities, often from smaller air ports not used b y established airlines. Customers v alue the con venience and speed associated with this business, model. The company also stripped costs dramatically by not offering meals during flights or, assigned seating, depar ture lounges at air ports, or bagg age transfers to other airlines. So, Southwest and its imitators such as Jet Blue and Europe’s Ryan Air have taken progressively, more market share from estab lished airlines, man y of w hich are no w in f inancial trouble., Another example is Dell Computer, which pioneered the business model of direct selling in, the personal computer industr y. Dell’s rivals, which sell through retail channels, ha ve been, struggling to find their equilibrium since Dell took advantage of the superior value proposition, and low costs associated with its business model to grab market leadership., What Google, Southwest Airlines, and Dell have done (and are continuing to do) is reshape, competition in their respecti ve markets by developing novel business models that of fer more, value to consumers, enabling them to take demand from established enterprises. The development, , 11/4/06 5:24:07 PM

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Managing Innovation and Change \\ CHAPTER 18, , 459, , of new business models is often predicated on the emergence of a new technology. Thus Google’s, business model could not have existed until the Web had emerged and until the technology for, searching Web pages had been perfected. Similarly, the emergence of Web browsing made Dell’s, direct selling model par ticularly powerful and disr uptive. Technological innovation, in other, words, offers fertile ground for the de velopment of ne w business models. But ne w business, models can sometimes emerge in the absence of new technology: No new technology underlay, the business model developed by Southwest Airlines., , // PUNCTUATED EQUILIBRIUM, Paradigm shifts are episodic e vents in the histor y of an industr y. Studies have revealed that, most industries are characterized b y long periods of stability in w hich the de velopment of, technology proceeds along a w ell-established trajector y (a gi ven S-cur ve) and estab lished, business models are adopted by all; but these periods of stability are interspersed with periods, of rapid change. Nor mally such change is due to the emer gence of a new technology, a new, business model, or some combination of these that triggers a paradigm shift. This view of the, evolution of an industry, referred to as punctuated equilibrium, holds that long periods of, equilibrium, when an industry’s structure is stable, are punctuated by periods of rapid change, when industry structure is revolutionized by innovation.6, F, igure 18.4 shows what punctuated equilibrium might look lik e for one key dimension of, industry: competitive structure. From time t0 to t1 the competitive structure of the industry is, stable and highly concentrated, with a handful of companies sharing the mark et. At time t ,a, major innovation is pioneered by either an existing company or a new entrant. The new technology lowers barriers to entry into the industr y; new companies enter the mark et using the, new technology; and the industry structure becomes more fragmented and competitive. After, a while incumbent companies that cannot adapt go out of business, as do the new entrants that, cannot gain enough market share to reap economies of scale. By time t2 the industry becomes, consolidated again, but now different f irms dominate the mark et. Thus there is a period of, turbulencebetween t1 and t2, after which the industry settles down into a new equilibrium with, different industry leaders., During a period of rapid change when industry structure is being revolutionized by a technological innovation, value typically migrates to business models championed by new entrants, and based on ne w strategies.7 In the photo graphy industry value has mig rated away from a, , Period of, change, , Stable period, , Stable period, , Industry structure, , Consolidated, , punctuated, equilibrium, A view of industry evolution, asserting that long periods, of equilibrium are, punctuated by periods of, rapid change when industry, structure is revolutionized, by innovation., , Industry, becomes more, consolidated, again, but, different firms, now lead the, market., , Change is triggered, by the emergence, of new technology., New entry results in, a more fragmented, industry., , Fragmented, Time, , t0, , t1, , t2, , F I G U R E 1 8 .4, Punctuated Equilibrium, , hiL30123_ch18_452-477.indd 459, , 11/10/06 4:48:05 AM

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460, , PART 5 // Change, , business model based on the sale of f ilm and film processing services and toward digital imaging. Kodak was the champion of the old business model; He wlett-Packard and Sony have, championed the new model (and now makers of wireless phones, such as Samsung, are getting into the mark et with camera phones). In the stock brok erage industr y value mig rated, away from the full-ser vice broker model championed b y the lik es of Mer rill Lynch to the, online trading model championed by E*Trade. In the book-selling industry value has migrated, away from small neighborhood bookshops to ward lar ge bookstore chains lik e Bar nes &, Noble and online bookstores such as amazon.com, both of w hich reap enormous economies, of scale. As value migrates during these periods of change, man y incumbent enter prises go, into decline or at least go through periods of wrenching change such as the one K odak is experiencing. In the next section we discuss why this is the case., , // Organizational Inertia, organizational, inertia, Internal and external, forces that make it difficult, to change the strategy or, organization architecture, of an enterprise., , We ha ve noted that w hen confronted with paradigm shifts, man y incumbent businesses, decline. This decline is normally due to the inability of an enterprise to change its strategy and, organization architecture as rapidly as the environment is changing due to or ganization inertia.8 By organizational inertia we mean internal and external forces that make it difficult, to change the strate gy or organization architecture of an enter prise. These inertia forces include cognitive schemata, internal political constraints, organizational culture, strategic commitments and capabilities, and external institutional constraints.9, , // COGNITIVE SCHEMATA, In the course of their work managers form cognitive schemata, which are mental models of, the world their enterprise inhabits. These mental models include beliefs about what works and, does not work in their business and about what is important and unimportant. These models are, based on experience. When a management team has worked together for some time, they often, come to share the same worldview—the same cognitive schema—and this can influence their, decision making.10 Although this can lead to quick decisions, management teams with a shared, ■ Cognitive schemata and, cognitive schema tend to ignore e vents, data, and suggestions that f all outside their schema:, inertia at Digital Equipment., They have cognitive blind spots.11 Consequently they may not understand the, threat posed by new technologies and new enterprises.12, Cognitive schemata are usually adopted because they have worked in the, past. Dann y Miller has postulated that senior managers in successful, enterprises often develop powerful cognitive schemata about the right w ay, to do business, and this mak es them par ticularly vulnerable to co gnitive, blind spots when new competitors or new technologies emerge. Miller calls, this the “Icarus paradox.”13 Icarus, a figure in Greek mythology, used a pair, of wings—made for him by his father—to escape from an island w here he, was being held prisoner. He flew so well that he climbed higher and higher,, ever closer to the sun, until the heat of the sun melted the wax that held the, feathers onto his wings and he plunged to his death in the sea. The paradox, The Fall of Icarus A figure from Greek, is that his g reatest asset—his ability to fl y—caused his demise. Miller ar mythology, Icarus flew too close to the sun,, gues that the same parado x applies to man y once-successful enter prises., which melted the wax holding feathers onto, According to Miller, managers at such companies become so dazzled b y, his wings, and he fell to his death. When, their early success that the y believe more of the same type of ef fort is the, confronted with new technology and new, way to future success: They develop powerful cognitive schemata about, competitors, high-flying corporations can, what works. Unfortunately these ideas can be invalidated by the rise of new, suffer the same fate if they adhere too, technologies, but the managers may not recognize this until it is too late., closely to the cognitive schemata (and, One of Miller’s examples is Ken Olson, the brilliant entrepreneur w ho, business models) that made them great., founded Digital Equipment Cor poration (DEC), one of the dominant, Their greatest assets can become their, computer companies of the 1970s and 1980s. The success of DEC w as, greatest weaknesses., based on minicomputers, w hich were smaller than mainframe computers, © The Art Archive/Corbis, but far more powerful than the personal computers of the day. For all of his, cognitive schema, A manager’s mental model, of the world his or her, enterprise inhabits., , hiL30123_ch18_452-477.indd 460, , 11/10/06 4:48:07 AM

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Managing Innovation and Change \\ CHAPTER 18, , 461, , brilliance, Olson and his management team at DEC failed to see the threat posed by the rise of, the personal computer, primarily because it fell outside their co gnitive schema. DEC made, powerful machines that w ere sold to businesses and accessed through ter minals. Olson believed that such machines w ere the w ay of the future. In 1977 Olson w as asked what he, thought of personal computers, w hich were just starting to emerge. He replied, “There is no, reason anyone would want a computer in their home.” Olson didn’t get it! His company missed, the personal computer re volution. Meanwhile, people who did get it, such as Ste ve Jobs at, Apple, Bill Gates at Microsoft, and Michael Dell at Dell Computer , were busy la ying the, foundations for a revolution in the industry., , // INTERNAL POLITICAL CONSTRAINTS, Organizations can be thought of as political systems within which there is an existing distribution of power and influence. 14 As we saw in Chapter 15, the power and influence enjoyed, by different managers is a function of several things, including their position in the hierarchy,, their control o ver valuable resources and infor mation, and their percei ved expertise. For, example, a well-regarded marketing vice president whose sales database gives her access to, important information about customer preferences might enjoy significant power in an organization otherwise dominated b y engineers. Personal attributes are also a source of po wer,, including a manager’s energy, eloquence, empath y with others, and ph ysical endurance., Senator Ed Muskie, one of the most po werful members of the Senate during his da y, was, reputed to be ab le to get things done, and thus accumulate po wer, in par t because of his, enormous physical stamina. When a bill was being debated in committee, he ne ver left the, room, not even to go to the bathroom—proving the old adage that a lar ge bladder can be an, asset in a bureaucracy.15, However power is accumulated, managers who possess it are unlik ely to give it up willingly, and this is the problem. Any change, almost by definition, tends to alter the established, distribution of power and influence within an organization. Those whose power is threatened, by change will naturall y tend to oppose it, often ar guing that the change is inappropriate., Because they have power, this opposition may be considerable. To the extent that they are successful, this constitutes a source of organizational inertia that might slow or stop change., For example, in the 1990s the lar ge Dutch multinational enter prise Philips NV increased, the roles and responsibilities of its global product divisions and decreased those of its foreign, subsidiary companies. The idea was to consolidate po wer in the hands of di visional heads,, letting them reap economies of scale and lo wer costs b y closing down factories in v arious, countries and consolidating production in a fe w efficient plants. This implied that managers, running the foreign subsidiar y companies, w ho had wielded considerab le po wer within, Philips, would see their power and influence decline. As might be expected, the managers of, foreign subsidiary companies did not like this change and resisted it, w hich slowed the pace, of change and put Philips at a competiti ve disadv antage relati ve to ri vals lik e Son y and, Matsushita, both of which had powerful global product divisions., , // ORGANIZATIONAL CULTURE, Another source of organizational inertia is the existing culture of the enter prise as expressed, in norms and value systems (see Chapter 10). Closel y related to co gnitive schemata, value, systems reflect deepl y held beliefs; as such the y can be hard to change. If the for mal and, informal socialization mechanisms within an organization have emphasized a consistent set of, values for a prolonged period, and if hiring, promotion, and incenti ve systems have all reinforced these values, suddenly announcing that those values are no longer appropriate and need, to be changed can produce resistance and dissonance among emplo yees. At Philips, for, example, the culture had long placed a high value on granting autonomy to the managers running foreign subsidiaries. The changes of the 1990s implied a reduction in this autonom y,, which contradicted the established values of the company and was thus resisted., , hiL30123_ch18_452-477.indd 461, , ■ Organizational inertia at, Philips NV., , 11/4/06 5:24:14 PM

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462, , PART 5 // Change, , // COMMITMENTS AND CAPABILITIES, strategic, commitments, A firm’s investments in, tangible and intangible, assets to support a, particular way of doing, business (a particular, business model)., , ■ Strategic commitments in, the auto industry., , A major determinant of the ability of an incumbent firm to respond to new competition is the, nature of that f irm’s prior strategic commitments.16 Strategic commitments are a firm’s, investments in tangib le and intangib le assets to suppor t a par ticular way of doing business, (a particular business model). Tangible assets are buildings, plants, and equipment. Intangible, assets include capabilities (skills and knowledge) that are accumulated over time. Once a firm, has made a strate gic commitment, it will ha ve difficulty responding to ne w competition if, doing so requires a break with this commitment. When established firms have deep commitments to a particular way of doing business and have developed supporting capabilities, they, may be slow to imitate an innovating firm’s strategy or adopt radical new technology. In part, this is because the y are unwilling to w alk away from their e xisting commitments; and their, capabilities may not be w ell suited to the ne w competitive environment, so the y stick with, what they know best even if that is no longer working., The history of the U.S. automobile industry offers an example. From 1945 to 1975 the, industry was dominated by the stable oligopoly of General Motors, Ford, and Chrysler, all, of w hich geared their operations to making lar ge cars, w hich American customers, demanded at the time. When the mark et shifted from lar ge cars to small, fuel-ef ficient, ones during the late 1970s, U.S. companies lacked the assets and capabilities required to, produce these cars. Their prior commitments had built the wrong assets and capabilities, for this new environment. As a result, foreign producers, particularly the Japanese, stepped, into the mark et breach by providing compact, fuel-efficient, high-quality, low-cost cars., The f ailure of U .S. auto manuf acturers to react quickl y to the entr y of Japanese auto, companies gave the latter time to build a strong mark et position and brand loyalty, which, subsequently has proved difficult to attack. Ironically the same thing seems to be occurring, now, with high fuel prices switching demand away from the large SUVs made by Ford and, General Motors and to ward small fuel-ef ficient cars, such as the Toyota Prius, built b y, foreign manufacturers., Another example is IBM. In the 1980s IBM had major investments in the mainframe computer business. When the mark et shifted to ward personal computers, IBM w as stuck with, significant assets specialized to the declining mainframe business: Its manuf acturing facilities, research or ganization, and sales force w ere geared to the production of mainframes., Because these assets and capabilities were not well suited to the emerging personal computer, business, IBM’s difficulties in the earl y 1990s were in a sense ine vitable. Its prior strate gic, commitments locked it into a business that was shrinking. Shedding these assets was bound to, cause hardship for all organization stakeholders., , Source of Inertia IBM’s investments in the mainframe computer business, once a source of strength, became a source of, inertia once the PC revolution gained speed., (left) © Bob Rowan; Progressive Image/Corbis. (right) © Kimberly White/Reuters/Corbis., , hiL30123_ch18_452-477.indd 462, , 11/10/06 4:48:10 AM

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Managing Innovation and Change \\ CHAPTER 18, , 463, , // EXTERNAL INSTITUTIONAL CONSTRAINTS, External constraints imposed b y powerful institutions, such as go vernment agencies or labor, unions, can also act as a source of inertia.17 Unions, for example, might resist job cuts or attempts, to introduce flexible work rules, thereby slowing a f irm’s ability to meet ne w competition. The, ability of established airlines such as United to respond to low-cost competitors such as Jet Blue, and Southwest, for example, has been hindered by strong labor unions that have resisted attempts, to change aspects of their employment contracts and to restr ucture pensions, which has kept the, cost structure of United Airlines high.18 Similarly, government regulations can limit the ability of, an or ganization to change its strate gy and or ganization to meet ne w competition. In some, countries, for example, local content rules specify that a certain percentage of a product sold in a, country must be produced there. This can mak e it dif ficult for a business to counter lo w-cost, competition by moving parts of its production system to countries where costs are lower., , // Organizational Change, As we have just seen, organizations are characterized by considerable inertia forces that impede, organizational adaptation to new competitive realities. According to many scholars, the failure, of organizations to adapt rapidly to new market realities is a major cause of corporate decline.19, This raises the question of what managers can do to implement organizational change quickly, and successfully. Research on organizational change suggests that there are four steps in a successful organizational change process: leadership committed to change, unfreezing the organization, moving the organization toward a new strategic and organizational configuration, and, refreezing the organization in its new configuration (see Figure 18.5).20, , // LEADERSHIP COMMITTED TO CHANGE, Organizations cannot change unless their leaders reco gnize the need for change and are, committed to pushing it through. This is not as easy as it sounds. As we have seen, the shared, , Leadership committed to, change, , Unfreezing the, organization, , Requires:, • Shock therapy, • Compelling case, for change, • Compelling vision, , Requires:, • Outsider or "inside-outsider", • Leading by example, , Moving the, organization, , Requires:, • Decisive action, • Committed, management team, • New strategy, • Asset disposals, • New organization, architecture, • Cultural change effort, • Employee involvement, , Refreezing, the, organization, , Requires:, • Multi-year perspective, • Constant pressure, • Ongoing socialization, • Consistent application, of new organization, architecture, , F I G U R E 1 8 .5, The Process of, Organizational Change, , hiL30123_ch18_452-477.indd 463, , 11/4/06 9:11:07 PM

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464, , ■ Change agents at IBM, 3M,, and Xerox., , PART 5 // Change, , cognitive schemata of a leadership g roup might be a source of iner tia, causing f ailure to, recognize the need for change. In many cases change is reactive instead of proactive because, leaders are unable to recognize quickly enough that change is necessar y and are pushed to, accept reality by declining financial performance., When managers decide to institute radical change, they often turn to an outsider who does, not share their ideas and cultural v alues. When IBM w as in deep troub le during the earl y, 1990s (IBM lost $14 billion between 1990 and 1993) the board of directors appointed an outsider, Lou Gerstner, to the CEO position. Similarly, when the board of 3M decided that it was, time to shake up the compan y’s culture after a decade of mediocre perfor mance, they hired, Jim McNerney from General Electric, the first outsider ever to hold the CEO position at 3M., Alternatively, appointing an “outside–insider” to the leadership role—someone who is a manager in the f irm but does not share the dominant co gnitive schema and cultural values—can, work. Jack Welch, who transformed GE, fits this description, as does Anne Mulcahy, who was, the sur prise pick of the Xero x board to lead that troub led company in 2001. A successful, longtime Xerox executive, Mulcahy had never been considered CEO material. Not onl y was, she a woman in a male-dominated organization, but she was also a salesperson in an engineering culture. F our years later, after guiding Xero x through an impressi ve tur naround, this, “outside–insider” was being heralded as one of the best CEOs in America.21, A leader w ho is committed to or ganizational change not onl y recognizes the need for, change and can communicate this eloquentl y to employees, motivating them to suppor t the, change effort, but must also “walk the talk.” Jack Welch worked as hard as he was asking his, employees to, and he embodied the v alues he w as asking managers at GE to adopt. Anne, Mulcahy logged 100,000 miles visiting employee locations during her first year as, CEO, spreading the gospel of change. When Lee Iacocca became CEO of the, troubled Chr ysler Cor poration in the 1970s, he accepted pa y of onl y $1 a y ear, until Chrysler made money. These leaders showed through personal commitment, that they were serious about change. They led by example., , // UNFREEZING THE ORGANIZATION, , Turnaround Queen When Anne, Mulcahy took over as CEO of Xerox,, the company was a shambles. It was, losing market share to rivals because, it had been slow to move from analog, to digital copiers and from black and, white to color. The company was, bleeding red ink and only a few, quarters from bankruptcy. Four years, later the company was turning a, profit and gaining market share., Courtesy Xerox Corporation, , hiL30123_ch18_452-477.indd 464, , Unfreezing an or ganization involves confronting all emplo yees with the need for, change and getting them to belie ve that change is necessar y. Because organizations, are by nature static, attempts at incremental or g radual change will usuall y be successfully resisted by those within the organization who stand to lose from the change, effort. Thus many experts recommend bold, dramatic action to signal to emplo yees, that change is coming. What is needed, they say, is something akin to shock therapy., Sometimes, as at IBM and Xerox, poor financial performance provides the necessary, shock. In other cases leaders have to create a sense of crisis by warning that unless the, organization changes its ways, decline is inevitable. Jack Welch commented that one, of the biggest prob lems he f aced early on at General Electric w as convincing a, company that was performing reasonably well that it was facing a crisis of competitiveness. Managers have adopted some interesting tactics to push reluctant or ganizations to change. One CEO repor tedly deliberately engineered the largest accounting, loss in the company’s history to startle employees out of their comfort zone. Another, manager commissioned the compan y’s f irst customer satisf action survey, knowing, that the results would be awful, and used those findings to push for change.22, To convince employees of the need for change, leaders may have to draw on, all their communication abilities. They need a compelling message that tells employees why change is necessar y, along with a credib le strategic vision for the, firm; and they must deliver that message and vision in an eloquent manner so that, it resonates among emplo yees. Sometimes bold symbolic action ma y also help, awaken employees to the need for change. F rustrated by a lack of pro gress after, four years of trying to change the culture at General Electric, Jack Welch fired 12, of the top 14 managers in a single day. Welch came to this decision after realizing, that the inner circle of senior managers at GE w as among those most resistant to, , 11/4/06 5:24:24 PM

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Managing Innovation and Change \\ CHAPTER 18, , 465, , change. This action sent an unmistakable signal to other GE managers that Welch was serious, about changing the organization.23, , // MOVING THE ORGANIZATION, Moving an organization entails changing management, strate gy, organization architecture,, and employee behavior. Movement requires action. At Xerox the action w as decisive, as it, needs to be in these situations because slo w action is often successfull y resisted. Anne, Mulcahy quickly assembled her own management team, handpicking people from within and, outside Xerox to work with her on the change effort. These people shared loyalty to Mulcahy, and to what she was trying to achieve (as opposed to the old Xero x). Indeed, building a top, management team that is committed to the change ef fort is recognized as an important first, step in the movement process.24 This helps consolidate power and authority in the key change, agent, the leader., While still recruiting senior managers, Mulcahy moved to change strategy, directing R&D ■ Organizational change at, resources toward accelerating Xerox’s development of digital copiers while simultaneously Xerox., shutting down several of Xerox’s factories and selling others to third-par ty manufacturers., She even closed down the desktop copier division, a business she had created. Asset disposals like this are also characteristic of man y organizational change efforts as the enter prise, reconfigures itself to pursue a different strategy. Layoffs are a tough but necessary aspect of, many such disposals. To remove the uncer tainty and adv erse motivational consequences, associated with not kno wing where layoffs will strik e next, it is suggested that managers, move through any downsizing phase as rapidly as possible and then signal to the remaining, employees when it is completed., Along with changes in strategy, resource allocation, and asset disposals, signif icant reengineering of the organization architecture is a standard part of many change efforts. Often the idea, is to clarify who is responsible for what within an organization and to push down responsibility, and accountability, stripping away unnecessary layers of management. At General Electric Jack, Welch reduced the number of management layers between himself and the lowest-level employees from as many as 11 to as fe w as 4. At the same time he pushed responsibility for strate gic, and operational decision making fur ther down in the or ganization. He also initiated s weeping, changes in GE’s control and incentive systems, boosting incentive pay and linking it to output, targets like division profitability. The message behind these or ganizational changes was clear: ■ Organizational change at, “GE is now a performance-driven culture.” Changes in organization architecture also disturb the British Airways., distribution of power and influence within a firm, breaking the, hold of those who are trying to protect the status quo., At the hear t of man y organizational change ef forts is an, attempt to shift the culture of the enter prise. To some extent, this can be done by rewarding people who manage according, to the ne w values, letting go those w ho do not, and hiring, people who support the new values rather than the failed culture. In addition, leaders often introduce systematic employee, development programs aimed at socializing emplo yees into, the ne w culture. A classic e xample occur red in the 1980s, when British Airways launched a cultural change ef fort. At, the time customers often referred to the initials of the airline,, BA, as standing for “bloody awful.” After deciding that British, Airways was in the customer ser vice business rather than the, transportation business (a strate gic shift), the CEO put the, From Bloody Awful to Bloody Awesome in Five, entire 37,000-strong w orkforce through a tw o-day cultural, Years After large losses, British Airways went through an, change program called “Putting People First.” Almost all the, organizational change effort that transformed the culture of, 1,400 managers went through a five-day version titled “Manthe airline and helped make it into one of the best and most, aging People First.” To drive home the customer service mesprofitable in the world., sage, BA also changed its control and incenti ve systems. In, © Linsey Parnaby/epa /Corbis, the new scheme managers w ere rewarded not onl y for ho w, , hiL30123_ch18_452-477.indd 465, , 11/10/06 4:48:19 AM

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466, , PART 5 // Change, , well they performed, but also for how they behaved—and in, particular whether that behavior was consistent with the new, customer-centric focus of the airline. F ive years later British, Airways had gone from registering massive losses to having, the highest prof it rate in the entire airline industr y and was, winning awards for customer service.25, A critical component of many change efforts is involving employees in the change process, thereby giving them a, sense of ownership. At General Electric Jack Welch created, a process known as “workout” to involve employees in his, attempt to turn GE into a performance-driven culture. Employees would meet for two to three days and come up with, ideas for improving productivity in their work units. At the, end they would make presentations to their managers, who, Transformational Tool Jack Welch used management, had to approve or reject the suggestions on the spot. To put, development classes held at GE’s Crontonville Management, pressure on the managers, subordinates w ould be in the, Education Center as a forum for socializing managers into, room, observing. If accepted, ideas had to be implemented., the cultural values that he believed were important for, The process placed real po wer in the hands of emplo yees, success at GE., and was responsible for some of GE’ s dramatic gains in, Courtesy of GE, productivity during the 1990s. To help cement emplo yee, empowerment Welch introduced 360-de gree perfor mance, evaluations for all managers, enabling Welch, in his words, to identify “those who smiled, ■ Organizational change, up and kicked down.”26, at GE., , // REFREEZING THE ORGANIZATION, Refreezing an organization involves trying to solidify the new strategy and architecture of an, organization so that the desired employee behavior becomes second nature. This is not easy. In, the 1980s the Scandina vian airline SAS w ent through a major or ganizational change effort, similar to that adopted by British Airways. Initially it seemed to work; but after a few years the, CEO noticed that the old culture seemed to betrying to reassert itself, so he launched a second, organizationwide training ef fort to tr y to solidify the ne w culture. Trying to alter an, organization’s culture is difficult because culture includes deepl y held and persistent shared, values. Effecting a change may require years of effort., Refreezing an enterprise in a new strategic and organizational configuration requires constant, attention and pressure. Leaders within the or ganization must stay on message and embody the, desired behavior persistently. Control and incentive systems have to foster the desired behavior, and reward managers and employees who perform well while acting in a manner that isconsistent, with the v alues and nor ms of the ne w culture. Ongoing attention is required for hiring and, employee de velopment policies. Some companies, for example, use e xtensive in-house, management education programs to socialize managers into a ne w culture, explaining to them, why it is important. At GE Jack Welch used the company’s Crontonville Management Education, Center as a socialization mechanism. He taught in every class, constantly emphasizing the entrepreneurial, performance-oriented values that he wanted to see managers adopt at GE., A striking feature of Jack Welch’s two-decade tenure at GE is that he ne ver stopped pushing his change agenda. He kept thinking of new programs and initiatives to push the culture of, the organization along the desired trajectory. That seems to be what is required to refreeze an, organization in a new configuration., , // Failed Change Efforts and the Secrets of Success, Many managers have tried to push through radical change efforts in their organizations. Many, have f ailed. By his o wn count John K otter of Har vard Business School has studied o ver, 100 organizational change efforts, both as an academic researcher and as a consultant w ho, participated in the change effort. According to Kotter, there are eight errors that leaders often, , hiL30123_ch18_452-477.indd 466, , 11/4/06 5:24:28 PM

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Managing Innovation and Change \\ CHAPTER 18, , 467, , make when implementing a change ef fort.27 First, Kotter estimates that o ver 50 percent of, companies that fail to implement change do so because from the outset, they do not establish, a great enough sense of urgency. In other words, they do not create a sense of crisis that startles employees out of their comfor t zone. Second, Kotter says many leaders do not create a, powerful enough guiding coalition to push through the change. They do not understand the, importance of power and the fact that many incumbent managers can be a source of inertia. As, we saw, Anne Mulcahy at Xerox dealt with this problem by handpicking her own top management team, and Jack Welch f ired 12 of his 14 top managers, replacing them with managers, who shared his values and sense of urgency., Third, many change efforts fail because the leader lacks a compelling vision that tells employees what the organization is trying to achieve by its change effort. Fourth, and related to, this, the leader may have a vision, but the vision may be poorly communicated. According to, Kotter, many managers do not understand the need to communicate the vision consistentl y,, often over a period of years, and to make sure it is heard by employees at all levels in the organization., Fifth, K otter comments that man y change ef forts f ail because leaders fail to r emove, obstacles to the change effort. The obstacles may include managers who are unable or unwilling to buy into the ne w culture or an or ganization architecture that continues to foster old, habits. Change ef forts that f ail to remo ve obstacles are cosmetic because the leaders ha ve, failed to change either the balance of po wer within the or ganization (shifting it a way from, managers who have a vested interest in maintaining the status quo) or an or ganization structure that reinforces the status quo., Sixth, transformation efforts can fail due to a loss of momentum. K otter sees the biggest, error here as not planning for and creating short-term wins. People need to see evidence that, the change effort is working—or they will fail to believe that change is possible and revert to, the old ways of doing things. They need feedback to convince them that the change ef fort is, making progress., Seventh, Kotter believes that a big mistak e is declaring victory too soon. As we have, already stated, successful change efforts can take years, and persistence is required. If leaders, declare victory too soon, the pressure for impro ved performance is released, and employees, might slide back to the old way of doing things. Finally, Kotter notes that change fails when it, is not anchored in the organization’s culture. Without cultural change (change in the v alues, that guide behavior in the organization) managers and employees revert to the old culture, and, the change effort will not take., Although not in K otter’s list, there is another impor tant reason for f ailed change efforts:, failure to empower employees and lower-level managers to implement the c hange.28 As we, have seen, a critical element of dri ving change ef forts is to gi ve emplo yees a sense of, ownership—to give them the power to push through changes. Often emplo yees far down in, the organization can be the g reatest allies of senior managers. This was what Jack Welch, understood when he created the workout process at General Electric. Change is not something, you drive just from the top. It can also be driven from the bottom., So what is required to make a change effort work? In summary, change demands leaders, who are committed to the change effort, who can create a sense of urgency, who can form, a powerful guiding coalition to push through the change, who can craft a compelling vision, for the organization to strive toward, and who can successfully and persistently communicate that vision to all within the organization. Also required are quick and decisive changes, in management and organization architecture to remove obstacles to change (to neutralize, inertia forces). Managers should also ar range shor t-term wins to k eep the momentum, going. They should develop and implement processes that empo wer employees, enlisting, them in the change effort as Jack Welch did at GE with the workout process. Finally, they, must not only push the culture of the organization in a new direction but also institutionalize that culture b y creating suppor ting re ward and incenti ve systems, hiring the right, people, and socializing emplo yees into the culture through training and de velopment, programs. Moreover, they must do this consistently and persistently for years to stabilize, the change., , hiL30123_ch18_452-477.indd 467, , 11/4/06 5:24:30 PM

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468, , PART 5 // Change, , // Driving Innovation, , quantum, innovations, Innovations that, incorporate new technology, and disrupt competition,, shifting the dominant, paradigm., incremental, innovations, Innovations that represent, improvements in product, functionality within an, established technology., , In this chapter we have discussed what managers must do to overcome inertia forces and lead, a change in the strategy and organization of their enter prise so it can sur vive a technological, paradigm shift in their industr y. In this f inal section we discuss what a business might do to, generate technological innovations—to be proactive and drive change in its industr y. These, might be quantum innovations that incorporate new technology and disrupt competition,, shifting the dominant paradigm; or they might be incremental innovations that represent, improvements in product functionality within an estab lished technology (that is, an established S-cur ve). For e xample, eBa y’s adoption of Inter net technolo gy to r un an auction, business can be considered a quantum innovation: It involved a radically different technology, (compared to a human auctioneer running an auction), and it effectively transformed the auction industry. In contrast, the latest personal computers represent cumulative incremental improvements of a technology that was introduced in the 1970s (the first personal computers, in, contrast, were quantum innovations because they represented a distinct break with the past)., In many ways innovation is the most important source of competitive advantage for a business organization. This is because innovation can create new products that better satisfy customer needs, improve the quality of existing products, or reduce the costs of making products, customers want. The ability to develop innovative new products, processes, or business models gives a business a major competitive advantage, allowing it to differentiate its products and, charge a premium price or lower its cost structure below that of its rivals. Competitors, however, attempt to imitate successful inno vations and often succeed. Therefore, maintaining a, competitive advantage requires a continuing commitment to innovation., Successful new product launches are major dri vers of business success. Rober t Cooper, looked at more than 200 new product introductions and found that of those classif ied as successful, some 50 percent achieve a return on investment in excess of 33 percent; half have a, payback period of two years or less; and half achieve a market share in excess of 35 percent.29, Many companies ha ve established a record of accomplishment for successful inno vation:, Sony, whose successes include the Walkman, the compact disk, and the Pla yStation; Nokia,, which has been a leader in the de velopment of wireless phones; Pf izer, a drug company that, during the 1990s and early 2000s produced eight blockbuster new drugs; and 3M, which has, applied its core competency in adhesives to develop a wide range of new products., , // NEW PRODUCT FAILURES, , Incremental Innovation While the first cell phones were a, true quantum innovation, improvements since then have been, incremental additions to existing technology., © 2006 Motorola, Inc. Reproduced with permission from Motorola, Inc., , hiL30123_ch18_452-477.indd 468, , Although promoting innovation can be a source of competitive advantage, the failure rate of innovative new products is high. Research suggests that only 10–20 percent of, major R&D projects gi ve rise to commerciall y viab le, products.30 Well-publicized product failures include Apple, Computer’s Newton, a personal digital assistant; Son y’s, Betamax format in the video player and recorder market;, and Se ga’s Dreamcast video g ame console. Although, many reasons have been advanced to explain why so many, new products fail to generate an economic return, five explanations for failure appear on most lists.31, First, many new products fail because the demand for, innovations is inherentl y uncer tain. It is impossib le to, know before market introduction whether a new product, has tapped an unmet customer need or if there is suf ficient market demand to justify making the product. Good, market research can reduce but not eradicate uncer tainty, about likely future demand for a new technology, so some, failures are to be expected., Second, new products often fail because the technology, is poorl y commercialized. This occurs w hen there is, , 11/10/06 4:48:21 AM

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Managing Innovation and Change \\ CHAPTER 18, , definite customer demand for a new product, but the product is not well adapted to customer, needs because of f actors such as poor design and poor quality . For instance, the f ailure of, Apple Computer to establish a market for the Newton, a handheld personal digital assistant, that Apple introduced in the summer of 1993, can be traced to poor commercialization of a, potentially attractive technology. Apple predicted a $1 billion market for the Newton, but sales, failed to materialize when it became clear that the Ne wton’s handwriting software (an attribute Apple chose to emphasize in its mark eting) could not adequately recognize messages, written on the Newton’s message pad. Subsequently Palm entered this market with the Palm, Pilot, a very successful product that racked up over $1 billion in sales., Third, new products ma y fail because of poor strate gy, including inappropriate pricing,, weak promotion, or a poor distribution strategy. Apart from poor product quality, another reason for the failure of the Apple Newton was poor positioning strategy. The Newton was introduced at such a high initial price (close to $1,000) that there w ould probably have been few, buyers even if the technology had been well commercialized., Another reason why many new product introductions fail is that companies often market a, technology for which there is not enough demand. A company can be blinded by the wizardry, of a new technology and fail to examine whether there is sufficient customer demand for the, product. Finally, companies fail when they are slow to get their products to market. The more, time that elapses betw een initial de velopment and f inal marketing—the slower the “c ycle, time”—the more lik ely it is that someone else will beat the compan y to mark et and gain a, first-mover advantage.32 In the car industr y General Motors has suf fered from being a slo w, innovator. Its product de velopment cycle has been about f ive years, compared with tw o to, three years at Honda, Toyota, and Mazda and three to four y ears at Ford. Because the y are, based on five-year-old technology and design concepts, GM cars are already out of date when, they reach the market., , 469, , ■ New product failure at, Apple Computer., , // GENERATING SUCCESSFUL INNOVATIONS, Managers can tak e a number of steps to build inno vation skills in their or ganizations and, avoid failure. Six of the most important steps seem to be, • Building skills in basic and applied scientific research., • Developing a good process for project selection and project management., , Usingcross-functional integration., • Creating product development teams., • Implementing partly parallel development processes., •, , • Placing a radically new technology in an autonomous organization unit.33, , Building Skills in Basic and Applied Research Building skills in basic and applied, research requires the emplo yment of research scientists and engineers and the estab lishment of a w ork environment that fosters creati vity. A number of top companies tr y to, achieve this by setting up university-style research facilities, where scientists and engineers, are given time to work on their own research projects in addition to projects that are linked, directly to ongoing company research. At Hewlett-Packard, for example, company labs are, open to engineers around the clock. He wlett-Packard e ven encourages its cor porate, researchers to devote 10 percent of compan y time to e xploring their own ideas and does, not penalize them if they fail. 3M allows researchers to spend 15 percent of the workweek, researching any topic that intrigues them, as long as there is the potential of a pa yoff for, the company. The most famous outcome of this policy is the ubiquitous Post-its. The idea, for them e volved from a researcher’ s desire to f ind a w ay to k eep the bookmark from, falling out of his hymnal. Post-its are now a major 3M business, with annual re venues of, around $300 million., Project Selection and Management Project management is the overall management of the, innovation process, from generation of the original concept through development and into final, , hiL30123_ch18_452-477.indd 469, , 11/4/06 5:24:36 PM

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470, , PART 5 // Change, , FIG UR E 1 8 .6, , Phase 2:, Project, refinement, , Gate 2, , Phase 1:, Idea, generation, , Gate 1, , A Development Funnel, , Phase 3: Project, execution, , Market, , production and shipping. Project management requires three important skills: the ability to generate as many good ideas as possible, the ability to select among competing projects at an early, stage of development so that the most promising receive funding and potential costly failures are, killed off, and the ability to minimize time to mark et. The concept of the development funnel,, divided into three phases, summarizes what is required to build these skills (see Figure 18.6).34, The objective in phase 1 is to widen the mouth of the funnel and encourage as much idea generation as possible. To this end, a company should solicit input from all its functions as w ell as, from customers, competitors, and suppliers. At gate 1 the funnel narrows. Here ideas are reviewed, by a cross-functional team of managers w ho did not participate in the original concept development. Concepts that are ready to proceed then mo ve to phase 2, where the details of the project, proposals are worked out. Note that gate 1 is not a go/no-go evaluation point. At this screen ideas, may be sent back for further concept development and then resubmitted for evaluation., During phase 2, which typically lasts only one or two months, the data and information from, phase 1 are put into a for m that will enable senior management to compare proposed projects., Normally this requires the de velopment of a careful project plan, complete with details of the, proposed target market, attainable market share, likely revenues, development costs, production, costs, key milestones, and the lik e. The next selection point, g ate 2, is a go/no-go e valuation, point. Senior managers review the projects under consideration and select those that seem likely, winners and make the most sense from a strate gic perspective given the long-term goals of the, company. The overriding objective is to select projects whose successful completion will help to, maintain or build a competitive advantage for the company. A related objective is to ensure that, the company does not spread its scarce capital and human resources too thinl y over too many, projects, instead concentrating resources where the chances of success and potential returns are, most attractive. Any project selected to go forward at this stage will be funded and staf fed with, the expectation that it will be car ried through to market introduction. In phase 3 the project development proposal is executed by a cross-functional product development team., Cross-Functional Integration Tight cross-functional integration between R&D, production, and marketing can help a company to ensure that, • Product development projects are driven by customer needs., • New products are designed for ease of manufacture., • Development costs are kept in check., • Time to market is minimized., , hiL30123_ch18_452-477.indd 470, , 11/4/06 5:24:36 PM

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Managing Innovation and Change \\ CHAPTER 18, , 471, , Close integration between R&D and marketing ensures that product development projects, are driven by the needs of customers. A company’s customers can be one of its primar y, sources of ne w product ideas. The identif ication of customer needs—par ticularly unmet, needs—can set the context within which successful product innovation takes place. As the, point of contact with customers, the mark eting function can provide valuable information., Moreover, integrating R&D and marketing is crucial if a new product is to be properly commercialized. Otherwise a company runs the risk of developing products for which there is, little or no demand., The case of Techsonic Industries illustrates the benefits of integrating R&D and marketing., This company manufactures depth finders—electronic devices that fishers use to measure the, depth of water beneath a boat and to track their prey. Techsonic had weathered nine consecutive new product f ailures when the compan y decided to inter view spor tspeople across the, country to identify what they needed. They discovered an unmet need for a depth f inder with, a gauge that could be read in bright sunlight, so that is what Techsonic developed. In the year, after the $250 depth f inder hit the mark et, Techsonic’s sales tripled to $80 million, and its, market share surged to 40 percent.35, Integration between R&D and production can help managers ensure that products are, designed with manuf acturing requirements in mind. Design for manuf acturing lo wers, manufacturing costs and leaves less room for mistakes—and thus can lower costs and increase, product quality. Integrating R&D and production can help cut de velopment costs and speed, products to market. If a new product is not designed with manufacturing capabilities in mind,, it may prove too difficult to build. In that case the product will have to be redesigned, and both, overall development costs and time to market may increase significantly. For example, making, design changes during product planning could increase o verall de velopment costs b y, 50 percent and add 25 percent to the time it tak es to bring a product to mark et.36 Moreover,, many quantum product inno vations require ne w manufacturing processes, w hich makes it, even more important to achieve close integration between R&D and production: Minimizing, time to mark et and de velopment costs ma y require the simultaneous de velopment of ne w, products and new processes.37, Product Development Teams One of the best ways to achieve cross-functional integration, is to establish product development teams composed of representatives from R&D, marketing,, and production. The objective of a team should be to take a product development project from, the initial concept de velopment to mark et introduction. A number of attributes seem to be, important for a product development team to function effectively and meet all its development, milestones.38, First, a heavyweight project manager—one who has high status within the organization and the power and authority required to get the f inancial and human resources the team, needs—should lead the team and be dedicated primaril y (if not entirely) to the project. The, leader should believe in the project (that is, be a champion) and be skilled at inte grating the, perspectives of different functions and helping personnel from dif ferent departments work, together for a common goal. The leader should also be able to act as an advocate of the team, to senior management., Second, the team should have at least one member from each key function. The team members should possess a number of attributes, including the ability to contribute functional, expertise, high standing within their functions, willingness to share responsibility for team, results, and the ability to put functional advocacy aside. It is generally preferable if core team, members are 100 percent dedicated to the project for its duration. This keeps their focus on, the project, not on the ongoing work of their function., Third, the team members should be ph ysically colocated to create a sense of camaraderie, and facilitate communication. Fourth, the team should have a clear plan and clear goals, par ticularly for critical development milestones and development budgets. The team should have, incentives to attain those goals, such as pay bonuses when major development milestones are, hit. Finally, each team needs to develop processes for communication and conflict resolution., For example, one product de velopment team at Quantum Cor poration, a Califor nia-based, , hiL30123_ch18_452-477.indd 471, , heavyweight project, manager, A manager who has, high status within an, organization and the power, and authority required, to get the financial and, human resources that, his or her team needs to, succeed., , 11/4/06 5:24:37 PM

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472, , PART 5 // Change, , FIG UR E 1 8 .7 A, A Sequential Process, Opportunity, identification, , Concept, development, , Product, design, , Process, design, , Commercial, production, , manufacturer of disk drives for personal computers, instituted a r ule that all major decisions, would be made and conflicts resolv ed at meetings that w ere held every Monday afternoon., This simple rule helped the team meet its development goals.39, Partly Parallel Development Processes One way to compress the time it takes to develop, a product and bring it to market is to use a par tly parallel development process. Traditionally, product development processes have been organized sequentially, as illustrated in Figure 18.7a., A problem with this kind of process is that product de velopment proceeds without manufacturing issues in mind. Because the basic product design is completed prior to the design of a, manufacturing process and full-scale commercial production, there is no earl y evaluation of, manufacturability. Consequently the company may find that it cannot efficiently manufacture, the product and have to send it back for redesign. Cycle time lengthens as a product bounces, back and forth between stages., To solve this problem, organizations can use a process similar to that illustrated inFigure 18.7b., In a partly parallel development process, development stages overlap so that, for example, work, starts on the development of the production process before the product design is complete. By, reducing the need for e xpensive and time-consuming product redesign, such a process can significantly reduce the time it takes to develop a new product and bring it to market., , ■ Creating an autonomous, unit at Hewlett-Packard., , hiL30123_ch18_452-477.indd 472, , Creating an Autonomous Unit When a f irm develops a quantum innovation—one that, might usher in a technological paradigm shift in its industr y—there is a danger that managers within the f irm may fear the consequences of unleashing this inno vation on the established business of the enterprise.40 They may worry that the innovation will cannibalize, sales of the firm’s established business. Thus even though Kodak was a leader in developing digital imaging, for years Kodak reportedly hesitated to aggressively push digital cameras because managers knew the new technology would disrupt the industry and cut f ilm, sales., In addition, a quantum innovation often requires a radicall y different business model. It, may require a different manufacturing system, a different distribution system, and different, pricing strategies from those used b y the estab lished business. For example, the business, model associated with digital cameras is radically different from the business model associated with Kodak’s traditional f ilm business. Research suggests that it is almost impossib le, for two distinct business models to coe xist within the same organization. Almost inevitably, the established business model will suffocate the business model associated with the disruptive technology.41, The solution to these prob lems is to separate the ne w technology and place it in its o wn, autonomous division. For example, during the early 1980s Hewlett-Packard built a successful, laserjet printer business. Then HP invented inkjet technology. Some people in the compan y, believed inkjet printers would cannibalize sales of laserjets and consequentl y argued that HP, should not produce inkjets. F ortunately for HP , senior managers at the time sa w inkjet, technology for w hat it w as: a potentiall y powerful disr uptive technology. They allocated, significant R&D funds toward its commercialization. Furthermore, when the technology was, ready for market introduction, they established an autonomous inkjet di vision at a dif ferent, geographic location with its o wn manufacturing, marketing, and distribution acti vities. HP, managers accepted that the inkjet di vision would take sales away from the laserjet di vision, and decided that it was better to have an HP division cannibalize the sales of another HP division than have those sales taken by another company., , 11/4/06 5:24:37 PM

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Managing Innovation and Change \\ CHAPTER 18, , 473, , F I G U R E 1 8 .7 B, A Partly Parallel Process, Opportunity, identification, Concept, development, Product, design, Process, design, , IN CO N CL U SI ON, , Commercial, production, , WH Y DOE S IT M ATT E R ?, , In this chapter we have seen that industries are periodically revolutionized by new, competitors that champion new technology. If established businesses are to survive, the paradigm shifts initiated by new technology, they must change their strategy and, organization architecture. This requires managers to adopt a systematic approach to, organizational change that neutralizes inertia forces that defend the status quo and, forges ahead with meaningful business transformation. We have also discussed what, steps managers must take to make their own organizations successful at generating, both quantum and incremental innovations., Why does this material matter for students of management? We live in a world in, which change is constant. Competition is a process that is driven by the development, of new products, processes, and business models some of which destroy old business, models, while creating entirely new product market opportunities. To succeed as a, manager you must understand how this process works and be ready to play a part in, leading it. You must be able to stay ahead of the competition by pushing your organization to develop better innovations, recognizing paradigm shifts when they occur. You, must be ready to push for change in the strategy and organization architecture of your, company so that it can adapt, survive, and prosper when facing a new competitive, reality. For change to be successful, you must be able to identify inertia forces in your, organization and know how to counteract them, helping the organization overcome the, inevitable resistance to change. These skills mark truly great managers., , MANAGEMENT CHALLENGES, 1., , 2., , Where do you think Kodak’s traditional film business and digital imaging business are, located on their respective S-curves? What are the competitive implications of your, answer?, Paradigm shifts don’t occur only in high-technology industries. Can you think of a, paradigm shift that occurred in a business not normally thought of as being high-tech?, When did this paradigm shift occur, and what were its consequences?, , hiL30123_ch18_452-477.indd 473, , 11/4/06 5:24:38 PM

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474, , PART 5 // Change, , 3., , 4., , During the late 1990s the discount broker Charles Schwab was faced with a paradigm, shift. Research the cause of this paradigm shift and document how Schwab responded., What lessons can be drawn from the Schwab example?, General Motors is currently facing considerable challenges in its core U.S. market. What, are the natures of these challenges? What must GM do to respond to these challenges?, What inertia forces might make it difficult for GM to respond?, , MANAGEMENT PORTFOLIO, FOR THE ORGANIZATION YOU HAVE CHOSEN TO FOLLOW:, 1., 2., , 3., 4., , CLOSING CASE, , Select a technology the organization uses. Where is that technology positioned on its, S-curve?, Is the organization facing a paradigm shift, or has it faced one in the near past? If so,, describe the nature of that shift and how the organization is responding (or did respond), to the paradigm shift., Did the organization pioneer, or help pioneer, a paradigm shift in the past? If so,, describe what occurred., What inertia forces does the organization confront? If a future paradigm shift disrupts, the organization’s business model, how easy do you think it will be for the organization, to adapt? What steps will it have to take to change the organization?, , TRANSFORMING REUTERS, , London-based Reuters is a venerable company. Established, in 1850 and de voted to deli vering infor mation around the, world by the fastest means available—which in 1850 meant, a fleet of 45 carrier pigeons—by the late 1990s the company, had developed into one of the largest providers of information, in the world. Although Reuters is known best to the pub lic, for its independent, unbiased ne ws reporting, 90 percent of, Reuters’ revenues are generated by providing information to, traders in financial markets. In the 1990s the company used, a proprietary computer system and a dedicated telecommunications network to deliver real-time quotes and f inancial, information to Reuters ter minals—devices that an y selfrespecting financial trader could not function without. When, Reuters entered the f inancial data business in the earl y, 1970s, it had 2,400 employees, most of them journalists. By, the late 1990s its employee base had swelled to 19,000, most, of whom were on the f inancial and technical side. During, this period of heady g rowth Reuters amassed some 1,000, products, often through acquisitions, such as foreignlanguage data ser vices, man y of w hich used di verse and, sometimes incompatible computer delivery systems., , hiL30123_ch18_452-477.indd 474, , The late 1990s w ere the high point for Reuters. Two, shocks to Reuters’ business put the compan y in a tailspin., First came the Inter net, which allowed newer companies,, such as Thompson Financial Ser vices and Bloomber g, to, provide real-time f inancial infor mation to an y computer, with an Inter net connection. Suddenly Reuters was losing, customers to a cheaper and increasingly ubiquitous alternative. The Inter net was commoditizing the asset on w hich, Reuters had built its business: infor mation. Then in 2001, the stock mark et bubble of the 1990s f inally broke; thousands of people in f inancial ser vices lost their jobs; and, Reuters lost 18 percent of its contracts for ter minals in a, single y ear. Suddenl y a compan y that had al ways been, profitable was losing money., In 2001 Reuters appointed Tom Glocer as CEO. The first, nonjournalist CEO in the compan y’s histor y, Glocer , an, American in a British-dominated f irm, was described as, “not par t of the old bo ys’ netw ork.” Glocer had long, advocated that Reuters move to an Inter net-based delivery, system. In 2000 he w as put in charge of rolling out such a, system across Reuters but met signif icant resistance. The, , 11/4/06 5:24:38 PM

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Managing Innovation and Change \\ CHAPTER 18, , old proprietar y system had w orked well, and until 2001 it, had been extremely profitable. Many managers were therefore reluctant to move toward a Web-based system that commoditized information and had lo wer prof it margins. They, were worried about product cannibalization. Glocer’s message was that if the compan y didn’t roll out a Web-based, system, Reuters’ customers would defect in droves. In 2001, his prediction seemed to be coming true., Once in char ge, Glocer ag ain pushed an Inter net-based, system, but he quickl y recognized that Reuters’ problems, ran deeper. In 2002 the compan y registered its f irst annual, loss in history, £480 million, and Glocer described the business as “fighting for survival.” Realizing that dramatic action, was needed, in February 2003 Glocer launched a three-y ear, strategic and organizational transformation program called, Fast Forward. It was designed to return Reuters to profitability by streamlining its product offering, prioritizing what the, company focused on, and changing its culture. The first part, of the program was an announcement that 3,000 employees, (nearly 20 percent of the workforce) would be laid off., To change its culture Reuters added an element to its F ast, Forward program known as “Living Fast,” which defined key, values such as passionate and urgent working, accountability,, and commitment to customer ser vice and team. A two-day, conference of 140 managers, selected for their positions of, influence and business understanding rather than their seniority, launched the program. At the end of the two days the managers collectively pledged to buy half a million shares in the, company, which at the time were trading at an all-time low., After the conference the managers w ere f ired up; but, going back to their re gular jobs, the y found it dif ficult to, convey that sense of ur gency, conf idence, and passion to, , 475, , their employees. This led to the development of a follow-up, conference: a one-da y e vent that included all compan y, employees. Following a video message from Glocer and a, brief summary of the goals of the program, employees spent, the rest of the day in 1,300 cross-functional groups addressing challenges outlined b y Glocer and proposing concrete, solutions. Each g roup chose one of “T om’s challenges” to, address. Many employee g roups came up with ideas that, could be rapidly implemented—and were. More generall y,, the employees asked for greater clarity in product offerings,, less bureaucracy, and more accountability. With this mandate, managers launched a program to rationalize the product line, and streamline the compan y’s management str ucture. In, 2003 the company had 1,300 products. By 2005 Reuters was, focusing on 50 key strategic products, all delivered over the, Web. The early results of these changes w ere encouraging., By the end of 2004 the compan y recorded a £380 million, profit, and the stock price had more than doubled.42, CASE DISCUSSION QUESTIONS, 1. What technological paradigm shift did Reuters face in the, 1990s? How did that paradigm shift change the competitive playing field?, 2. Why w as Reuters slo w to adopt Inter, technology?, , net-based, , 3. Why do you think Tom Glocer was picked as CEO? What, assets did he bring to the leadership job?, 4. What do y ou think of Glocer’ s attempts to change the, strategy and organizational culture at Reuters? Was he on, the right track? Would you do things differently?, , ENDNOTES, D., 1. Henry, “A Tense Moment at Kodak,” BusinessWeek, October 17, 2005, p. 84;, W.M. Bulkeley, “Kodak Scales Back Short-Term View but Sees Revival,” The Wall, Street Journal, September 29, 2005, p. B4., 2.J.M. Utterback, Mastering the Dynamics of Innovation (Boston: Harvard Business, School Press, 1994); A.J. Sl ywotzky, Value Migration: Ho w to Think Se veral, Moves Ahead of the Competition (Boston: Harvard Business School Press, 1996)., .3 C.M. Christensen, The Innovator’s Dilemma (Boston: Har vard Business School, Press, 1997); R.N . F oster, Innovation: The Attac ker’s Advantage (New York:, Summit Books, 1986)., 4.Foster, Innovation., 5.See Christensen, The Innovator’s Dilemma; and C.M. Christensen and M. Ov erdorf, “Meeting the Challenge of Disr uptive Change,” Harvard Business Review,, March–April 2000, pp. 66–77., .6 The term punctuated equilibrium is bor rowed from e volutionary biology. For a, detailed e xplanation of the concept, see M.L. Tushman, W.H. Ne wman, and, E. Romanelli, “Convergence and Upheaval: Managing the Unsteady Pace of Organizational Evolution,” California Management Review 29, no. 1 (1985), pp. 29–44;, C.J.G. Gersick, “Revolutionary Change Theories: A Multilevel Exploration of the, Punctuated Equilibrium Paradigm,” Academy of Management Review 16 (1991),, pp. 10–36; R. Adner and D.A. Levinthal, “The Emergence of Emerging Technologies,” California Management Review 45 (Fall 2002), pp. 50–65., , hiL30123_ch18_452-477.indd 475, , .7 Slywotzky, Value Migr ation: Ho w to Think Se veral Mo ves Ahead of the, Competition., 8. M. Hannah and J. Freeman, Organizational Ecology (Cambridge, MA: Har vard, University Press, 1989); M.T . Hannah and J . Freeman, “Str uctural Iner tia and, Organizational Change,” American Sociological Review 49 (1984), pp. 149–64., 9.C.J. Fombrum, Leading Corporate Change (New York: McGraw-Hill, 1992)., 10. C.K. Prahalad and R.A. Bettis, “The Dominant Lo gic: A New Linkage between, Diversity and P erformance,” Strategic Mana gement J ournal 7 (1986),, pp. 495–501., 11.E.J. Zajac and M.H. Bazer man, “Blind Spots in Industr y and Competitor, Analysis,” Academy of Management Review 16 (1991), pp. 37–57., 12. M. Tripsas and G. Ga vetti, “Capabilities, Cognition, and Iner tia: Evidence from, Digital Imaging,” Strategic Management Journal 21 (2000), pp. 1147–61., 13.D. Miller, The Icarus Paradox (New York HarperBusiness, 1990)., 14.G. Morgan, Images of Or ganization (Be verly Hills: Sage, 1986); J . Pfef fer,, Managing with P ower: Politics and Influence within Or ganizations (Boston:, Harvard Business School Press, 1992)., 15.H. Smith, The Power Game: How Washington Works ( New York: Ballantine, 1988)., 16.P. Ghemawat, Commitment: The Dynamic of Strategy (New York: Free Press, 1991)., , 11/4/06 5:24:39 PM

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476, , PART 5 // Change, , 17. P.J. DeMaggio and W.W. Powell, “The Iron Cage Revisited: Institutional Isomorphism and Collective Rationality in Organizational Fields,” American Sociological, Review 48 (1983), pp. 147–60., 18. J. Ott, “United No More, ” Aviation Week and Space Technology, May 16, 2005,, p. 28., 19.Hannah and Freeman, Organizational Ecology; Hannah and Freeman, “Structural, Inertia and Organizational Change.”, 20.M. Beer, Organization Change and Development: A Systems View (Santa Monica,, CA: Goodyear Publishing, 1980); Fombrum, Leading Corporate Change; K. Lewin,, Field Theory in Social Sciences: Selected Theoretical Papers (New York: Harper, Brothers, 1951); M.L. Tushman and C.A. O’Reilly, Winning through Innovation: A, Practical Guide to Leading Organizational Change and Renewal (Boston: Harvard, Business School Press, 1997); M.L. Tushman and C.A. O’Reill y, “Ambidextrous, Organizations: Managing Ev olutionary and Re volutionary Change,” California, Management Review 38, no. 4 (1996), pp. 8–31; M. Washington and M.J. Ventresca,, “How Organizations Change,” Organization Science 15 (2004), pp. 82–97., 21. B. Morris, “The Accidental CEO,” Fortune, June 23, 2003, p. 58., , 31. S.L. Brown and K.M. Eisenhardt, “Product Development: Past Research, Present, Findings, and Future Directions, ” Academy of Mana gement Review 20 (1995),, pp. 343–78; M.B. Lieberman and D.B. Montgomery, “First Mover Advantages,”, Strategic Management Journal 9 (Special Issue, Summer 1988), pp. 41–58; D .J., Teece, “Prof iting from Technological Innovation: Implications for Inte gration,, Collaboration, Licensing, and Pub lic P olicy,” Research P olicy 15 (1987),, pp. 285–305; G.J. Tellis and P.N. Golder, “First to Mark et, First to Fail?” Sloan, Management Review Winter 1996, pp. 65–75; G.A.Stevens and J. Burley, “Piloting, the Rocket of Radical Innovation,” Research Technology Management 46 (2003),, pp. 16–26., 32. G. Stalk and T.M. Hout, Competing against Time (New York: Free Press, 1990)., 33.K.B. Clark and S.C. Wheelwright, Managing Ne w Pr oduct and Pr ocess, Development (Ne w York: F ree Press, 1993); M.A. Schilling and C.W .L. Hill,, “Managing the Ne w Product De velopment Process,” Academy of Mana gement, Executive 12, no. 3 (August 1998), pp. 67–81., 34.Clark and Wheelwright, Managing New Product and Process Development., 35. P. Sellers, “Getting Customers to Love You,” Fortune, March 13, 1989, pp. 38–42., , 22.J.P. Kotter, “Leading Change: Why Transformational Ef forts F ail,” Harvard, BusinessReview 73 (March–April 1995), pp. 55–63., , 36.O. Port, “Moving Past the Assembly Line, ” BusinessWeek, Special Issue:, Reinventing America, 1992, pp. 177–80., , 23.GE’s Two-Decade Transformation: Jack Welch’s Leadership (Har vard Business, School Case 9-399-150)., , 37. G.P. Pisano and S.C. Wheelwright, “The New Logic of High-Tech R&D,” Harvard, Business Review, September–October 1995, pp. 93–105., , 24.Fombrum, Leading Corporate Change., , 38. K.B. Clark and T. Fujimoto, “The Power of Product Integrity,” Harvard Business, Review, No vember–December 1990, pp. 107–18; Clark and, Wheelwright,, Managing Ne w Pr oduct and Pr ocess De velopment; Bro wn and Eisenhardt,, “Product Development”; Stalk and Hout, Competing against Time., , 25.Tushman and O’Reill y, “Ambidextrous Organizations: Managing Ev olutionary, and Revolutionary Change.”, 26.Quoted in GE’s Two-Decade Transformation: Jack Welch’s Leadership., 27.J.P. Kotter, “Leading Change: Why Transformational Ef forts F ail,” Harvard, BusinessReview 73 (March–April 1995), pp. 55–63., 28. G. Labianca and B. Gray, “A Grounded Model of Organizational Schema Change, during Empowerment,” Organization Science 11 (2000), pp. 235–57; P .J. Gade, and E.L. P erry, “Changing the Ne wsroom Culture: A Four-Year Case Study of, Organizational Development at the St. Louis Post-Dispatch,” Journalism and Mass, Communication Quarterly 80 (2003), pp. 327–47., 29.R.G. Cooper, Product Leadership (Reading, MA: Perseus Books, 1999)., 30.Cooper, Product Leader ship; A.L. P age, PDMA’s Ne w Pr oduct De velopment, Practices Survey: Performance and Best Practices (PDMA 15th Annual International, Conference, Boston, MA, October 16, 1991); E. Mansf ield, “How Economists See, R&D,” Harvard Business Review, November–December 1981, pp. 98–106., , hiL30123_ch18_452-477.indd 476, , 39.C. Christensen, Quantum Corporation—Business and Pr oduct Teams (Harvard, Business School Case #9-692-023)., 40.Christensen, The Innovator’s Dilemma; C.W.L. Hill and F.T. Rothearmel, “The, Performance of Incumbent Firms in the Face of Radical Technological Change,”, Academy of Management Review 28 (2003), pp. 257–77., 41.Christensen, The Innovator’s Dilemma., 42. A.M. Bell, “Inspiring Organizational Change at Reuters,” Strategic Communication Mana gement, August–September 2005, pp. 18–23; K. Brook er, “London, Calling,” Fortune, April 2, 2001, pp. 130–34; J. Matloff, “Can Reuters Recover?”, Columbia Journalism Review 42 (July–August 2003), pp. 49–53., , 11/4/06 5:24:39 PM

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Managing Innovation and Change \\ CHAPTER 18, , 477, , NOTES, , hiL30123_ch18_452-477.indd 477, , 11/4/06 5:24:39 PM

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hiL30123_glo.indd Page 478 5/19/07 12:26:40 AM epg, , /Volumes/108/MHIA051/hiLglo, , \\ GLOSSARY \\\, A, achievement motivation Theunconscious concern for, achieving excellence in accomplishments through one’s individual, efforts., achievement-oriented leadership Occurs when a leader sets, high goals for subordinates, has high expectations for their, performance, and displays confidence in subordinates, encouraging, and helping them to take on greater responsibilities., action plans Plans that specify with precision how strategies will, be put into effect., active listeners Listeners who receive a sender’s signals, decode, them as intended, and provide appropriate and timely feedback to the, sender., adaptive culture An organizational culture in which employees, focus on the changing needs of customers and other stakeholders and, support initiatives to keep pace with these changes., adverse (or disparate) impact The effect of a policy or, practice that appears neutral but has a significant and unintentional, negative influence on one or more protected groups., affirmative action Policies and practices to assist members of, protected groups that are underrepresented in the organization., anticompetitive behavior Behavior aimed at harming, actual or potential competitors, most often by using monopoly, power., aptitude test A selection method that measures a person’s, potential ability, such as general intelligence and finger dexterity., artifacts The observable symbols and signs of an organization’s, culture., assembly-line production Systems used to mass-produce large, volumes of a standardized product., assertiveness Applying hierarchical power to influence others., asset utilization The extent to which assets are “working,”, generating income for the organization., attitudes Clusters of beliefs, assessed feelings, and behavioral, intentions toward a person, object, or event., attribution process Deciding whether an observed event is, caused primarily by external or internal factors., autonomous subunit A unit that has all the resources and, decision-making power required to run its operation daily., availability error Arises from our predisposition to estimate the, probability of an outcome based on how easy the outcome is to, imagine., , B, backchannel An informal channel through which managers can, collect important information., balanced scorecard (BSC), Acontrol approach that suggests, managers use several different financial and operational metrics to, track performance and control an organization., bargaining power of buyers Ability of buyers to bargain, down prices charged by firms in the industry or to raise the costs of, firms in the industry by demanding better product quality and, service., , 478, , bargaining power of suppliers Ability of suppliers to bargain, up prices charged by firms in the industry or to raise the costs of firms, in the industry by supplying lower-quality products and service., barriers to entry Factors that make it costly for potential, competitors to enter an industry and compete with firms already in, the industry., barriers to exit Factors that stop firms from reducing capacity, even when demand is weak and excess capacity exists., barriers to imitation Factors that make it difficult for a firm to, imitate the competitive position of a rival., bicultural audit The practice of diagnosing cultural relations, between companies and determining the extent to which cultural, clashes will likely occur., Big Five personality dimensions Thefive abstract dimensions, representing most personality traits: conscientiousness, agreeableness,, neuroticism, openness to experience, and extroversion., bounded rationality Limits in human ability to formulate complex, problems, to gather and process the information necessary for solving, those problems, and thus to solve those problems in a rational way., brand loyalty The preference of consumers for the products of, established companies., broad market strategy, , Serving the entire market., , buffer stocks, , Inventories held for some unexpected contingency., , build to order, , Taking an order first, then building the product., , build to stock Stocking a distribution channel in the anticipation, that a customer will purchase those products., bureaucratic control, rules and procedures., , Control through a formal system of written, , business ethics Accepted principles of right or wrong governing, the conduct of businesspeople., business model The way in which an enterprise intends to make, money., business-level strategy Strategy concerned with deciding how, a firm should compete in the industries in which it has elected to, participate., , C, centrality The degree and nature of interdependence between the, power holder and others., centralization The concentration of decision-making authority at, a high level in a management hierarchy., ceremonies Planned activities conducted specifically for the, benefit of an audience., charisma The ability of some people to charm or influence others., coalition A group of people that comes together to cooperate in, attaining a certain goal., cognitive biases Decision-making errors that we are all prone to, making and that have been repeatedly verified in laboratory settings, or controlled experiments with human decision makers., cognitive dissonance Anuncomfortable tension experienced, when behavior is inconsistent with our attitudes., cognitive schema A manager’s mental model of the world his or, her enterprise inhabits.

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Glossary, , commitment Occurs when people identify with the request of, somebody trying to influence them and internalize that request,, adopting it as their own., commodity product A product that is difficult to differentiate, from those produced by rivals., communication The process by which information is exchanged, and understood between people., competencies A manager’s skills, values, and motivational, preferences., competitive advantage Advantage obtained when a firm, outperforms its rivals., competitive structure The number and size distribution of, incumbent firms in an industry., competitive tactics Actions that managers take to try to, outmaneuver rivals in the market., , decision heuristics, , Simplerules of thumb., , deep-level diversity Differences in the psychological, characteristics of employees, including personalities, beliefs, values,, and attitudes., delayering, , Reducing the number of layers in a hierarchy., , demographic forces Outcomes of changes in the characteristics, of a population, such as age, gender, ethnic origin, race, sexual, orientation, and social class., design for manufacturing Trying to increase productivity yb, designing products that are easy to manufacture., developing employees The task of hiring, training, mentoring,, and rewarding employees in an organization, including other managers., devil’s advocacy The generation of both a plan and a critical, analysis of the plan by a devil’s advocate., , complementors Firms providing goods or services that are, complementary to the product produced by enterprises in the industry., , dialectic inquiry The generation of a plan (a thesis) and a, counterplan (an antithesis) that reflect plausible but conflicting, courses of action., , compliance Occurs when people comply with a request, but only, because they have to., , differentiation strategy Increasing the value of a product, offering in the eyes of consumers., , conceptual skills The ability to see the big picture., , directive leadership Occurs when leaders tells subordinates, exactly what they are supposed to do, giving them goals, specific, tasks, guidelines for performing those tasks, and the like., , conflict A process in which one party perceives that its interests, are being opposed or negatively affected by another party., consolidated industry An industry dominated by a few large, companies., contingency plans Plans formulated to address specific possible, future events that might have a significant impact on the organization., contingent work Any work arrangement in which the individual, does not have an explicit or implicit contract for long-term, employment, or one in which the minimum hours of work can vary in, a nonsystematic way., continuance commitment Anemployee’s calculative, attachment to an organization, whereby an employee is motivated to, stay only because leaving would be costly., continuous flow production Productionsystems that, continuously produce a standardized output that flows out of the system., control The process through which managers regulate the, activities of individuals and units., controlling The process of monitoring performance against goals,, intervening when goals are not met, and taking corrective action., controls Metrics used to measure the performance of subunits and, to judge how well managers are running those subunits., corporate-level strategy Strategy concerned with deciding, which industries a firm should compete in and how the firm should, enter or exit industries., countervailing power, superiors., , Power that subordinates have over their, , crisis management plan, with possible future crises., , Plan formulated specifically to deal, , cultural control Regulating behavior by socializing employees so, that they internalize the values and assumptions of an organization, and act in a manner that is consistent with them., , D, decentralization Vesting decision-making authority in lowerlevel managers or other employees., , hiL30123_glo_478-486.indd 479, , 479, , discontinuous change Changethat fundamentally transforms, the nature of competition in the task environment., discretion The freedom to exercise judgment—to make decisions, without referring to a specific rule or receiving permission from, someone else., disruptive technology A new technology that gets its start, away from the mainstream of a market and then, as its functionality, improves, invades the main market., distinctive competency A unique strength that rivals lack., diversification, , Entry into new business areas., , downward communication Occurswhen information flows, from higher to lower levels within an organization hierarchy., drives Instinctive tendencies to seek particular goals or maintain, internal stability., drop-off Distortion in the content of a message as it passes, through a communication system., , E, 80–20 rule A heuristic stating that 80 percent of the consequences, of a phenomenon stem from 20 percent of the causes., economies of scale Cost advantages derived from a large, volume of sales or production., economies of scope Cost reductions associated with sharing, resources across businesses., effective leadership The ability of a leader to get high, performance from his or her subordinates., emotional contagion The automatic process of “catching” or, sharing another person’s emotions by mimicking that person’s facial, expressions and other nonverbal behavior., emotional intelligence The ability to monitor one’s own and, others’ feelings and emotions, to discriminate among them, and to, use this information to guide one’s thinking and actions., , 11/4/06 5:26:10 PM

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480 //, , Glossary, , emotions Physiological, behavioral, and psychological episodes, experienced toward an object, person, or event that create a state of, readiness., employee assistance programs (EAPs) Counselingservices, that help employees overcome personal or organizational stressors, and adopt more effective coping mechanisms., employee engagement Employees’ emotional and cognitive, (rational) motivation, their perceived ability to perform the job, their, clear understanding of the organization’s vision and their specific, role in that vision, and their belief that they have been given the, resources to get the job done., employee orientation Theorganization’s systematic process, of helping new employees make sense of and adapt to the work, context., employee stock ownership plans (ESOPs), that encourage employees to buy company stock., , Reward systems, , employer brand The package of functional, economic, and, psychological benefits provided by employment and identified with, the company as an employer., employment discrimination Any situation in which some, people have a lower probability of being hired, promoted, financially, rewarded, or receiving valuable training and development, opportunities due to non–job-related demographic characteristics., empowerment A psychological concept represented by four, dimensions: self-determination, meaning, competence, and impact of, the individual’s role in the organization., , F, filtering The tendency to alter information in some way, or fail to, pass it on at all, as it moves through a communication system., five-forces model Model of competitive forces that determine, the intensity of competition in an industry., fixed costs The costs that must be borne before the firm makes a, single sale., flaming The act of sending an emotionally charged message to, others., flat hierarchies Organizations with few layers of management., flexible production technologies A set of methodologies that, allows enterprises to produce a wider range of end products from a, given production system without incurring a cost penalty., focus strategy, , Serving a limited number of segments., , foreign direct investment Investments by a company based in, one nation in business activities in another nation., formal channels Systems of officially sanctioned channels within, an organization that are used regularly to communicate information., four-drive theory A motivation theory based on the innate drives, to acquire, bond, learn, and defend that incorporates both emotions, and rationality., fragmented industry An industry with many small or mediumsized companies., Bias arising from how a problem or decision is, , enacted values Values that actually guide behavior., , framing bias, framed., , environmental degradation Taking actions that directly or, indirectly result in pollution or other forms of environmental harm., , franchising, format., , equity theory A theory that explains how people develop, perceptions of fairness in the distribution and exchange of, resources., , frontline managers Managers who manage employees who are, themselves not managers., , escalating commitment Arises when decision makers, having, already committed significant resources to a project, commit even, more resources if they receive feedback that the project is failing., espoused values What people say is important to them., , Licensing the right to offer a service in a particular, , functional managers Managers responsible for leading a, particular function or a subunit within a function., functional structure A structure that follows the obvious, division of labor within the firm, with different functions focusing on, different tasks., , ethical dilemmas Situations in which there is no agreement over, exact accepted principles of right and wrong., , fundamental attribution error The tendency to blame people, rather than the environment for poor performance., , ethical values Values that society expects people to follow, because they distinguish right from wrong in that society., , G, , ethnocentric staffing A staffing policy in which all key, management positions are staffed by home country nationals., exchange The promise of benefits or resources in exchange for, another party’s compliance with your request., Amodel that, , general adaptation syndrome, model, A, of the stress experience,, consisting of three stages: alarm reaction, resistance, and exhaustion., , Home country executives sent to a foreign post., , general environment Political and legal forces, macroeconomic, forces, demographic forces, sociocultural forces, technological, forces, and international forces., , exit–voice–loyalty–neglect (EVLN) model, outlines the consequences of job dissatisfaction., expatriates, , expectancy theory A motivation theory based on the idea that, work effort is directed toward behaviors that people believe will lead, to desired outcomes., exporting Producing a good at home, and then shipping it to, another country., external environment Everything outside a firm that might, affect the ability of the enterprise to attain its goals., extrinsic reward Anything received from another person that, the recipient values and is contingent on his or her behavior or, results., , hiL30123_glo_478-486.indd 480, , gainsharing plan A reward system in which team members earn, bonuses for reducing costs and increasing labor efficiency in their, work process., , general managers Managersresponsible forthe overall, performance of an organization or one of its major self-contained, subunits or divisions., geocentric staffing A staffing policy that seeks the best people, for key jobs throughout the organization, regardless of nationality., geographic structure A structure in which a firm is divided into, different units on the basis of geography., global standardization strategy Treating the world market as, a single entity, selling the same basic product around the globe., , 11/4/06 5:26:11 PM

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Glossary, , globalization The process whereby national economies and, business systems are becoming deeply interlinked with each other., globalization of markets The merging of historically distinct, and separate national markets into one huge global marketplace., globalization of production Sourcing goods and services from, locations around the globe to take advantage of national differences, in the cost and quality of factors of production., goal A desired future state that an organization attempts to realize., goal setting The process of motivating employees and clarifying, their role perceptions by establishing performance objectives., grapevine The spread of unsanctioned information (rumor and, gossip) through personal networks., groupthink Arises when a group of decision makers embarks on a, course of action without questioning underlying assumptions., , H, , 481, , information manipulation Situations in which managers use their, control over corporate data to distort or hide information to enhance, their own financial situations or the competitive position of the firm., information overload Occurs when the volume of information, received exceeds a person’s capacity to get through it., ingratiation Attempts to increase the extent to which someone, likes you., inoculation effect Warning an audience you are trying to, influence about opposing arguments., intangible resources Nonphysical assets that are the creation of, managers and other employees, such as brand names, the reputation, of the company, processes within the firm for performing work and, making decisions, and the intellectual property of the company,, including that protected through patents, copyrights, and trademarks., integrating mechanisms Mechanisms for coordinating subunits., internal environment Everything inside a firm that affects, managers’ ability to pursue actions or strategies., , heavyweight product manager A manager who has high, status within an organization and the power and authority required to, get the financial and human resources that his or her team needs to, succeed., , internal governance skills The ability of senior managers to, elicit high levels of performance from the constituent businesses of a, diversified enterprise., , horizontal communication Occurs among employees and units, that are at the same hierarchical level in an organization., , intrinsic reward A positive emotional experience resulting, directly and naturally from the individual’s behavior or results., , horizontal differentiation The formal division of the organization, into subunits., , inventory holding costs The capital cost of money tied up in, inventory and the cost of the warehouse space required to store, inventory., , human capital The knowledge, skills, and capabilities embedded, in individuals., human resource (HR) planning The process of ensuring that, the organization has the right kinds of people in the right places at the, right time., human skills Skills that managers need, including the abilities to, communicate, persuade, manage conflict, motivate, coach, negotiate,, and lead., , I, illusion of control The tendency to overestimate one’s ability to, control events., impression management The process of actively shaping one’s, public image., incentive A factor, monetary or nonmonetary, that motivates, individuals to pursue a particular course of action; also, a device used, to encourage and reward appropriate employee behavior., incremental change Changes that do not alter the basic nature, of competition in the task environment., incremental innovations Innovations that represent, improvements in product functionality within an established, technology., industry-specific regulators Government agencies with, responsibility for formulating, interpreting, and implementing rules, specific to a particular industry., influence costs The loss of efficiency caused by deliberate, information distortion for personal gain within an organization., influence tactics Steps that people can take to exert influence, over others in an organization., informal channels Unoff icial communication channels not, formally established by managers., , hiL30123_glo_478-486.indd 481, , international trade The sale of a good or service across borders., , inventory turnover The speed with which inventory is replaced., , J, jargon Technical language and acronyms as well as recognized words, with specialized meaning in specific organizations or social groups., job analysis The systematic investigation and documentation of, duties performed, tools and equipment involved, conditions, surrounding work, and competencies required by job incumbents to, perform the work., job characteristics model A job design model that relates the, motivational properties of jobs to specific personal and organizational, consequences of those properties., job enrichment A job design practice in which employees are, given more responsibility for scheduling, coordinating, and planning, their own work., job satisfaction A person’s evaluation of his or her job and work, context., job shop Production systems used when items are ordered, individually., joint venture An agreement between a firm and a partner to, establish a new enterprise in which they each take an equity stake., just in time Inventory that enters a production process just in, time to be used., justice theories Theories that focus on attaining a just, distribution of economic goods and services., , K, knowledge network A netw, ork for transmitting information, within an organization based on informal contacts between managers, within an enterprise and on distributed information systems., , 11/4/06 5:26:11 PM

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482 //, , Glossary, , motivation The forces within a person that affect his or her, direction, intensity, and persistence of voluntary behavior., , L, leader–member relations, and like their leaders., , How well followers respect, trust,, , leadership substitutes Contingencies that may act as, substitutes for a leadership style., leadership The process of motivating, influencing, and directing, others in the organization to work productively in pursuit of, organization goals., leading The process of motivating, influencing, and directing others, in the organization to work productively in pursuit of organization goals., learning effects, , Cost savings that come from learning by doing., , legacy constraints Prior investments in a particular way of, doing business that are difficult to change and limit a firm’s ability to, imitate a successful rival., legitimate power Power deriving from an implicit agreement, that people higher in a hierarchy can request certain behaviors of, their subordinates., licensing Licensing a foreign firm to produce its product in a, country or region in return for royalty fees on any sales that the, licensee makes., local customization strategy Varying some aspect of product, offerings or marketing messages to take country or regional, differences into account., location economies The economies that arise from performing a, business activity in the optimal locations for that activity., low-cost strategy Focusing managerial energy and attention on, doing everything possible to lower the costs of the organization., , M, macroeconomic forces Forces that affect the general health and, well-being of a national or the regional economy, which in turn affect, the profitability of firms within that economy., management The art of getting things done through people., managerial roles, management., , Specific behaviors associated with the task of, , market controls Regulating the behavior of individuals and units, within an enterprise by setting up an internal market for some, valuable resource such as capital., market economy An economy in which businesses are, privately owned and prices are set by the interaction of supply and, demand., MARS model A model that outlines the four factors that influence, an employee’s voluntary behavior and resulting performance—, motivation, ability, role perceptions, and situational factors., Maslow’s needs hierarchy theory Amotivation theory of, needs arranged in a hierarchy, whereby people are motivated to fulfill, a higher need as a lower one becomes gratified., mass customization The ability to customize the final output of, a product to individual customer requirements without suffering a, cost penalty., matrix structure An organization with two overlapping hierarchies., media richness The volume and variety of information that a, sender and receiver can transmit during a specific time., mission, , Thepurpose of an organization., , hiL30123_glo_478-486.indd 482, , multidivisional structure A structure in which a firm is divided, into different divisions, each of which is responsible for a distinct, business area., multinational enterprise (MNE) A business that has productive, activities in two or more countries., , N, needs Mostly conscious deficiencies that energize or trigger, behaviors to satisfy those needs., negotiation An interpersonal decision-making process by which, two or more parties try to reach an agreement over an issue that is, being disputed, such as the allocation of scarce resources., network building Actively seeking and establishing relationships, with people who may prove useful in the future., noise The psychological, social, and structural barriers that distort, and obscure a sender’s intended message., nonverbal communication Messagessent through human, actions and behavior rather than words., norms The informal rules and shared expectations that groups, establish to regulate the behavior of their members; the social rules and, guidelines that prescribe appropriate behavior in particular situations., , O, operating plans Plans that specify goals, actions, and, responsibility for individual functions., operating strategy Strategy concerned with the actions that, should be taken at the level of individual functions, such as production,, logistic, R&D, and sales, to support business-level strategy., operations The different activities involved in creating an, organization’s products and services., operations managers, , People who manage operations., , opportunistic exploitation Unilaterally rewriting the terms of a, contract with suppliers, distributors, or complement providers in a, way that is more favorable to a firm, often using its power to force, the revision through., organization architecture The totality of a firm’s organization,, including formal organization structure, control systems, incentive, systems, organizational culture, and people., organization structure The location of decision-making, responsibilities in the firm, the formal division of the organization, into subunits, and the establishment of integrating mechanisms to, coordinate the activities of subunits., organizational commitment Anemployee’s emotional, attachment to, identification with, and involvement in a particular, organization., organizational culture The values and assumptions shared, within an organization., organizational inertia Internal and external forces that make it, difficult to change the strategy or organization architecture of an, enterprise., organizational socialization The process by which individuals, learn the values, expected behaviors, and social knowledge necessary, to assume their roles in an organization., , 11/4/06 5:26:11 PM

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Glossary, , organizing The process of deciding who within the organization, will perform what tasks, where decisions will be made, who reports, to whom, and how different parts of the organization will coordinate, their activities to pursue a common goal., output controls Setting goals for units or individuals to achieve, and monitoring performance against those goals., outside view Identifying a reference class of analogous past, strategic initiatives, determining whether those initiatives succeeded or, failed, and evaluating a project at hand against those prior initiatives., , P, paradigm shift Occurs when a new technology or business, model comes along that dramatically alters the nature of demand, and competition., participative leadership A leadership style in which the leader, consults with his or her subordinates, asking for their opinions before, making a decision., patterned behavior description interview Astructured, employment interview method that asks applicants to recall specific, incidents in the past and describe how they handled the situations., peer control Occurs when employees pressure others within their, team or work group to perform up to or in excess of the expectations, of the organization., people The employees of an organization, the strategy used to, recruit, compensate, motivate, and retain those individuals, and the, type of people they are in terms of their skills, values, and orientation., , 483, , polycentric staffing A staffing policy in which key management, positions in a subsidiary are staffed by host country nationals., position power The power that derives from formal hierarchical, power over subordinates, including the legitimate power to hire, fire,, reward, and punish subordinates., power The potential of a person, team, or organization to require, others to do certain things., power motivation The unconscious drive to acquire status and, power and to have an impact on others., primary activities Activities having to do with the design,, creation, and delivery of the product; its marketing; and its support and, after-sales service., prior hypothesis bias Decision makers who have strong prior, beliefs about the relationship between two variables tend to make, decisions on the basis of these beliefs, even when presented with, evidence that their beliefs are wrong., process losses Resources (including time and energy) expended, toward team development and maintenance rather than tasks., production system, , How the flow of work is configured., , productivity The output produced by a given input., productivity of capital Sales divided by the total capital, (money) invested in a business., productivity of labor, labor inputs., , Unit output divided by some measure of, , profit-sharing plan A reward system that pays bonuses to, employees based on the previous year’s level of corporate profits., , people-oriented behavior A leadershipstyle that includes, showing mutual trust and respect for subordinates, demonstrating, genuine concern for their needs, and having a desire to look out for, their welfare., , psychological harassment Repeated and hostile or unwanted, conduct, verbal comments, actions, or gestures that affect an, employee’s dignity or psychological or physical integrity and that, result in a harmful work environment for the employee., , perception The process of attending to, interpreting, and, organizing information., , punctuated equilibrium A view of industry evolution asserting, that long periods of equilibrium are punctuated by periods of rapid, change when industry structure is revolutionized by innovation., , performance ambiguity A situation that occurs when the link, between cause and effect is ambiguous., performance appraisal A systematic process of evaluating an, employee’s performance., personal control Making sure through personal inspection and, direct supervision that individuals and units behave in a way that is, consistent with the goals of an organization., personal networks, , Relationshipsbetween individuals., , personality The relatively stable pattern of behaviors and consistent, internal states that explains a person’s behavioral tendencies., personalized power orientation, gain., , Seeking power for personal, , Q, quantum innovations Innovations that incorporate new, technology and disrupt competition, shifting the dominant paradigm., quota A limit on the number of items of a good that can be, imported from a foreign nation., , R, realistic job preview (RJP) Giving job applicants a balance of, positive and negative information about the job and work context., , persuasion The use of reason through factual evidence and, logical arguments., , reasoning by analogy The use of simple analogies to make, sense out of complex problems., , piece rate systems Systems that reward employees based on the, number of units produced., , recency effect, perceptions., , planning A process whereby managers select goals, choose, actions (strategies) to attain those goals, allocate responsibility for, implementing actions to specific individuals or units, measure the, success of actions by comparing actual results against the goals, and, revise plans accordingly., , recruitment A set of activities that improves the number and, quality of people who apply for employment and the probability that, qualified and compatible applicants will accept employment offers., , planning horizon, , How far out a plan is meant to apply., , political and legal forces Industry changes resulting from, changes in laws and regulations., , hiL30123_glo_478-486.indd 483, , Occurs when the most recent data dominate, , regional trade agreements Agreements to remove barriers to, trade between nations within a geographic region., related diversification Diversification into a business related to, the existing business activities of an enterprise by distinct similarities, in one or more activities in the value chain., , 11/4/06 5:26:12 PM

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484 //, , Glossary, , reliability How consistently a selection method measures a, person’s characteristics., representativeness, single vivid anecdote., , Generalizing from a small sample or even a, , resilience The capability of individuals to cope successfully in the, face of significant change, adversity, or risk., resistance Refusing to perform or delaying engagement in a, required behavior., resource-based view A view that resources of an enterprise can, be a source of sustainable competitive advantage., resources Assets that managers have to work with in their quest, to improve the performance of an enterprise., rights theories The view that human beings have fundamental, rights and privileges., rituals The programmed routines of daily organizational life that, dramatize the organization’s culture., role A set of behaviors that people are expected to perform because, they hold certain positions in a team and organization., , social culture The system of values and norms that are held in, common by people living in a society., social loafing Occurs when people exert less effort (and usually, perform at a lower level) when working in groups than when working, alone., social responsibility A sense of obligation on the part of, managers to build certain social criteria into their decision making., socialist economy An economy in which businesses are owned, by the state and prices are set by state planners., socialized power orientation Accumulatingpower to achieve, social or organizational objectives., sociocultural forces The way in which changing social mores, and values affect an industry., span of control The number of direct reports a manager has., stakeholder An individual, institution, or community that has a, stake in the operations of an organization and in how it does, business., standard A performance requirement that the organization is, meant to attain on an ongoing basis., Plans used to handle events that reoccur, , S, , standing plans, frequently., , satisfice Aiming for a satisfactory level of a particular, performance variable rather than its theoretical maximum., , stereotyping The process of assigning traits to people based on, their membership in a social category., , scenario planning, about the future., , Plans that are based on “what if ” scenarios, , selection The process of deciding which job applicants will make, the most suitable employees., selective perception The tendency to notice and attend to, information that is consistent with our values, beliefs, and, expectations while ignoring or screening out information that is, inconsistent with these., self-actualization The need for self-fulfillment in reaching one’s, potential., self-control Occurs when employees regulate their own behavior, so that it is congruent with organizational goals., self-dealing Situations in which managers find a way to feather, their own nests with corporate funds., self-directed teams Teams organized around work processes that, complete an entire piece of work requiring several interdependent tasks, and have substantial autonomy over the execution of those tasks., self-serving bias The tendency to attribute our favorable, outcomes to internal factors and our failures to external factors., sensing The process of receiving signals from a sender and paying, attention to them., sexual harassment A type of harassment that includes, unwelcome conduct of a sexual nature that detrimentally affects the, work environment or leads to adverse job-related consequences for, its victims., shared values Values held in common by several people., silent authority Occurs when someone complies with a request, because of role expectations and the requester’s legitimate, hierarchical power., single-use plans, reoccur., , Plans that address unique events that do not, , small batch Production systems used when customers order in, small batches but when each order is different., , hiL30123_glo_478-486.indd 484, , stock options A reward system that gives employees the right, to purchase company stock at a future date at a predetermined, price., strategic commitments A firm’s investments in tangible and, intangible assets to support a particular way of doing business (a, particular business model)., strategic plan A plan that outlines the major goals of an, organization and the organizationwide strategies for attaining those, goals., strategic thinking The cognitive ability to analyze a complex, situation, abstract from it, and draw conclusions about the best, strategy for the firm to follow., strategizing The process of thinking through on a continual, basis what strategies an organization should pursue to attain its, goals., strategy An action that managers take to attain the goals of an, organization., strategy implementation, , Puttingaction plans into effect., , stress An adaptive response to a situation that is perceived as, challenging or threatening to a person’s well-being., stressors Any environmental conditions that place a physical or, emotional demand on a person., subgoal An objective that, if achieved, helps an organization attain, or exceed its major goals., substandard working conditions Tolerating unsafe working, conditions or paying employees below-market rates to reduce costs of, production., substitutability, , Theavailability of alternative resources., , substitute products The goods or services of different, businesses or industries that can satisfy similar customer needs., superordinate goals Common objectives held by conflicting, parties that are more important than the departmental or individual, goals on which the conflict is based., , 11/4/06 5:26:12 PM

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Glossary, , supply chain The chain of suppliers that provides raw, materials, partly finished products, or finished products to an, organization., support activities Activities that provide inputs that allow the, primary activities to occur., supportive leadership A leadership style in which the leader is, approachable and friendly, shows concern for the welfare of, subordinates, and treats them as equals., surface-level diversity Observable demographic or, physiological differences in people, such as their race, ethnicity,, gender, age, and physical disabilities., sustainable competitive advantage, that rivals cannot easily match or imitate., , Adistinctive competency, , switching costs The time, energy, and money required to switch, from the products offered by one enterprise to those offered by, another., SWOT, , Strengths,weaknesses, opportunities, and threats., , T, tactical plans The actions managers adopt over the short to, medium term to deal with a specific opportunity or threat that has, emerged., tall hierarchies, management., , 360-degree feedback Performance feedback received from a, full circle of people around an employee., transactional leader A leader who helps an organization achieve, its current objectives., transformational leader A leader who is an agent of strategic, and organizational change., trust A psychological state comprising the intention to accept, vulnerability based on positive expectations of the intent or behavior, of another person., , U, uncertainty An inability to predict with accuracy the nature,, magnitude, timing, and direction of change in the environment., unit plans Plans for departments within functions, work teams,, or individuals., unrelated diversification Diversification into a business not, related to the existing business activities of an enterprise by distinct, similarities in one or more activities in the value chain., upward communication Occurs when information flows from, lower to higher levels within an organization hierarchy., utilitarian approaches The view that the moral worth of actions, or practices is determined by their consequences., , Organizations with many layers of, , tangible resources Physical assets, such as land, buildings,, equipment, inventory, and money., tariff, , Atax on imports., , task environment Actual and potential competitors, suppliers,, and buyers (customers or distributors); firms that provide substitute, products to those sold in the industry; and firms that provide, complements., task interdependence The extent to which team members must, share common inputs to their individual tasks, need to interact in, executing their work, or receive outcomes (such as rewards) that are, partly determined by the performance of others., task-oriented behavior The style of leaders who assign, employees to specific tasks, clarify their work duties and procedures,, ensure that they follow company rules, and push them to reach their, performance capacity., task structure The degree to which the jobs of subordinates are, highly structured with clear work responsibilities, well-defined tasks,, explicit goals, and specific procedures., , V, validity How well a selection method predicts an applicant’s, suitability as an employee., values Stable, evaluative beliefs that guide our preferences, for outcomes or courses of action in a variety of situations; the, philosophical priorities to which managers are committed., value innovation Using innovation to offer more value at a lower, cost than competitors., vertical differentiation Thelocation of decision-making, responsibilities within a structure., vertical integration Moving upstream into businesses that, supply inputs to a firm’s core business or downstream into businesses, that use the outputs of the firm’s core business., virtual teams Teams whose members operate across space, time,, and organizational boundaries and are linked through information, technologies to achieve organizational tasks., visibility The extent to which a power holder is known, or visible,, to others., , team building Any formal activity intended to improve the, development and functioning of a work team., , vision, , team cohesiveness The degree of attraction people feel toward, a team and their motivation to remain members., , W, , team effectiveness The team’s effect on the organization,, individual team members, and the team’s existence., teams Groups of people who interact and influence each other, are, mutually accountable for achieving common goals associated with, organizational objectives, and perceive themselves as a social entity, within an organization., technical skills Skills that include mastery of specific equipment, or following technical procedures., , hiL30123_glo_478-486.indd 485, , 485, , Adesired future state., , wholly owned subsidiary A foreign subsidiary that is fully, owned by a firm., work sample test A selection method that requires job, candidates to demonstrate their behavior and performance in a realtime situation., workforce diversity Differences in the demographic, cultural,, and personal characteristics of employees., work–life balance, nonwork demands., , state, A of minimal conflict between work and, , 11/4/06 5:26:12 PM

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486 //, , NOTES, , hiL30123_glo_478-486.indd 486, , 11/4/06 5:26:13 PM

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// ORGANIZATION INDEX ///, Abbott, 292, ABC, 388, Abercrombie & Fitch, 139, 142, Activision, 37, ACUITY, 315–316, 321, 324, 325,, 327–328, 329, 333, 337–338, Adeeco Employment Services, 301, AIM Management Group, 364, Airborne Express, 30, 31, Airbus, 43, 61, 497, Air Tran, 27, Akamai, 325, Allied Signal, 20, 404, Allstate, 292, Amazon, 120, 124, AMD, 32, 105, American Airlines, 29, 147, American Express, 292, American Psychological, Association, 363, American Quality Foundation, 169, Ameritrade, 458, Amgen, 65, Anhalt Motor Works, 289, AOL, 118, 119, 120, 124, 154, AOL-Time Warner, 118, 247, Apple Computer, 4, 18, 31, 42–43, 149,, 296, 325, 404, 409, 461, 468, 469, Aramco, 46, 48, Arlington Echo Outdoor Education, Center, 269, Armani, 137, Armstrong Worldwide, Inc., 274, 277, Arthur D. Little, 169, Asea Brown Boveri, 73, AstraZeneca, 50, 363, AT&T, 317, AT&T Labs, 129, Auto Nation, 41, Bain & Company, 296, Ball Janik, 362, Bank of America, 18, 292, Bank of America New Jersey, 292, Banyan Air Service, 303, Barclays Group, 291, Barnes & Noble, 460, BASF, 203, Bayer, 203, BellSouth, 292, Best Buy, 364, Bethlehem Steel, 454, Black MBA Association, 299, Blockbuster Inc., 36, 218, Bloomberg, 474, Bloomingdale’s, 292, Blue Cross and Blue Shield of, Florida, 292, , BMW, 174, 237, 295, 296, Boeing Company, 28, 34, 43–44, 58,, 60–61, 64, 88, 100–101, 109, 153,, 161, 333, 334, 397–398, Bon Appetit Group, 76–77, Bose, 37, Boston Consulting Group, 296, BP, 10, 98–99, Brann Baltimore, 361–362, Bristol-Myers, 246, British Airways, 19, 465–466, Brooks Brothers, 139, Brown & Brown Inc., 245, BSkyB, 388, Bungie Studios, 44, Burberry, 3, 7, 13, 256, BusinessWeek, 21, , DaimlerChrysler, 158, 177, 302, 303, Daiwa House Industry Co., 330, Dell Computer, 43, 48, 62, 135, 136, 137,, 138, 142–143, 147, 149, 159, 165,, 166, 170, 172–173, 174, 209,, 231–232, 233, 234, 235, 236–237,, 239, 240, 241, 242, 243, 244, 245,, 417, 437, 454, 458, 459, 461, DHL, 30–31, Digital Equipment Corporation (DEC),, 460–461, Dofasco, Inc., 288, 289, Dollar Tree, 141, Dow Chemical, 203–204, Dow Jones, 242, Du Pont, 203, DVD Forum, 44, , Cantor Fitzgerald, 110, Careerbuilder.com, 298, Caterpillar, 61, 145, 457, CBS, 81, Celestica, 257, Central Intelligence Agency, 296, Chandler Chicco Agency (CCA), 238, Charles Schwab & Co., 250–251,, 386–387, 388, 392, Chick-fil-A, 13, Chico’s, 139, Chrysler Corporation, 335, 417–418,, 462, 464, Cingular, 292, Cisco Systems, 36, 44, 249, Citibank, 242, Citibank Japan, 242, Citigroup, 61, 292, 296, Clorox, 422, CNN, 62, 63, Coca-Cola Company, 30, 41, 47, 48, 49,, 61, 65, 67, 292, 294, Coffee Partners, 76, Colgate-Palmolive, 292, Comcast, 114, 148, Comerica, 292, Compaq, 242, 243, Compass Group, 295, 296, Conroe Independent School District,, 286–287, 288, Consolidated Edison Co. of, New York, 292, The Container Store, 238, 270, Continental Airlines, 403–404, 405, 406,, 416, 417, 418, 443, Costco Wholesale, 140, 141, 224, 334, Creative Artists Agency (CAA), 388, Creative Toys, Inc., 278, Credit Suisse, 100, CXtec, 347, 348, 350, , eBay, 4, 120, 404, Eddie Bauer, 139, 142, Electronic Arts (EA), 37, 357, Encarta, 125, Encyclopedia Britannica, 125, 454, Enron, 87, 90–91, 92, 95, 96, 126, 231, 241, Ernst & Young, 292, ESCO Korea Ltd., 76, E*Trade, 386–387, 458, 460, Eurfresh, 331, European Union (EU), 58, Exxon, 119–120, Federal Aviation Administration (FAA),, 43–44, Federal Bureau of Investigation, 296, Federal Emergency Management Agency, (FEMA), 187, Federal Reserve, 40, FedEx, 30, 31, 35, 38, 214, Ford, 37, 58, 61, 114, 144–145, 158,, 159, 160–161, 162–163, 177, 178,, 462, 469, Forward Media, 331, Four Seasons Hotels & Resorts, 270, Fox Network, 359, Fox News Channel, 390, 434, Fox TV, 388, Friends of the Earth, 84, Frito-Lay, 340, Gap, 62, Gateway, 143, Genentech, 377, 379, 381, 383, 384, General Electric (GE), 4, 7, 8, 9, 20, 21,, 41, 45, 95, 114, 119, 121, 150, 151,, 182, 191, 193, 212, 214, 240, 246,, 295, 296, 322, 411, 417, 418, 419,, 464–465, 466, 467, 487, , hiL30123_ondx_487-489.indd 487, , 11/17/06 7:24:00 PM

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488, , Organization Index, , General Motors, 37, 114, 137, 149–150,, 153, 158, 172, 177–178, 193, 194,, 224, 237, 462, 469, 474, Genuity Inc., 129, G.I. Joe’s, 332, Gillette, 147, 458, Global Crossing, 34, 129, Goldman Sachs, 296, Google, 46, 121, 153–154, 187, 285, 286,, 287, 289, 290, 296, 297, 298–299,, 300, 301, 303, 308, 309, 350, 431,, 435, 458, 459, Greenpeace, 84, 85, Group 4 Securitas, 359, Haier Group, 244, Halliburton, 89, Harley Davidson, 260, Harvard University, 427–428, HBO, 62, 292, Health Care Service Corp., 292, Hear Music, 5, 6, Heavy Urban Search and Response, (HUSAR), 307, Heritage Foundation, 57, Heritage Mutual, 315, Hewlett-Packard (HP), 91, 135–136, 143,, 147, 169, 172, 173–174, 234, 242,, 265, 437, 445, 460, 469, 472, Hoechst AG, 203, Hollywood Video, 36, Home Depot, 239–240, 245, 246, Honda, 177, 469, Honda America, 301, Honeywell, 20, Hotjobs.com, 298, Hugo Boss Industries, 352, IBM, 4, 19, 32, 43, 61, 68, 74, 244, 262,, 404, 417, 437, 454, 462, 464, ICI, 203, IKON Office Solutions, 292, Imation Corp., 335, Infosys, 68, 74, Intel, 32, 43, 105, 107, 108, 160,, 417, 454, International Steel Group (ISG), 256, Invensys PLC, 261–262, Investors Business Daily, 41, ISG, 331, Japan Airlines, 58, J.C. Bamford, 457, J.D. Power, 168, JetBlue Airways, 27, 29, 46, 147, 152,, 458, 463, J.I. Case, 457, John Deere, 331, 457, Johnson & Johnson, 111, 296, JPMorgan Chase, 292, 334, , hiL30123_ondx_487-489.indd 488, , KarstadtQuelle, 77, Kellogg’s, 175, Kennedy Space Center, 447, 448, Keyspan Corporation, 332, KFC, 71, 332, Kia, 141, 177, Kimberly-Clark, 422, Kmart, 142, Kodak, 113, 114, 452–454, 460, 472, 473, Komatsu, 61, Korea Telecom, 331, KPMG, 362, 434, KT, 331, , Mitsubishi Motors, 73, Mittal Steel, 240–241, Mittel Group, 331, Monsanto, 84–85, Monster.com, 298, MONY Group, 292, Morgan Stanley, 293, 296, Morton Thiokol, 448, Motley Fool, 41, Motorola, 73, Mount Carmel Health, 157, 158, MTV, 62, MTV Networks, 69–70, , Lands’ End, 163, 172, Lawn Mowgul, 331, Lenova, 68, 74, Level 3 Communications, 129, Levi, 172, Lexus, 140, Library of Congress, 439, Liggett-Stashower Inc., 362, Lighthouse Publishing, 271–272, Lilly-ICOS, 108–109, Lincoln Electric, 227, Linksys, 249, LipoScience, 19, Lockheed Martin, 248, 290, 291, Lucent Technologies, 19, 301, Lukoil, 74, , National Aeronautics and Space, Administration (NASA), 278, 301,, 438, 447–448, National Aquarium, 361, National Association of Asian American, Professionals, 299, National Australia Bank (NAB), 245, National City Corp., 297, National Health Service (NHS), 330, 386, National Hockey League Players’, Association, 274, 275, National Society of Hispanic MBAs, 299, National Transportation Safety Board, (NTSB), 267, NBC, 7, Netscape, 87, News Corp., 359, 388, News Ltd., 359, New York Police Department, 406,, 417, 419, The New York Times, 406, New York Transit Police, 406, Nike, 81, 82, 86, 88, 90, 95, 298, Nintendo, 61, Nokia, 64, Nordstrom, 14, 135, 136, 137, 141–142,, 184, 207, 208, 209, 210,, 211, 214, Nortel Networks, 364–365, Novartis, 261, Nucor Corporation, 114, 165, 182,, 183–184, 191, 192, 216–217,, 416, 454, , Macy’s, 292, Manpower, Inc., 441, Marks & Spencer, 316, Marley Cooling Tower Co., 330, Marriott International, 292, Matsushita, 219, 222, 461, Maxjet, 152, Mayo Clinic, 236, Mazda, 469, McDonald’s Corporation, 61, 62, 64,, 67, 68–69, 71, 159, 161–162,, 309–310, 362, McDonnell Douglas, 397, McKinesy & Company, 296, Medrad Inc., 264, Merck & Co., 50, 291, Mercury Interactive, 360, Meriwest Credit Union, 332, Merrill Lynch, 380, 413, 418, 458, 460, Metropolitan Area Transit Authority, (Washington, D.C.), 318, Microsoft, 10, 11, 14, 17, 18, 31, 37, 38,, 43, 44, 46, 49, 61, 62, 87–88, 121,, 128, 136, 149, 150, 151, 152, 154,, 185, 186, 201–202, 217, 238, 296,, 326, 380, 407, 408, 417, 439, 442,, 454, 458, 461, Milton Elementary School (Milton,, Delaware), 269, , Oakley Inc., 238, Ohio Art Company, 88, Olivetti, 32, Organization of Petroleum Exporting, Countries (OPEC), 119–120, Otis Elevator, 22, Outback Steakhouse Inc., 354, Overture Services, 154, Owens Corning, 316, Palm, 469, PDN Inc., 215, 216, 223, , 11/17/06 7:24:01 PM

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Organization Index, , Peoples Temple, 409, PepsiCo, 19, 30, 41, 48, 61, 73, 292, Perrier, 33, Pfizer, 50, 145, 468, Philips NV, 192, 461, Pike Place Fish market, 350, 351, Pinnacol Insurance, 354, Pixar Animation Studios, 404, 445– 446, Pizza Hut, 332, Porsche, 140, Pratt & Whitney, 22, Pretoria Portland Cement, 347, 348, PricewaterhouseCoopers (PWC),, 261, 292, Princeton, 427, Procter & Gamble (P&G), 31, 67, 148,, 150, 186, 234, 235, 242, 262, 297,, 394–395, 421–422, Progressive Inc., 305, Quantum Corporation, 243, 471–472, Qwest Communications, 129, RadioShack, 301, Research in Motion (RIM), 247, Reuters, 474–475, Ritz-Carlton Hotels, 347, 348, Rockwell, 448, Rolex, 137, 141, Royal Dutch Shell, 112, Ryan Air, 458, Sainsbury, 298, Saks Fifth Avenue, 3, Samsung, 219, SANS Fibres, 256, SAP, 382, SAS Institute, 234–235, 295, 466, Saturn Corporation, 474, Sazaby Inc., 76, S.C. Johnson, 422, ScotiaBank, 305, Scott Paper, 85, Sears Roebuck & Co., 331, 354, Sega, 37, Semco Corporation, SA, 338, Sempra Energy, 292, 7-Eleven, 18, Shell, 262, Sikorsky, 22, Sirius Radio, 39, 49, , hiL30123_ondx_487-489.indd 489, , Smith Barney, 356, Smith Corona, 32, 454, Sodexho, 292, Sony, 37, 61, 296, 324, 325, 460,, 461, 468, Southern California Gas Co., 292, Southwest Airlines, 27, 29, 46, 84, 137,, 165, 166, 225, 237, 445, 458, 463, Speedera Networks, 325, 326, Spiegel, 142, Stanford University, 301, Starbucks Corporation, 5, 6, 10, 61, 64,, 67, 75–77, 84, 110, 138, 139, 225,, 435–436, Stevens Aviation, 237, Sunbeam, 85, 405, SunTrust Banks, 292, Taco Bell, 332, Target, 158, Techsonic Industries, 471, Texas Instruments, 175, TheStreet.com, 41, Thompson Financial Services, 474, 360 Networks, 34, 129, 3M, 48, 107, 108, 109, 136, 150, 151,, 200–201, 214, 222–223, 398, 416,, 464, 468, 469, Time magazine, 408, Time Warner, 114, 118, 119, 124, Timex, 137, 141, Titanium Metals Corp., 88, Tokai Rubber Industries Ltd., 330, Toronto Fire Services, 307, Toyota, 36, 37, 48, 61, 64, 71, 114, 137,, 140, 150, 153, 158, 162, 165, 168,, 171–172, 174, 175, 177, 192, 416,, 462, 469, Toyota North America, 292, Transparency International, 89–90, Tully’s, 138, Turner Broadcasting, 292, Tyco International, 87, 96, UBS Warburg, 321, Unilever, 31, 95, 103n, 148, 187,, 195–196, 197, Unimerco, 347, 348, Union Carbide, 110, United Airlines, 28, 29, 46, 152, 463, , 489, , United Nations, 52n, U.S. Department of State, 296, U.S. Trust, 250–251, United States Steel Industry, Association, 39, United Technologies Corporation (UTC),, 22–23, 96, University of Notre Dame, 301, University Village, 5, UPN, 388, UPS, 30, 31, 38, 331, Vancouver City Savings Credit Union, (VanCity), 347, 348, 352–353, 363, Verizon, 316, 326, Verizon Communications, Inc., 287, 288,, 292–293, 299, Verizon Wireless, 114, 117–118, 292, Victoria’s Secret, 139, Virgin Group, 354, Wachovia, 292, Walgreen, 409, The Wall Street Journal, 41, Wal-Mart, 4, 31, 32, 68, 101–102, 133,, 134, 136, 137, 139, 140, 141–142,, 144, 145, 146, 158, 164–165, 170,, 174, 185, 186, 210, 224, 235, 239,, 394–395, 409, 445, Walt Disney, 296, Wang Computers, 454, Wegmans Food Market, 347, 348, 354, Wells Fargo, 292, Whirlpool Corporation, 41, 238, Whole Foods Market, 255–256, 260, 265, Wikipedia, 125, 454, Wild Oats Markets, 17, Williams Communications Group, 129, Wipro Technologies, 68, 74, 304, W.L. Gore & Associates, 347, 348, World Bank, 428, WorldCom, 34, 96, 129, 241, 381, World Trade Organization (WTO), 58, Xerox, 335, 464, 465, 467, XM Radio, 39, 49, XO Communications, 34, 129, Yahoo!, 41, 120, 124, 153, 154, 233, 458, Yum! Brands Inc., 332, , 11/17/06 7:24:01 PM

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\\ SUBJECT INDEX \\\, Ability in MARS model, 317, Ability tests for selection, 303, Achievement, need for, 322, Achievement motivation, 408, Achievement-oriented, leadership, 414, Acquisition, drive to acquire and,, 323, 324, Action, managerial motivation, and, 20, Action learning for employee, training, 306, Action plans, 113, strategic planning and, 117, Active listeners, 443–444, Adaptive cultures, 241, Adjourning stage of team, development, 268, Adjustments in strategic planning, process, 117–118, Adverse impact, 304, Advisory teams, 258, 259, Affiliation, need for, 322, Affirmative action, 304, Age Discrimination in Employment Act, of 1967, 293, Agreeableness, 365, 366, Alarm reaction, 358, 359, Americans with Disabilities Act, of 1990, 293, Analogy, reasoning by, 123–124, Anticompetitive behavior, 87–88, Appeal to a higher authority as influence, tactic, 388–389, Aptitude tests for selection, 303, Artifacts, corporate culture and, 236–237, organizational culture and, 238, 245, Artistic personality/work environment,, 367, 368, Assembly-line production, 159, Assertiveness as influence tactic, 387, Asset utilization, 165–167, Assimilation, merging organizational, cultures through, 247, 248, Assumptions, corporate culture and, 234, Attitudes, 349–351, behavior related to, 349–351, components of, 349, personality and, 366, Attribution process, 437, Audiovisual materials for employee, training, 306, Autonomous subunits, 186, Autonomy, employee motivation and, 337, innovation and, 472, Availability error, 124–125, , Baby boomers, 291, Backchannel, 225, Balanced scorecard (BSC), 116, 223–225,, 331–332, Bargaining power, of buyers, 31–32, of suppliers, 32, Bargaining zone model of negotiation,, 393–394, Barriers, to communication. See Communication, barriers and breakdowns, to entry, 30, to exit, 34, to imitation, 136, Beauty premium, 437, Behavior, modeling of, by transformational, leaders, 417–418, negotiation and, 395, Behavioral intentions, attitudes and, 349, Behavior perspective on leadership,, 410–411, Beliefs, attitudes and, 349, Biases, cognitive, 123–125, framing, 125, Big Five personality dimensions,, 365–366, Blogs, media richness of, 431, Bona fide occupational, qualifications, 293, Bonding, drive to bond and, 323, 324, Bounded rationality, 122, Brand loyalty, 30, Broad market strategy, 140, Buffer stocks, 172, Build-to-order model, 172–174, Build-to-stock model, 172, 173, Bundling tactic, 148, Bureaucratic controls, 213–214, Business ethics, 86–97, anticompetitive behavior and, 87–88, behaving ethically and, 94–97, corruption and, 89–90, environmental degradation and, 88–89, ethical dilemmas and, 86, information manipulation and, 87, justice theories and, 93–94, opportunistic exploitation and, 88, organizational culture and, 241–242, rights theories and, 92–93, roots of unethical behavior and,, 90–92, self-dealing and, 87, 91, substandard working conditions and, 88, utilitarian approach to, 92, Business-level general managers, 9, , Business-level strategy, 107, 134,, 137–143, competitive advantages and strategic, fit and, 146, differentiation, 137–139, implementing, 143–146, low-cost, 137, low cost-differentiation frontier and,, 141–143, market segmentation and, 139–141, value chain and, 144–146, Business models, 458–459, Business systems, national differences in,, 64–65, Buyers, bargaining power of, 31–32, Calculus-based trust, 272, Capacity, excess, 34, Capital, human, 7, 45–46, productivity of, 158–159, Career satisfaction, personality and, 367, Centrality, power and, 385, Centralization, arguments for, 185, choice between decentralization and,, 186–187, Ceremonies, corporate culture and, 237, Changing organizational culture,, 242–246, artifacts and, 245, culturally consistent rewards and,, 245–246, employee selection and socialization, and, 246, founders’ and leaders’ actions and,, 243–244, Channels of communication. See, Communication channels, Charisma, 409, 419, Chief executive officers (CEOs), 8–9, Chief financial officers (CFOs), 9, Chief operating officers (COOs), 9, Chief technology officers (CTOs), 9, Civil Rights Act of 1964, 293, Civil Rights Act of 1991, 293, Coaching, 306, Coalitions as influence tactic, 388, Cognitive biases, 123–125, Cognitive dissonance, 351, Cognitive schemata, 460–461, Commissions, 330, Commitment, escalating, 123, influence and, 391, Commitments, strategic, inertia, and, 462, Commodity products, 33, , 502, , hiL30123_sndx_502-512.indd 502, , 11/17/06 7:24:21 PM

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Subject Index, , Communication, 426–446, active listening and, 443–444, barriers and breakdowns in. See, Communication barriers and, breakdowns, channels for. See Communication, channels, direct, with employees, 445, downward, 434–435, facilitating through workspace design,, 445–446, grapevine and, 436, 444–445, horizontal, 435, improving, 442–446, matching media to messages and, 442, nonverbal, 431–432, process of, 428–429, reducing information overload, and, 442, upward, 435, verbal, 430–431, Communication barriers and breakdowns,, 436–442, cultural differences as, 440–441, filtering as, 438, gender differences as, 441–442, information overload as, 439–440, language barriers as, 438–439, perceptions as, 436–438, Communication channels, 429–434, data-carrying capacity of, 430, formal, 434–435, informal, 435–436, nonverbal, 431–432, selection of, 432–434, verbal, 430–431, Communism, collapse in Eastern, Europe, 57, Competencies, 16–20, distinctive, 135, managerial motivation as, 20, managerial skills as, 16–29, managerial values as, 19–20, of virtual teams, 262, Competency-based rewards, 330, Competency perspective on leadership,, 407–410, achievement motivation and, 408, charisma and, 409, emotional intelligence and, 409–410, limitations and implications of, 410, power motivation and, 408, strategic thinking and, 407–408, Competition, managerial motivation, and, 20, Competitive advantage, strategic fit and, 146, superior performance and, 134–137, sustainable, 135–136, , hiL30123_sndx_502-512.indd 503, , Competitive intelligence, 43–44, Competitive structure of industries, 36–37, Competitive tactics, 147–148, pricing decisions and, 147, product decisions and, 148, Complementors, 37, Completer role in teams, 266, Compliance, influence and, 391, Component devaluation costs, 169, Computer-based training, 306, Conceptual skills, 16–19, Conflict, 392. See also Negotiation;, Team conflict, Congruence in Holland’s theory, 367, Conscientiousness, 365, 366, Consistency in Holland’s theory, 368, Consolidated industries, 36, Consumer behavior, national differences, in, 64, Containerization, 59, Containment stage of crisis management, plan, 111, Contingencies, in path-goal theory, 415, of power, 385–386, Contingency perspective on leadership,, 411–416, Fiedler’s contingency theory and,, 411–413, leadership substitutes and, 416, path-goal theory and, 413–416, Contingency plans, 110–112, Contingent work, 289, Continuance commitment, 356, Continuous flow production, 160, Control(s), 182, 208, bureaucratic, 213–214, cultural, 216–217, exerting over environment, 44, illusion of, 124, market, 218–219, output, 214–216, peer, 218, personal, 212–213, Controlling as management function, 6, Control systems, 206–227, backchannel control methods, and, 225, balanced scorecard and, 223–225, bureaucratic controls and, 213–214, comparing performance against goals, and standards and, 210–211, corporate culture and, 239, corrective action and, 211, cultural control and, 216–217, in diversified firms, 221–223, establishing goals and standards and,, 208–210, incentives and, 217–218, , 503, , Control systems—Cont., market controls and, 218–219, measuring performance and, 210, output controls and, 214–216, personal controls and, 212–213, providing reinforcement and, 211–212, in single business, 220–221, Conventional personality/work, environment, 367, 368, Coordination, integrating mechanisms, and, 201–202, Coordinator role in teams, 266, Core competencies, leveraging, 150, Corporate culture, functions served by, 239, workforce diversity and, 290, Corporate governance, promoting ethical, behavior and, 96–97, Corporate-level strategy, 107, 134,, 148–151, diversification and, 150–151, focus on single business and, 149, international expansion and, 151, vertical integration and, 149–150, Corrective action, 211, Corruption, 89–90, international comparison of, 89–90, power and, 379, Costs, of communication, falling, 58–59, component devaluation, 169, fixed, 35–36, influence, 190, inventory-driven, 169, obsolescence, 169, price reduction, 169, of production systems, 160–162, return, 169, stockout, 169, switching, 31–32, of tall hierarchies, 190, of transportation, falling, 58–59, Cost structure of firms, 35–36, Countercultures, 235, Countervailing power, 378, Crisis management plans, 110–111, Cross-functional integration, innovation, and, 470–471, Cults, corporate, 240–241, Cultural control, 216–217, Cultural differences as communication, barrier, 440–441, Culture, organizational. See, Organizational culture, Currency exchange rates, 40, Customer perspective, balanced scorecard, and, 223, Customer satisfaction, job satisfaction, and, 354–355, , 11/17/06 7:24:22 PM

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504, , Subject Index, , Decentralization, arguments for, 185–186, choice between centralization and,, 186–187, Decisional roles of managers, 15, Decision criteria, 122, Decision heuristics, 123, Decision making, 121–127, bounded rationality and, 122, cognitive biases and, 123–125, decision heuristics and, 123, groupthink and, 126–127, improving, 127, promoting ethical behavior and,, 95–96, prospect theory and, 125–126, rational decision-making model, and, 122, satisficing and, 122–123, Deculturation, merging organizational, cultures through, 248, Deep-level diversity, 291, Defense, drive to defend and, 323, 324, Deficiency needs, 320, Delayering, 191, Demand, excess, 34, for human resources, 287–288, rivalry and, 33–35, Demographic forces in general, environment, 40–41, Departmental teams, 258, 259, Design for manufacturing, 175, Developing employees as management, function, 6–7, Devil’s advocacy, 127, Devil’s advocate role of managers, 16, Dialectic inquiry, 127, Difference principle, 93, Differentiation in Holland’s theory, 368, Differentiation strategy, 137–139, Diminishing returns, 141, Directive leadership, 414, Discontinuous change, 42–43, Discretion, power and, 385–386, Discrimination, employment,, 293–294, Discussions as training method, 306, Disparate action, 304, Disruptive technology, 456–458, Dissemination role of managers, 14, Dissent, suppression by strong, organizational culture, 241, Distinctive competencies, 135, Distress, 357, consequences of, 358, Disturbance handler role of managers, 15, Diversification, control systems and, 221–223, failures of, 151, , hiL30123_sndx_502-512.indd 504, , Diversification—Cont., internal governance and, 151, leveraging core competencies, and, 150, related, 150, unrelated, 150, Diversification strategy, 150–151, Diversity. See Workforce diversity, DMAIC, 168, Downward communication, 434–435, Drives, 319, to acquire, 323, 324, to bond, 323, 324, to defend, 323, 324, four-drive theory and, 322–325, to learn, 323, 324, Drop-off, 439, Economic growth, 39–40, Economic order quantity (EOQ),170–171, Economies of location, 151, Economies of scale, as barrier to entry, 30, globalization and, 67, 151, low-cost strategy and, 137, sources of, 160–161, Economies of scope, 150, Effective leadership, 405–406, Efficiency frontier, 141, 80–20 rule, 123, Electronic data interchange (EDI), 174, E-mail, media richness of, 430–431, Emotion(s), 348–351, attitudes and behavior and, 349–351, cognitive dissonance and, 351, personality and, 366, Emotional intelligence, 409–410, Emotion contagion, 432, Empathy, communication and, 443, Employee(s). See also Human capital;, Human resource entries, developing, as management, function, 6–7, empowerment of, 337–338, 418, executive–employee pay ratios, and, 334, in internal environment, 29, job satisfaction and. See Job, satisfaction, organizational culture and, 246, recruiting. See Recruitment, rewards and. See Extrinsic rewards;, Intrinsic rewards; Reward systems, selecting. See Selection, Employee assistance programs, (EAPs), 363, Employee engagement, 316–318, MARS model of, 316–318, Employee involvement, organizational, commitment and, 357, , Employee orientation, 304–305, Employee stock ownership plans, (ESOPs), 331–332, Employee training, 305–307, managerial support for, 307, methods for, 305–307, needs analysis for, 305, Employer brand, 295–296, Employment discrimination, 293–294, Employment interviews, 302–303, Empowerment, 337–338, 418, Enacted values, 19, 233, Enterprising personality/work, environment, 367, 368, Entrepreneur role of managers, 15, Entry, barriers to, 30, into foreign markets, modes of, 70–71, Environment, 26–51, external. See External environment;, General environment; Task, environment, internal. See Internal environment, Environmental degradation, 88–89, Equal Pay Act of 1963, 293, Equilibrium, punctuated, 459–460, Equity of rewards, 333–335, Equity theory, 334, Escalating commitment, 123, Espoused values, 19, 233, Establishing client relationships, 337, Ethical dilemmas, 86, Ethical values, 19–20, Ethics, business. See Business ethics, personal, 90, Ethics officers, 96, Ethnocentric staffing, 72, 73, E-to-P expectancy, 327, 328, Eustress, 358, Evaluating in active listening, 444, Evaluator role in teams, 266, Excess capacity, 34, Excess demand, 34, Exchange as influence tactic, 388, Exchange rates, 40, Exhaustion in general adaptation, syndrome, 358, 359, Exit, barriers to, 34, Exit-voice-loyalty-neglect (EVLN), model, 352–353, Expatriates, 72, Expectancy theory of motivation,, 327–329, Experienced meaningfulness, 337, Experienced responsibility, 337, Expertise, power and, 381, Exploitation, opportunistic, 88, Exporting, entry into foreign, markets via, 70, , 11/17/06 7:24:22 PM

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Subject Index, , External analysis, strategic planning, and, 116, External constraints, inertia and, 463, External environment, 28–29. See also, General environment; Task, environment, incremental versus discontinuous, change in, 42–43, uncertainty and, 43–44, Extrinsic rewards, 329–335, competency-based, 330, equitable reward and, 333–335, job status-based, 330, membership- and seniority-based, 329, nonfinancial, 332, performance-based, 330–333, Extroversion, 365, 366, Face-to-face communication, media, richness of, 430, Family and Medical Leave Act of 1993,, 293, 364, Feedback, motivation through,, 325–326, Feelings, attitudes and, 349, Fiedler’s contingency theory, 411–413, Figurehead role of managers, 13, Filtering, 438, Financial perspective, balanced scorecard, and, 223, 225, Finisher role in teams, 266, Firms, cost structure of, 35–36, interdependence of, 36–37, internal environment of. See Internal, environment, multinational. See Multinational, enterprises (MNEs), organizational architecture of, 45, Five forces model, 29–38, Fixed costs, 35–36, Flaming, 430, Flat hierarchies, 188–191, Flexibility of production systems,, 160–162, Flexible production technology,, 162–163, Focus strategy, 140, Foreign direct investment, 58, 60, Foreign exchange rates, 40, Formal communication channels, 434–435, Forming stage of team, development, 268, Founders, organizational culture and,, 243–244, Four-drive theory, 322–325, Fragmented industries, 36, Framing bias, 125, Franchising, entry into foreign markets, via, 70–71, , hiL30123_sndx_502-512.indd 505, , Frontline managers, 7, 8, 10, Functional managers, 7, 8, 9–10, Functional structure, 192–193, control systems and, 220–221, Fundamental attribution error, 437, Gainsharing plans, 331, Gender differences, as communication barrier, 441–442, in leadership, 419–420, General adaptation syndrome, 358, 359, General Agreement on Tariffs and Trade, (GATT), 58, General environment, 28, 38–42, demographic forces in, 40–41, international forces in, 41–42, macroeconomic forces in, 39–40, political and legal forces in, 39, sociocultural forces in, 41, technological forces in, 41, General managers, 7, 8, corporate-level, 8–9, Generation X, 291, Generation Y, 291, Geocentric staffing, 72, 73, Geographic structure, 194–196, Globalization, 54–77, benefits of, 66–69, constraints on, 62–66, differences in social culture and,, 65–66, entry mode and, 70–71, expansion of markets by, 67, falling barriers to trade and investment, and, 58, falling communication and, transportation costs and, 58–59, global learning of skills and, 68–69, global standardization versus local, customization and, 69–70, implications of, 59–62, locating activities of enterprise and,, 71–72, location economies and, 67–68, management challenges related to,, 69–73, managing people in multinational firms, and, 72–73, of markets, 61, national differences in business, systems and, 64–65, national differences in consumer, behavior and, 64, of production, 60–61, protectionist countertrends and, 63–64, scale economies and, 67, spread of market-based systems and,, 56–57, technology as facilitator of, 61–62, Global learning, 151, , 505, , Global standardization, 69–70, Goals, comparing performance, against, 210–211, establishing, 208–210, setting, motivation through, 325–326, strategic planning and, 115–116, superordinate, 277, Grapevine, description of, 436, proactive use of, 444–445, Groupthink, 126–127, Growth need, 320, Guerrilla recruitment, 298–299, Harassment, psychological, 359–360, sexual, 360, Heavyweight project managers, 471, Hierarchical rank, power related to,, 379–381, 412, Hiring, organizational culture and, 246, promoting ethical behavior and, 95, Holland’s theory, 367–368, 374, Horizontal communication, 435, Horizontal differentiation, 184,, 191–198, functional structure and, 192–193, geographic structure and, 194–196, matrix structure and, 196–198, multidivisional structure, and, 193–194, Hostile work environment, 360, Human capital, 7, 45–46, Human resource(s), demand for, 287–288, recruiting job applicants and. See, Recruitment, selection and. See Selection, supply of, 288–289, Human resource (HR) planning,, 286–290, contingent workforce and, 289–290, demand and, 287–288, job analysis and, 287, supply and, 288–289, Human resources function as support, activity, 145, Human skills, 17–19, Icarus paradox, 460, Identification-based trust, 272, Illusion of control, 124, Imitation, barriers to, 136, Implementation in strategic planning, process, 116, Implementer role in teams, 266, Impression management as influence, tactic, 389–390, , 11/17/06 7:24:22 PM

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506, , Subject Index, , Incentives, 6, control through, 217–218, as organization architecture, component, 182, Inclusive meritocracy, 292, Incremental change, 42, 43, Incremental innovation, 468, Individual attributes, power and,, 383–384, Industries, competitive structure of, 36–37, consolidated, 36, fragmented, 36, Industry-specific regulators, 39, Inertia. See Organizational inertia, Inflation, 40, Influence, 386–392, consequences and contingencies and,, 391–392, influence tactics and, 386–391, Influence costs, 190, Influence tactics, 386–391, Informal communication channels,, 435–436, Information, control over, as power, 381–383, distortion of, in tall hierarchies, 190, Informational roles of managers, 14, Information control as influence, tactic, 391, Information manipulation, 87, Information overload, 439– 440, reducing, 442, Information systems, inventory management and,, 174–175, as support activity, 145–146, Information technologies, virtual teams, and, 262, Ingratiation as influence tactic, 389, Initial offer point, 393, Innovation, 468–472, generating, 469–472, incremental, 468, new product failures and, 468–469, quantum, 468, value, 142–143, Innovation perspective, balanced, scorecard and, 224, Inoculation effect, 391, Instant messaging (IM), media richness, of, 431, Intangible resources, 46, Integrating mechanisms, 184, 198–202, formal, 198–199, informal, 199–201, strategy and coordination and,, 201–202, Integration, merging organizational, cultures through, 248, , hiL30123_sndx_502-512.indd 506, , Integrity, 408, of transformational leaders, 418, Interest rates, 40, Internal analysis, strategic planning, and, 116, Internal environment, 28, 29, 44–48, employees and, 45–46, internal organization of firm, and, 44–45, resources and, 46–48, Internal governance, diversification, and, 151, International expansion, 151, International forces. See also, Globalization, in general environment, 41–42, International trade, 58, protectionism and, 63–64, Internet. See also World Wide Web, recruitment using, 297–298, Interpersonal networks, power, and, 383, Interpersonal roles of managers, 13–14, Interviews, employment, 302–303, Intrinsic rewards, 328, 335–338, empowerment and, 337–338, job characteristics model and,, 336–337, job enrichment and, 337–338, Introversion, 365, Inventory-driven costs, 169, Inventory holding costs, 169, Inventory management, 169–174, build to order and, 172–174, economic order quantity and, 170–171, just-in-time inventory systems and,, 171–172, Inventory turnover, 170, Investigative personality/work, environment, 367, 368, Jargon, 439, Job analysis, 287, Job applicants. See Recruitment;, Selection, Job application forms, 301, Job enrichment, 337–338, Job evaluation, 330, Job feedback, 337, Job rotation, 306, Job satisfaction, 351–355, customer satisfaction and, 354–355, performance and, 354, work behavior and, 352–353, Job sharing, 364, Job shop systems, 159, Job status-based rewards, 330, Joint ventures, entry into foreign, markets via, 71, , Justice, organizational commitment, and, 356, Justice theories, 93–94, Just-in-time (JIT) inventory systems,, 170, 171–172, Kanban system, 171, Karoshi, 360, Knowledge-based trust, 272, Knowledge networks, 199–201, Knowledge of results, 337, Labor, productivity of, 158–159, Language, organizational, 238, Language barriers, 438–439, Leader(s). See also Manager(s);, Managerial entries, organizational culture and, 243–244, transactional, 417, Leader–member relations, 412, Leadership, 402–420. See also, Management, achievement-oriented, 414, behavior perspective on, 410–411, commitment to change, 463, competency perspective on, 407–410, contingency perspective on, 411–416, directive, 414, effective, 405–406, gender differences in, 419–420, management contrasted with, 404–405, participative, 414, power–influence perspective, on, 406–407, promoting ethical behavior and, 95, styles of, 414, supportive, 414, transformational, 416–419, unethical behavior and, 91–92, Leadership role of managers, 13, Leadership substitutes, 416, Leadership teams, 258, 259, Leading as management function, 6, Learned needs theory, 322, Learning, drive to learn and, 323, 324, Learning effects, 161, Lectures as training method, 306, Legacy constraints, 136, Legal forces in general environment, 39, Legends, corporate culture and, 237, Legitimate power, 380, Liaison role of managers, 13–14, Licensing, entry into foreign, markets via, 70, Listening, active, 443–444, Local customization strategy, 69–70, Location economies, 151, multinational enterprises and, 67–68, Locations of activities of multinational, enterprises, 71–72, , 11/17/06 7:24:22 PM

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Subject Index, , Loop backs, 164, Low-cost strategy, 137, Macroeconomic forces in general, environment, 39–40, Management, defined, 4, executive–employee pay ratios and, 334, functions of, 4–10, leadership contrasted with, 404–405, support for training process from, 307, Management by walking around, 445, Manager(s), becoming, 10–11, direct contact between, as integrating, mechanism, 198–199, frontline, 7, 8, 10, functional, 7, 8, 9–10, general, 7, 8–9, job of, 11–12, operations, 158, types of, 7, 8, Managerial motivation, 20, Managerial roles, decisional, 15, informational, 14, interpersonal, 13–14, Mintzberg’s model of, 12–16, Managerial skills, 16–19, conceptual, 16–17, human, 17–29, technical, 17, Managerial values, 19–20, Managing people in multinational, enterprises, 72–73, Market(s), globalization of, 61, Market controls, 218–219, Market economies, 56, 57, Marketing as primary activity, 144–145, Market segmentation, 139–141, choosing segments to serve and, 140, strategy and, 140–141, MARS model, 316–318, ability and, 317, diagnosing employee disengagement, using, 318, motivation and, 316–317, role perceptions and, 317–318, situational factors and, 318, Marxism, 57, Maslow’s needs hierarchy theory, 319–321, Mass customization, 163, Matrix structure, 196–198, Media, matching to messages, 442, Media richness, 430–431, Membership-based rewards, 329, Mentoring, 306, Mentoring role of managers, 16, Mergers, organizational culture during,, 246–249, , hiL30123_sndx_502-512.indd 507, , Mintzberg’s model, 12–16, Mission, strategic planning and,, 113–114, Model cell, 164, Monitor role, of managers, 14, in teams, 266, Moral courage, promoting ethical, behavior and, 97, Motivation, 314–319, achievement, 408, drives and, 319, 322–325, expectancy theory of, 327–329, goal setting and feedback and,, 325–326, managerial, 20, MARS model of, 316–318, needs and, 319–322, power, 408, rewards and. See Extrinsic rewards;, Intrinsic rewards, Moving organizations, organization, change and, 465–466, Multidivisional structure, 193–194, Multinational enterprises (MNEs),, 66–69, global learning and, 68–69, location economies and, 67–68, market expansion and, 67, scale economies and, 67, Need(s), 319–322, learned needs theory and, 322, Maslow’s needs hierarchy theory and,, 319–321, Need for achievement (nAch), 322, Need for affiliation (nAff), 20, 322, Need for power (nPow), 322, Needs analysis for training, 305, Negotiation, 391–395, bargaining zone model of,, 393–394, Negotiator role of managers, 15, Network building as influence, tactic, 387, Neuroticism, 365, 366, New products, failure of, 468–469, Nonfinancial rewards, 332, Nonverbal communication, 431–432, Norm(s), definition of, 65, in teams, 269–270, Norming stage of team, development, 268, North American Free Trade Agreement, (NAFTA), 58, Obsolescence costs, 169, Online recruitment, 297–298, Openness to experience, 365, 366, , 507, , Operating plans, 107, Operating strategy, 107, Operation(s), 156–178, asset utilization and, 165–166, inventory management and. See, Inventory management, product development and, 175, production system and. See Production, system, productivity and, 158–159, 175, quality management and, 167–169, supply chain management and, information systems and, 174–175, Operational perspective, balanced, scorecard and, 223–224, Operations managers, 158, Opportunistic exploitation, 88, Opportunities, 28–29, Organizational analysis, 305, Organizational architecture, 45, Organizational change, 463–466, failed and successful efforts for,, 466–467, leadership commitment to, 463–464, moving the organization and,, 465–466, refreezing the organization and, 466, unfreezing the organization and,, 464–465, Organizational commitment, 355–357, building, 356–357, continuance commitment and, 356, Organizational communication, 434–436, formal channels and, 434–435, informal channels and, 435–436, Organizational comprehension,, organizational commitment, and, 357, Organizational culture, 45, 182–183,, 230-249, adaptive, 241, artifacts and, 236–237, 238, business ethics and, 241–242, changing, 242–246, concept of, 232, content of, 234–235, cults and suppression of dissent and,, 240–241, importance of, 239–242, inertia and, 461, during mergers, 246–249, organizational language and, 238, physical structures and decor and, 238, promoting ethical behavior and, 95, rituals and ceremonies and, 237, shared assumptions and, 234, shared values and, 233, stories and legends and, 237, strength and fit of, 239–240, subcultures and, 235, , 11/17/06 7:24:23 PM

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508, , Subject Index, , Organizational inertia, 460–463, cognitive schemata and, 460–461, commitments and capabilities, and, 462, external institutional constraints, and, 463, internal political constraints and, 461, organizational culture and, 461, Organizational rewards, 331–332, Organizational socialization, 246, Organizational subcultures, 235, Organization architecture, 180–204. See, also Control systems; Incentives;, Organizational culture; Organization, structure, value chain and, 146, Organization of firm in internal, environment, 29, Organization structure, 182, horizontal differentiation and, 184,, 191–198, integrating mechanisms and, 184,, 198–202, matching controls to, 220–223, vertical differentiation and, 184–191, Organizing as management function, 5, Orienting employees, 304–305, Outcome valences, 327, 328, Output controls, 214–216, Outside view, 127, Outsourcing, 55, Paradigm shifts, 454–460, disruptive technology and, 456–458, natural limits to technology and,, 455–456, 457, new business model and, 458–459, punctuated equilibrium and, 459–460, Participative leadership, 414, Partly parallel development, processes, 472, Path-goal theory, 413–416, Patterned behavior description, interview, 302, Peer control, 218, People-oriented behavior, 411, People-oriented leaders, 412, Perception, communication and, 436–438, selective, 436–437, Performance, comparing against goals and standards,, 210–211, job satisfaction and, 354, measuring, 210, personality and, 367, Performance ambiguity, 216, Performance appraisals, definition of, 331, improving, 332–333, , hiL30123_sndx_502-512.indd 508, , Performance-based rewards, 330–333, Performance gap analysis, 305, Performance goals, pressure to meet, 91, Performing stage of team, development, 268, Personal controls, 212–213, Personal ethics, 90, Personality, 365–368, Big Five personality dimensions and,, 365–366, career satisfaction and, 367–368, emotions and attitudes and, 366, performance and, 367, stress and well-being and, 366–367, Personality tests for selection, 303, Personalized power, 322, Personalized power orientation, 20, Personal networks, 435–436, Persuasion as influence tactic, 390–391, Pharmaceutical industry, 50–51, Physical structure, organizational culture, and, 238, Piece rate systems, 330–331, Plan(s). See also Planning; Strategic, planning, action, 113, 117, contingency, 110–112, crisis management, 110–111, operating, 107, single-use, 109, standing, 109–110, strategic, 107, tactical, 108–109, unit, 107–108, Planning, 106–121. See also Plan(s), benefits of, 118–119, contingency, 110–112, human resource. See Human resource, (HR) planning, improving, 120–121, levels of, 107–108, as management function, 4–5, pitfalls of, 119–120, planning horizons and, 108–109, scenario, 111–112, strategic. See Strategic planning, Planning horizons, 108–109, Plant role in teams, 266, Political constraints, internal, 461, Political forces in general, environment, 39, Polycentric staffing, 72, 73, Position power, 379–381, 412, Power, 378–386, contingencies of, 385–386, control over information and, 381–383, countervailing, 378, expert, 381, individual attributes and, 383–384, influence and. See Influence, , Power —Cont., legitimate, 380, managerial motivation and, 20, need for, 322, negotiation and, 394–395, networks of allies and, 383, personalized, 322, position, 379–381, 412, over rewards and sanctions, 380–381, over scarce resources, 381, socialized, 322, sources of, 379–384, Power–influence perspective on, leadership, 406–407, Power motivation, 408, Preparation stage of crisis management, plan, 110–111, Price inflation, 40, Price reduction costs, 169, Pricing decisions, tactical, 147, Prior hypothesis bias, 123, Process innovation, 164–165, Process losses, 258, Process reengineering, 164, Procurement as support activity, 145, Product(s), commodity, 33, Product decisions, tactical, 148, Product development, 175, Product development teams, 471–472, Production, globalization of, 60–61, as primary activity, 144, Production system, 159–165, flexibility and costs and, 160–162, flexible production technology and,, 162–163, process reengineering and process, innovation and, 164–165, traditional, 159–160, Production teams, 258, 259, Productivity, 158–159, of capital, 158–159, of labor, 158–159, social loafing and, 258, Product proliferation tactic, 148, Profit-sharing plans, 331–332, Project management, innovation and,, 469–470, Promotion, promoting ethical behavior, and, 95, Prospect theory, 125–126, Protectionism, 63–64, Psychological harassment, 359–360, P-to-O expectancy, 327, 328, 329, Punctuated equilibrium, 43, 459–460, Quality management, 167–169, Quantum innovation, 468, Quid pro quo, 360, Quotas, 58, , 11/17/06 7:24:23 PM

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Subject Index, , Rational decision-making, model, 122, Rationality, bounded, 122, Readings as training method, 306, Realistic job previews (RJPs), 304, Realistic personality/work environment,, 367, 368, Reasoning by analogy, 123–124, Recency effect, 438, Recognition as reward, 332, Recruitment, 294–299, channels for, 297–299, diversity and, 299, employer brand and, 295–296, internal versus external, 296–297, Reference checks, 301, Refreezing, organization change, and, 466, Regional trade agreements, 58, Rehabilitation Act of 1973, 293, Reinforcement for meeting goals and, standards, 211–212, Related diversification, 150, Reliability of selection methods,, 299–300, Rephrasing, communication and, 443, Representativeness, 124, Research and development (R&D), 144,, 175. See also Innovation, Resilience, 366–367, Resistance, in general adaptation syndrome,, 358, 359, influence and, 391, Resistance point, 393, Resource(s), 46–48, intangible, 46, power over, 381, tangible, 46, Resource allocator role of managers, 15, Resource-based view, 46, Resource investigator role in, teams, 266, Responding in active listening, 444, Résumés, 301, Return costs, 169, Reviewing in strategic planning process,, 117–118, Rewards, power over, 380–381, Reward systems. See also Extrinsic, rewards, organizational culture and, 245–246, Rights theories, 92–93, Rituals, corporate culture and, 237, Rivalry between firms, 33–37, competitive structure and, 36–37, cost structure and, 35–36, demand and supply conditions, and, 33–35, nature of product and, 33, , hiL30123_sndx_502-512.indd 509, , Rivals, failure to anticipate actions, of, 120, Role(s), managerial, 12–16, in teams, 265–266, Role perceptions in MARS model,, 317–318, Role-playing, for employee, training, 306, ROWE: results-oriented work, environment, 364, Sales, as primary activity, 144–145, tie-in, 87–88, Sanctions, power over, 380–381, Sarbanes-Oxley Act, 96, 97, Satisficing, 122–123, Scale economies. See Economies, of scale, Scenario planning, 111–112, Scope economies, 150, Segmentation. See Market segmentation, Selection, 299–304, ability tests and, 303, application forms and, 301, diversity and, 303–304, employment interviews and,, 302–303, personality tests and, 303, reference checks and, 301, reliability of selection methods and,, 299–300, résumés and, 301, validity of selection methods, and, 300–301, work sample tests and, 301, Selective perception, 436–437, Self-actualization, 320, Self-control, 216, Self-dealing, 87, 91, Self-directed teams, 259, 260–261, Self-serving bias, 437–438, Seniority-based rewards, 329, Sense making, corporate culture, and, 239, Sensing, 443–444, Separation, merging organizational, cultures through, 248–249, Service as primary activity, 145, Service teams, 258, 259, Sexual harassment, 360, Shaper role in teams, 266, Shared values, 19, 233, organizational commitment and, 356, Silent authority as influence, tactic, 387, Simulations for employee, training, 306, Single-use plans, 109, , 509, , Situational factors in MARS model, 318, negotiation and, 394, Six sigma methodology, 168–169, Skills, conceptual, 16–19, global learning of, 68–69, human, 17–19, technical, 16–19, variety of, 336, Skunkworks, 258, 259, Small batch production systems, 159, Social culture, national differences in,, 65–66, Social glue, corporate culture as, 239, Socialist economies, 56–57, Socialization, organizational, 246, Socialized power, 322, Socialized power orientation, 20, Social loafing, 258, Social personality/work environment,, 367, 368, Social responsibility, arguments for, 98–99, Friedman doctrine and, 99, Social support, stress management, and, 363, Sociocultural forces in general, environment, 41, Span of control, 189, 190, Specialist role in teams, 266, Spokesperson role of managers, 14, Staffing. See Human resource (HR), planning, Stakeholders, 82–86, organization and, 83, taking into account, 83–86, Standards, 208, comparing performance against,, 210–211, establishing, 208–210, Standing plans, 109–110, Stereotyping, 437, Stock options, 331–332, Stockout costs, 169, Stories, corporate culture and, 237, Storming stage of team, development, 268, Strategic commitments, inertia and, 462, Strategic planning, 112–118, action plans and, 117, external and internal analysis, and, 116, goals and, 115–116, implementation and, 117, mission and, 113–114, review and adjustments and,, 117–118, SWOT analysis and, 116, values and, 114–115, vision and, 114, , 11/17/06 7:24:23 PM

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510, , Subject Index, , Strategic plans, 107, Strategic thinking, 407–408, Strategizing as management function, 5, Strategy, 4–5, 132–154, broad market, 140, business-level. See Business-level, strategy, competitive advantage and. See, Competitive advantage, competitive tactics and, 147–148, corporate-level. See Corporate-level, strategy, differentiation, 137–139, focus, 140, integrating mechanisms and,, 201–202, low-cost, 137, matching controls to, 220–223, operating, 107, Strategy implementation, 117, Strengths, 29, Stress, 357–365, changing perceptions of, 362, consequences of distress and, 358, controlling consequences of,, 362–363, distress and, 357, eustress and, 357, general adaptation syndrome, and, 358, 359, personality and, 366–367, sources of, 359–361, work-life balance and, 363–365, work-related, managing, 361–363, Stressors, 359–361, harassment and incivility as,, 359–360, low task control as, 360–361, removing, 363, withdrawal from, 361–362, work overload as, 360, Subcultures, organizational, 235, Subgoals, 208, Substandard working conditions, 88, Substitutability, power and, 385, Substitute products, 32, Superordinate goals, 277, Suppliers, bargaining power of, 32, Supply, of human resources, 288–289, rivalry and, 33–35, Supply chain, 174, management of, 174–175, Support, organizational commitment, and, 356, Supportive leadership, 414, Surface-level diversity, 290–291, Sustainable competitive advantage,, 135–136, Swift trust, 273, , hiL30123_sndx_502-512.indd 510, , Switching costs, 31–32, SWOT analysis, 29, strategic planning and, 113, 116, Tactical plans, 108–109, Tactics, competitive, 147–148, Tall hierarchies, 188–191, delayering, 191, problems in, 189–190, span of control and, 189, 190, Tangible resources, 46, Target point, 393, Tariffs, 58, Task control, low, 360–361, Task environment, 28, bargaining power of buyers and,, 31–32, bargaining power of suppliers, and, 32, complementors and, 37, five forces model of, 29–38, intensity of rivalry and, 33–37, threat of entry and, 30–31, threat of substitutes and, 32, Task forces, 258, 259, Task identity, 336, Task interdependence, 264, Task-oriented behavior, 411, Task-oriented leaders, 412, Task significance, 337, Task structure, 412, Team(s), 254–278, advisory, 258, 259, cohesiveness of, 271–272, composition of, 265, conflict in, 274–277, departmental, 258, 259, design of, 264–266, development of, 267–269, effectiveness of, 262–264, leadership, 258, 259, norms of, 269–270, problems with, 258, production, 258, 259, roles in, 265–266, self-directed, 259, 260–261, service, 258, 259, size of, 264–265, skunkworks as, 258, 259, task characteristics and, 264, task forces as, 258, 259, trust in, 272–273, virtual, 259, 261–262, Team building, 269, Team cohesiveness, 271–272, Team conflict, 274–277, interpersonal conflict management, styles and, 275–277, structural solutions to, 277, task versus relationship, 274–275, , Team effectiveness, 262–264, Teamworker role in teams, 266, Technical skills, 17, Technological forces in general, environment, 41, Technology, disruptive, 456–458, globalization and, 61–62, paradigm shifts and. See Paradigm, shifts, Technology S-curve, 455, Telecommuting (teleworking), work-life, balance and, 364–365, Telephone conversations, media richness, of, 430, Threats, 29, 360-degree feedback, 333, Tie-in sales, 87–88, Timing, communication and, 443, Total quality management, (TQM), 168, Trade agreements, regional, 58, Trade barriers, 58, Transactional leaders, 417, Transformational leadership,, 416–419, elements of, 417–419, evaluation of, 419, Trust, organizational commitment, and, 356–357, in teams, 272–273, Uncertainty, 43–44, collecting information and,, 43–44, exerting control and, 44, Unfreezing, organization change and,, 464–465, Unit plans, 107–108, Unrelated diversification, 150, Upward communication, 435, Utilitarian approach to business, ethics, 92, Validity of selection methods,, 300–301, Value(s), 19–20, corporate culture and, 233, enacted, 19, espoused, 19, ethical, 19–20, organizational commitment, and, 356, shared, 19, strategic planning and, 114–115, Value chain, 144–146, organization architecture and, 146, primary activities and, 144–145, support activities and, 145–146, , 11/17/06 7:24:23 PM

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Subject Index, , Value innovation, 142–143, Verbal communication, 430–431, Vertical differentiation, 184–191, centralization and decentralization, and, 184–187, tall versus flat hierarchies and, 188–191, Vertical integration, 149–150, Virtual teams, 259, 261–262, Visibility, power and, 386, Vision, strategic planning and, 114, Weaknesses, 29, Web logs, media richness of, 431, Well-being, personality, and, 366–367, , hiL30123_sndx_502-512.indd 511, , Wholly owned subsidiaries, entry into, foreign markets via, 71, Win–lose situations, 393, Win–win situations, 393, Work behavior, job satisfaction and,, 352–353, Workforce. See Human resource (HR), planning, Workforce diversity, 290–294, importance of, 291–294, recruitment and, 299, surface-level and deep-level,, 290–291, Working conditions, substandard, 88, Work–life balance, 363–365, , 511, , Work overload, 360, Workplace diversity, selection and,, 303–304, Work sample tests, 301, Workspace design, facilitating, communication through, 445–446, World Wide Web, coordination and, 201–202, facilitation of communication, by, 62, falling cost of communication, and, 59, Written communication, media richness, of, 431, , 11/17/06 7:24:23 PM

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