Management VII
286 PART 4 | Leading
Learning Objectives
After studying Chapter 13, you will be able to
LO1 Discuss important advantages of two-way communication.
LO2 Identify communication problems to avoid.
LO3 Describe when and how to use the various communication channels.
LO4 Give examples of ways to become a better “sender” and “receiver” of information.
LO5 Explain how to improve downward, upward, and horizontal communication.
LO6 Summarize how to work with the company grapevine.
LO7 Describe the boundaryless organization and its advantages.
13 Communicating chapter
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CHAPTER 13 | Communicating 287
E ffective communication is a fundamental aspect of job performance and managerial effectiveness. 1 It is a primary means by which managers carry
out the responsibilities described throughout this book, such as
making group decisions, sharing a vision, coordinating individ-
uals and work groups within the organization’s structure, hiring
and motivating employees, and leading teams. In these and other
areas of management, managers have to be able to share ideas
clearly and convincingly, and they have to listen effectively to the
ideas of others. Firms that use effective communication are four
times more likely to report high levels of employee engagement
as are firms using less effective communication. 2 In this chapter
we present important communication concepts and practical
guidelines for improving your effectiveness. We also discuss
communication at the interpersonal and organizational levels.
communication the transmission of information and meaning from one party to another through the use of shared symbols
LO1 Discuss important advantages of two-way communication
symbols (the words chosen for the message). Then the sender transmits, or sends, the message through some channel, such as a verbal or written medium.
The receiver decodes the message (e.g., reads it) and attempts to interpret the sender’s meaning. The receiver may pro- vide feedback to the sender by encoding a message in response to the sender’s message.
In one-way communication , information flows in only one direction—from the sender to the receiver, with no feed- back loop. A manager sends an e-mail to a subordinate without asking for a response. An employee phones the information technology (IT) department and leaves a message requesting repairs for her computer. A supervisor scolds a production worker about defects and then storms away.
The communication process often is hampered by noise, or interference in the system, that blocks perfect understanding. Noise could be anything that interferes with accurate commu- nication: ringing telephones, thoughts about other things, or simple fatigue or stress. At times noise can derail your mes- sage. Imagine asking your boss for a raise on the same day that she received a below-average performance review. No matter how effectively you present your case, the likelihood of receiv- ing an affirmative answer is low.
The model in Exhibit 13.1 is more than a theoretical treat- ment of the communication process: it points out the key ways in which communications can break down. Mistakes can be made at each stage of the model. A manager who is alert to potential problems can perform each step care- fully to ensure more effective communication. The general model and two-way communication model exemplified in Exhibit 13.2 help explain the topics discussed next: the dif- ferences between one-way and two-way communication, communication pitfalls, misperception, and the various com- munication channels.
Exhibit 13.1 A general model of communication
Person A (Sender) Person B (Receiver)
1. Intended meaning
2. Encoding
4. Decoding
5. Perceived meaning
3. Communication channel
Feedback
1 | INTERPERSONAL COMMUNICATION
When people in an organization conduct a meeting, share sto- ries in the cafeteria, or deliver presentations, they are making efforts to communicate. To understand why communication efforts sometimes break down and find ways to improve your communication skills, it helps to identify the elements of the communication process. Communication is the transmis- sion of information and meaning from one party to another through the use of shared symbols. Exhibit 13.1 shows a general model of how one person communicates with another.
1.1 | One-Way Communication Is Common
The sender initiates the process by conveying information to the receiver —the person for whom the message is intended. The sender has a meaning he or she wishes to commu- nicate and encodes the meaning into
one-way communication a process in which information flows in only one direction—from the sender to the receiver, with no feedback loop
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1.2 | Communication Should Flow in Two Directions
As shown in Exhibit 13.2 , when a receiver (in this case, trainee) responds to a sender (here, trainer), two-way communication has occurred. One-way communication in situations like those just described can become two-way if the manager’s e-mail invites the receiver to reply with any questions, the IT department returns the employee’s call and asks for details about the com- puter problem, and the supervisor calms down and listens to the production worker’s explanation of why defects are occurring.
True two-way communication means not only that the receiver provides feedback but also that the sender is receptive to the feedback. In these constructive exchanges, information is shared between both parties rather than merely delivered from one person to the other.
Because one-way communication is faster and easier for the sender, it is much more common than it should be. A busy executive finds it easier to dash off an e-mail message than to discuss a nagging problem with a subordinate. Also, he doesn’t have to deal with questions or be challenged by someone who disagrees.
Two-way communication is more difficult and time-consuming than one-way communication. However, it is more accurate; fewer mistakes occur, and fewer problems arise. When receiv- ers have a chance to ask questions, share concerns, and make suggestions or modifications, they understand more precisely what is being communicated and what they should do with the information. 3
Consider what happened to Dick Nicholson when he was a sales manager attending a company reception for the sales department. Out of Nicholson’s earshot, his company’s chair- man asked the vice president why a particular employee—a chronic underperformer—was “still a salesman.” The vice president then told Nicholson what he thought the chairman meant: the chairman wanted to promote the salesperson. If communication were limited to one way, Nicholson could have simply carried out the chairman’s apparent order, but instead he visited the chairman later and asked for an expla- nation. He was relieved when the chairman explained that he was wondering why the ineffective salesperson was still working for the company at all. 4
Exhibit 13.2 An illustration of a two-way communication model
A trainer (sender) encodes her message and delivers it via a
presentation (communication channel):
“When dealing with customers, it’s important to use active listening skills.”
The trainer is receptive to the feedback and responds
by saying:
“The company offers listening skills training
seminars twice per year.”
The trainee (receiver) decodes the message and thinks to
herself:
I need to be a better listener to earn more sales from
customers.
The trainee (now the sender) asks the trainer (now
the receiver) a question:
“I agree, but how can I develop better listening
skills?”
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perspectives—say, to really understand the viewpoints of customers or suppliers—can improve others’ assessments of your performance. 8
Filtering is the process of withholding, ignoring, or dis- torting information. Senders do this, for example, when they tell the boss what they think the boss wants to hear or give unwarranted com- pliments rather than honest criticism. Receivers also filter information; they may fail to recognize an important message or may attend to some aspects of the message but not others.
2 | WATCH OUT FOR COMMUNICATION PITFALLS
As we know from personal experience, the sender’s intended message does not always get across to the receiver. You are operating under an illusion if you think there is a perfect cor- relation between what you say and what people hear. 5 Errors can occur in all stages of the communication process. In the encoding stage, words can be misused, decimal points entered in the wrong places, facts left out, or ambiguous phrases
inserted. In the transmission stage, a report may get lost on a cluttered desk, the words on the slide may be too small to read from the back of the room, or words may be spoken with ambiguous inflections.
Decoding problems arise when the receiver doesn’t listen carefully or reads too quickly and overlooks a key point. And of course receivers can misinterpret a message, as when a reader draws the wrong conclusion from an unclear text mes- sage, a listener takes a general statement by the boss too per- sonally, or a an extended pause in a conversation is taken the wrong way.
2.1 | Everyone Uses Perceptual and Filtering Processes
More generally, people’s perceptual and filtering processes cre- ate misinterpretations. Perception is the process of receiving and interpreting information. Such processes are not perfectly objective. They are subjective, because people’s self-interested motives and attitudes toward the sender and the message bias their interpretations. People assume that others share their views, and naturally pay more attention to their own views than to the views of others. 6 But perceptual differences get in the way of consensus. To remedy this situation, it helps to remember that others’ viewpoints are legitimate and to incor- porate others’ perspectives into your interpretation of issues. 7
Generally, adopting another person’s viewpoint is fundamen- tal to working collaboratively. And your ability to take others’
two-way communication a process in which information flows in two directions—the receiver provides feedback, and the sender is receptive to the feedback
perception the process of receiving and interpreting information
filtering the process of withholding, ignoring, or distorting information
LO2 Identify communication problems to avoid
“ The single biggest problem with communication is the illusion that it has taken place. ”
— George Bernard Shaw
LISTEN & LEARN ONLINE
YOUNG MANAGERS
Speak Out! “ I prefer to receive performance feedback. That’s how I find that I can grow better and be a better person. With daily feedback, there is a two-pronged approach. Identify a problem and something they are doing well. There is a direct link from communication to success. ”
—Timothy Paul , Store Manager
289
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different things, and people interpret the same message in dif- ferent ways. For example, a prospective customer may, at the end of a sales presentation, say, “I really like your product.” One salesperson may leave the presentation thinking he won the customer’s business, while a different salesperson may leave feeling less confident because she noticed that the cus- tomer did not sound very excited and avoided eye contact when he made the statement.
If the communication is between people from different cultures, these problems are magnified. 12 Communication breakdowns often occur when business transactions take place between people from different countries. Nancy J. Adler, an expert in international management, suggests the following tac- tics for communicating effectively with someone who speaks a different language: 13
Verbal Behavior
• Clear, slow speech. Enunciate each word. Do not use colloquial expressions.
• Repetition. Repeat each important idea using different words to explain the same concept.
• Simple sentences. Avoid compound, long sentences.
• Active verbs. Avoid passive verbs.
Nonverbal Behavior 14
• Visual restatements. Use as many visual restatements as possible, such as pictures, graphs, tables, and slides.
• Gestures. Use more facial and appropriate hand gestures to emphasize the meaning of words.
• Demonstrations. Act out as many themes as possible.
• Pauses. Pause more frequently.
• Summaries. Hand out written summaries of your verbal presentation.
Accurate Interpretation
• Silence. When there is a silence, wait. Do not jump in to fill the silence. The other person is probably just thinking more slowly in the nonnative language or translating.
• Intelligence. Do not equate poor grammar and mispronunciation with lack of intelligence; it is usually a sign of nonnative language use.
• Differences. If unsure, assume difference, not similarity.
Comprehension
• Understanding. Do not just assume that they understand; assume that they do not understand.
• Checking comprehension. Have colleagues repeat their under- standing of the material back to you. Do not simply ask if they understand or not. Let them explain to you what they understand.
Design
• Breaks. Take more frequent breaks. Second language comprehen- sion is exhausting.
Filtering and subjective perception pervade one interesting aspect of the communications dynamic: how men and women differ in their communicating styles. A female manager at a magazine tended to phrase the assignments she gave her report- ers as questions: “How would you like to do the X project with Y?” and “I was thinking of putting you on the X project; is that okay?” She was criticized by her male boss, who told her she did not assume the proper demeanor with her staff. 9 The female owner of a retail operation told one of her store managers to do something by saying, “The bookkeeper needs help with the billing. How would you feel about helping her out?” He said fine but didn’t do it. Although the boss thought he meant he would do it, the store manager said he meant to indicate how he would feel about helping. He decided he had better things to do. 10
Because of such filtering and perceptual differences, you cannot assume the other person means what you think he means, or understands the meanings you intend. Managers need to excel at reading interactions and adjusting their communica- tion styles and perceptions to the people with whom they inter- act. 11 The human tendencies to filter and perceive subjectively underlie much of the ineffective communication, and the need for more effective communication practices, that you will read about in the rest of this chapter.
2.2 | Mistaken Perceptions Cause Misunderstandings
A common thread underlying the discussion so far is that people’s perceptions can undermine attempts to commu- nicate. People do not pay attention to everything going on around them. They inadvertently send mixed signals that can undermine the intended messages. Different people attend to
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CHAPTER 13 | Communicating 291
misinterpret your messages. It helps to say not only what you mean but also what you don’t mean. Every time you say, “I am not saying X, I am saying Y, ” you eliminate a possible misinterpretation. 19
3 | COMMUNICATIONS FLOW THROUGH DIFFERENT CHANNELS
Communication can be sent through a variety of channels (step 3 in Exhibit 13.1 ), including oral and written. As shown in Exhibit 13.3 , the effectiveness of a communication channel depends on the situation.
Oral communication includes face-to-face discussion, tele- phone conversations, and formal presentations and speeches. Advantages are that questions can be asked and answered; feedback is immediate and direct; the receiver(s) can sense the sender’s sincerity (or lack of it); and oral communication is more persuasive and sometimes less expensive than written. Yet oral communication also has disadvantages: it can lead to
• Small modules. Divide the material to be presented into smaller modules.
• Longer time frame. Allocate more time for each module than you usually need for presenting the same material to native speakers of your language.
Motivation
• Encouragement. Verbally and nonverbally encourage and reinforce speaking by nonnative language participants.
• Drawing out. Explicitly draw out marginal and passive participants.
• Reinforcement. Do not embarrass novice speakers.
An example highlights the operation of mixed signals and misperceptions. A bank CEO knew that he had to downsize his organization, and the employees who remained would have to commit to customer service, become more empowered, and really earn customer loyalty. 15 Knowing that his employees would have concerns about the coming reorganization, he decided to promise that he would do his best to guarantee employment to the survivors.
What signals did the CEO communicate to his people by his promises? One positive signal was that he cared about his people. But he also signaled that he would take care of them, thus undermining his goal of giving them more responsibility and empowering them. The employees wanted management to take responsibility for the market challenge that they needed to face by learning new ways of doing business. Inadvertently, the CEO spoke to their backward-looking desire for security, rather than conveying that the bank’s future depended on their efforts. However, the CEO did avoid a common pitfall at companies that announce plans for downsizing or outsourcing: ignoring the emotional significance of their message. 16 Sometimes man- agers are so intent on delivering the business rationale for the changes that they fail to acknowledge the human cost of lay- offs. When employees hear a message that neglects to address their feelings, they generally interpret the message to mean that managers don’t care.
Another way people may undermine an intended message is when they are deceitful in their communication. Ethical com- munication is accurate, honest, sincere, and not deceptive in any way. 17 In contrast, unethical communicators may exagger- ate or manipulate their message, omit negative information, or state opinions as facts to achieve personal gain. 18
Consider how many problems can be avoided—and how much more effective communication can be—if people take the time to do four things:
1. Ensure that the receivers attend to the message they are sending.
2. Consider the other party’s frame of reference and attempt to con- vey the message with that viewpoint in mind.
3. Take concrete steps to minimize perceptual errors and improper signals in sending and receiving.
4. Send consistent messages.
You should make an effort to predict people’s interpreta- tions of your messages and think in terms of how they could
LO3 Describe when and how to use the various communication channels
● Face-to-face communication can be more effective than other channels when you want to exchange information, receive immediate feedback, or present your ideas in a persuasive manner.
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is a common communication tool for mobile business profes- sionals. While Skype is a popular choice for individuals who use video chat apps, other related apps are gaining in popular- ity. OoVoo is a free video chat app that displays the real-time images of up to four participants on a split screen (a group chat can include up to 11 users). Glide allows users to send out vid- eos, fast, without uploading or downloading them. Recipients can view the videos live or offline and can chat in groups and send texts while other users are recording. 22 Also, you proba- bly are intimately familiar with e-mail, instant messaging, text messaging, and blogging.
E-mail has become a fundamental tool of workplace com- munication with more than 100 billion business e-mails sent and received on a daily basis around the globe. 23 The number of mobile e-mail users is expected to double from 897 million users in 2013 to 1.8 billion users in 2017. 24 New versions of e-mail software may encourage workers to use a wider vari- ety of electronic communication tools. IBM’s recent update to IBM Notes (formerly Lotus Notes), called 9 Social Edition, helps you collaborate on business applications like word pro- cessing or spreadsheets, while staying socially connected with colleagues via e-mail, calendars, instant messaging, blogs, teamrooms, profiles, status updates, and file sharing. 25 Users can also let all project participants review the information and receive notifications when it changes. The latest version of Microsoft’s Outlook e-mail program lets users make Internet phone calls, as well as manage documents and publish reports in a SharePoint collaborative workspace. The advantage of a collaborative workspace is that all participants can go directly to a central location and work directly on a project, without the intervening step of an e-mail. 26 These technology advances encourage collaboration along with communication.
spontaneous, ill-considered statements (and regret), and there is no permanent record of it (unless an effort is made to record it).
Written communication includes texts, e-mails, memos, letters, reports, computer files, and other written documents. Advantages to using written messages are that the message can be revised several times, it is a permanent record that can be saved, the message stays the same even if relayed through many people, and the receiver has more time to analyze the message. Disadvantages are that the sender has no control over where, when, or if the message is read; the sender lacks imme- diate feedback; the receiver may not understand parts of the message; and the message must be longer to contain enough information to answer anticipated questions. 20
You should weigh these considerations when deciding whether to communicate orally or in writing. Also, sometimes it is wise to use both channels, such as following up a meeting with a confirming memo or writing a letter to prepare someone for your phone call.
3.1 | Electronic Media Offer Flexible, Efficient Channels
More and more of today’s oral and written communication takes place through electronic media. Managers use computers, laptops, tablets, and smartphones, not only to gather and dis- tribute quantitative data but also to “communicate” with others electronically. In electronic decision rooms, software supports simultaneous access to shared files, and allows people to share views and do work collectively. 21 Other means of electronic communication include teleconferencing and videoconferenc- ing. Online meeting software that offers videoconferencing features, such as GoToMeeting (Citrix) and WebEx (Cisco),
Situation Asking your boss
for a pay raise
Channel: Have a face- to-face discussion
Tips: Observe nonverbal communication, rehearse
what you want to say and ask when s/he is in a good mood
Situation Reminding coworkers to attend a meeting
Channel: Send a succinct text
message or e-mail
Tips: Provide date/time/ location and why their
attendance matters
Situation Introducing a new product to a key
customer
Channel: Present the information via
multiple channels
Tips: Relay information multiple times and review
this chapter’s Take Charge of Your career (see page 298)
Exhibit 13.3 Examples and tips related to the effective use of communication channels
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CHAPTER 13 | Communicating 293
Exhibit 13.4 summarizes advantages and disadvantages of electronic media.
Advantages The advantages of electronic communication are numerous and dramatic. Within firms, advantages include the sharing of more information and the speed and efficiency in delivering routine messages to large numbers of people across vast geographic areas. Business-related wikis such as Socialtext let project teams post their ideas in one forum for others to add contributions. Socialtext allows project leaders to grant users access based on their need to know and participate. Web Crossing uses wikis for product development. Michael Krieg, vice president of marketing, says the wikis save the company “untold amounts of paper, postage, meetings, travel budgets, conference calls, and the time required to coordinate it all.” 29
Communicating electronically can reduce time and expenses devoted to traveling while expanding participation to a larger
number of people. In 2013, Provident New York Bancorp held its first virtual annual stockholder meeting. CEO William F. Helmer stated: ”The virtual meeting gives better access to all of our shareholders to participate in the annual meeting, experience the full presentation,
vote, and ask questions.” Bancorp donated the savings gained from not having a large face-
to-face meeting to the United Way. 30 Some companies, including Boeing,
use brainstorming software that allows anonymous contributions, presum-
ing it will add more honesty to internal discussions. Research indicates more data sharing and critical argumentation, and higher-quality decisions, with a group decision sup- port system than is found in face-to-face meetings. 31 But
anonymity also offers potential for lies, gossip, insults, threats, harassment, and the release of confidential information. 32
Disadvantages The disadvan- tages of electronic communication include the difficulty of solving complex problems that require more extended, face-to-face inter- action and the inability to pick up subtle, nonverbal, or inflectional clues about what the communi- cator is thinking or conveying. In online bargaining—even before it begins—negotiators distrust one another more than in face-to-face negotiations. After the negotia- tion (compared with face-to-face
Blogging—posting text to a website—also has arrived in the business world. Some companies use blogs to communicate with the external environment—for example, by sharing information about product uses or corporate social responsibility efforts. Blogs also may foster communication within the organization. 27
A project team might have a blog where the team leader posts fre- quent updates along with relevant presentations and spreadsheets. Searching the blog site can be an easy way for team members to find information about the project. They also can post ideas and comments in response to the blogger’s entries. Similarly, blogs can be used to encourage collaboration among employees with a shared interest in particular products, functions, or customers.
The most recently developed tools for electronic commu- nication generally fall into a category called Web 2.0 , a set of Internet-based applications that encourage user-provided content and collaboration. The most widely used Web 2.0 applications include social networking, podcasts, RSS (really simple syndi- cation, where users subscribe to receive news, blogs, or other information they select), and wikis (online publications created with contributions from many authors/users). These tools became popular at such sites as Facebook, YouTube, and Wikipedia, but users have brought the experience to work, applying online collabora- tion to business needs. Unlike the first generation of Internet applica- tions, introduced to organizations when information technology (IT) departments evaluated an application and made a pur- chase, employees typically begin using Web 2.0 tools on their own to meet a need. Rod Smith, IBM’s vice president for emerging technologies, recalls a meeting at which he told Royal Bank of Scotland’s IT head about wikis. The IT chief said the bank didn’t use them, but when Smith asked the other participants, more than two dozen said they did. 28
web 2.0 a set of Internet- based applications that encourage user-provided content and collaboration
● Texting is a fast, convenient, and efficient form of communication for basic messages, but likely not the best medium for trying to solve more complex problems or when seeing nonverbal cues is essential.
Advantages Disadvantages
Allows information to be shared rapidly with large numbers of stakeholders.
May not be effective for solving some types of complex problems.
Enables routine messages to be delivered with speed and efficiency.
Prevents interpretation of subtle nonverbal cues conveyed by the sender.
Reduces time and expenses related to traveling, photocopying, and mailing.
Engenders less trust among users than does face- to-face communication.
Encourages more people to participate and share their ideas with others.
Messages can hurt feelings, be insensitively worded, or be intentionally hurtful.
Leaves a permanent record of communication for later reference.
Sensitive or private information can be leaked or sent to the wrong recipient.
Exhibit13.4 Advantages and disadvantages of using electronic media at work
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294 PART 4 | Leading
Employees have reported being laid off via e-mail and even text messages. 36 These more impersonal forms of commu- nication can hurt feelings, and an upset employee can easily forward messages, which often has a snowball effect that can embarrass everyone involved. Like e-mail, IMs can help peo- ple work together productively, but they can also leak sensitive information.
Companies are worried about leaks and negative portrayals, and they may require employees to agree to specific guidelines
negotiators), people usually are less satisfied with their outcomes, even when the outcomes are economically equivalent. 33
Although organizations rely heavily on computer-aided communication for group decision making, face-to-face groups generally take less time, make higher-quality decisions, and are more satisfying for members. 34 E-mail is most appropri- ate for routine messages that do not require the exchange of large quantities of complex information. It is less suitable for confidential information, resolving conflicts, or negotiating. 35
“ W hat are you doing?” It’s a familiar question—particularly to
legions of Twitter users worldwide. Social networking site Twitter provides a fast, easy way to stay close to friends, offering up the minutiae of life in real-time “bytes”—for example, “washing my sister’s car,” “catch- ing a movie with friends,” or “thinking about studying for econ midterm but need pizza first.” With each tweet limited to 140 char- acters, Twitterers quickly learn to get their message across succinctly.
When Gen-Xers Jack Dorsey, Biz Stone, and Evan Williams founded Twitter in 2006, their idea was to enable users to access a communication network at what they called “the lowest common denominator.” To access Twitter, users need nothing more than a cell phone with instant messaging capability. As a result, the site has grown exponentially. By 2014, Twitter reported hav- ing 255 million active users, with 77 percent of accounts registered outside of the United States. The company reports that approx- imately 500 million tweets are being sent each day!
Twitter quickly became something more than a casual conduit for staying in touch. The site is a valuable medium for reporting and tracking information during disasters and world events.
After earthquakes devastated China in May 2008, Twitter became the primary source of eyewitness accounts. It reported information even faster than the U.S. Geological Survey, the agency respon- sible for tracking quake readings world- wide. Just weeks later, when earthquakes hit Los Angeles, cell phone–delivered
tweets flooded the Twitter network within seconds. In contrast, it was nine minutes before the Associated Press reported the story.
When a US Airways jet made an emer- gency landing on the Hudson River in 2009, it was a Twitter user who, with his cell phone, snapped a photo of the plane gliding into the river and posted it on a Twitter photo-sharing site. The surreal image appeared worldwide in minutes. Today the Federal Emergency Management Agency (FEMA) hosts a Twitter page and uses it to provide real-time infor- mation on disasters like the 2011 tornadoes that tore through Alabama and other south- eastern states, killing 328 people over a two- day period.
A more recent tragic event occurred on April 15, 2013, when two bombs detonated near the finish line of the Boston marathon,
killing 3 people and injuring 260 others. Within minutes of the explosions, observ- ers used Twitter and other social media to tweet and post news and images of the tragedy. The Pew Research Center found that approximately a quarter of Americans received information about the Boston marathon bombings and subsequent hunt for the perpetrators via social media sites like Twitter and Facebook.
Twitter as a Lifeline During Disasters
Discussion Questions • What are Twitter’s advantages as an
electronic communication medium? Its disadvantages?
• When might a manager find Twitter an appropriate communication channel? When might a manager want to discour- age employees from using Twitter?
SOURCES: L. Petrecca, “After Bombings, Social Media Informs (and Misinforms),” USA Today (online), April 23, 2013, www.usatoday.com ; P. Jonsson, “With Response to Tornadoes, FEMA Begins to Rebuild Its Reputation,” The Christian Science Monitor (Online), May 6, 2011, www.csmonitor.com ; Federal Emergency Management Agency, “Twitter FEMA Now: We
Want to Hear from You,” FEMA website, www.fema .gov ; J. Diamond, “The Twitter Guys,” The New York Times, May 8, 2009, http://nytimes.com ; United Press International, “Don’t Fight Twitter, Disaster Expert Says,” UPI website, March 6, 2009, www .upi.com ; C. Beaumont, “New York Plane Crash: Twitter Breaks the News, Again,” London Telegraph, January 16, 2009, www.telegraph.co.uk ; S. Ovide, “Twittering the USAirways Plane Crash,” The Wall Street Journal, January 15, 2009, http://blogs.wsj .com ; E. Noonan, “Life Is Tweet,” Boston Globe, January 4, 2009, www.boston.com ; J. Cox, “Tweets, Twits, and the California Earthquake,” Network World, July 30, 2008, www.networkworld.com ; and M. Ingram, “Twitter Breaks Chinese Earthquake News,” Toronto Globe and Mail, May 12, 2008, www .theglobeandmail.com .
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CHAPTER 13 | Communicating 295
3.2 | Managing the Electronic Load
Electronic communication media seem essen- tial these days, and people wonder how they ever worked without them. But the sheer vol- ume of communication can be overwhelming, especially when it doesn’t let up during meet- ings or breaks after work. 43
Fortunately, a few rules of thumb can help you manage your electronic communica- tions. 44 For the problem of information over- load, the challenge is to separate the truly important from the routine. Effective man- agers find time to think about bigger busi- ness issues and don’t get too bogged down
in responding to every message that seems urgent but may be trivial. Essential here is to think strategically about your goals, identify the items that are most important, and prioritize your time around those goals. This is easier said than done, of course, but it is essential, and it helps. Most communication software has tools that can help. For example, with instant messaging, set your “away” message when you want to con- centrate on something else. Of course management also has a role to play. Some employees check messages constantly because they believe (perhaps correctly) that this is what their bosses expect of them. Managers can help employees by lim- iting and communicating the times during which they expect a prompt response. 45
A few more specific suggestions: With e-mail, don’t hit “reply to all” when you should hit just “reply.” Get organized by creating folders sorted by subject, priority, or sender, and flag messages that require follow-up. If you receive a copy, you don’t need to respond; it’s just for your information.
Some companies are recognizing the downsides of elec- tronic media overuse. In France, a recently signed labor agree- ment curtails electronic media overuse. The agreement requires employees, once they leave at the end of the work day (and over weekends), to disconnect and not respond to their man- agers’ e-mails (even on their smartphones). 46 The agreement affects employees from the consulting and technology sec- tors, including the French groups of PricewaterhouseCoopers, Deloitte, Facebook, and Google. 47 Thierry Breton, CEO of tech firm Atos, implemented a “zero e-mail” policy that bans all employees of the firm from sending e-mails. He is replacing internal e-mail with collaborative and social media tools and an online chat system that allows videoconferencing. 48
As overwhelming as electronic communications can be, you can take steps to simplify them. For example, a global customer account management team established two ground rules:
1. Whenever a member communicated with a customer, the member was to send a briefing to all team members.
2. They designated a primary contact on the team for each customer, with no one else on the team authorized to discuss or decide strate- gies or policies with the customer.
before starting blogs. Some general guidelines should guide corporate bloggers: 37
• Remember that blogs posted on a company’s website should avoid any content that could embarrass the company or disclose confidential information.
• Stick to the designated topic of any compa- ny-sponsored blog.
• If members of the media contact you about reporting on a blog you have written, get official approval before proceeding.
Most electronic communications are quick and easy, and some are anonymous. As a result, one inevitable consequence of electronic com- munication is “flaming”: hurling insults, sending “nastygrams,” venting frustration, snitching on coworkers to the boss, and oth- erwise breaching protocol. E-mail, blogs, and instant messaging liberate people to send messages they would not say to a per- son’s face. Without nonverbal cues, “kidding” remarks may be taken seriously, causing resentment and regret. Some people try to clear up confusion with emoticons such as smiley faces, but those efforts can further muddy the intent. 38
Also, confidential information, including government secu- rity and intelligence data, was recently leaked by ex-government contractor Edward Snowden. Currently taking refuge in Russia, Snowden is accused of releasing an untold number of classified National Security Agency documents. A governmental report assessed the extent of the leak: “The scope of the compromised knowledge related to U.S. intelligence capabilities is staggering.” 39
Other downsides to electronic communication are important. 40
Different people and sometimes different working units latch onto different channels as their media of choice. For example, an engineering division might use e-mail most, but a design group might rely primarily on instant messaging and neglect e-mail. Another disadvantage is that electronic messages sometimes are monitored or seen inadvertently by those for whom they are not intended. Be careful with your IMs: make sure you don’t acciden- tally send them to the wrong person and that they don’t pop up on the screen during a PowerPoint presentation. 41 One way to avoid sending to the wrong person is to close all IM windows except those you’re currently using for active conversations. Deleting electronic messages—whether e-mail, IMs, or cell phone text messages—does not destroy them; they are saved elsewhere. Recipients can forward them to others without the original sender knowing it. Many companies use software to monitor e-mail and IMs. And the messages can be used in court cases to indict indi- viduals or companies. Electronic messages sent from work and on company-provided devices are private property—but they are private property of the system’s owner, not of the sender.
An e-mail golden rule (like the sunshine rule in the ethics chapter): don’t hit “send” unless you’d be comfortable having the contents on the front page of a newspaper, being read by your mother or a competitor. And it’s not a bad idea to have a colleague read nonroutine e-mails before you send them.
E-mail overload costs businesses as much as $1 billion a year in lost employee productivity. 42
Did You Know?
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To foster communication and maintain strong working relation- ships, Accenture assigns each new consultant to a career counselor, a senior employee in the same specialty who helps the employee develop his or her career. They communicate by phone monthly. Accenture trains its managers in how to lead virtual teams. They learn to schedule conference calls that respect time differences and to allow plenty of opportunity for casual conversation that main- tains a sense of belonging to the team. Accenture also uses a web conferencing system for online meetings, as well as a company net- working site called Accenture People, where employees can con- nect, share skills and interests, and collaborate. 54
3.4 | Use “Richer” Media for Complex or Critical Messages
Some communication channels convey more information than others. The amount of information a medium conveys is called media richness . 55 The more information or cues a medium sends to the receiver, the “richer” the medium is. 56 The rich- est media are more personal than technological, provide quick feedback, allow lots of descriptive language, and send differ- ent types of cues. Face-to-face communication is the richest medium because it offers a variety of cues in addition to words: tone of voice, facial expression, body language, and other non- verbal signals. It also allows more descriptive language than, say, a memo does. In addition, it affords more opportunity for the receiver to give feedback to and ask questions of the sender, turning one-way into two-way communication.
The telephone is less rich than face-to-face communica- tion, electronic mail is less rich yet, and memos are the least rich medium. In general, you should send difficult and unusual
If contacted by a customer, team members would direct the customer to the appro- priate contact person. These steps simplified communi- cation channels and greatly reduced contradictory and confusing messages. 49
3.3 | The Virtual Office Many entrepreneurs conduct business via open “offices” on the Internet, working on their computers from wherever they hap- pen to be. Similarly, major companies like IBM, GE, Deloitte LLP, and Prudential California Realty are slashing office space and giving people laptop or notebook computers, telecom- munications software, voice mail, and other communications technologies so they can work virtually anywhere, anytime. 50 Based on the philosophy that management’s focus should be on what people do, not where they are, the virtual office is a mobile office in which people can work anywhere—home, car, airport, customers’ offices—as long as they have the tools to communicate with customers and colleagues.
In the short run at least, the benefits of virtual offices appear substantial. Saving money on rent and utilities is an obvious advantage. By offering most of its 45,000 employees the option to telecommute up to five days a week, Deloitte LLP reduced office space and energy costs by 30 percent. 51 A virtual office also gives employees access to whatever information they need from the company, whether they are in a meeting, visiting a client, or work- ing from home. 52 Hiring and retaining talented people is easier because virtual offices support scheduling flexibility and even may make it possible to keep an employee who wants to relocate—for example, with a spouse taking a new job in another city.
But what will be the longer-term impact on productivity and morale? We may be in danger of losing too many “human moments”—those authentic encounters that happen only when two people are physically together. 53 Some people hate working at home. Some send faxes, e-mail, and voice mail in the middle of the night—and others receive them. Some work around the clock yet feel they are not doing enough. Long hours of being constantly close to the technical tools of work can cause burn- out. And in some companies, direct supervision at the office is necessary to maintain the quality of work, especially when employees are inexperienced and need guidance. The virtual office requires changes in human beings and presents technical challenges, so although it is much hyped and useful, it will not completely replace real offices and face-to-face work.
Many of consulting giant Accenture’s 290,000 employees spend most of their time at clients’ workplaces. Under those conditions, cultivating teamwork is difficult for managers, and developing a career is challenging for consultants, who may have a client on one continent, a supervisor on another, and support staff in a third country.
When to use face-to-face communication If you’re like most students, you probably have a busy schedule and tend to rely on texting or e-mail for most of your communi- cation. In the United States the average college student sends about 100 texts per day. When should you make the time to sit down for a face-to-face chat with a professor? You may want to use this rich communication medium when you have com- plex problems or concerns like reviewing the questions you missed on a recent exam, asking advice about how to handle a slacker on your student project team, or requesting a let- ter of recommendation for a scholarship. You are much more likely to understand better and resolve your problem faster by talking face-to-face than communicating electronically.
study tip 13
virtual office a mobile office in which people can work anywhere as long as they have the tools to communicate with customers and colleagues
media richness the degree to which a communication channel conveys information
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can improve their skills in making persuasive presentations, writing, language use, and sending nonverbal messages.
Presentation and Persuasion Skills Throughout your career, you will be called on to state your case on a variety of issues. You will have information and perhaps an opinion or proposal to present to others. Typically your goal will be to “sell” your idea. In other words, your challenge will be to persuade others to go along with your recommendation. As a leader, you will find that some of your toughest challenges arise when people do not want to do what has to be done. Leaders have to be persuasive to get people on board. 61
Your attitude in presenting ideas and persuading others is very important. Persuasion is not what many people think: merely selling an idea or convincing others to see things your way. Don’t assume that it takes a “my way or the highway” approach, with a one-shot effort to make a hard sell and resist- ing compromise. 62 It usually is more constructive to consider persuasion a process of learning from each other and negotiat- ing a shared solution. Persuasive speakers are seen as authentic, which happens when speakers are open with the audience, make a connection, demonstrate passion, and show they are listening as well as speaking. Practice this kind of authenticity by notic-
ing and adopting the type of body language you use when you’re around people you’re comfortable
with, planning how to engage directly with your listeners, identifying the reasons why you care about your topic, and watching for nonverbal cues as well as fully engaging when you listen to audience comments and questions. 63
The most powerful and persuasive mes- sages are simple and informative, are told with stories and anecdotes, and convey excite-
ment. 64 People are more likely to remember and buy into your message if you can express it as a story that is simple, unex- pected, concrete, credible, and includes emotional content. For example, Nordstrom moti- vates employees by passing along stories of times when
its people have provided extraordinary service, such as warming up customers’ cars while they shopped or
ironing a shirt so that a cus- tomer could wear it to a meet- ing. Trader Joe’s shares similar stories of employees who have gone the extra mile for cus- tomers. One such employee received a phone call from a concerned daughter regarding
messages through richer media, transmit simple and routine messages through less rich media, and use multiple media for important messages that you want to ensure people attend to and understand. 57 You should also consider factors such as cost, which medium your receiver prefers, and the preferred communication style in your organization. 58 In the following situations, based on the message and the audience, which chan- nel would you select? 59
1. A midsize construction firm wants to announce a new employee benefit program.
2. A manager wishes to confirm a meeting time with 10 employees.
3. Increase enthusiasm in a midsize insurance company for a pro- gram that asks employees from different departments to work on the same project team.
4. A group of engineers who are geographically dispersed want to exchange design ideas with one another.
5. Describe a straightforward but somewhat detailed and updated version of a voice mail system to 1,000 employees who are geo- graphically dispersed.
4 | IMPROVING COMMUNICATION SKILLS
In recent years, employers have been dismayed by college graduates’ poor communication skills. A demonstrated abil- ity to communicate effectively makes a job candidate more attractive and distinguishes him or her from others. You can do many things to improve your communica- tion skills, both as a sender and as a receiver.
4.1 | Senders Can Improve Their Presentations, Writing, Word Choice, and Body Language
To start, be aware that honest, direct, straight talk is important but all too rare. CEOs are often coached on how to slant their messages for different audiences—the investment community, employees, or the board. That’s not likely to be straight talk. The focus of the messages can differ, but they can’t be incon- sistent. People should be able to identify your perspective, your reasoning, and your intentions. 60 Beyond this basic point, senders
LO4 Give examples of ways to become a better “sender” and “receiver” of information
● Financial guru Suze Orman has been ranked as one of the best presenters by Bloomberg Businessweek magazine for her ability to relay information in easy-to-understand ways. She delivers financial information using clear, concise, and direct language. Great business communicators use simple language to discuss complex issues.
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298 PART 4 | Leading
and paragraphs. Use specific, concrete words rather than abstract phrases. Instead of saying, “A period of unfavorable weather set in,” say, “It rained every day for a week.”
Be critical of your own writing. If you want to improve, start by reading The Elements of Style by William Strunk and E. B. White and the most recent edition of The Little, Brown Handbook. 69
Language Word choice can enhance or interfere with com- munication effectiveness. For example, jargon is actually a form of shorthand and can make communication more effective when both the sender and the receiver know the buzzwords. But when the receiver is unfamiliar with the jargon, misunder- standings result. When people from different functional areas or disciplines communicate with one another, misunderstand- ings often occur because of such language barriers. As in writ- ing, simplicity usually helps.
Whether speaking or writing, you should consider the receiv- er’s background—cultural as well as technical—and adjust your language accordingly. When you are receiving, don’t assume
her snowed-in 89-year-old father who needed food for his spe- cial low-sodium diet. The employee delivered the food to the elderly customer and did not charge for the food or the deliv- ery. 65 To be credible, a communicator backs up the message with actions consistent with the words.
Writing Skills Effective writing is more than correct spell- ing, punctuation, and grammar (although these help). Good writing above all requires clear, logical thinking. 66 The act of writing can be a powerful aid to thinking because you have to think about what you really want to say and what the logic is behind your message. 67
You want people to find your e-mail and reports readable and interesting. Strive for clarity, organization, readability, and brevity. 68 Brevity is much appreciated by readers who are over- loaded with documents, including wordy memos. Use a dictio- nary and a thesaurus, and avoid fancy words.
Your first draft rarely is as good as it could be. If you have time, revise it. Take the reader into consideration. Go through your entire document, and delete all unnecessary words, sentences,
Take Charge of Your Career Tips for making formal presentations more powerful!
L ynn Hamilton, from the University of Virginia, offers 10 useful tips for making for- mal presentations more powerful:
1. Spend adequate time on the content of your presentation. It’s easy to get so distracted with PowerPoint slides or concern about delivery skills that the actual content of a presentation is neglected. Know your con- tent inside and out; you’ll be able to discuss it conversationally and won’t be tempted to memorize. If you believe in what you’re say- ing and own the material, you will convey enthusiasm and will be more relaxed.
2. Clearly understand the objective of your presentation. Answer this question with one sentence: “What do I want the audience to believe following this presentation?” Writ- ing down your objective will help you focus on your bottom line. Everything else in a presentation—the structure, the words, the visuals—should support your objective.
3. Tell the audience the purpose of the pres- entation. As the saying goes, “Tell them what you’re going to tell them, then tell them, then tell them what you’ve told them.” Use a clear preview statement early on to help the audience know where you’re taking them.
4. Provide meaning, not just data. Today information is widely available; you won’t impress people by overloading them with data. People have limited attention spans and want presenters to help clarify the meaning of data.
5. Practice, practice, practice. Appearing polished and relaxed during a presentation requires rehearsal time. Practice making your points in a variety of ways. Above all, don’t memorize a presentation’s content.
6. Remember that a presentation is more like a conversation than a speech. Keep your tone conversational yet professional. Audi- ence members will be much more engaged if they feel you are talking with them rather than at them. Rely on PowerPoint slides or a broad outline to jog your memory.
7. Remember the incredible power of eye contact. Look at individual people in the audience. Try to have a series of one-on-one
conversations with people in the room. This will calm you and help you connect with your audience.
8. Allow imperfection. If you forget what you were going to say, simply pause, look at your notes, and go on. Don’t “break char- acter” and effusively apologize or giggle or look mortified. Remember that an audience doesn’t know your material nearly as well as you do and won’t notice many mistakes.
9. Be prepared to answer tough questions. Try to anticipate the toughest questions you might receive. Plan your answers in advance. If you don’t have an answer, acknowledge the fact and offer to get the information later.
10. Provide a crisp wrap-up to a question- and-answer session. Whenever possible, follow the Q&A period with a brief summary statement. Set up the Q&A session by say- ing, “We’ll take questions for 10 minutes and then have a few closing remarks.” This pre- vents your presentation from just winding down to a weak ending. Also, if you receive hostile or hard-to-answer questions, you’ll have a chance to have the final word.
Source: Reprinted with permission of Lynn A. Hamilton, University of Virginia.
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In conversation, except when you intend to convey a neg- ative message, you should give nonverbal signals that express warmth, respect, concern, a feeling of equality, and a willingness to listen. Negative nonverbal signals show coolness, disrespect, lack of interest, and a feeling of superiority. 77 The following suggestions can help you send positive nonverbal signals:
• Use time appropriately. Avoid keeping your employees waiting to see you. Devote enough time to your meetings with them, and com- municate frequently, which signals your interest in their concerns.
• Make your office arrangement conducive to open communication. A seating arrangement that avoids separating people helps estab- lish a warm, cooperative atmosphere. In contrast, when you sit behind your desk and your subordinate sits before you, the environ- ment is more intimidating and authoritative. 78
• Remember your body language. Research indicates that facial expression and tone of voice can account for 90 percent of the communication between two people. 79 Several nonverbal body sig- nals convey a positive attitude toward the other person: assuming a position close to the person; gesturing frequently; maintaining eye contact; smiling; having an open body orientation, such as facing the other person directly; uncrossing the arms; and leaning forward to convey interest in what the other person is saying.
that your understanding is the same as the speaker’s intentions. Cisco CEO John Chambers, whose background is in business, simply asks the engineering managers in his high-tech company to explain any jargon. He says, “They do it remarkably well.” 70 At the same time, Chambers shows respect and enhances his credibility by being truly interested in their work. Whenever Chambers travels with or reviews engineers, he asks them to teach him a topic—and he listens.
The meaning of word choices also can vary by culture. Japanese people use the simple word hai (yes) to convey that they understand what is being said; it does not necessarily mean they agree. Asian businesspeople rarely use the direct “no,” using more subtle ways of disagreeing. 71 Global teams fail when members have difficulties communicating because of language, cultural, and geographic barriers. Heterogeneity harms team functioning at first. But when they develop ways to interact and communicate, teams develop a common identity and perform well. 72
When conducting business overseas, try to learn something about the other country’s language and customs. Americans are less likely to do this than people from some other cultures; few Americans consider a foreign language necessary for doing business abroad, and a significant majority of U.S. firms do not require employees sent abroad to know the local language. 73 But those who do will have a big edge over competitors who do not. 74 Making the effort to learn the local language builds rap- port, sets a proper tone for doing business, aids in adjustment to culture shock, and especially can help you “get inside” the other culture. 75 You will learn more about how people think, feel, and behave in their personal and business dealings.
4.2 | Nonverbal Signals Convey Meaning, Too
People send and interpret signals other than those that are spoken or written. These nonverbal messages can support or undermine the stated message. Often nonverbal cues make a greater impact than other signals. In employees’ eyes, man- agers’ actions often speak louder than the words managers choose. Project manager Steve Bailey had already given many presentations when he attended a presentation skills workshop. There a facilitator pointed out Bailey’s habit of clasping and unclasping his hands as he spoke. The behavior was distracting and conveyed a lack of authority. When Bailey stopped making that gesture, he discovered that his audiences tended to be more convinced by his presentations. 76
“ Good communication does not mean that you have to speak in perfectly formed sentences and paragraphs. It isn’t about slickness. Simple and clear go a long way. ”
— John Kotter
● Learning to observe and interpret accurately people’s nonverbal cues will help you become a more effective communicator.
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assume that good listening is easy and natural, in fact it is dif- ficult and far less common than needed. Catherine Coughlin practiced her listening skills as a customer service represen- tative for Union Electric Company during the summers of the years she was earning her college degree. Whether an indi- vidual was calling about an unpaid bill or a power outage, or just looking for an excuse to talk to somebody, Coughlin found that “you’ve got to respect everyone and their story” and then decide how to respond. Over the following decades, Coughlin used that experience to build a successful career with Southwestern Bell Telephone and its successor compa- nies. She is now senior executive vice president and global marketing officer of AT&T and is still committed to careful listening. 82
A basic technique called reflection will help a manager listen effectively. 83 Reflection is a process by which a per- son states what he or she believes the other person is saying. This technique places greater emphasis on listening than on talking. When both parties actively engage in reflection, they get into each other’s frame of reference rather than listening and responding from their own. The result is more accurate two-way communication. Besides using reflection, you can
improve how well you listen by practicing the following techniques: 84
1. Find an area of interest. Even if you decide the topic is dull, ask yourself, “What is the speaker saying that I can use?”
2. Judge content, not delivery. Don’t get caught up in the speaker’s personality, mannerisms, speaking voice, or clothing. Instead try to learn what the speaker knows.
3. Hold your fire. Rather than getting immediately excited by what the speaker seems to be saying, withhold evaluation until you under- stand the speaker’s message.
4. Listen for ideas. Don’t get bogged down in all the facts and details; focus on central ideas.
5. Be flexible. Have several systems for note taking, and use the sys- tem best suited to the speaker’s style. Don’t take too many notes or try to force everything said by a disorganized speaker into a formal outline.
6. Resist distraction. Close the door, shut off the radio, move closer to the person talking, or ask him or her to speak louder. Don’t look out the window or at papers on your desk.
7. Exercise your mind. Some people tune out when the material gets difficult. Develop an appetite for a good mental challenge.
8. Keep your mind open. Many people get overly emotional when they hear words referring to their most deeply held convictions—for
Silence is an interesting nonverbal situation. The aver- age American is said to spend about twice as many hours per
day in conversation as the average Japanese. 80 North Americans tend to talk to fill silences. Japanese allow long silences to develop, believing they can get to know people better. Japanese believe that two people with good rapport will know each other’s thoughts. The need to use words implies a lack of understanding.
Nonverbal Signals in Different Countries Here are just a few nonverbal mistakes that Americans might make in other coun- tries. 81 Nodding the head up and down in Bulgaria means no. The American thumb-and-first-finger circular A-OK gesture is vulgar in Brazil, Singapore, Russia, and Paraguay. The head is sacred in Buddhist cultures, so you must never touch someone’s head. In Muslim cultures, never touch or eat with the left hand, which is thought unclean. Crossing your ankle over your knee is rude in Indonesia, Thailand, and Syria. Don’t point your finger toward yourself in Germany or Switzerland—it insults the other person.
You also must correctly interpret the nonverbal signals of others. Chinese scratch their ears and cheeks to show happiness.
Greeks puff air after they receive a compliment. Hondurans touch their fingers below their eyes to show disbelief or caution. Japanese indicate embarrassment or “no” by sucking in air and hissing through their teeth. Vietnamese look to the ground with their heads down to show respect. Compared with Americans, Russians use fewer facial expressions, and Scandinavians fewer hand gestures, whereas people in Mediterranean and Latin cultures may gesture and touch more. Brazilians are more likely than Americans to interrupt, Arabs to speak loudly, and Asians to respect silence.
Use these examples not to stereotype but to remember that people in other cultures have different styles and to aid in com- munication accuracy.
4.3 | Receivers Can Improve Their Listening, Reading, and Observational Skills
Once you become effective at sending oral, written, and non- verbal messages, you are halfway toward becoming a complete communicator. However, you must also develop adequate receiving capabilities. Receivers need good listening, reading, and observational skills.
Listening In today’s demanding work environment, man- agers need excellent listening skills. Although it is easy to
“ You never learn anything while you’re talking. ” — Catherine Coughlin , senior executive vice president and global marketing officer, AT&T 87
reflection process by which a person states what he or she believes the other person is saying
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your reading materials, but read important messages, doc- uments, and passages slowly and carefully. Note important points for later referral. Consider taking courses to increase your reading speed and comprehension skills. Finally, don’t limit your reading to items about your particular job skill or technical expertise; read materials that fall outside your immediate concerns. You never know when a creative and useful idea will be inspired by a novel, a biography, a sports story, or an article about a problem in another business or industry.
Observing Effective communicators are also capable of observing and interpreting nonverbal communications. For example, by reading nonverbal cues, a presenter can determine how her talk is going and adjust her approach if necessary.
Some companies train their sales force to inter- pret the nonverbal signals of potential custom- ers. People can also decode nonverbal signals to determine whether a sender is being truthful or deceitful. In the United States, deceitful com- municators tend to maintain less eye contact, make either more or fewer body movements than usual, and smile either too much or too lit- tle. Verbally, they offer fewer specifics than do truthful senders. 89
A vital source of useful observations comes from visiting people, plants, and other locations to get a firsthand view. 90 Many corporate exec- utives rely heavily on reports from the field and don’t travel to remote locations to observe what is going on. Reports are no substitute for actu- ally seeing things happen in practice. Frequent visits to the field and careful observation can help a manager develop deep understanding of current operations, future prospects, and ideas for how to fully exploit capabilities. 91
Of course you must accurately interpret what you observe. A Canadian conducting business with a high-ranking official in Kuwait was surprised that the meeting was held in an open office and was interrupted constantly. 92
He interpreted the lack of a big, private office and secretary to mean that the Kuwaiti was of low rank and uninterested in doing business, so he lost interest in the deal. The Canadian
observed the facts accurately, but his perceptual biases and lim- ited awareness of cultural differences in norms caused him to misinterpret what he saw.
example, union, subsidy, import, Republican or Democrat, and big business. Try not to let your emotions interfere with comprehension.
9. Capitalize on thought speed. Take advantage of the fact that most people talk at a rate of about 125 words per minute, but most of us think at about four times that rate. Use those extra 400 words per minute to think about what the speaker is saying rather than turning your thoughts to something else.
10. Work at listening. Spend some energy. Don’t just pretend you’re paying attention. Show interest. Good listening is hard work, but the benefits outweigh the costs.
For managers, the stakes are high: failure to listen causes man- agers to miss good ideas and can even drive employees away. When Ben Berry was a senior systems analyst at a hospital, he was assigned to help lead a team charged with developing com- puter applications. The other team leader, a doc- tor, had little interest in hearing ideas from Berry and the team members. He was more focused on issuing directions. The team members and Berry felt discouraged from participating. Berry tried discussing the issue with his supervisor and with the doctor, but the doctor never saw a need to lis- ten, so Berry left the organization to take another job. 86
Listening begins with personal contact. Staying in the office, keeping the door closed, and eating lunch at your desk are sometimes necessary to get pressing work done, but that is no way to stay on top of what’s going on. Better to walk the halls, initiate conversations and go to lunch even with people outside your area, have coffee in a popular gathering place, and maybe even move your desk onto the factory floor. 88
When a manager takes time to really listen to and get to know people, they think, “She’s show- ing an interest in me” or “He’s letting me know that I matter” or “She values my ideas and contri- butions.” Trust develops. Listening and learning from others are even more important for innova- tion than for routine work. Successful change and innovation come through lots of human contact.
Reading Illiteracy is a significant problem in the United States. Even if illiteracy is not a problem in your organization,
reading mistakes are common and costly. As a receiver, for your own benefit, read memos and e-mail as soon as possi- ble, before it’s too late to respond. You may skim most of
An employee survey asked: “What is the most critical skill a leader can possess when working with others?” The three most frequent responses were (from most frequent): (1) communication/ listening, (2) effective management skills, and (3) emotional intelligence and empathy. 85
Did You Know?
“ You can observe a lot by watching. ” — Yogi Berra
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may include communications traveling downward, upward, horizontally, and informally within the organization.
5.1 | Downward Communication Directs, Motivates, Coaches, and Informs
Downward communication refers to the flow of information from higher to lower levels in the organization’s hierarchy. Examples include a manager giving an assignment to an assis- tant, a supervisor making an announcement to his subordinates, and a company president delivering a talk to her management team. Downward communication that provides relevant infor- mation helps create employee identification with the company, supportive attitudes, and decisions consistent with the organi- zation’s objectives. 95
People must receive the information they need to perform their jobs and become—and remain—loyal members of the organization. But they often lack adequate information. 96
Several problems underlie the lack of information:
• Information overload —Managers and employees are bombarded with so much information that they fail to absorb everything. Much of the information is not very important, but its volume causes a lot of relevant information to be lost.
• Lack of openness between managers and employees —Managers may believe “No news is good news,” “I don’t have time to keep them informed of everything they want to know,” or “It’s none of their business, anyway.” Some managers withhold information even if sharing it would be useful.
• Filtering —As we discussed earlier in the chapter, when mes- sages are passed from one person to another, some information is left out. When a message passes through many people, more
information may be lost during each transmission. The message also can be distorted as people add words or interpretations. Filtering poses seri- ous problems in organizations when messages are communicated down- ward through many organizational levels and much information is lost.
The data in Exhibit 13.5 suggest that by the time messages reach the people for whom they are intended, the receivers may get very little useful information. The fewer authority levels through which communications must pass, the less information will be lost or distorted. As a result, in flatter orga- nizations, filtering is less of a problem with downward communication.
Managers can address some of these issues by fostering a culture that values communication. At a large tele- communications company, employees consistently rated the human resource
The Japanese are partic- ularly skilled at interpreting every nuance of voice and ges- ture, putting most Westerners at a disadvantage. 93 When one
is conducting business in Asian or other countries, local guides can be invaluable not only to interpret language but to “decode” behavior at meetings, what subtle hints and nonverbal cues mean, who the key people are, and how the decision-making process operates.
5 | ORGANIZATIONAL COMMUNICATION
Being a skilled communicator is essential to being a good man- ager and team leader. But communication must also be managed throughout the organization. Every minute of every day, count- less bits of information are transmitted through an organiza- tion. The flow of information affects how well people perform. When a group’s success depends on discovering new infor- mation, individuals who independently tap information from a variety of sources help achieve that success. For evaluating information and arriving at decisions, people in the most effec- tive groups communicate extensively with their team mem- bers (a richly connected network). The most productive teams switch back and forth between using centralized networks and richly connected networks. 94 These patterns of communication
downward communication information that flows from higher to lower levels in the organization’s hierarchy
LO5 Explain how to improve downward, upward, and horizontal communication
Exhibit 13.5 Information loss in downward communication
100% Board
63% Vice presidents
56% General managers
40% Plant managers
30% Supervisors
20% Workers
% d
0% loss
37% loss
44% loss
60% loss
70% loss
80% loss
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CHAPTER 13 | Communicating 303
to quit too early. Then too, top management often clois- ters itself, prompting rumors and anxiety. CEOs and other senior execs are surrounded by lawyers, investment bank- ers, and so on—people who are paid merely to make the deal happen, not to make it work. Yet with the peo- ple who are affected by the deal, you must increase, not decrease, communication. 102
In a merger of two Fortune 500 companies, two plants received very different information. 103 All employees at both plants received the initial letter from the CEO announcing the merger. But after that, one plant was kept in the dark while the other was continually filled in on what was happening. Top management gave employees information about layoffs, trans- fers, promotions and demotions, and changes in pay, jobs, and benefits.
Which plant do you think fared better as the difficult tran- sitional months unfolded? In both plants, the merger decreased employees’ job satisfaction and commitment to the organization and increased their belief that the company was untrustworthy, dishonest, and uncaring. In the plant whose employees got little information, these problems persisted for a long time. But in the plant where employees received complete information, the situation stabilized, and attitudes improved toward their normal levels. Full communication not only helped employees survive an anxious period but also served a symbolic value by signal- ing care and concern for employees. Without such communica- tions, employee reactions to a merger or acquisition may be so negative as to undermine the corporate strategy.
Open-Book Management Executives often are proud of their newsletters, staff meetings, videos, and other vehicles of downward communication. More often than not, the informa- tion provided concerns company sports teams, birthdays, and new copy machines. But today a more unconventional phi- losophy is gathering steam. Open-book management is the practice of sharing with employees at all levels of the organiza- tion vital information previously meant for management’s eyes only. This information includes financial goals, income state- ments, budgets, sales, forecasts, and other relevant data about company performance and prospects. This practice is dramat- ically different from the traditional closed-book approach in which people may or may not have a clue about how the com- pany is doing, may or may not believe the things that manage- ment tells them, and may or may not believe that their personal performance makes a difference. Open-book management is controversial because many managers prefer to keep such information to themselves. Sharing strategic plans and finan- cial information with employees could lead to leaks to com- petitors or to employee dissatisfaction with compensation. But
(HR) division best at communicating with them. The divisional president sent out monthly e-mail messages about new accounts, products in development, hiring trends, and individual employ- ees’ accomplishments. Employees and managers were also kept up-to-date through face-to-face communications at quarterly town hall meetings, monthly meetings of line managers, and weekly senior management meetings. And the president invited about 10 employees at a time to communicate informally at monthly breakfasts and lunches. 97
Coaching Some of the most important downward commu- nications occur when managers give performance feedback to their direct reports. We discussed earlier the importance of giv- ing feedback and positive reinforcement when it is deserved. It is also important to explicitly discuss poor performance and areas that can be improved.
Coaching is dialogue with a goal of helping another be more effective and achieve his or her full potential on the job. 98 Done properly, coaching develops executives and enhances performance. 99 According to a recent survey by the American Management Association, approximately half of responding companies use coaching to prepare individuals for a promotion or new role. 100 When people have performance problems or exhibit behaviors that need to be changed, coaching is often the best way to help them change and succeed. And coaching is not just for poor performers; as the greatest athletes know, it is for anyone who is good and aspires to excellence. Coaches for executives sometimes are hired from the outside, but a coach from outside your organization may not fully understand the context in which you work. 101 So don’t take advice automati- cally. The best use of a coach is as a sounding board, helping you think through the potential impact of your ideas, generate new options, and learn from experience.
Companies including Coca-Cola use coaching as an essen- tial part of their executive development process. When done well, coaching is true dialogue between two committed people engaged in joint problem solving. It is far more than an occasion for highlighting poor performance, delivering reprimands, or giv- ing advice. Good coaching requires achieving real understanding of the problem, the person, and the situation; jointly generating ideas for what to do; and encouraging the person to improve. Good coaches ask a lot of questions, listen well, provide input, and encourage others to think for themselves. Effective coaching requires honesty, calmness, and supportiveness, all aided by a sin- cere desire to help. The ultimate and longest-lasting form of help is enabling people to think through and solve their own problems.
Downward Communication in Difficult Times Adequate downward communication can be particularly valuable during difficult times. During corporate mergers and acquisitions, employees feel anxious and wonder how the changes will affect them. Ideally (and ethically), top management should communi- cate with employees about the change as early as possible.
But some argue against that approach, on the grounds that informing employees about the reorganization might cause them
coaching dialogue with a goal of helping another be more effective and achieve his or her full potential on the job
open-book management practice of sharing with employees at all levels of the organization vital information previously meant for management’s eyes only
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304 PART 4 | Leading
• Managers learn what’s going on. Management gains a more accu- rate picture of subordinates’ work, accomplishments, problems, plans, attitudes, and ideas.
• Employees gain from the opportunity to communicate upward. People can relieve some of their frustrations, achieve a stronger sense of participation in the enterprise, and improve morale.
• Effective upward communication facilitates downward communi- cation as good listening becomes a two-way street.
A manufacturing company relied on upward communica- tion as it prepared to operate shifts around the clock. Managers expected that the change would be challenging for some employ- ees, so it assembled a focus group of factory workers to inform management about how the new work shifts would affect work- ers’ families and other commitments, including night school. Discussing possibilities with the focus group members before the change had been formally announced posed the risk that employ- ees would spread rumors, but management determined that this
risk was less important than the risk of proceeding with igno- rance of employees’ concerns. The change to the new shifts took employees’ concerns into account and proceeded smoothly. 112
The problems common in upward communication resemble those for downward communication. Managers, like their sub- ordinates, are bombarded with information and may neglect or miss information from below. In addition, some employees are not always open with their bosses; filtering occurs upward as well as downward. People tend to share only good news with their bosses and suppress bad news for several reasons:
• They want to appear competent.
• They mistrust their boss and fear that if he or she finds out about something they have done, they will be punished.
• They fear the boss will punish the messenger, even if the reported problem is not that person’s fault.
• They believe they are helping their boss if they shield him or her from problems.
For these and other reasons, managers may not learn about important problems. As one leadership expert put it, “If the messages from below say you are doing a flawless job, send back for a more candid assessment.” 113
Managing Upward Communication Generating useful information from below requires managers to both facilitate
the companies that share this information claim a favorable impact on motivation and productivity. Cecil Ursprung,
former chair and CEO of Reflexite Corporation in New Britain, Connecticut, said, “Why would you tell 5 percent of the team what the score was and not the other 95 percent?” 104
Father of scientific management Frederick Taylor early in the 20th century would have considered opening the books to all employees “idiotic.” 105 But then Jack Stack tried it at Springfield ReManufacturing Corporation, which was on the brink of collapse. 106 The results? A reporter called Jack Stack’s SRC “the most highly motivated and business-savvy workforce I ever encountered.” In addition, “I met fuel-injection-pump rebuilders who knew the gross margins of every nozzle and pump they produced. I met crankshaft grinders and engine assemblers who could discuss the ROI of their machine tools.” The rewards they deserve are part of the picture, too: “I met a
guy who worked on turbochargers and ran his area as if it were his own small business. Then again, why shouldn’t he? Like the other employees, he was an owner of SRC.” 107 Worth only 10 cents per share in 1983, the company’s current stock price is close to $200 per share. 108
Other small companies joined the movement. Then bigger com- panies, including BP Canada, R. H. Donnelley, Wabash National, and Baxter Healthcare, began to use open-book management.
Opening the books, done properly, is a complete commu- nications system that makes sense to people on the shop floor just as it does to the top executives. Moving toward open-book management includes these basic steps: 109
1. Provide the information.
2. Teach basic finance and the basics of the business.
3. Empower people to make decisions based on what they know.
4. Make sure everyone shares directly in the company’s success (and risks), such as through stock ownership and bonuses.
5.2 | Upward Communication Is Invaluable to Management
Upward communication travels from lower to higher ranks in the hierarchy. Adequate upward communication is important for several reasons: 110
upward communication information that flows from lower to higher levels in the organization’s hierarchy
“ Many people believe that if you are doing a good job and accomplishing something, your bosses necessarily know
this, but they don’t. — Jeffrey Pfeffer , professor of organizational behavior, Stanford 111
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CHAPTER 13 | Communicating 305
• It allows units to share infor- mation, coordinate work, and solve mutual problems.
• It helps resolve conflicts.
• By allowing interaction among peers, it provides social and emotional support.
All these factors contribute to morale and effectiveness. David Carere, vice president of finance, credit, and account settlement for Rich Products, emphasizes that his staff must collaborate with employees in other functions, especially sales and customer service. This horizontal collaboration helps the frozen dessert company ensure that its sales are profitable and that bad debt is kept to a minimum. To foster communication between his employees and those in other departments, Carere sets up meetings where the credit department explains its role to employees of other departments and learns more about what they do. 120
Managing Horizontal Communication In complex envi- ronments, in which decisions in one unit affect another, informa- tion must be shared horizontally. An example of good horizontal communication is BluePages, IBM’s internal social networking site. Accessed daily by about 6 million IBMers, the site invites employees to post information about who they are, how they can be contacted, what projects they work or worked on, and what
and motivate upward communication. For example, they can have an open-door policy and encourage people to use it, have lunch or coffee with employees, use surveys, institute a pro- ductivity program for suggestions, or have town hall meetings. They can ask for employee advice, make informal visits to plants, really think about and respond to employee suggestions, and distribute summaries of new ideas and practices inspired by employee suggestions and actions. 114
Some executives practice MBWA (management by wander- ing around). That term, coined by Ed Carlson of United Airlines, refers simply to getting out of the office, walking around, and talking frequently and informally with employees. 115 Reed Hastings, CEO of Netflix, has taken MBWA to another level. He purposely doesn’t have an office at the Netflix headquar- ters; he connects with managers and employees by working at random places around the buiding. 116
At an aerospace company, management brought in con- sultants because trust and communications between manage- ment and employees were poor. The consultants assembled a team of employees to study the problem, and their top-priority recommendation was for managers to conduct informal walk- arounds, visiting employees in their work areas. The members of the problem-solving team told management they wanted these visits as a signal that managers cared to get to know them, spend time with them, and listen to them. 117
Useful upward communication must be reinforced and not pun- ished. Someone who tries to talk to a manager about a problem must not be consistently brushed off. An announced open-door policy must truly be open-door. Also, people must trust their supervisor and know that he or she will not hold a grudge if they deliver neg- ative information. To get honesty, managers must truly listen, not punish the messenger for being honest, and act on valid comments.
5.3 | Horizontal Communication Fosters Collaboration
Much information needs to be shared among people on the same hierarchical level. Such horizontal communication can take place among people in the same work team or in different departments. For example, a purchasing agent discusses a prob- lem with a production engineer, and a task force of department heads meets to discuss a particular concern. Horizontal com- munication also occurs with people outside the firm, including potential investors. 118
Horizontal communication has several important functions: 119
Traditional Thinking Managers should ignore rumors because they are usually baseless and they think they will go away on their own.
The Best Managers Today Neutralize potentially destructive rumors by providing factual information.
● Effective managers encourage and facilitate upward communication.
horizontal communication information shared among people on the same hierarchical level
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306 PART 4 | Leading
• Formal communications are official, organization-sanctioned epi- sodes of information transmission. They can move upward, down- ward, or horizontally and often are prearranged and necessary for performing some task.
• Informal communication is more unofficial. People gossip; employ- ees complain about their boss; people talk about their favorite sports teams; work teams tell newcomers how to get by. 125
The grapevine is the social network of informal commu- nications. Informal networks provide people with information, help them solve problems, and teach them how to do their work successfully. You should develop a good network of people willing and able to help. 126 However, the grapevine can be destructive when irrelevant or erroneous gossip and rumors proliferate and harm operations. 127
What does this mean for you personally? Don’t engage in e-gossip. Embarrassing episodes become public, and lawsuits based on defamation of character and invasion of privacy have used e-mail evidence. But don’t avoid the grapevine, either. 128 Listen, but evaluate before believing what you hear. Who is the source? How credible is he or she? Does the rumor make sense? Is it consistent or inconsistent with other things you know or have heard? Seek more information. Don’t stir the pot.
6.1 | Managing Informal Communication
Rumors start over any number of topics, including salaries, job security, costly mistakes, and the identity of people who are
skills they possess. 121 NASA co-locates scientists from dif-
ferent disciplines. And Hewlett-Packard uses common databases for different product groups to share information and ideas. 122
General Electric offers a great example of how to use pro- ductive horizontal communication as a competitive weapon. 123 GE’s businesses could operate independently, but each is sup- posed to help the others. They transfer technical resources, people, information, ideas, and money among themselves. GE accomplishes this high level of communication and coopera- tion through easy access between divisions and to the CEO; a culture of openness, honesty, trust, and mutual obligation; and quarterly meetings in which all the top executives get together to share information and ideas. Similar activities take place at lower levels as well.
6 | INFORMAL COMMUNICATION NEEDS ATTENTION
Organizational communications differ in formality:
grapevine informal communication network
LO6 Summarize how to work with the company grapevine
A survey explored four modes of work: focus work (concentrating on a task that may involve thinking, writing, and reflecting), collaborating (working with others to generate and evaluate ideas), learning (acquiring new knowledge), and socializing (developing relationships). In top- performing firms, people spent more time collaborating, learning, and even socializing than in average firms. 124
Did You Know?
0
10
20
30
40
50
60 Top-performing firms
Average firms
%Time spent on focus work
%Time spent collaborating
%Time spent learning
%Time spent socializing
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CHAPTER 13 | Communicating 307
the term boundarylessness. A boundaryless organization is one without any barriers to information flow. If no bound- aries separate people, jobs, processes, and places, then ideas, information, decisions, and actions can move to where they are most needed. 134 This free flow does not imply a random free-for-all of unlimited communi- cation and information overload. It implies information available as needed, moving quickly and easily enough that the organiza- tion functions far better as a whole than as separate parts.
GE’s chief learning officer uses the metaphor of the organi- zation as a house with three kinds of boundaries: the floors and ceilings, the walls separating the rooms, and the outside walls. In organizations, these barriers correspond to the boundaries between different organizational levels, between different units and departments, and between the organization and its external stakeholders, such as suppliers and customers. GE also identi- fies a fourth wall: global boundaries separating domestic from global operations. 135
A method of breaking down boundaries is GE’s famous Workout program, a series of meetings for business members across multiple hierarchical levels, characterized by extremely frank, tough discussions that break down vertical boundaries. Workout has involved over hundreds of thousands of GE people; in any given week, thousands may be participating in a Workout program. 136 Workout is also done with customers and suppliers, breaking down outside boundaries. GE has reached out to the community by sharing this expertise with nonprofits, such as CommonBond Communities, a provider of affordable housing. A GE employee led a Workout session in which CommonBond employees identified how to improve processes and horizontal communication. 137
GE uses plenty of other techniques to break down bound- aries, too. It relentlessly benchmarks competitors and com- panies in other industries to learn best practices all over the world. GE places different functions together physically, such as engineering and manufacturing. It shares services across units. And it sometimes shares physical locations with its customers.
Boundaryless organizations intentionally create dialogue across boundaries, turning barriers into permeable membranes. As the GE people put it, people from different parts of the orga- nization need to learn “how to talk.” 138 They must also learn “how to walk.” That is, dialogue is essential, but it must be followed by commensurate action.
As GE’s Workout program and the rest of this chapter demonstrates, effective communication is an essential tool for all leaders, managers, and employees. As you continue reading, consider how being an effective communicator can help you achieve managerial control (Chapter 14) and innovation and change (Chapter 15).
leaving or being promoted. Rumors can destroy people’s faith and trust in the company—and in each other. But the grapevine cannot be eliminated. So managers need to work with the grape- vine. The grapevine can be managed in several ways: 129
• If a manager hears a story that could get out of hand, he or she should talk to the key people involved to get the facts and their per- spectives. Don’t allow malicious gossip.
• To prevent rumors from starting, managers can explain events that are important but have not been explained; dispel uncertainties by providing facts; and establish open communications and trust over time. 130 These efforts are especially important during times of uncer- tainty, such as after a merger or layoff or when sales slow down, because rumors increase along with anxiety. For example, when advertising revenues fell at R. H. Donnelley, which publishes yellow pages directories, management stepped up efforts to make sure employees heard any company news straight from management, rather than on the news. Donnelley also encouraged its managers to make regular visits to salespeople to answer their questions. 131
• The manager should neutralize rumors once they have started. Disregard the rumor if it is ridiculous; openly confirm any parts that are true; make public comments (no comment is seen as a confir- mation of the rumor); deny the rumor, if the denial is based in truth (don’t make false denials); make sure communications about the issue are consistent; select a spokesperson of appropriate rank and knowledge; and hold town meetings if needed. 132
Some companies use informal rumors to create buzz and excitement in advance of a new product launch. In 2014, rumors abound regarding Amazon’s purported soon-to-be launched smartphone that is expected to feature 3-D graphics (without users having to wear special glasses) and six cameras that will track eye movement to enable touchless commands. 133 Numerous tech and business blogs, journals, and websites are tracking this “next big thing.”
7 | BOUNDARYLESS ORGANIZATIONS HAVE NO BARRIERS TO INFORMATION FLOW
Many executives and management scholars today believe orga- nizations need to ensure free access to information in all direc- tions. Jack Welch, when he was CEO of General Electric, coined
boundaryless organization organization in which there are no barriers to information flow
LO7 Describe the boundaryless organization and its advantages
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308 PART 4 | Leading
Study Che klist Did you tear out the perforated student review card at
the back of the text to revisit learning objectives and key terms and definitions?
Connect® Management is available for M Management. Additional resources include:
Interactive Applications: • Comprehension Case: Have We Changed the Channel? • Drag & Drop: Communication at Cupcake Kingdom • Self-Assessment: Your Communication Style Under
Stress • Video Case: Is This Effective Communication?
LearnSmart—Multiple choice questions help you determine what you already know, are not sure about, or need to practice based on your score. And with SmartBook, you can read the relevant section in the eBook as well as practice and recharge what you’ve learned.
Chapter Video: Google, The Digital Age, and Your Memory
Young Manager Speaks Out: Timothy Paul, Store Manager
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310 PART 5 | Controlling
Learning Objectives
Managerial Control
After studying Chapter 14, you should be able to
LO1 Explain why companies develop control systems for employees.
LO2 Summarize how to design a basic bureaucratic control system.
LO3 Describe the purposes for using budgets as a control device.
LO4 Recognize basic types of financial statements and financial ratios used as controls.
LO5 List procedures for implementing effective control systems.
LO6 Discuss ways in which market and clan control influence performance.
part five
14 chapter
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CHAPTER 14 | Managerial Control 311
LO1 Explain why companies develop control systems for employees
A
• Lax top management —Senior managers do not emphasize or value the need for controls, or they set a bad example.
• Absence of policies —The firm’s expectations are not estab- lished in writing.
• Lack of agreed-upon standards —Organization members are unclear about what needs to be achieved.
• “Shoot the messenger” management —Employees feel their careers would be at risk if they reported bad news.
• Lack of periodic reviews —Managers do not assess performance on a regular, timely basis.
• Bad information systems —Key data are not measured and reported in a timely and easily accessible way.
• Lack of ethics in the culture —Organization members have not internalized a commitment to integrity.
Employees simply wasting time cost U.S. employers bil- lions of dollars each year! 2 Ineffective control systems result
1 | SPINNING OUT OF CONTROL?
Control is one of the fundamental forces that keep the organi- zation together and heading in the right direction. Control is any process that directs the activities of individuals toward the achievement of organizational goals. It is how effective man- agers make sure that activities are going as planned. During challenging economic times when resources are limited and budgets need to be stretched, managerial control becomes even more important for survival. Some managers don’t want to admit it, but control problems—the lack of controls or the wrong kinds of controls—frequently cause irreparable damage to organizations. Here are some signs that a company lacks controls:
s seen in Chapter 3, macroenvironments and
competition can influence business opportuni-
ties and control strategies. Take pharmaceutical
companies. The weak economy and downward price pressure
from generic drug manufacturers have caused pharmaceutical
companies to look for ways to reduce costs. Adding additional
pressure to the industry is the recent increase in governmen-
tal regulations and laws, both in the United States and when
shipping certain drugs to some foreign countries. To address
these external pressures, some pharmaceutical companies are
controlling costs by outsourcing logistics—the storage, ship-
ping, and delivery of drugs and related products to customers.
By outsourcing nonessential value chain activities, these drug
makers can focus on R&D for product development and other
core competency activities.
What companies are poised to take over the logistics of these
and other health care companies? Efficient and control-oriented
shipping companies like United Parcel Service (UPS). Over the
past eight years, UPS has built 41 dedicated health care facil-
ities around the world. Not only do these warehouses have
temperature-controlled storage and freezer capabilities to keep
drugs from losing efficacy, but they also meet quality assurance
and geographic regulatory requirements (e.g., Food and Drug
Administration, Health Canada, European Medicines Agency,
and so forth). UPS also has its own team of 4,000 pharmacists
to expedite orders made by hospitals and other customers of
pharmaceutical companies.
Walgreens picked UPS to ship $9 million (375,000 doses) of
flu vaccine from UPS’s headquarters in Kentucky to Laos, a
trip of 8,500 miles. Using two refrigerated airfreight containers
and 50 logisticians, UPS successfully delivered the vaccines.
Medtronic is a Minneapolis-based medical technology com-
pany that provides, among other products, an FDA-approved
integrated diabetes management system. While the company
doesn’t make insulin, it sells the equipment patients need to
manage their diabetes: insulin pump, continuous glucose moni-
tor, and therapy management software. UPS pharmacists at the
firm’s headquarters in Louisville, Kentucky, fill the orders and
ship them (via UPS) to Medtronic’s patients. As a result of out-
sourcing their medical device shipping needs to UPS, Medtronic
was able to reduce costs by closing its own distribution ware-
house and decreasing the cost of processing each order. 1
control any process that directs the activities of individuals toward the achievement of organizational goals
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in problems ranging from employee theft to lead in the paint of children’s toys. Large auto makers are not immune. Mary Barra, CEO of General Motors, was questioned by members of Congress as to why it took GM more than 10 years to recall and fix vehicles with faulty ignition switches. Barra responded that she did not know why the recall took so
long and announced that an internal investigation was under way. Evidence suggested that the faulty switches in some GM
models led to the engine shutting off and subsequent loss of power steering, power brakes, and air bags, causing 13 deaths and 31 accidents. In 2014, GM recalled 2.6 million vehicles to replace the ignition switches. Barra suggested that the 10-year delay was partly attributable to GM’s “cost culture” (where reducing costs is the top priority) but added that the auto giant is currently moving toward a more “customer-focused culture.” 3
Control has been called one of the Siamese twins of man- agement. The other twin is planning. Some means of control are necessary because once managers form plans and strategies, they must ensure that the plans are carried out. They must make sure that other people are doing what needs to be done and not doing inappropriate things. Control provides managers with continuous feedback so that when plans are not carried out prop- erly, managers can take steps to correct the problem. This pro- cess is the primary control function of management. By ensuring creativity, enhancing quality, and reducing cost, managers must figure out ways to control the activities in their organizations.
Not surprisingly, effective planning facilitates control, and control facilitates planning. Planning lays out a framework for the future and, in this sense, provides a blueprint for control. Control systems, in turn, regulate the allocation and use of resources and, in so doing, facilitate the next phases of plan- ning. In today’s complex organizational environment, both functions have become more difficult to implement while they have become more important in every department of the organi- zation. Managers today must control their people, inventories, quality, and costs, to mention just a few of their responsibilities.
According to William Ouchi of the University of California at Los Angeles, managers can apply three broad strategies for achieving organizational control: 4
1. Bureaucratic control is the use of rules, standards, regula- tions, hierarchy, and legitimate authority to guide performance. It includes such items as budgets, statistical reports, and perfor- mance appraisals to regulate behavior and results. It works best where tasks are certain and workers are independent.
2. Market control involves the use of prices, competition, and exchange relationships to regulate activities in organizations as though they were economic transactions. Business units may be treated as profit centers and trade resources (services or goods) with one another via such mechanisms. Managers who run these units may be evaluated on the basis of profit and loss. Market con- trol is most effective where tangible output can be identified and a market can be established between the parties to be controlled.
bureaucratic control the use of rules, regulations, and authority to guide performance
market control control based on the use of pricing mechanisms and economic information to regulate activities within organizations
“More than at any time in the past, companies will not be able to hold themselves together with the traditional
methods of control: hierarchy, systems, budgets, and the like. . . . The bonding glue will increasingly become ideological.”
— Collins & Porras 5
LISTEN & LEARN ONLINE
YOUNG MANAGERS
Speak Out! “ Keep an open mind in terms of the experiences that you will encounter as a manager, have confidence in your- self that you can make decisions, don’t be afraid to ask questions, and be willing to learn, and learn from your mistakes. ”
—Jeremy Partacz , Customer Experience Manager
312
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CHAPTER 14 | Managerial Control 313
managers’ objectives. Control systems detect and correct signif- icant variations, or discrepancies, in the results of planned activities.
2.1 | Control Systems Have Four Steps
As Exhibit 14.1 shows, a typical control system has four major steps:
1. Setting performance standards.
2. Measuring performance.
3. Comparing performance against the standards and determining deviations.
4. Taking action to correct problems and reinforce successes.
Step 1: Setting Performance Standards Every organiza- tion has goals: profitability, innovation, satisfaction of customers
3. Clan control , unlike the first two types, does not assume that the inter- ests of the organization and individuals naturally diverge. Instead it is based on the idea that employees may share the values, expectations, and goals of the organization and act in accordance with them. When members of an organization have common values and goals—and trust one another—formal controls may be less necessary. Clan control is based on interpersonal processes of organization culture, leadership, and groups and teams. It works best where there is no “one best way” to do a job and employees are empowered to make decisions.
2 | BUREAUCRATIC CONTROL SYSTEMS
Bureaucratic (or formal) control systems are designed to mea- sure progress toward set performance goals and, if necessary, to apply corrective measures to ensure that performance achieves
Take Charge of Your Career Learn how to control without being too controlling!
C ontrol is one of the most misunderstood areas in management. For many employees, the term can conjure up images of the scene in the movie, The Internship, when the authori- tarian boss (actor John Goodman) yells “You’re dinosaurs!” as justification for firing watch salesmen Billy McMahon (actor Vince Vaughn) and Nick Campbell (actor Owen Wilson).
Fortunately there are many managers who create and maintain high-morale envi- ronments in which employees know what is expected of them and are trusted to deliver results. These managers have learned, often through trial and error, or observing more experienced managers, that exerting the cor- rect amount of control over employees is an important skill. Different employees respond in different ways to control. Some employees like knowing exactly what needs to be done and appreciate you asking them how their work is progressing, while others prefer to be left alone so they can get their work done.
Managers who learn what each employee requires in terms of guidance and control will be more effective.
How can you develop your control man- agement skills? Assume that three of your employees are about to begin a lengthy, complex project. Here are some tips regard- ing how to exert control without being too controlling:
• Spend time helping your employees develop a detailed project plan, including key mile- stones and due dates. By exerting control
during the planning stage of a project, you are less likely to have to be heavy-handed later on.
• When an employee makes a mistake, ask what he could have done differently to avoid the error. Use a neutral and profes- sional tone. You may even want to share a quick story about a previous error you made and how you fixed it. This signals to the employee that it’s okay to make a mistake, but it needs to be corrected.
• After the project is finished, ask your employees what could be done to improve the process for next time. This is where controlling leads to better planning, organ- izing, and leading. No matter how well your employees’ performance met the standards of the project, there is always room for con- tinuous improvement.
You can learn how to exert the right amount of control over your employees. Give yourself some time to develop this skill, and be sure to observe how your employees react to your guidance, questions, and directives. This is another feedback loop that will help you continuously improve your managerial control skills.
Vince Vaughn as Billy McMahon and Owen Wilson as Nick Campbell in The Internship, 2013. This scene shows the duo seeking internships from Google after being laid off from their current jobs.
clan control control based on the norms, values, shared goals, and trust among group members
LO2 Summarize how to design a basic bureaucratic control system
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314 PART 5 | Controlling
● When Google cofounder Larry Page replaced his mentor Eric Schmidt as Google’s CEO in 2012, Page insisted that the company had to be more aggressive about countering the threat posed by Facebook’s ever-growing popularity. Over the past year, Page responded with a social networking crusade that is reshaping Google.
you learned in an earlier chapter, benchmarking is the process of comparing your firm’s practices and technologies with those of other organizations. Standards can be set for any activity— financial activities, operating activities, legal compliance, chari- table contributions, and so on. 6
We have discussed principles of setting performance standards in other chapters. For example, employees tend to be motivated by specific, measurable performance standards that are challeng- ing and aim for improvement over past performance. Typically performance standards are derived from job requirements, such as increasing market share by 10 percent, reducing costs 20 per- cent, and answering customer complaints within 24 hours. But performance standards don’t apply just to people in isolation; they frequently integrate human and system performance. With more than 4,500 employees, Blue Cross Blue Shield (BCBS) of North Carolina provides 3.8 million customers with health insurance. During the recent economic recession, the organization realized that many of its managers lacked several important leadership skills. The situation was described in the following manner: “Managers were not fully prepared to achieve corporate goals or lead emerging business opportunities.” In response, BCBS devel- oped an organizationwide set of competencies and performance
standards, and assessed their 600 managers’ current capabilities against those standards. Managers who did not initially meet the standards were given additional training and team assignments to increase their leadership skills and competencies. As a result of the initiative, BCBS was able to reduce operating costs by more than $1 million, reengineer business processes, and reduce employee turnover. The new stan- dards also resulted in an 18 per- cent increase in promotions and manager quality scores that sur- passed the 80 percent benchmark. 7
As illustrated in Exhibit 14.2 , there are several metrics against which performance standards can be compared. For example, pro- duction activities include volume of output (quantity), defects (qual- ity), on-time availability of fin- ished goods (time use), and dollar expenditures for raw materials and direct labor (cost). Many import- ant aspects of performance, such as customer service, can be mea- sured by the same standards— adequate supply and availability of products, quality of service, speed of delivery, and so forth.
and employees, and so on. A standard is the level of expected performance for a given goal. Standards are targets that establish desired performance levels, motivate performance, and serve as benchmarks against which to assess actual performance. As
Exhibit 14.1 The control process
Reinforce and continue
work.
Set performance
standards.
Measure performance.
Compare. Determine deviation.
Standards. Meets standards.
Take corrective
action. No Yes
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CHAPTER 14 | Managerial Control 315
they can make any necessary adjustments before a national rollout. Information that is not available is of little or no use to managers.
Step 3: Comparing Perfor- mance with the Standard The third step in the control process is comparing per- formance with the standard. In this process, the manager evaluates the performance. For some activities, rela- tively small deviations from the standard are acceptable, while in others a slight deviation may be serious. In many man- ufacturing processes, a significant deviation in either direction (e.g., drilling a hole that is too small or too large) is unac- ceptable. In other cases, a deviation in one direction, such as sales or customer satisfaction below the target level, is a prob- lem, but a deviation in the other—exceeding the sales target or customer expectations—is a sign employees are getting better-than-expected results. Therefore, managers who perform the oversight must analyze and evaluate the results carefully.
The managerial principle of exception states that control is enhanced by concentrating on the exceptions to, or signifi- cant deviations from, the expected result or standard. In other words, in comparing performance with the standard, managers need to direct their attention to the exception—for example, a handful of defective components produced on an assembly line or the feedback from customers who are upset or delighted with a service. Atlanta-based US Security Associates uses informa- tion technology to gather performance data on its uniformed security guards and dispatches supervisors to investigate any variances from performance norms, such as a failure of a guard to sign in at a client’s location on time. 8
With the principle of exception, only exceptional cases require corrective action. This principle is important in controlling. The manager is not concerned with performance that equals or closely approximates the expected results. Managers can save much time and effort if they apply the principle of exception.
The accounting and consulting firm of Moody, Famiglietti & Andronico (MFA) uses a formal control process to ensure that it provides exceptional service tailored to each client’s needs and preferences. The Tewksbury, Massachusetts, firm adopted the U.S. Army’s practice of conducting before-action reviews and after-action reviews to learn from experience and apply those les- sons in the future.
When employees are preparing to handle an assignment, they call a short meeting with everyone who has worked with that client during the previous year, as well as employees who have handled similar assignments for other clients. During this before-action review, participants trade experiences with and knowledge about
One word of caution: the downside of establishing perfor- mance targets and standards is that they may not be supported by other elements of the control system. Each piece of the system is important and depends on the others. Otherwise the system can get out of balance.
Step 2: Measuring Performance The second step in the control process is to measure performance levels. For example, managers can count units produced, days absent, papers filed, samples distributed, and dollars earned. Performance data com- monly are obtained from three sources:
1. Written reports include computer printouts and on-screen reports. Thanks to computers’ data-gathering and analysis capabilities and decreasing costs, companies of any size can gather huge amounts of performance data.
2. Oral reports allow two-way communication. When a salesperson contacts his or her supervisor each evening to report the day’s accomplishments, problems, and customer reactions, the manager can ask questions to gain additional information or clear up any misunderstandings. When necessary, tentative corrective actions can be worked out during the discussion.
3. Personal observation involves going to the area where activities take place and watching what is occurring. The manager can directly observe work methods, employees’ nonverbal signals, and the gen- eral operation. Personal observation gives a detailed picture of what is going on, but it also has some disadvantages. It does not provide accurate quantitative data; the information usually is general and subjective. Also, employees can misunderstand the purpose of per- sonal observation as mistrust or lack of confidence. Still, many man- agers believe in the value of firsthand observation. As you learned in earlier chapters, personal contact can increase leadership visibility and upward communication. It also provides valuable information about performance to supplement written and oral reports.
Regardless of the performance measure used, the informa- tion must be provided to managers on a timely basis. For exam- ple, consumer goods companies like General Foods carefully track new product sales in selected local markets first so that
Exhibit 14.2 Common measures of performance standards
Quantity
Cost Time used
Quality
standard expected performance for a given goal: a target that establishes a desired performance level, motivates performance, and serves as a benchmark against which actual performance is assessed
principle of exception a managerial principle stating that control is enhanced by concentrating on the exceptions to or significant deviations from the expected result or standard
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316 PART 5 | Controlling
in the future, as well as mistakes to avoid next time. Besides noting whether they helped the client meet goals, they also record what they learned about serving the client. Because lessons they learn will come up at future before-action reviews, MFA employees are motivated to fix mistakes and improve methods. 9
Step 4: Taking Action to Correct Problems and Reinforce Successes The last step in the control process is to take appropriate action when there are significant deviations. This step ensures that operations are adjusted to achieve the planned results—or to continue exceeding the plan if the manager deter- mines that is possible. If significant variances are discovered, the manager usually takes immediate and vigorous action.
An alternative approach is for the corrective action to be taken, not by higher-ups, but by the operator at the point of the problem. In computer-controlled production technology, two basic types of control are feasible:
1. Specialist control —Operators of computer numerical control (CNC) machines must notify engineering specialists of malfunctions. With this traditional division of labor, the specialist takes corrective action.
2. Operator control —Multiskilled operators can rectify their own problems as they occur. This strategy is more efficient because deviations are controlled closer to their source. It is also more sat- isfying because operators benefit by having a more enriched job.
The selection of the corrective action depends on the nature of the problem. The corrective action may involve a shift in marketing strategy (if, say, the problem is lower-than-expected sales), a disciplinary action, a new way to check the accuracy of manufactured parts, or a major modification to a process or system. Sometimes managers learn they can get better results if they adjust their own practices. Yum Brands, whose franchise restaurants include KFC, Taco Bell, Pizza Hut, and Long John Silver’s, conducts regular surveys to learn whether employees feel strong commitment to their jobs. These data are shared with managers to help them measure their performance as leaders and motivators. Jonathan McDaniel, a Houston KFC manager, once learned that his employees were unhappy with their work hours. He began asking them ahead of time whether they wanted particular days off each month—information that helped him create better schedules and end a cause of employee dissatisfaction. 11
2.2 | Bureaucratic Control Occurs Before, During, and After Operations
Bureaucratic control combines three approaches, defined according to their timing:
1. Feedforward control takes place before operations begin and includes policies, procedures, and rules designed to ensure that planned activities are carried out properly. Examples include inspection of raw materials and proper selection and training of employees.
the client—say, questions that are likely to arise or existing tools for handling common problems. The input from this meeting helps the team establish goals.
During the assignment, team members meet periodically to assess progress and identify any adjustments needed. Soon after the project’s completion, the team reassembles to compare outcomes with goals. Participants identify successful actions to recommend
“Controlling” your grades Most students monitor how their grades are progressing during the semester. However, some students don’t realize until it is too late that they’re not going to earn their desired grade. You can stay on top of your progress and make adjustments by fol- lowing the steps in the control process in Exhibit 14.1 : 1. Set your performance standard or desired grade. 2. Measure your performance by calculating your grade
average after every assignment, quiz, or exam. 3. Compare your running grade average against your standard. 4. If your grade average is lower than desired, take correc-
tive action like studying harder or asking the professor for study advice. Alternatively, if your grade average meets your standard, continue your current study approach.
study tip 14
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CHAPTER 14 | Managerial Control 317
aimed at preventing such prob- lems in an organization include training in appropriate behavior (including how to avoid sexual harassment) and creating and enforcing workplace policies. According to a 2013 survey by the Society for Human Resource Management, 42 percent of companies used verbal and writ- ten policies to exert control over workplace romances. Nearly all (99 percent) of the policies prohibited romances between a supervisor and a subordinate. The most common consequence of being discovered in an office romance was a transfer of one of the participants to another department. 15
Concurrent Control Concurrent control, which takes place while plans are carried out, is the heart of any control system. On a manufac- turing floor, all efforts are directed toward pro- ducing the correct quantity and quality of the right products in the specified amount of time. In an airline terminal, the baggage must get to the right airplanes before flights depart. And in many settings, supervisors watch employ- ees to ensure they work efficiently and avoid mistakes.
Advances in information technology have created powerful concurrent controls. Computerized systems give managers immedi- ate access to data from the remotest corners of their companies. For example, managers can update budgets instantly from a continuous flow of performance data. In production facilities, monitoring systems that track errors per hour, machine speeds, and other measures let man- agers correct small production problems before they become disasters. Point-of-sale terminals in store checkout lines send sales data back to a retailer’s headquarters to show which products are selling in which locations.
For Ronald M. Shaich, CEO of Panera Bread, paying attention to what is happening in the
restaurants in critical. Recently, the company experienced a decrease in sales as some customers, frustrated with long lines and inconsistent service, opted to purchase their sandwiches and salads elsewhere. Simply put, customer demand for the restau- rant chain’s products has outgrown the company’s ability to consistently deliver a high-quality in-store experience. Shaich is addressing these problems by implementing the following
2. Concurrent control takes place while plans are being carried out. It includes directing, monitoring, and fine-tuning activities as they occur.
3. Feedback control focuses on the use of information about results to correct deviations from the acceptable standard after they arise.
Feedforward Control Feedforward control (sometimes called preliminary control ) is future oriented; its aim is to pre- vent problems before they arise. Instead of waiting for results and comparing them with goals, a manager or employees can exert control by limiting activities in advance. For exam- ple, companies have policies defining the scope within which decisions are made. As in the example of Coca-Cola’s Code of Business Conduct, 12 a company may dictate that managers must adhere to clear ethical and legal guidelines when making decisions. Formal rules and procedures also prescribe people’s actions before they occur. For example, legal experts advise companies to establish policies forbidding disclosure of pro- prietary information or making clear that employees are not speaking for the company when they post messages on blogs, microblogging sites such as Twitter, or social networking sites such as Facebook. Human resource policies defining what forms of body art are acceptable to display at work can avoid awkward case-by-case conversations about a tattoo that offends coworkers or piercings that are incompatible with the company’s image. 13
At Donnelly Custom Manufacturing in Alexandria, Minnesota, all 225 employees of this short run, close tolerance injection mold manufacturer par- ticipated in “error proofing” workshops that taught them to identify and correct errors before they occur. After potential problems are identified, employees develop and then rank order solutions according to the speed, complexity, and cost of implementing them. The employees also consider the effectiveness of each alternative solution. Since applying these “error proofing” techniques to several molding jobs with a long-time customer, 75 percent fewer parts were rejected due to human error, and parts-per-million defects were lowered by two-thirds. 14
Recently more managers have grown con- cerned about the organizational pitfalls of work- place romances, and some have sought a solution in feedforward controls. As wonderful as it is to find love, problems can arise if romantic activities between a supervisor and subordi- nate create a conflict of interest or charges of sexual harassment. Other employees might interpret the relationship wrongly—that the company sanctions personal relationships as a path to advance- ment. In addition, romantic ups-and-downs can spill over into the workplace and affect everyone’s mood and motivation. Controls
feedforward control the control process used before operations begin, including policies, procedures, and rules designed to ensure that planned activities are carried out properly
concurrent control the control process used while plans are being carried out, including directing, monitoring, and fine-tuning activities as they are performed
feedback control control that focuses on the use of information about previous results to correct deviations from the acceptable standard
In his book, Drive, Dan Pink states: “A Cornell University study of 320 small businesses, half of which granted workers autonomy and half of which relied on top- down direction, found that the businesses that offered autonomy grew at four times the rates of the control-oriented firms and had one-third the turnover.” 10
Did You Know?
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318 PART 5 | Controlling
organization’s “innovation catalysts”—people who actively participate in information sharing. Managers can use the social network analysis to reward innovation catalysts; give them important assignments; and, in areas where not enough col- laboration is occurring, train and motivate employees to share knowledge. 18
The Role of Six Sigma One of the most important quality control tools to emerge is six sigma, which we mentioned in Chapter 7. It is a particularly robust and powerful application of feedback control. Six sigma is designed to reduce defects in all organization processes—not just product defects but any- thing that may result in customer dissatisfaction, such as inad- equate service, delayed delivery, and excessively high prices due to high costs or inefficiency. The system was developed at Motorola in the late 1980s, when the company found it was being beaten consistently in the competitive marketplace by foreign firms that were able to produce higher-quality prod- ucts at a lower cost. Since then, the technique has been widely adopted and even improved on by many companies, such as GE, Allied Signal, Ford, Xerox, 3M, Dell, and Bechtel.
Sigma is the Greek letter used in statistics to designate the estimated standard deviation, or variation in a process. It indi- cates how often defects in a process are likely to occur. The lower the sigma number, the higher the level of variation or defects; the higher the sigma number, the lower the level of variation or defects. For example, as illustrated in Exhibit 14.3 , a two-sigma-level process has more than 300,000 defects per million opportunities (DPMO)—not a very well-controlled process. A three-sigma-level process has 66,807 DPMO, which is roughly a 93 percent level of accuracy. Many organizations operate at this level, which on its face does not sound too bad,
changes: (1) adding 35 extra hours of labor per week to each store (adding $15 million in annual labor costs), (2) redesigning workflows and retraining employees, and (3) moving many of the phone orders (10 percent of sales) to the Web to free-up employees to serve in-store customers. 16
Feedback Control Feedback control is involved when per- formance data have been gathered and analyzed and the results have been returned to someone (or something) in the process to make corrections. When supervisors monitor behavior, they are exercising concurrent control. When they point out and correct improper performance, they are using feedback as a means of control.
Timing is an important aspect of feedback control. Long time lags often occur between performance and feedback, such as when actual spending is compared with the quarterly bud- get, instead of weekly or monthly, or when some aspect of per- formance is compared with the projection made a year earlier. Yet if feedback on performance is not timely, managers cannot quickly identify and eliminate the problem and prevent more serious harm. 17
Some feedback processes are under real-time (concurrent) control, such as a computer-controlled robot on an assem- bly line. Such units have sensors that continually determine whether they are in the correct position to perform their func- tions. If they are not, a built-in control device makes immediate corrections.
In other situations, feedback processes require more time. Some companies that value innovation are applying social net- work analysis, which uses data from surveys to create diagrams showing which employees collaborate with which colleagues. Employees who are at a hub of information sharing are the
“Mistakes and problems are inevitable in complex enterprises. . . . We shouldn’t expect heads of established organizations to be perfect, but we should expect them
to catch and correct their mistakes quickly.” — Rosabeth Moss Kanter, professor, Harvard Business School 19
Traditional Thinking Managers should rely on feedback control to correct deviations from acceptable standards.
The Best Managers Today Use feedforward control to ensure that planned activities are executed properly.
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CHAPTER 14 | Managerial Control 319
of other companies and inter- nal audits of their own compa- nies. Some of the same tools and approaches are used for both types of audit. 24
External Audits An external audit occurs when one organi- zation evaluates another orga- nization. Typically an external body such as a certified public accountant (CPA) firm con- ducts financial audits of an organization (discussed later in the chapter). But any company can conduct external audits of competitors or other companies for its own strategic decision-making purposes. This type of analysis investigates other organizations for possible merger or acquisition, determines the soundness of a company that will be used as a major supplier, or discovers the strengths and weaknesses of a competitor to maintain or better exploit the competitive advantage of the inves- tigating organization. Publicly available data usually are used for these evaluations. 25
External audits provide essential feedback control when they identify legal and ethical lapses that could harm the organization and its reputation. They also are useful for preliminary control because they can prevent problems from occurring. If a company seeking to acquire other businesses gathers adequate, accurate information about possible candidates, it is more likely to acquire the most appropriate companies and avoid unsound acquisitions.
Internal Audits An organization may assign a group to con- duct an internal audit to assess what the company has done for itself and what it has done for its customers or other recip- ients of its goods or services. The company can be evaluated on a number of factors, including financial stability, production efficiency, sales effectiveness, human resources development, earnings growth, energy use, public relations, civic responsibil- ity, and other criteria of organizational effectiveness. The audit
until we consider its implications—for example, 7 items of air- line baggage lost for every 100 processed. The additional costs to organizations of such inaccuracy are enormous. Even at just above a 99 percent defect-free rate, or 6,210 DPMO, the accu- racy level is often unacceptable—the statistical equivalent of about 50 dropped newborn babies a day. 20
At six sigma level, a process is producing fewer than 3.4 defects per million, which means it is operating at a 99.99966 percent level of accuracy. Six sigma companies have not only close to zero product or service defects but also substantially lower production costs and cycle times and much higher levels of customer satisfaction. The methodology isn’t just for the factory floor, either. Accountants have used six sigma to improve the quality of their audits investigating risks faced by their clients. 21
The six sigma approach is based on an intense statistical analysis of business processes that contribute to customer satis- faction. 22 For example, a process GE measured when it began using the method was product delivery time. Once the defects or variations are measured, their causes are analyzed. Teams of employees work on designing and testing new processes that will reduce the causes of the variations. For example, if the team finds that delivery delays are caused by production bot- tlenecks, it will work on eliminating those. When an improved process is installed, it is analyzed again for remaining defects, and employees then work on reducing those. This cycle con- tinues until the desired quality level is achieved. In this way, the six sigma process leads to continuous improvement in an organization’s operations.
Six sigma has come under some criticism for not always delivering business results. 23 One likely reason why six sigma doesn’t always improve the bottom line is that it focuses only on how to eliminate defects in a process, not whether the pro- cess is the best one for the organization. So, for example, at 3M, a drive to improve efficiency through six sigma has been blamed for slowing the flow of innovative ideas. At Home Depot, six sigma has been credited with improving such pro- cesses as customer checkout and deciding where to place prod- ucts in stores, but some say the effort took store workers away from customers. One way managers can apply the strengths of six sigma and minimize the drawbacks is by setting different goals and control pro- cesses for the company’s mature products than for its areas of innovation.
2.3 | Management Audits Control Various Systems
Over the years, management audits have developed as a means of evaluating the effectiveness and efficiency of various sys- tems within an organization, from social responsibility programs to accounting con- trol. Management audits may be external or internal. Managers conduct external audits
management audit an evaluation of the effectiveness and efficiency of various systems within an organization
external audit an evaluation conducted by one organization, such as a CPA firm, on another
Sigma Level DPMO Is Four Sigma Good Enough?
2 s 308,537 Consider these everyday examples of four sigma quality . . .
3 s 66,807 • 20,000 lost articles of mail per hour.
4 s 6,210 • Unsafe drinking water 15 minutes per day.
5 s 233 • 5,000 incorrect surgical operations per week.
6 s 3.4 • 200,000 wrong prescriptions each year.
• No electricity for 7 hours each month.
Source: T. Rancour and M. McCracken, “Applying 6 Sigma Methods for Breakthrough Safety Performance,” Professional Safety 45. no. 10 (October 2000). pp. 29–32. Reprinted with permission of American Society of Safety Engineers. Permission conveyed through Copyright Clearance Center.
Exhibit 14.3 Relationship between sigma level and defects per million opportunities
internal audit a periodic assessment of a company’s own planning, organizing, leading, and controlling processes
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320 PART 5 | Controlling
3 | BUDGETARY CONTROLS
Budgetary control is one of the most widely recognized and com- monly used methods of managerial control. It ties together feedfor- ward control, concurrent control, and feedback control, depending on the point at which it is applied. Budgetary control is the process of finding out what’s being done and comparing the results with the corresponding budget data to verify accomplishments or rem- edy differences. Budgetary control commonly is called budgeting.
3.1 | Fundamental Budgetary Considerations
In private industry, budgetary control begins with an estimate of sales and expected income. Exhibit 14.4 shows a budget with a forecast of expected sales (the sales budget ) on the top row, fol- lowed by several categories of estimated expenses for the first three months of the year. In the bottom row, the profit estimate is deter- mined by subtracting each month’s budgeted expenses from the sales in that month’s sales budget. Columns next to each month’s budget provide space to enter the actual accomplishments so man- agers can readily compare expected amounts and actual results.
Although this discussion of budgeting focuses on the flow of money into and out of the organization, budgeting information is not confined to finances. The entire enterprise and any of its units can create budgets for their activities, using units other than dol- lars, if appropriate. For example, many organizations use produc- tion budgets forecasting physical units produced and shipped, and labor can be budgeted in skill levels or hours of work required.
A primary consideration of budgeting is the length of the budget period. All budgets are prepared for a specific time period. Many
budgets cover one, three, or six months or one year. The length of time selected depends on the primary purpose of the budget- ing. The period should include the enterprise’s complete nor- mal cycle of activity. For exam- ple, seasonal variations should be included for production and for sales. The budget period commonly coincides with other control devices, such as mana- gerial reports, balance sheets, and statements of profit and loss. Selection of the budget period also should consider the extent to which reasonable forecasts can be made.
reviews the company’s past, present, and future, includ- ing any risks the organization should be prepared to face. 26 A recent study found that the stock prices of companies with highly rated audit com- mittees tended to rise faster than shares of companies with lower-rated internal auditors. The higher-rated audit com- mittees probably do a better job of finding and eliminating undesirable practices. 27
To perform a management audit, auditors list desired qualifications and assign a weight to each qualification. Among the most common undesirable practices uncov- ered by a management audit are the performance of unnec- essary work, duplication of
work, poor inventory control, uneconomical use of equipment and machines, procedures that are more costly than necessary, and wasted resources. At Capital One Financial Corporation, the human resource (HR) department performed an audit of facilities usage. Over several months, staff members walked through headquarters, noting which desks were occupied. The audit determined that more than 4 out of 10 desks were unused each day, and another 3 out of 10 were unused at least part of the day. Employees were away at meetings, visiting clients, or working flexible schedules. The HR staff developed a plan for Capital One to operate more efficiently in one-third of its space. Now most employees keep their work items in a cart, which they take to a desk when they need one. The change saves the company $3 million a year. 28
budgeting the process of investigating what is being done and comparing the results with the corresponding budget data to verify accomplishments or remedy differences; also called budgetary controlling.
accounting audits procedures used to verify accounting reports and statements
LO3 Describe the purposes for using budgets as a control device
January February March
Estimate Actual Estimate Actual Estimate Actual
Sales $1,200,000 $1,350,000 $1,400,000
Expenses
General overhead $ 310,000 $ 310,000 $ 310,000
Selling 242,000 275,000 288,000
Producing 327,000 430,500 456,800
Research 118,400 118,400 115,000
Office 90,000 91,200 91,500
Advertising 32,500 27,000 25,800
Estimated gross profit $ 80,100 $ 97,900 $ 112,900
Exhibit 14.4 A sales-expense budget
activity-based costing (ABC) a method of cost accounting designed to identify streams of activity and then to allocate costs across particular business processes according to the amount of time employees devote to particular activities
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can determine whether the organization’s budget objectives are being met. Then the budget is either approved or sent back down the hierarchy for additional refinement.
Accounting records must be inspected periodically to ensure they were properly prepared and are correct. Accounting audits, which are designed to verify accounting reports and statements, are essential to the control process. This audit is performed by members of an outside firm of public accountants. Knowing that accounting records are accurate, true, and in keeping with gen- erally accepted accounting practices (GAAP) creates confidence that a reliable base exists for sound overall controlling purposes.
3.3 | Activity-Based Costing Traditional methods of cost accounting may be inappropriate in today’s business environment because they are based on outdated methods of rigid hierarchical organization. Instead of assuming that organizations are bureaucratic “machines” that can be separated into component functions such as human resources, purchasing, and maintenance, companies such as Hewlett-Packard and GE have used activity-based costing (ABC) to allocate costs across business processes.
ABC starts with the assumption that organizations are collec- tions of people performing many different but related activities to satisfy customer needs. The ABC system is designed to identify those streams of activity and then allocate costs across particular business processes. The basic procedure, outlined in Exhibit 14.6 , works as follows: First, employees are asked to break down what they do each day in order to define their basic activities. For exam- ple, employees in Dana Corporation’s material control depart- ment engage in a number of activities that range from processing
As shown in Exhibit 14.5 , the budgetary control process proceeds through three stages.
Although practices differ widely, a member of top management often serves as the chief coordinator for formulating and using the budget. Usually the chief financial officer (CFO) has these duties. He or she needs to be less concerned with the details than with resolving conflicting interests, recommending adjustments when needed, and giving official sanc- tion to the budgetary procedures. In a small company, budgeting responsi- bility generally rests with the owner.
3.2 | Types of Budgets There are many types of budgets. Several are frequently used:
• Sales budget. Usually data for the sales budget include forecasts of sales by month, sales area, and product.
• Production budget. The production budget commonly is expressed in physical units. Required information for preparing this budget includes types and capacities of machines, economic quantities to produce, and availability of materials.
• Cost budget. The cost budget is used for areas of the organization that incur expenses but no revenue, such as human resources and other support departments. Cost budgets may also be included in the production budget. Costs may be fixed (independent of the immediate level of activity), like rent, or variable (rising or falling with the level of activity), like raw materials.
• Cash budget. The cash budget is essential to every business. It should be prepared after all other budget estimates are completed. The cash budget shows the anticipated receipts and expenditures, the amount of working capital available, the extent to which outside financing may be required, and the periods and amounts of cash available.
• Capital budget. The capital budget is used for the cost of fixed assets like plants and equipment. Such costs are usually treated not as regular expenses but as investments because of their long- term nature and importance to the organization’s productivity.
• Master budget. The master budget includes all the major activities of the business. It brings together and coordinates all the activities of the other budgets and can be thought of as a “budget of budgets.”
Traditionally, budgets were imposed top-down, with senior management setting specific targets for the entire organization at the beginning of the budget process. In today’s more complex orga- nizations, the budget process is more likely to be bottom-up, with top management setting the general direction, while lower-level and midlevel managers actually develop the budgets and submit them for approval. When the budgets are consolidated, senior managers
Exhibit 14.5 Three stages of budgetary control
Stage 1: Establish expectancies
Starts with the broad plan for the company and estimate of sales, and ends with budget approval and publication.
Stage 2: Perform budgetary operations
Stage 3: Take action
Involves responding appropriately with some combination of reinforcing successes and correcting problems.
Deals with identifying what is being accomplished and comparing the results with expectancies.
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322 PART 5 | Controlling
M any products today are made from various types of waste—old tires, scrap metal, plastic bottles. Companies look for ways to recycle and reuse just about every material imaginable. But the founder of one company looked to the ground for his business inspiration and came up with a unique idea for plant fertilizer: worm poop. About 13 years ago, Tom Szaky was a student when he entered his universi- ty’s annual business plan competition. He used an old high school science project as its basis. Using the worms to generate fertilizer was cheap, simple, and organic. Best of all, his business idea won the prize. In fact, the company he eventually started—TerraCycle—was largely funded by various business competition winnings.
Despite the fact that his organic plant food, TerraCycle, is now sold in such stores as Home Depot and Walmart, Szaky still thinks the way a student does when it comes to budgets. That means cheap. The company is located not far from his alma mater, Princeton. He hosts college interns each summer in a rambling old house furnished with cast-off dorm furni- ture and used computers that have been discarded by larger companies but still have more than enough computing power for TerraCycle. The furnishings are eclec- tic but free. “No entrepreneur should ever buy furniture or mediocre computer equip- ment,” advises Szaky. “Everything here is garbage. Princeton renovates one dorm a year, so we get all that.” Gesturing toward a huge fan and a 52-inch TV, he says, “That’s all student waste. You find it in dumpsters on move-out day.” The interns work for peanuts, but they love the job.
One reason TerraCycle is so successful is that its plant fertilizer product is inexpen- sive to produce. TerraCycle is made from the waste of red worms that eat garbage. The worms don’t incur labor costs and never stop producing waste. The compost of waste is brewed into a kind of tea on which plants seem to thrive. It is packed in reused soda bottles outfitted with spray
tops that have been discarded by manu- facturers of other spray products. And the boxes in which all the bottles are shipped are the misprinted cast-offs from other companies. Because everything that Szaky uses has already been used before, the whole operation is a bargain. This means he can offer the same bargain to retailers— who can earn gross margins that are dou- ble or triple what they’d earn on the more familiar chemically produced fertilizers.
Major retailers have noticed TerraCycle. In recent years, the firm has expanded its green business model well beyond plant fertilizer. The company converts tradition- ally hard-to-recycle waste (including drink pouches, chip bags, toothbrushes, and many more) into a large variety of con- sumer products including flip-flops, back- packs, office supplies, park benches, and playgrounds. Expecting 2014 revenues to be approximately $20 million, Terracycle’s products are currently sold through Target, Home Depot, Walmart, Whole Foods, and other retailers. During the past couple of years, TerraCycle launched opera- tions in Norway, Spain, Germany, Ireland, Switzerland, Denmark, Israel, Belgium, Argentina, and the Netherlands. The com- pany has created more than 30 new waste collection programs and expanded its global staff to more than 100 employees.
Szaky’s long-term objective is ambi- tious: “Our goal is to eliminate the idea of waste by creating collection and solution systems for anything that today must be sent to a landfill.” Given the pace at which TerraCycle is growing, the millions of peo- ple from various countries sending him tons of waste, and the expanding number of partnerships with major retailers, he’s not just talking trash.
TerraCycle’s Cost Control Formula Is Garbage
Tom Szaky, CEO of TerraCycle, dropped out of Princeton University to launch his eco-friendly company whose original product, plant fertilizer, was made from worm waste and packaged in used plastic bottles and jugs. Today, the company collects waste and converts it into a variety of new products that it sells through major retailers.
Discussion Questions • Identify some criteria that you think Szaky
would use in establishing performance standards for TerraCycle. What methods might he use to measure performance?
• What elements of budgetary control does Szaky use to help his business develop and grow?
SOURCES: Company website, www.terracycle.com ; H. Bradford, ”TerraCycle Recycles The ’Non- Recyclable’—Cigarette Butts, Candy Wrappers And Its Own Profits,” Huffington Post (online), July 30, 2013, www.huffingtonpost.com ; J. Neff,
“How Little Brands Land Big Bang for Their Buck,” Advertising Age 82, no. 40 (November 7, 2011), p. 36; D. Flaum, “Here’s the Real Poop on Recycling,” Memphis Commercial Appeal, August 7, 2007, www.terracycle.net ; “Waste, Worms, and Wealth: The Story of TerraCycle,” U.S. Environmental Protection Agency, May 15, 2007, www.epa.gov ; K. Walsh, “How TerraCycle Built a Corporate Network with Discarded Hardware and Open Source Software,” CIO, April 5, 2007, www.cio.com ; “Worm Poo in Plastic Bottles: Get Rich and Save the World,” CNN, January 26, 2007, www.cnn.com ; and B. Burlingham, “The Coolest Little Start-Up in America,” Inc., July 2006, www.inc.com .
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CHAPTER 14 | Managerial Control 323
Assets 5 Liabilities 1 Stockholders’ equity
Exhibit 14.7 shows an exam- ple of a balance sheet. During the year, the company grew because it enlarged its building and acquired more machinery and equipment by means of long- term debt in the form of a first mortgage. Additional stock was sold to help finance the expan- sion. At the same time, accounts receivable were increased, and work in process was reduced. Observe that Total assets ($3,053,367) 5 Total liabili- ties ($677,204 1 $618,600) 1 Stockholders’ equity ($700,000 1 $981,943 1 $75,620).
Summarizing balance sheet items over a long period of time uncovers important trends and gives a manager further insight into overall performance and areas in which adjustments are needed. For example, at some point, the company might decide that it would be prudent to slow down its expansion plans.
4.2 | Profit and Loss Statement The profit and loss statement is an itemized financial state- ment of the income and expenses of a company’s operations.
sales orders and sourcing parts to requesting engineering changes and solving problems. These activities form the basis for ABC. Second, managers look at total expenses computed by traditional accounting—fixed costs, supplies, salaries, fringe benefits, and so on—and spread total amounts over the activities according to the amount of time spent on each activity. At Dana, customer service employees spend nearly 25 percent of their time process- ing sales orders and only about 3 percent scheduling parts. Thus 25 percent of the total cost ($144,846) goes to order processing, and 3 percent ($15,390) goes to scheduling parts. As can be seen in Exhibit 14.6 , both the traditional and ABC systems reach the same bottom line. However, because the ABC method allocates costs across business processes, it provides a more accurate pic- ture of how costs should be charged to products and services. 29
This heightened accuracy can give managers a more realistic picture of how the organization is actually allocating its resources. It can highlight where wasted activities are occurring or whether activities cost too much relative to the benefits provided. Managers can then act to correct the problem. For example, Dana’s most expensive activity is sales order processing. Its managers might try to find ways to lower that cost, freeing up resources for other tasks. By providing this type of information, ABC has become a valuable method for streamlining business processes.
4 | FINANCIAL CONTROLS
In addition to budgets, businesses commonly use other statements for financial control. Two finan- cial statements that help control overall organizational perfor- mance are the balance sheet and the profit and loss statement.
4.1 | Balance Sheet The balance sheet shows the financial picture of a company at a given time. This statement item- izes three elements:
1. Assets are the values of the vari- ous items the corporation owns.
2. Liabilities are the amounts the cor- poration owes to various creditors.
3. Stockholders’ equity is the amount accruing to the corpora- tion’s owners. The relationship among these
three elements is as follows:
balance sheet a report that shows the financial picture of a company at a given time and itemizes assets, liabilities, and stockholders’ equity
assets the values of the various items the corporation owns
liabilities the amounts a corporation owes to various creditors
stockholders’ equity the amount accruing to the corporation’s owners
profit and loss statement an itemized financial statement of the income and expenses of a company’s operations
LO4 Recognize basic types of financial statements and financial ratios used as controls
Exhibit 14.6 How Dana discovers what its true costs are
Source: Courtesy Dana Holding Corporation.
Old-style accounting identifies costs according to the category of expense. The new math tells you that your real costs are what you pay for the different tasks your employees perform. Find that out and you will manage better.
Salaries $371,917
Fringes $118, 069
Supplies $76,745
Fixed costs $23,614
Total $590,345
S al
ar ie
s Fr
in ge
s Su
pp lie
s Fi
xe d
co st
sOld way
Activity- based costing
New way
Total $590,345
$144,846Process sales order.
$136,320Source parts.
Expedite supplier orders. $ 72,143
Expedite internal processing. $ 49,945
Receive supplier quality. $ 47,599
Reissue purchase orders. $ 45,235
Expedite customer orders. $ 27,747
Schedule intracompany sales. $ 17,768
Request engineering change. $ 16,704
Resolve problems. $ 16,648
Schedule parts. $ 15,390
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324 PART 5 | Controlling
Comparative Balance Sheet for the Years Ending December 31
This Year Last Year
Assets
Current assets:
Cash $ 161,870 $ 119,200
U.S. Treasury bills 250,400 30,760
Accounts receivable 825,595 458,762
Inventories:
Work in process and finished products 429,250 770,800
Raw materials and supplies 251,340 231,010
Total current assets 1,918,455 1,610,532
Other assets:
Land 157,570 155,250
Building 740,135 91,784
Machinery and equipment 172,688 63,673
Furniture and fixtures 132,494 57,110
Total other assets before depreciation 1,202,887 367,817
Less: Accumulated depreciation and amortization
67,975 63,786
Total other assets 1,134,912 304,031
Total assets $3,053,367 $1,914,563
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable $287,564 $ 441,685
Payrolls and withholdings from employees 44,055 49,580
Commissions and sundry accruals 83,260 41,362
Federal taxes on income 176,340 50,770
Current installment on long-term debt 85,985 38,624
Total current liabilities 667,204 622,021
Long-term liabilities:
15-year, 9 percent loan, payable in each of the years 2002–2015
210,000 225,000
5 percent first mortgage 408,600
Registered 9 percent notes payable _____ 275,000
Total long-term liabilities 618,600 500,000
Stockholders’ equity:
Common stock: authorized 1,000,000 shares, outstanding last year 492,000 shares, outstanding this year 700,000 shares at $1 par value 700,000 492,000
Capital surplus 981,943 248,836
Earned surplus 75,620 51,706
Total stockholders’ equity 1,757,563 792,542
Total liabilities and stockholders’ equity $3,053,367 $1,914,563
Exhibit 14.7 A comparative balance sheet
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CHAPTER 14 | Managerial Control 325
if the company’s net income were $300,000 this year, its return on capital would be 12.6 percent ($300,000/ ($1,757,563 1 $618,600)), nor- mally a reasonable rate of return.
Using Financial Ratios Although ratios provide perfor- mance standards and indicators of what has occurred, exclusive reliance on financial ratios can have negative consequences. Ratios usually are expressed in limited time horizons (monthly, quarterly, or yearly), so they often cause management myopia —managers focus on short-term earnings and prof- its at the expense of their longer-term strategic obligations. 30 To reduce management myo- pia and focus attention further into the future, control systems can use long-term (say, three- to six-year) targets.
A second negative outcome of ratios is that they relegate other important considerations to a secondary position. Managers focused on ratios may not pay enough attention to research and develop- ment, management development, progressive human resource practices, environmental sustainability, and other considerations.
Exhibit 14.8 shows a comparative statement of profit and loss for two consecutive years. In this illustration, the enterprise’s operating revenue has increased. Expense also has increased, but at a lower rate, resulting in a higher net income. Some man- agers draw up tentative profit and loss statements and use them as goals. Then they measure performance against these goals or standards. From comparative statements of this type, a manager can identify trouble areas and correct them.
Controlling by profit and loss is most commonly used for the entire enterprise and, in the case of a diversified corpo- ration, its divisions. However, controlling can be by depart- ments, as in a decentralized organization in which department managers have control over both revenue and expense. In that case, each department has its own profit and loss statement. Each department’s output is measured, and a cost, including overhead, is charged to each department’s operation. Expected net income is the standard for measuring a department’s performance.
4.3 | Financial Ratios An effective approach for checking an enterprise’s overall per- formance is to use key financial ratios, which suggest strengths and weaknesses. Key ratios are calculated from selected items on the profit and loss statement and the balance sheet:
1. Liquidity ratios indicate a company’s ability to pay short-term debts. The most common liquidity ratio is current assets to current liabil- ities, called the current ratio or net working capital ratio. This ratio indicates the extent to which current assets can decline and still be adequate to pay current liabilities. Some analysts set a ratio of 2 to 1, or 2.00, as the desirable minimum. For example, if you refer back to Exhibit 14.7 , the liquidity ratio there is about 2.86 ($1,918,455/$667,204). The company’s current assets are more than capable of supporting its current liabilities.
2. Leverage ratios show the relative amount of funds in the business supplied by creditors and shareholders. An important example is the debt–equity ratio , which indicates the company’s ability to meet its long-term financial obligations. If this ratio is less than 1.5, the amount of debt is not considered excessive. In Exhibit 14.7 , the debt–equity ratio is only 0.35 ($618,600/$1,757,563). The company has financed its expansion almost entirely by issuing stock rather than by incurring significant long-term debt.
3. Profitability ratios indicate management’s ability to generate a financial return on sales or investment. For example, return on investment (ROI) is a ratio of profit to capital used, or a rate of return from capital (equity plus long-term debt). This ratio lets managers and shareholders assess how well the firm is doing compared with other investments. For example, in Exhibit 14.7 ,
Comparative Statement of Profit and Loss for the Years Ending June 30
This Year Last Year Increase or Decrease
Income:
Net sales $253,218 $257,636 $4,418 *
Dividends from investments 480 430 50
Other 1,741 1,773 32
Total 255,439 259,839 4,400 *
Deductions:
Cost of goods sold 180,481 178,866 1,615
Selling and administrative expenses 39,218 34,019 5,199
Interest expense 2,483 2,604 121 *
Other 1,941 1,139 802
Total 224,123 216,628 7,495
Income before taxes 31,316 43,211 11,895 *
Provision for taxes 3,300 9,500 6,200 *
Net income $ 28,016 $ 33,711 $5,695 *
*Decrease.
Exhibit 14.8 A comparative statement of profit and loss
current ratio a liquidity ratio that indicates the extent to which short-term assets can decline and still be adequate to pay short- term liabilities
management myopia focusing on short- term earnings and profits at the expense of longer-term strategic obligations
debt –equity ratio a leverage ratio that indicates the company’s ability to meet its long-term financial obligations
return on investment (ROI) a ratio of profit to capital used, or a rate of return from capital
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326 PART 5 | Controlling
employees must keep their desks neat. Of course a chaotic workplace has its problems, but one survey found that people who said their desks were “very neat” spent more of their day looking for items than people who said their desks were “fairly messy.” 34 By that measure, controlling neatness actually makes employees less efficient. Likewise, trying to control your own productivity by limiting phone calls and e-mail to certain times of day is beneficial only if ignoring the phone or e-mail won’t cause you to annoy customers or miss important problems.
We have all been victimized at some time by rigid bureau- cratic behavior and veterans are no exception.
Take the recent discovery that administrators falsified medical records and appointment times at the Phoenix Veterans Admin- istration (VA) Medical Center. The falsification was done to ”comply” with a VA policy that veteran patients would see a doctor within 14 days of making an appointment. According to an employee who worked at the medical center, administrators were waiting ”6 to 20 weeks” to create the appointment. In the wake of these revelations, the VA’s bureaucracy and leadership received much of the blame, culminating in the resignation of Eric Shinseki, the Secretary of the Department of Veteran Affairs. Blame has also been leveled at the underfunded VA budget that contributes to shortages of medical centers (1,700 nationwide) and primary care physicians (5,100 total) who are currently car- ing for 85 million veterans. 35
Stories such as these have, of course, given bureaucracy a bad name. Some managers will not even use the term bureaucratic control because of its potentially negative connotation. However, the control system itself is not the problem. The problems occur when the systems are no longer viewed as tools for running the business but instead as rules for dictating rigid behavior.
Tactical Behavior Control systems will be ineffective if employees engage in tactics aimed at “beating the system.” The most common type of tactical behavior is to manipulate infor- mation or report false performance data. People may produce invalid data about what has been done and about what can be done. False reporting about the past is less common because it is easier to identify someone who misreports what happened than someone who incorrectly predicts or estimates what might happen. Still, managers sometimes change their account- ing systems to “smooth out” the numbers. Also, people may intentionally feed false information into a management infor- mation system to cover up errors or poor performance. New York City prosecutors indicted the owner and five employ- ees of American Standard Testing & Consulting Laboratories
As a result, the use of ratios should be supplemented with other control measures. Organizations can hold managers accountable for market share, number of patents granted, sales of new products, human resource development, energy efficiency, waste reduction, and other performance indicators.
4.4 | Bureaucratic Control has a Downside
So far you have learned about control from a mechanical view- point. But organizations are not strictly mechanical; they are composed of people. While control systems are used to con- strain people’s behavior and make their future behavior pre- dictable, people are not machines that automatically fall into line as the designers of control systems intend. In fact, control systems can lead to dysfunctional behavior. To set up an effec- tive control system, managers need to consider how people will react to it, including three potential negative responses: 31
1. Rigid bureaucratic behavior.
2. Tactical behavior.
3. Resistance.
Rigid Bureaucratic Behavior Often people act in ways that will look good on the control system’s measures. This tendency is useful when it focuses people on required behaviors. But it can result in rigid, inflexible behavior geared toward doing only what the system requires. For example, in the earlier discussion of the six sigma control process, we noted that it emphasizes efficiency over innovation. After 3M began using six sigma extensively, it slipped from its goal of having at least one-third of sales come
from newly released products. When George Buckley took the CEO post, only one-fourth of sales were coming from new products. Buckley began relying less extensively on efficiency controls because, as he explained to a reporter, “Invention is by its very nature a disorderly process.” 32 This shift to innovation is paying off for 3M. Several new products, like ultrathin solar panels, are expected to help the company’s growth double to 7–8 percent per year over the next several years. 33 The control challenge, of course, is for 3M to be both efficient and creative.
Rigid bureaucratic behavior occurs when control systems prompt employees to stay out of trouble by following the rules. Unfortunately such systems often lead to poor customer ser- vice and make the entire organization slow to act. Some com- panies, including General Motors and UPS, enforce rules that
“The disease which inflicts bureaucracy and what they usually die from is routine.”
— John Stuart Mill
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CHAPTER 14 | Managerial Control 327
• Control systems may be seen as an invasion of privacy, lead to law- suits, and cause low morale.
5 | MORE EFFECTIVE CONTROL SYSTEMS
Effective control systems maximize potential benefits and min- imize dysfunctional behaviors. To achieve this, management needs to design control systems that meet several criteria:
• The systems are based on valid performance standards.
• They communicate adequate information to employees.
• They are acceptable to employees.
• They use multiple approaches.
• They recognize the relationship between empowerment and control.
5.1 | Establish Valid Performance Standards
An effective control system must be based on valid and accurate performance standards. The most effective standards, as discussed
earlier, tend to be expressed in quan- titative terms; they are objective
rather than subjective. Also, the measures should be difficult to sabotage or fake. Moreover, the system must incorporate all important aspects of perfor- mance. For example, a com- pany that focused only on sales volume without also looking at profitability might soon go out of business. As you learned earlier, unmeasured behav- iors get neglected. Consider performance standards for delivering training and other HR programs, which often emphasize trainee satisfaction as reported on surveys. In con-
trast, the Philadelphia Department of Licenses and Inspections verified that its training improved employee performance. The department, notorious for long lines and rude workers, sought help from the Philadelphia Ritz-Carlton Hotel (the chain is known for its superb customer service). The hotel’s area gen- eral manager trained 40 department workers in how to improve their service skills. Afterward, the department checked wait times for license applicants, which dropped from 82 minutes to
Inc., a concrete-testing company, for falsifying testing results on major construction projects. The indictment accuses the six individuals of systematically skipping safety tests and writing false reports about the “quality and strength of concrete used in building projects around the city.” Tests were allegedly faked at several locations, including Yankee Stadium, Memorial Sloan Kettering Cancer Center, and the Fulton Street subway station. The owners of the affected sites were notified and have taken steps to fix the problem. 36
More commonly, people falsify predictions or requests for the future. When asked to give budgetary estimates, employees usually ask for more than they need. Or if they believe a low estimate will help them get a budget or a proj- ect approved, they may submit unrealistically low estimates. Budget-setting sessions can become tugs-of-war between subordinates trying to get slack in the budget and superiors attempting to minimize slack. Similar tactics are exhibited when managers negotiate unrealistically low performance standards so that subordinates will have little trouble meet- ing them, when salespeople project low forecasts so they will look good by exceeding them, and when workers slow down the work pace while time study analysts are setting work pace standards. The people in these examples are concerned only with their own performance figures, not with the overall performance of their department or company.
Resistance to Control Often people strongly resist control systems. They do so for sev- eral reasons:
• Comprehensive control sys- tems increase the accuracy of performance data and make employees more accountable for their actions. Control sys- tems uncover mistakes, threaten people’s job security and sta- tus, and decrease people’s autonomy.
• Control systems can change expertise and power struc- tures. For example, manage- ment information systems can speed up the costing, purchas- ing, and production decisions previously made by managers. Those individuals may fear a loss of expertise, power, and decision-making authority as a result.
• Control systems can change an organization’s social structure. They can create competition and disrupt social groups and friend- ships. People may end up competing against those with whom they formerly had comfortable, cooperative relationships. People’s social needs are important, so they will resist control systems that reduce satisfaction of those needs.
LO5 List procedures for implementing effective control systems
● Many companies administer pre-hire and random drug tests as a way to control illicit drug use among employees.
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328 PART 5 | Controlling
1. Vanity —A company might measure order fulfillment in terms of whether products are delivered by the latest date promised by the organization rather than by the tougher and more meaningful mea- sure of when the customers request to receive the products.
2. Provincialism —If a company’s transportation department mea- sures only shipping costs, it won’t have an incentive to consider that shipping reliability (delivery on a given date) will affect perfor- mance at the company’s stores or distribution centers.
3. Narcissism —A maker of computer systems measured on-time shipping of each component; if 90 percent of the system’s compo- nents arrived at the customer on time, it was 90 percent on time. But from the customer’s point of view, the system wasn’t on time at all because the customer needed all the components to use the system.
4. Laziness —An electric power company simply assumed customers cared about installation speed, but in fact customers really cared more about receiving an accurate installation schedule.
5. Pettiness — An example would be clothing manufacturers that assume they should consider just manufacturing cost rather than the overall costs of making exactly the right products available in stores when customers demand them.
6. Inanity — A fast-food restaurant targeted waste reduction and was surprised when restaurant managers began slowing down opera- tions by directing their employees to hold off on cooking anything until orders were placed.
7. Frivolity — In some organizations, more effort goes to blaming oth- ers than to correcting problems.
According to Hammer, the basic correction to these “sins” is to carefully select standards that look at entire business pro- cesses, such as product development or order fulfillment, and identify which actions make those processes succeed. Then managers should measure performance against these standards precisely, accurately, and practically, making individuals responsible for their achievement and rewarding success.
5.2 | Provide Adequate Information Management must communicate to employees the importance and nature of the control system. Then people must receive feedback
14 minutes. The department is continuing its partnership with Ritz-Carlton through additional employee training. 37
Management also must defend against another problem: too many measures that create overcontrol and employee resis- tance. To make many controls tolerable, managers can empha- size a few key areas while setting “satisfactory” performance standards in others. Or they can set simple priorities, such as directing a purchasing agent to meet targets in the follow- ing order: quality, availability, cost, inventory level. Finally, managers can set tolerance ranges, as when financial budgets include optimistic, expected, and minimum levels.
Many companies’ budgets set cost targets only. This causes managers to control spending but also to neglect earnings. At Emerson Electric, profit and growth are key measures. If an unanticipated opportunity to increase market share arises, man- agers can spend what they need to go after it. The phrase “it’s not in the budget” is less likely to stifle people at Emerson than it is at most other companies.
This principle applies to nonfinancial aspects of performance as well. At many customer service call centers, control aims to maximize efficiency by focusing on the average amount of time each agent spends handling each phone call. But the business objectives of call centers should also include other measures such as cross-selling products or improving customer satisfac- tion and repeat business. Online commerce site eBay Enterprise is using voice analytics technology by Interaction Analytics to mine business insights from the 20 million customer calls it receives each year. The data are analyzed by employees of the company’s new Consumer Insight Department, who look for variables that can promote increased sales for the compa- ny’s clients. Since implementing the Big Data program, eBay Enterprise has experienced a 9 percent increase in customer sat- isfaction and a 19 percent bump in average order value over the past two years. 38
As illustrated in Exhibit 14.9 , business consultant Michael Hammer has identified seven “deadly sins” of performance measurement to avoid. 39 The following examples suggest how these sins might manifest in organization:
Vanity Using measures that make managers and the organization look good.
Provincialism Limiting measures to functional/departmental responsibilities rather than the organization’s overall objectives.
Narcissism Measuring from the employee’s, manager’s, or company’s point of view rather than the customer’s.
Laziness Neglecting to expend the effort to analyze what is important to measure.
Pettiness Measuring just one component of what affects business performance.
Inanity Failing to consider the way standards will affect real-world human behavior and company performance.
Frivolity Making excuses for poor performance rather than taking performance standards seriously.
Source: Adapted from M. Hammer, “The Seven Deadly Sins of Performance Measurement and How to Avoid Them,” MIT Sloan Management Review 48, no. 3 (Spring 2007), pp. 19–28.
Exhibit 14.9 The seven “deadly sins” of performance measurement
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CHAPTER 14 | Managerial Control 329
about their performance. Feedback motivates people and provides information that enables them to correct their own deviations from performance standards. Allowing people to initiate their own cor- rective action encourages self-control and reduces the need for out- side supervision. Open-book management, described in an earlier chapter, is a powerful use of this control principle.
Information should be as accessible as possible, particularly when people must make decisions quickly and frequently. For example, a national food company with its own truck fleet had a difficult problem. The company wanted drivers to go through customer sales records every night, insert new prices from headquarters every morning, and still make their rounds—an impossible set of demands. To solve this control problem, the company installed personal computers in more than 1,000 delivery trucks. Now drivers use their PCs for constant com- munication with headquarters. Each night drivers send infor- mation about the stores, and each morning headquarters sends prices and recommended stock mixes.
In general, a manager designing a control system should evaluate the information system in terms of the following questions: 40
• Does it provide people with data relevant to the decisions they need to make?
• Does it provide the right amount of information to decision makers throughout the organization?
• Does it provide enough information to each part of the organization about how other, related parts of the organization are functioning?
Ritz-Carlton sets performance measures for maintaining its impres- sive reputation and ensures that employees see how they contribute. The measures are based on the key factors behind the hotel chain’s success: its mystique, employee engagement, customer engagement, product service excellence, community involvement, and financial performance. For each success factor, cross-functional teams iden- tify targets as detailed as the number of scuff marks on elevator doors or the percentage of satisfied employees at a location. Because these teams include frontline employees, employees believe that their input matters.
At each location, at the beginning of every shift, all employ- ees meet to discuss activities, issues, and Ritz-Carlton’s business philosophy. They compare recent performance against the targets in each area. These conversations reinforce the key performance factors and help employees appreciate the importance of what they do.
● Cross-functional teams of employees at The Ritz-Carlton Hotel set specific performance measures, including customer engagement and product service excellence, in order to maintain its outstanding reputation.
“I’ve learned that mistakes can often be as good a teacher as success.”
— Jack Welch, former CEO, General Electric
Each business unit focuses on up to three priorities, with each employee working to improve customer, employee, or financial results. Employees appreciate their role in giving guests a special experience. They take to heart the hotel’s first service value: “I build strong relationships and create Ritz-Carlton guests for life.” When Joanne Hanna checked into a Ritz-Carlton after a grueling
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330 PART 5 | Controlling
Still, managers sometimes need to discipline employees who are failing to meet important standards. In such cases, an approach called progressive discipline is usually most effective. In this approach, clear standards are established, but failure to meet them is dealt with in a progressive, or step-by-step, pro- cess. The first time an employee’s sales performance has been worse than it should have been, the supervising manager may offer verbal counseling or coaching. If problems persist, the next step might be a written reprimand. This type of reason- able and considered approach signals to all employees that the manager is interested in improving their performance, not in punishing them.
5.5 | Use Multiple Approaches Multiple controls are necessary. For example, banks need con- trols on risk so they don’t lose a lot of money from defaulting borrowers, as well as profit controls including sales budgets that aim for growth in accounts and customers.
As you learned earlier in this chapter, control systems generally should include both financial and nonfinancial per- formance targets and incorporate aspects of preliminary, concurrent, and feedback control. In recent years, a growing number of companies have combined targets for managers into a balanced scorecard , a combination of four sets of perfor- mance measures: 43
1. Financial.
2. Customer satisfaction.
3. Business processes (quality and efficiency).
4. Learning and growth.
The goal is generally to broaden management’s horizon beyond short-term financial results so that the company’s long-term success is more likely. For example, J.P. Morgan Chase uses a balanced scorecard approach that extends beyond earnings to address such questions as (1) Are we recruiting and developing great people? (2) Are we innovating better prod- ucts? (3) Are we relentlessly improving our core processes? (4) Are we making good returns on capital? 44 The balanced scorecard also is adaptable to nonprofit settings. Ocean- Monmouth Legal Services, which provides legal services to poor people in New Jersey, uses a balanced scorecard to track progress in meeting strategic, operational, financial, and cli- ent satisfaction goals. The organization’s executive director, Harold E. Creacy, credits the approach with helping to cope with the rising costs and tight resources that so often plague nonprofits. 45
Effective control also requires managers and organizations to use many of the other techniques and practices of good man- agement. For example, compensation systems grant rewards for meeting standards and impose consequences if they are not met. And to gain employee acceptance, managers may rely on many of the other communication and motivational tools that we discussed in earlier chapters, such as persuasion and posi- tive reinforcement.
series of airport delays, a hotel employee carried her bags and lis- tened to her frustration. After learning she didn’t have time for a spa visit or a masseuse, he brought her a scented candle—and had the information entered into Ritz-Carlton’s database. Now, on every visit, a candle in Hanna’s room reminds her of the employ- ee’s empathy. 41
5.3 | Ensure Acceptability to Employees
Employees are less likely to resist a control system and exhibit dysfunctional behaviors if they accept the system. They are more likely to accept systems that have useful performance standards but are not overcontrolling. Employees also will find systems more acceptable if they believe the standards are pos- sible to achieve.
The control system should emphasize positive behavior rather than focusing on simply controlling negative behavior. McBride Electric, an electrical contracting company, uses an electronic monitoring system called DriveCam to encourage its drivers to behave responsibly in terms of safety and fuel con- sumption. A DriveCam video monitor in each truck records activity inside and outside the cab; it saves that recording only if the truck is involved in a specified “trigger event” such as braking hard or swerving. Management explained the system to the drivers, emphasizing that it would help the company improve profits (a relevant message in a company that prac- tices open-book management) and would protect the workers if they were ever accused falsely of unsafe practices. Not only did McBride immediately begin seeing improvements in safety and vehicle wear and tear, but it was also able to make good on its promise to defend employees. An anonymous phone caller complained that poor driving by a McBride driver had caused him to wreck his car. The McBride manager who took the call explained that he would be able to review a video taken from the truck that day—and the caller quickly hung up. 42 This approach exhibits the motivational quality of “procedural jus- tice,” described in Chapter 11. It gave employees the feeling that they were being evaluated by a fair process, so they were more likely to accept it.
5.4 | Maintain Open Communication When deviations from standards occur, it is important that employees feel able to report the deviations so the problem can be addressed. If employees believe their managers want to hear only good news, or worse, if they fear reprisal for reporting bad news, even if it is not their fault, then any controls in place are much less likely to be effective. Problems may go unreported or even reach the point where solutions are much more expen- sive or difficult. But if managers create an environment of openness and honesty, where employees feel comfortable shar- ing even negative information and are appreciated for doing so in a timely fashion, then the control system is much more likely to work effectively.
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CHAPTER 14 | Managerial Control 331
• Price competition has the effect of controlling produc- tivity and performance.
The basic principles that underlie market controls can operate at the level of the corporation, the business unit (or department), and the individual. Exhibit 14.10 shows a few ways in which market controls are used in an organization.
Market Controls at the Corporate Level In large, diver- sified companies, market controls often are used to regulate independent business units. Particularly in large conglomerate firms that act as holding companies, business units typically are treated as profit centers that compete with one another. Top executives may place few bureaucratic controls on business unit managers but evaluate performance in terms of profit and loss data. While decision making and power are decentralized to the business units, market controls ensure that business unit performance is in line with corporate objectives.
This use of market control mechanisms has been criticized by those who insist that economic measures do not adequately reflect environmental sustainability or the complete value of an organization. Employees often suffer as diversified companies are repeatedly bought and sold based on market controls.
6 | THE OTHER CONTROLS: MARKETS AND CLANS
Although the concept of control has always been a central fea- ture of organizations, the principles and philosophies under- lying its use are changing. In the past, control was focused almost exclusively on bureaucratic (and market) mechanisms. Generations of managers were taught that they could maximize productivity by regulating what employees did on the job— through standard operating procedures, rules, regulations, and close supervision. To increase output on an assembly line, for example, managers in the past tried to identify the “one best way” to approach the work and then to monitor employees’ activities to make certain that they followed standard operating procedures. In short, they controlled work by dividing and sim- plifying tasks, a process referred to as scientific management.
Although formal bureaucratic control systems are perhaps the most pervasive in organizations (and the most talked about in management textbooks), they are not always the most effective. Market controls and clan con- trols may represent more flexible, though no less potent, approaches to regulating performance.
6.1 | Market Controls Let Supply and Demand Determine Prices and Profits
Market controls involve the use of economic forces—and the pricing mechanisms that accom- pany them—to regulate perfor- mance. The system works like this: When output from an indi- vidual, department, or business unit has value to other people, a price can be negotiated for its exchange. As a market for these transactions becomes established, two effects occur:
• Price becomes an indicator of the value of the good or service.
balanced scorecard control system combining four sets of performance measures: financial, customer, business process, and learning and growth
LO6 Discuss ways in which market and clan control influence performance
Exhibit 14.10 Examples of market control
Business unit
manager
CEO/ president
Market rates determine the base wage/salary for
managers and employees.
CEO uses market controls (such as
profitability, market share) to evaluate
performance of business unit heads.
Managers use transfer pricing to establish values for internal
transactions among units.
Business unit
manager
Business unit
manager
Business unit
manager
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332 PART 5 | Controlling
Market controls often are used by boards of directors to manage CEOs of major corporations. Although many people think of CEOs as the people controlling everyone else in the company, a CEO is accountable to the board of directors, and the board must ensure that the CEO acts in its interest. Absent board control, CEOs may act in ways that make them look good personally (such as making the company bigger or more diversified) but that do not lead to higher profits for the firm. And as recent corporate scandals have shown, without board control, CEOs may also artificially inflate the firm’s earnings or not fully declare expenses, making the firm look much more successful than it really is.
Traditionally, boards have tried to control CEO performance mainly through the use of incentive pay, including bonuses tied to short-term profit targets. In large U.S. companies, most CEO compensation is tied to the company’s performance. In addition to short-term incentives, boards use long-term incentives linked to the firm’s share price, usually through stock options, which we discussed earlier. Also, balanced scorecards are intended to keep CEOs focused on the company’s longer-term health. And
Market Controls at the Business Unit Level Market control also can be used within business units to regulate exchanges among departments
and functions. One way organizations try to apply market forces to internal transactions is through transfer pricing. A transfer price is the charge by one unit in the organization for a good or service that it supplies to another unit of the same organization. For exam- ple, in automobile manufacturing, transfer prices may be affixed to components and subassemblies before they are shipped to sub- sequent business units for final assembly. Ideally the transfer price reflects what the receiving business unit would have to pay for that good or service in the marketplace.
As organizations have more options to outsource goods and services to external partners, market controls such as transfer prices provide natural incentives to keep costs down and qual- ity up. Managers stay in close touch with prices in the market- place to make sure their own costs are in line, and they try to improve the service they provide to increase their department’s value to the organization. Consider the situation in which human resources activities can be done internally or outsourced to a consulting firm. If the human resources department can- not supply services at a reasonable price, there may be no rea- son for that department to exist inside the firm. For example, California-based Agilent Technologies outsourced benefits administration and payroll for its 20,000 employees. Similarly, Shell Oil Company outsourced retirement, pension, and health administration to an HR service provider. 46 Philadelphia-based Buzz Marketing Group, a family-run research and viral market- ing firm, found itself about to double in size after landing some large accounts like Dell. Tina Wells, the firm’s founder, was spending too much time on HR issues and not enough time on managing the business. She turned to Paychex—a $2.3 billion firm that specializes in meeting the HR needs of companies— to manage payroll, revamp company policies and procedures, write job descriptions, and track employee performance. 47
Market Controls at the Individual Level Market controls also are used at the individual level. For example, in situations where organizations are trying to hire employees, the supply and demand for particular skills influence the wages employ- ees can expect to receive and the rate organizations are likely to pay. Employees or job candidates who have more valuable skills tend to be paid a higher wage. Of course wages don’t always reflect market rates—sometimes they are based (per- haps arbitrarily) on internal resource considerations—but the market rate is often the best indicator of an employee’s poten- tial worth to a firm.
Market-based controls such as these are important in that they provide a natural incentive for employees to enhance their skills and offer them to potential employers. Even after indi- viduals gain employment, market-based wages are important as controls in that people with higher economic value may be promoted faster to higher positions in the organization.
● Are the sometimes ridiculously high salaries that today’s professional athletes are paid truly indicative of the players’ skills?
transfer price price charged by one unit for a good or service provided to another unit within the organization
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CHAPTER 14 | Managerial Control 333
act in accordance with them, then clan control can be very effective. 49 As we noted at the beginning of this chapter, clan control involves creating relationships built on mutual respect and encouraging each individual to take responsibility for his
or her actions. Employees work within a guiding framework of values, and they are expected to use good judgment. For example, at NetApp, an IT company specializing in data stor- age and protection, a commitment to employee empowerment prompted the switch from a 12-page travel policy to some simple guidelines for employees who need to go on a business trip: “We are a frugal company. But don’t show up dog-tired to save a few bucks. Use your common sense.” 50 An empow- ered organization emphasizes satisfying customers rather than pleasing the boss. Mistakes are tolerated as the unavoidable by-product of dealing with change and uncertainty and are viewed as opportunities to learn. And team members learn together.
Here are a few practical guidelines for managing in an empow- ered world: 51
• Put control where the operation is. Layers of hierarchy, close supervision, and checks and balances are quickly disappearing and being replaced with self-guided teams. For centuries even the British Empire—as large as it was—never had more than six levels of management, including the Queen.
• Use real-time rather than after-the-fact controls. Issues and prob- lems must be solved at the source by the people doing the actual work. Managers become a resource to help out the team.
under the Sarbanes-Oxley Act, board members are expected to exercise careful control over the company’s financial perfor- mance, including oversight of the CEO’s compensation package.
6.2 | Clan Control Relies on Empowerment and Culture
Managers are discovering that control systems based solely on bureaucratic and market mechanisms are insufficient for direct- ing today’s workforce. There are several reasons:
• Employees’ jobs have changed. Employees working with comput- ers, for example, have more variable jobs, and much of their work is intellectual and therefore invisible. Because of this, there is no one best way to perform a task, and programming or standardizing jobs is extremely difficult. Close supervision also is unrealistic because it is nearly impossible to supervise activities such as reasoning and problem solving.
• The nature of management has changed. Managers used to know more about the job than employees did. Today, with the shift to knowledge work, employees typically know more about their jobs than anyone else does. When real expertise in organizations exists at the very lowest levels, hierarchical control becomes impractical. 48
• The employment relationship has changed. The social contract at work is being renegotiated. Employees once were most concerned about pay, job security, and the hours of work. Today, however, more and more employees want to be more fully engaged in their work, taking part in decision making, devising solutions to unique problems, and receiving assignments that are challenging and involving. They want to use their brains.
For these three reasons, the concept of empowerment not only has become more popular in organizations but also has become a necessary aspect of a manager’s repertoire of con- trol. With no “one best way” to approach a job and no way to scrutinize what employees do every day, managers must empower employees to make decisions and trust that they will act in the firm’s best interests. But this does not mean giving up control. It means creating a strong culture of high standards and integrity so that employees will exercise effective control on their own.
Recall our discussion of organization culture in Chapter 3. An organization culture that encourages the wrong behaviors will severely hinder an effort to impose effective controls. But if managers create and reinforce a strong culture that encour- ages correct behavior, one in which everyone understands management’s values and expectations and is motivated to
“Use good judgment in all situations. There will be no additional rules.”
— Nordstrom’s employee manual
● In order to enhance their agility, speed, and responsiveness, some companies are moving to a clan control approach that is based on employee empowerment, trust, and organizational culture.
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334 PART 5 | Controlling
team performance must become the dominant raison d’être of the measurement systems.
The resilience and time investment of clan control are a double-edged sword. Clan control takes a long time to develop and an even longer time to change. This gives an organization stability and direction during periods of upheaval in the environment or the organization (e.g., during changes in top management). Yet if managers want to estab- lish a new culture—a new form of clan control—they must help employees unlearn the old values and embrace the new. We will talk more about this transition process in the next chapter of this book.
• Rebuild the assumptions underlying management control to build on trust rather than distrust. Today’s “high-flex” organizations are based on empowerment, not obedience. Information must facilitate decision making, not police it.
• Move to control based on peer norms. Clan control is a powerful thing. Workers in Japan, for example, have been known to commit suicide rather than disappoint or lose face within their team. Although this is extreme, it underlines the power of peer influence. The Japanese have a far more homogeneous culture and set of values than we do. In North America, we must build peer norms systematically and put much less emphasis on managing by the numbers.
• Rebuild the incentive systems to reinforce responsiveness and teamwork. The twin goals of adding value to the customer and
Study Che klist Did you tear out the perforated student review card at
the back of the text to revisit learning objectives and key terms and definitions?
Connect ® Management is available for M Management. Additional resources include: Interactive Applications: • Case Analysis: How Legal Sea Foods Uses Control • Drag & Drop: Engaging Employees at the Ritz Carlton • Drag & Drop: The Right Ratio for the Job • Video Case: From Race Cars to Airplanes
LearnSmart—Multiple choice questions help you determine what you already know, are not sure about, or need to practice based on your score. And with SmartBook, you can read the relevant section in the eBook as well as practice and recharge what you’ve learned.
Chapter Video: Tom and Eddies
Young Manager Speaks Out: Jeremy Partacz, Customer Experience Manager
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What have other students found to help them study?
www.learnsmartadvantage.com
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- 13 Communicating
- 1 | INTERPERSONAL COMMUNICATION
- 1.1 | �One-Way Communication Is Common
- 1.2 | �Communication Should Flow in Two Directions
- 2 | WATCH OUT FOR COMMUNICATION PITFALLS
- 2.1 | �Everyone Uses Perceptual and Filtering Processes
- 2.2 | �Mistaken Perceptions Cause Misunderstandings
- 3 | COMMUNICATIONS FLOW THROUGH DIFFERENT CHANNELS
- 3.1 | �Electronic Media Offer Flexible, Efficient Channels
- 3.2 | �Managing the Electronic Load
- 3.3 | �The Virtual Office
- 3.4 | �Use “Richer” Media for Complex or Critical Messages
- 4 | IMPROVING COMMUNICATION SKILLS
- 4.1 | �Senders Can Improve Their Presentations, Writing, Word Choice, and Body Language
- 4.2 | �Nonverbal Signals Convey Meaning, Too
- 4.3 | �Receivers Can Improve Their Listening, Reading, and Observational Skills
- 5 | ORGANIZATIONAL COMMUNICATION
- 5.1 | �Downward Communication Directs, Motivates, Coaches, and Informs
- 5.2 | �Upward Communication Is Invaluable to Management
- 5.3 | �Horizontal Communication Fosters Collaboration
- 6 | INFORMAL COMMUNICATION NEEDS ATTENTION
- 6.1 | �Managing Informal Communication
- 7 | BOUNDARYLESS ORGANIZATIONS HAVE NO BARRIERS TO INFORMATION FLOW
- Take Charge of Your Career // Tips for making formal presentations more powerful!
- Twitter as a Lifeline During Disasters
- 14 Managerial Control
- 1 | SPINNING OUT OF CONTROL?
- 2 | BUREAUCRATIC CONTROL SYSTEMS
- 2.1 | �Control Systems Have Four Steps
- 2.2 | �Bureaucratic Control Occurs Before, During, and After Operations
- 2.3 | �Management Audits Control Various Systems
- 3 | BUDGETARY CONTROLS
- 3.1 | �Fundamental Budgetary Considerations
- 3.2 | �Types of Budgets
- 3.3 | �Activity-Based Costing
- 4 | FINANCIAL CONTROLS
- 4.1 | �Balance Sheet
- 4.2 | �Profit and Loss Statement
- 4.3 | �Financial Ratios
- 4.4 | �Bureaucratic Control Has a Downside
- 5 | MORE EFFECTIVE CONTROL SYSTEMS
- 5.1 | �Establish Valid Performance Standards
- 5.2 | �Provide Adequate Information
- 5.3 | �Ensure Acceptability to Employees
- 5.4 | �Maintain Open Communication
- 5.5 | �Use Multiple Approaches
- 6 | THE OTHER CONTROLS: MARKETS AND CLANS
- 6.1 | �Market Controls Let Supply and Demand Determine Prices and Profits
- 6.2 | �Clan Control Relies on Empowerment and Culture
- Take Charge of Your Career // Learn how to control without being too controlling!
- TerraCycle’s Cost Control Formula Is Garbage