MGT 450 Question

Leadership, Governance, Values, and Culture

Learning Objectives

By the time you have completed this chapter, you should be able to do the following:

• Understand the differences and similarities between leaders and managers. • Know why strategic success depends on finding, developing, and evaluating capable leaders. • Appreciate the value and necessity of creating a corporate vision. • Appreciate the value of having an overarching purpose for any organization. • Compare the roles and responsibilities of top management and the board of directors. • Appreciate that how a company is organized depends on the strategy it is pursuing. • Realize the importance of corporate values and culture and the extent to which they can enable or hinder strategy implementation.

• Understand that organizational change is inevitable and desirable if a corporation wants to improve its competitiveness and performance.

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CHAPTER 2Section 2.1 Strategic Leadership and Developing a Vision

Chapter Outline

2.1 Strategic Leadership and Developing a Vision

2.2 Leaders Versus Managers

2.3 Developing and Evaluating Leaders

2.4 Purposes of Organizations

2.5 Governance and the Role of the Board of Directors

2.6 Organizational Designs and Strategy

2.7 The Role of Top Management

2.8 Organizational Values

2.9 Organizational Culture

2.10 Managing Organizational Change

This chapter will focus on the roles of power, leadership, organizational culture, and attitudes toward innovation as they relate to strategic planning and management. The importance of lead- ership, the roles of top management and the board of directors, values and culture, and organiza- tional change all affect the quality of strategic planning and are in turn affected by it.

2.1 Strategic Leadership and Developing a Vision In articles in the business press and the literature, the words manager, leader, executive, and administrator are often used interchangeably. Consider, however, the implied judgments in the descriptions of a person as “a real leader” versus “just a manager,” and it becomes evident that the terms are different. Ackoff and Pourdehnad (2009) try to capture the differences as follows:

• An administrator is one who directs others in the pursuit of ends by the use of means, both of which are determined by a third party.

• A manager is one who directs others in the pursuit of ends by the use of means that the manager selects.

• A leader is one who induces and guides others in the voluntary pursuit of ends by the use of means that they, the followers, select or approve of if they are chosen by another.

Although all types of executives have the authority to coerce others into doing what they want done, leaders more often use influence rather than authority to get others to do what they want them to do and rely more extensively on interpersonal communication and the strength of their relationships with others to effect change.

From this, one might assume that the only person who creates a vision is the individual at the apex of an organization, such as CEO of the company or the president of a country. This is certainly

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CHAPTER 2Section 2.1 Strategic Leadership and Developing a Vision

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All types of executives have the power to coerce others into doing what they want. True leaders often use influence rather than authority to get people to do what they want them to do.

not the case. At any level and in any sphere of life, anyone who can visualize a better state of affairs and can persuade others that such a vision makes sense has demonstrated leadership qualities. Anyone who has suggestions for change and improvement dem- onstrates leadership qualities to the extent that they are able to persuade others involved of the merits and benefits of such changes. By contrast, managers charged with just implementing change and achieving a set of performance objectives don’t need to be lead- ers even though what they do is nonetheless critical to a company’s success.

Earlier, we used the phrase strategic leadership, but what makes leadership “strategic”? Recall from Chapter 1 that a strategy is required only to combat competition. In the same way, “strategic leadership” involves creating a vision and strategy that, in both the short term and the long run, helps the company succeed through becom- ing a stronger competitor. Whereas leadership may be required in implementing changes or improvements to parts of the organization, strategic leadership determines the long-run survival and success of the entire company.

Power in an Organization

Leaders often use communication to exact a range of pro-social influence tactics to gain others’ compliance. Leaders have the power to influence or affect the people around or under them. This is true regardless of whether they have been appointed to leadership positions. There are five types of power in an organization.

Legitimate power is the authority derived by virtue of occupying a position in the organiza- tion. The higher the position a person occupies, the greater the authority or legitimate power they hold. Expert power is based on the special knowledge, skills, and expertise that a leader possesses. For example, a group surviving a crash on a mountainside would willingly follow the member with survival knowledge and skills. Referent power is derived from subordinates’ or followers’ respect, admiration, and loyalty, and is a function of the personal characteristics of the leader. Leaders who have the ability to give or withhold meaningful incentives hold reward power. These can take the form of tangible rewards such as pay raises, bonuses, or preferred job assignments or intangible rewards like verbal praise or respect. A leader or manager to who is in a position to punish a subordinate is said to have coercive power. This could take the form of firing someone, denying a raise or bonus, or reassigning the person to an undesirable location (Jones & George, 2007).

Mission and Vision Statements

Companies—indeed any kind of organization—need mission and vision statements. Like many terms in the business lexicon, these too are misunderstood and often misused.

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CHAPTER 2Section 2.1 Strategic Leadership and Developing a Vision

Mission Statements A mission statement is a concise statement of a company’s reason for being, what it actually does, and for whom. It should contain what products and services the company produces for which tar- get market, as well as how it considers itself different or unique. It should not contain statements of values, strategies, or objectives (although many companies make this error), but could contain the company’s customer value proposition.

A mission statement answers the questions, “What do you do?” and “What is your raison d’être (reason for being)?” For many companies, the answer doesn’t change over many years, while for others in fast-moving industries when the strategies themselves are changing, it does. Periodically, therefore, a company needs to check that its mission statement is still valid. The ideal time to do this is at the end of the annual strategic-planning process.

When crafting a mission statement, care should be taken in how broadly or narrowly the company might be characterized. For example, a business could conceive of itself as a real-estate company or as a residential real-estate company, the latter precluding any work or involvement in commer- cial or industrial real estate. It could be an apparel store or a casual-apparel or sporting-apparel store, the former being broader and the latter ones more restrictive in the kind of apparel sold.

If in the course of conducting the strategic analysis, a company was to decide to go national from being a regional retailer and if the existing mission statement characterized it as being regional in scope, then clearly the mission statement would need to be modified and aligned with the new reality. It is for this reason that attention to both the mission and vision statements is paid at the end of the strategic-planning process.

The following three examples illustrate poor mission statements.

• “Profitable growth through superior customer service, innovation, quality, and commitment”

You would never guess that this is the mission statement of AGCO of Duluth, GA, a manufacturer and distributor of agricultural equipment including tractors and sprayers. Its brand names include AGCO, Massey Ferguson, Fendt, and Challenger, among others. Missing is what it does, for whom, its geographic scope, and so on.

• “Be the best in the eyes of our customers, employees and shareholders” (Mission State- ments.com, n.d.)

This mission belongs to American Standard, a producer of air conditioning systems, plumbing equipment, and brake systems. American Standard’s mission is troubling because it is very generic. Many if not most companies strive to be the best, thus the mission does not differentiate Ameri- can Standard from other firms.

• “Guided by relentless focus on our five imperatives, we will constantly strive to imple- ment the critical initiatives required to achieve our vision. In doing this, we will deliver operational excellence in every corner of the Company and meet or exceed our commit- ments to the many constituencies we serve. All of our long-term strategies and short-term actions will be molded by a set of core values that are shared by each and every associate” (Mission Statements.com, n.d.).

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CHAPTER 2Section 2.1 Strategic Leadership and Developing a Vision

This is the mission statement of Albertson’s, a national supermarket and drug-store chain with 2,500 locations in 37 states in the United States and over 200,000 employees (Mission State- ments.com, n.d.). What does it do and for whom?

The following is an example of a good mission statement:

“Our purpose is to enable individuals and businesses to manage financial risk. We provide insurance products and services tailored to meet the specific and ever- changing financial risk exposures facing our customers. We build value for our investors through the strength of our customers’ satisfaction and by consistently producing superior operating results” (Mission Statements.com, n.d.).

This is the mission statement of American Financial Group, Inc., of Cincinnati, Ohio, an insurance company that deals primarily in property and casualty insurance. The statement could easily have used the word mission instead of purpose, and it would have worked.

Vision Statements Does a strategic leader simply conjure up in isolation a vision for the company? Do effective lead- ers rely on others in the organization to support the development of a realistic vision? Let’s exam- ine the nature of vision statements and the strategies organizations utilize to create them. A vision statement is a concise expression of where the organization would like to see itself in the next 5 or 10 years. What makes an effective vision statement rather than one that just sounds good? In order to know whether the vision has been achieved, it makes sense to use some quantita- tive measure in the statement. For example, it could include “become a billion-dollar company by 2017,” or “be doing business in 25 countries by 2017.” It is imperative that the strategy and vision must be completely aligned, which is why an organization should review and, if necessary,

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revise the vision statement after deciding on the strategy and strategic direction in case the lat- ter has been changed. Ideally, the vision statement should be concise, inspiring, memorable, and achievable—a tall order, but not impossible.

Leaders who are visionary can, through collaborating with other top managers and their board of directors, craft a good vision statement that embodies their vision and makes sense to all of the company’s stakeholders. Getting everyone’s agreement takes time; however, it is as a result of such collaboration that the vision becomes truly shared and owned by everyone.

2.2 Leaders Versus Managers Warren Bennis, a pioneer in the contemporary study of leadership, once said, “Managers do things right; leaders do the right thing” (Bennis & Nanus, 1985, front of book jacket). Bennis’s words echo a common saying in business that “leaders create change while managers implement change.” The way that leaders create change is by creating a vision for the corporation (or indeed, any organization) and then “selling” the benefits of that vision to the rest of the organization. To the extent that they succeed, they create followers and motivate or influence them to put their best efforts to making the vision a reality. The leader’s vision then becomes their vision. One test of leadership is whether, in fact, the leader has any followers. Who, indeed, has the leader suc- ceeded in influencing?

Robert Allio has written on the differences between leaders and managers. The key differences he describes are summarized in Table 2.1. He further provides five prescriptions for improving

Discussion Questions

1. Imagine a leader that is visionary but has no followers—is the person still a leader? How are fol- lowers recruited?

2. Consider the following leaders. For each one, state the source or sources of their power, and explain the reasons for your choice: • Mahatma Gandhi • John F. Kennedy • Queen Elizabeth of England • Bill Gates, Chairman of Microsoft • The professor of your strategic management course

3. Are most CEOs and presidents today “strategic” leaders? Why or why not? 4. Why do organizations find it difficult to develop a good vision statement? 5. Vision statements typically look 5 or 10 years into the future. Name an organization (or an indus-

try) where a vision statement might be developed for 20 or more years, and one where less than a year might make sense.

6. Many companies have vision statements purely for PR purposes—they sound really good. How can you tell the difference between the PR kind and the genuine thing?

7. If a company has a good vision statement, why is a mission statement necessary? 8. Should every employee in the company be able to recite the mission statement? The vision state-

ment? Both? Why?

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CHAPTER 2Section 2.2 Leaders Versus Managers

the quality of leadership. Allio contends that good leaders must have good character. Integrity is an essential leadership virtue. While there’s no single best way to lead, leaders must develop a personal style that balances managing with leading. Leaders win when they commit to collaboration. They can- not go it alone. Adaptability makes longevity possible, so leadership entails adroit adaptation. Lastly, leaders are self-made, and good leadership requires constant prac- tice (Allio, 2009).

Table 2.1: Leaders vs. managers

Leaders Managers

Take the long view Take the short view

Formulate visions Make plans and budgets

Take risks Avoid risks

Explore new territory Maintain existing patterns

Initiate change Stabilize

Transform Transact

Empower Control

Encourage diversity Enforce uniformity

Invoke passion Invoke rationality

Act morally Act amorally

Source: Robert J. Allio. (2009). Leadership—the five big ideas. Strategy & Leadership, 37(2).

Is it difficult to be a leader? The list of attributes in Table 2.1 might appear daunting to a junior per- son in the organization. To someone who seeks out challenges, learns from experience, works well with others, takes the initiative, and in other ways “practices” leadership, it’s a natural progression to positions of leadership with ever-increasing responsibility and visibility.

Communication and Effective Leadership

Although personality, business acumen, legitimate power and authority, and expertise may all be factors in leadership ability, communication competence is central to the practice of influence and leadership in organizations. Without the ability to relate to others at work through interactions,

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Leaders may create change, but managers implement change. Managers adopt the leader’s vision as their own.

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influence and leadership are virtually impossible. A foundation of strong relational and commu- nication skills is critical to the ability to inspire motivation within others and to encourage the pursuit of organizational vision.

Impression Management Leadership effectiveness and communication satisfaction within organizations rely heavily on per- ceptions of individuals in formal or informal leadership positions. Thus, strong leaders are able to manage others’ perceptions and have a heightened degree of self-awareness. They must be aware of what is appropriate and expected in a given situation, possess the skills to deliver it, and demonstrate the motivation for accomplishing excellence.

Effective Message Content Good leaders pay a great deal of attention to the content of their messages. They approach their leadership communication as a goal-directed activity, rather than mindlessly. They craft their mes- sages strategically so as to provide others with a clear, concrete sense of their vision. The content of their formal and informal messages should be motivational and inspirational and succeed in convincing others that behaving consistently with the leader’s (or organization’s) vision is truly in their own best interests. Needless to say, leaders must also have unquestionable ethics and engage in this type of influence carefully and thoughtfully.

Strong Message Delivery Effective message delivery, often referred to as charisma, is central to leadership effectiveness. Numerous research studies point to the importance of message exchanges that foster a sense of “connectedness” among communicators. Although connection can be difficult to define, studies have isolated factors such as smiling, appropriate touch and diminished physical distance, mak- ing eye contact, removal of physical barriers (for example, sitting on the same side of a table or desk with the other communicator and avoiding the use of lecterns during public presentations or meetings), engaging in some degree of self-disclosure, and using animated facial expressions as important to reducing the psychological distance between people.

Communicator Style Communication researcher Robert Norton identified nine primary communicator styles that nearly 30 years of research have consistently supported. When applied to leadership, they give some insight into the repertoire of communication behaviors available to foster leadership and encourage influence. As you read about each, consider the situations in which they would be most appropriate. Remember, although an individual may have a primary communicator style, people can “borrow” habits from each of the styles. The most competent communicators are flexible and adaptive in their approaches to different situations.

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CHAPTER 2Section 2.2 Leaders Versus Managers

Types of Leaders

An animated leader relies primarily on nonverbal behaviors such as gestures, eye contact, and facial expressions to motivate others. An individual who fits this profile but is not able to draw on behaviors associated with the other styles will lack influence in contexts other than face-to-face communication.

An attentive leader relies primarily on listening skills in his/her relationships with others to exert influence. Through both verbal (asking questions, paraphrasing, and validating others’ positions) and nonverbal (eye contact, head-nodding, and leaning forward) means, attentive communicators illus- trate that they value individuals and their ideas. Attentive leaders must be careful to not only listen to others but also actually incorporate their perspectives into organizational strategies and plans to maximize the leader’s credibility and impact with others.

Contentious leaders are argumentative and challenging in their communication with others. They may enjoy playing the “devil’s advocate” and will often challenge others to prove or support their positions. Although the contentious communicator can be challenging to work with, this style can be used to enable transformation and to encourage others to think “outside the box.” Their style and interactions with others focus on asking questions, raising the bar, and being intellectually stimulating.

Similar to the contentious leader is the dominant one. However, instead of questioning and challenging others, dominant leaders take charge of conversations and speak in a strong manner. They tend to com- municate more frequently than others in meetings and conversations. This style suits the transactional, authoritative leader, but can be dangerous for leaders operating in more democratic environments.

Dramatic leaders make their points both verbally and nonverbally in “flowery” and exaggerated ways. They will use narratives and expressive language to convey their positions. They may even rely on poetry or literature and dramatic quotes from others to drive home their point.

The friendly leader influences others through the frequent delivery of positive feedback and praise.

Open communicators express emotion and self-disclose their own experiences (both positive and negative) as a way of inspiring and influencing others.

The impression leaving communicator finds ways to deliver memorable messages that others think about after the conversation is over.

And finally, relaxed leaders are calm and understated in their approach. They will rarely reveal anxiety or nervousness and react unflappably under pressure. They exude confidence and calm.

Summary

Effective leaders understand that impression management, strong message content, and effective delivery are central to their ability to influence others. Further, they recognize that there is not one perfect communicator style for a leader. Strong leaders are adept at analyzing people and situations and selecting a message, a delivery style, and a personal style that best fits the circumstances.

Questions for Critical Thinking and Engagement

1. What are some strategies leaders can use for managing others’ impressions of them? What are some specific ways you already practice these impression-management strategies in your per- sonal and professional life?

2. Consider each of Norton’s communicator styles as they relate to leaders and leadership. Identify at least two situations in which each style would be appropriate, and two situations in which each style would probably be ineffective. Explain.

3. What is the difference between a goal-directed message and a mindless message? Explain your perspective. Why is goal-directed communication more desirable for leaders than mindless communication?

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While experience is certainly a valuable contributor in the development of a leader, some key personality traits can typically be found in those in leadership positions at various levels. The first of these is vision—the ability to see the “big picture,” imagine likely futures, and infuse that vision with passion. Integrity is a requisite trait because it is impossible to influence others without gaining their trust. Communication skills, compassion, and charisma are needed to articulate the vision and persuade others to embrace it. Leaders demonstrate strong moral and ethical prin- ciples, giving attention to all stakeholders, not some at the expense of others. A commitment to collaboration encourages everyone to work together to achieve a vision. A less obvious trait of leaders is humility. Effective leaders typically give others credit for an organization’s success but will accept responsibility for poor results.

Max de Pree, the longtime chairman and CEO of the Herman Miller office-furniture company, personified the concept of servant leadership. He characterized the art of leadership as “lib- erating people to do what is required of them in the most effective and humane way pos- sible.” This puts the leader as the “servant” of his followers by removing obstacles that prevent them from doing their jobs, thus enabling them to realize their full potential (O’Toole, 1989, xviii–xvix).

The importance of humility also figures prominently in the concept of Level 5 leadership devel- oped by Jim Collins. His research examined how companies were able to transition from being merely “good” to “great.” He concluded that a leader builds “enduring greatness through a para- doxical blend of personal humility and professional will” (Collins, 2001, p. 20). Table 2.2 further elaborates on humility and will as they pertain to leadership. Many CEOs are egocentric, how- ever, and may take every opportunity to be the face of the company and be quoted in the press. Ironically, the companies they lead often don’t perform as well as their bluster might indicate. So where might you find a Level 5 leader? “Look for situations where extraordinary results exist but where no individual steps forth to claim excess credit. You will likely find a potential Level 5 leader at work” (Collins, 2001, p. 37).

Table 2.2: Summary of the two sides of level 5 leadership

Professional Will Personal Humility

Creates superb results, a clear catalyst in the transition from good to great.

Demonstrates a compelling modesty, shunning public adulation; never boastful.

Demonstrates an unwavering resolve to do whatever must be done to produce the best long-term results, no matter how difficult.

Acts with quiet, calm determination; relies principally on inspired standards, not inspiring charisma, to motivate.

Sets the standard for building an enduring great company; will settle for nothing less.

Channels ambition into the company, not the self; sets up successors for even greater success in the next generation.

Looks in the mirror, not out the window, to apportion responsibility for poor results, never blaming other people, external factors, or luck.

Looks out the window, not in the mirror, to apportion credit for the success of the company—to other people, external factors, and good luck.

Source: Jim Collins. (2001). Good to great: Why some companies make the leap . . . and others don’t. HarperCollins Publishers.

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CHAPTER 2Section 2.3 Developing and Evaluating Leaders

iStockphoto/Thinkstock

There are considerable advantages derived from developing lead- ers internally. Hiring a candidate externally can often come at a higher cost than promoting internally.

2.3 Developing and Evaluating Leaders Studies have shown that there are considerable advantages to devel- oping leaders internally instead of hiring from outside (Brant, Dooley, & Iman, 2008). While the talent pool of applicants can be impres- sive, external hires for leadership positions often fail. By the end of five years, two-thirds have failed. By contrast, the leaders of 10 out of 11 “good-to-great” companies studied by Collins in his book of the same name came from inside the company. The companies he exam- ined in comparison turned to out- siders six times as often yet failed to produce sustained great results.

In addition to having a higher risk of failure, recruiting external can- didates for leadership positions is more costly. Direct costs include search fees, interview costs, signing bonuses, relocation, and severance packages among others. By contrast, internal-development costs are far lower, com- prising training, education, program administration, and relocation costs involved with rotating assignments.

Finally, an organization that practices internal promotion is more likely to retain high-potential talent. Executive retention is positively correlated with formalized succession programs. In compa- nies having an executive turnover rate of 1–5% annually, 84% had formal development programs. At those companies reporting turnover rates of 6–10%, 24% had succession programs. Of busi- nesses experiencing turnover rates of 11–20%, only 11% had succession programs.

Developing the next generation of leaders is one of the most difficult challenges for a company. Companies committed to promoting from within can take certain measures to increase the pros- pects of success (Allio, 2009). First, they must have a good talent pool, which means hiring people with leadership potential in the first place. The organization must have a leadership-developmental

Discussion Questions

1. Managers are often promoted to more senior positions with substantial leadership mandates. What problems might they encounter in their first year in the new position?

2. Do you have what it takes to be a Level 5 leader? Why or why not? 3. Recount an experience you may have had that leads you to believe that you have leadership

potential. 4. What do you think a company should do to develop potential leaders when it has no budget for it?

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CHAPTER 2Section 2.3 Developing and Evaluating Leaders

program that intentionally puts these people in challenging situations and as members of cross- functional teams. A good development program obtains feedback about them and their perfor- mance from those that see them in action (Fulmer, Stumpf, & Bleak, 2009). For example, GE is known for its strong entry-level leadership development, which offers experience in communica- tions, engineering, finance, information technology, manufacturing/operations, sales/marketing, as well as a range of programs specific to GE’s various brands (GE, n.d.).

While there are clear advantages to promoting from within and signaling to current managers that the career path in the company goes right to the top, there are circumstances in which hiring a CEO from outside makes more sense. For instance, there are occasions when a business requires a transformational leader to shake up a structured, risk-averse enterprise, as was the case with aerospace conglomerate Allied-Signal, or to revitalize a company by taking it in a completely dif- ferent direction, as IBM recruited Louis Gerstner to do.

Hiring People with Leadership Potential

Multinational producer of polymer products W. L. Gore & Associates valued people who showed initiative and leadership and were team players. To select suitable candidates it employed a novel recruiting system. Applicants for a job came to the company expecting to undergo several interviews before being selected or turned down. Instead, they were told on arrival to “look around.” Those who were nonplussed, kept looking at the clock, and asking who was going to interview them were shown the door. Others who were curious and got up to walk around and see what was happening, then offered to help and rolled up their sleeves, were immediately hired (Hamel & Breen, 2007).

Hiring future leaders is not as easy as it sounds. Imagine you are interviewing someone for a middle-management job, such as a project manager. The person could be very well qualified for the position, but how do you assess his or her leadership potential? There are a few things that almost every employer looks for in an applicant when recruiting potential leaders.

An obvious indicator is experiences in the applicant’s resume where he or she made a difference. As important to having achieved something tangible is the way it was accomplished, such as taking initiative, leading a group, or otherwise demonstrating leadership qualities. References can pro- vide information about the extent to which the person was assigned to do something important and delivered results that met or surpassed expectations. They can also reveal whether team- mates would work with that person again. In other words, a reference is a source that can help ascertain if the candidate has a record of successfully completing assignments and being unafraid to take on more challenging ones. During the formal interview, some employers put applicants into various calculated situations to see how they would respond. Such “mock simulations” can be very revealing. Finally, following the old adage, “it takes one to know one,” several people currently in leadership roles should interview the applicant to provide a balanced and complete picture before actually hiring the person. Allio advises that candidates for future leaders possess three attributes: (1) motivation and a need to achieve, (2) attitude and the ability to inspire, to evince optimism in the face of adversity, and (3) morality—the possession of positive values and benevolent motives (Allio, 2009).

By no means should all hiring decisions take into account leadership potential. Some people, as a result of their temperament, interests, and experience, are more interested in playing a support- ing role on the team; they lack the motivation or even interest to lead. There are many roles within

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an organization that do not require leadership competency. One important purpose of recruiting, however, is to keep the potential-leadership pipeline full.

Developing Leaders

Good leadership depends primarily on what leaders do; thus, it is imperative that managers with leadership aspirations find ways to demonstrate their leadership abilities and actually practice what they’ve read in books. No amount of listening to lectures or attending leadership courses can realistically be expected to transform people into leaders. The only way to do so, it would appear, is to create opportunities in which people can practice being leaders.

Effective Leadership Development Some companies know how to develop leaders. General Electric Co. (GE) has for years been con- sidered one of the best incubators of leadership talent because its alumni have gone on to lead many other companies. The first step is to develop a short list of individuals with the most poten- tial as future leaders. Their development is then carefully monitored as they are given one chal- lenging assignment after another. Each assignment is documented (including team composition, objectives, timeframe, and budget) and formal feedback sought from group members and others that might have interacted with the group. The feedback is then examined and discussed with the individual, with special emphasis on what was done well and lessons learned. Because of this kind of attention to detail and the number of individuals involved, leadership development is managed as a program, with an experienced manager in charge. Individuals who build on their experience in this way and increase their stature with the organization become automatic candidates for senior- management positions as they open up.

In another example, Nike implemented Kouzes and Posner’s Leadership Challenge (Kouzes & Pos- ner, 2008) to develop senior managers for the apparel side of its business. This model involves modeling behavior, inspiring a shared vision, challenging the current process, enabling and empowering others, and encouraging the “human” aspects of leadership (such as celebrating community and recognizing individual accomplishments).

There are two more ways to develop leaders that complement a formal development program: Current leaders should be careful to model the behavior they expect potential leaders to emulate. Potential leaders should try to find a mentor, either in the same company or outside it, to help their development. Following model examples and having a mentor are immeasurably useful but are often overlooked aids to leadership development.

Leadership-Development Pitfalls Not all leadership-development programs produce desired results. According to Douglas A. Ready, a researcher on leadership-development efforts, organizations that experience difficulties imple- menting a successful development program or fail entirely manifest three “pathologies” (Ready & Conger, 2003).

Some companies display a control, ownership, and power mentality. This is characterized by a reluc- tance of those in positions of authority to give up control, to relinquish ownership of resources, or

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CHAPTER 2Section 2.3 Developing and Evaluating Leaders

AP Images/Reed Saxon

CBS Corporation’s CEO Leslie Moonves received $111.6 million in compensation in 2010. During his tenure, CBS share price nearly doubled and its revenue grew by 8%.

to share information. Identifying potential candidates and the right opportunities to develop them is seen by these kinds of managers as threatening, especially in large, complex organizations. This leads to reluctant or even zero cooperation with leadership-development programs.

Another pitfall is the “productization” of leadership development. This means creating a new pro- gram based on the latest management fad or the magical new offering promoted by a management- consulting firm, without regard to whether it has anything to do with the corporation’s strategy or future needs. To make matters worse, in tough economic times the leadership-development program is viewed as a cost and often curtailed. Over time, the disjointed efforts produce nothing of value.

Some organizations make the mistake of applying the wrong metrics. When the human-resources department promises an increased ability to deliver leadership-development programs at lower- than-expected costs, perhaps by using more e-learning technologies and new methodologies, the touted results sound impressive. In this situation it’s likely that the right questions aren’t being asked. In order to measure the value of a leadership-development program, one needs metrics that can provide answers to questions such as, “Are we better able to fill key jobs when they arise?” “To what extent are potential leaders knowledgeable about and committed to our strate- gic direction?” Short-term savings may have long-term costs.

Evaluating Leaders and Succession Planning

The most common measure to judge the effectiveness of leadership for a corporation, and in particular the CEO, is the company’s performance. Measures include beating its revenue and NIAT forecasts and achieving an increase in the corporation’s stock price. How do we know this? The CEO’s compensation package is designed to motivate achieving such performance for the corporation. Raises and bonuses are awarded only when the corporation performs at levels that meet or exceed expectations. Performance objectives and incentives are specified in the contract when the CEO is hired.

A recent case confirms the above measures and also illustrates the fragility of using such measures. In 2010, CBS Corporation’s CEO Leslie Moonves received a total compensation package worth an extraordinary $57.7 million. Beyond his base salary of $3.5 million, he was awarded a $27.5 million bonus and nearly $23 million in stock and option awards. The company also provided an additional $3.4 million for his pension fund and reim- bursement for taxes paid in New York. CBS justified the nearly 34% increase in compensation from 2009 say- ing that Moonves’s leadership resulted in extraordinary

growth in shareholder value and outpaced both the industry and the company’s internal targets. CBS’s share price nearly doubled during 2010, and its revenue climbed 8% (James, 2011).

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CHAPTER 2Section 2.3 Developing and Evaluating Leaders

Viewed in isolation these performance metrics indeed appear impressive; however, the resur- gence of advertising revenue in 2010 simply lifted the company to where it had been three years earlier. Its total revenues of $14 billion were largely unchanged when compared to 2007, before the recession. Moreover the company’s operating income of $1.8 billion was much less than the $2.6 billion in 2007. Shareholders may question whether such lavish compensation is warranted for only one year of performance.

Time and again, CEOs receive generous rewards for upsurges in company performance but are rarely penalized when corporate performance declines or cannot be sustained. For example, Rob- ert Nardelli, CEO of Home Depot, stepped down in January 2007 and took with him a $210 million severance package amid shareholder criticism about his “generous” compensation package rela- tive to the stock’s weak performance, slowing profits, and a regulatory probe about its options practices. On the announcement of Nardelli’s resignation, the company’s share price actually jumped 3% (Kavilanz, 2007). At the company’s final shareholder meeting before he resigned, he was the only director present, revealed no information, and allowed shareholders to speak for only one minute each (Nocera, 2006).

These examples illustrate that one measure to evaluate CEOs should be corporate success over an extended period of time. Another is the state and condition of a company at the end of a CEO’s tenure. For example, when CEO Carly Fiorina was forced out at Hewlett-Packard in 2005, the company’s stock price had declined by 50% during her tenure, and HP was still trying to digest the 2002 acquisition of its biggest competitor, Compaq, a move that was widely seen as a failure (Portfolio’s Worst, n.d.).

When long-time CEO Michael Eisner resigned in March 2005, a year before his contract was due to expire at Disney, the company’s performance had deteriorated on several fronts. Broadcast network ABC, acquired by Eisner, had lost market share over seven years. Disney had failed in a highly publicized attempt to build a historic American theme park near a civil-war battlefield. The company was widely criticized for the disastrous hiring of Michael Ovitz as his designated suc- cessor, who lasted just 16 months and cost the company $90 million in addition to stock options. Uncharacteristically, Disney had experienced a string of box-office movie flops starting in 2000, while over that same five-year period the board of directors had approved compensation pack- ages for him totaling $737 million (Gross, 2002).

In contrast, Steve Jobs, who relinquished operational control of Apple Inc. shortly before his death in 2011, left behind a company that he had led from near marginality in 1997 to being the largest high-tech company in the world. In place at the time of his departure were a successor and an innovative-design culture that will endure well into the future. The robust state in which he left the company reflects his performance as a leader and stands in stark contrast to Fiorina’s and Eis- ner’s leadership performances. A leader’s legacy really is important.

Succession Planning The quality of a leader’s successor also reflects on how people judge the leader. Is there a smooth transition at the top? Succession planning, especially at the top of an organization, is vital. It is too late to think about it when a CEO announces his resignation, even when the transition date is a few months away. The time to think about succession planning is years before the actual event. In other words, it should be done on an ongoing basis.

Good succession planning requires that a leadership pipeline be full at all times. This can be quite challenging especially for large corporations that employ over 10,000 people. There are

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CHAPTER 2Section 2.3 Developing and Evaluating Leaders

four principal reasons why it is difficult to maintain a leadership pipeline (Brant, Dooley, & Iman, 2008):

Inadequate criteria. When asked to recommend individuals in their unit who had leadership potential, managers’ recommendations may be based on criteria that reflect local values but do not match standards used in other functions or parts of the company.

Assessing potential vs. performance. Sometimes leaders find it difficult to distinguish between current performance and evidence of perceived ability to handle a more responsible role.

Inadequate data to make an informed decision. Decisions about leadership potential may rely too heavily on performance-appraisal scores that are high and fail to distinguish between candidates. The assessments suffer from “leniency” and have less to do with raters’ ability to make accurate judgments than with their willingness to be candid.

Over-reliance on traditional training. Leaders felt that traditional training methods, such as mem- bership in cross-functional teams, were inadequate.

To ensure that potential leaders and successors are being developed, leaders should establish criteria for identifying talent throughout the corporation. Standard terminology is important so that everyone knows what is meant and what one is looking for and why. Identifying promis- ing candidates for a leadership-development program should be company-wide and begin with recruiting. A system needs to be developed that formalizes feedback data about a particular person after a given assignment so that multiple evaluations can be aggregated. This process will help identify the employee best suited to a particular position from among all the potential candidates. Finally, an aggressive schedule of assignments consistent with the company’s strat- egy options and business model should be devised to test these talented people for their devel- opmental benefit as well as the company’s interests. If a company’s management doesn’t have the skills to create such a leadership pipeline, it should engage consultants with the necessary experience and expertise.

Discussion Questions

1. What would you do to discover whether an applicant for a job in your company had leadership potential before hiring that person?

2. If you were asked to develop a score sheet for interviewing managerial candidates to assess lead- ership potential, what would it look like?

3. Why do many companies persist in hiring senior and executive positions from outside despite research findings that people promoted from within do better and are less costly?

4. Are formal leadership-development programs a cost or an investment? If the latter, how might you calculate a return on that investment?

5. When obtaining feedback on an individual already in a leadership-development program, whose feed- back is more important—that of the person’s supervisor, teammates, direct report, or customers?

6. Design a feedback form to capture information you would find useful in assessing and developing someone’s leadership potential.

7. What principal elements of a potential leader’s performance in a developmental assignment should the company really look for?

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CHAPTER 2Section 2.4 Purposes of Organizations

2.4 Purposes of Organizations Section 1.5 discussed a number of measures of “suc- cess” for a corporation. This section examines how it is important for an organization to have an overarch- ing purpose, something that goes beyond the “bot- tom line,” shareholder value, and other traditional measures of success. While companies can certainly function without one, the publicly stated underly- ing purpose motivates employees, attracts people to work at such companies, and generates positive public relations.

Consider the following examples of companies’ pur- pose statements. Note how crisp, succinct, and mem- orable they are.

3M: Our purpose is to solve unsolved problems innovatively.

Merck: Our purpose is to preserve and improve human life.

Walt Disney: Our purpose is to make people happy.

The Petco Foundation: Our purpose is to raise the quality of life for pets and the people who love and need them (Petco.com).

SETI Institute: Our purpose is to explore, understand, and explain the origin, nature, prev- alence, and distribution of life in the universe.

Fannie Mae: Our purpose is to strengthen the social fabric by continually democratizing home ownership.

Hewlett-Packard: Our purpose is to make technical contributions for the advancement and welfare of humanity.

Sony: Our purpose is to experience the joy of advancing and applying technology for the benefit of the public.

Walmart: Our purpose is to give ordinary folk the chance to buy the same things as rich people.

Google: To organize the world’s information and make it universally accessible and useful.

Patagonia: To use business to inspire solutions to environmental crises.

Microsoft: To help people and businesses throughout the world realize their full potential.

Medtronic Inc., a well-known maker of stents and other medical products for opening blocked arteries, has a strong statement of purpose, but it’s buried in the mission statement, which reads in part:

© Steve Vidler/SuperStock

Purpose statements allow an organization to go beyond their bottom line and com- municate an overarching mission to the general public. Disney corporation’s pur- pose statement is “to make people happy.”

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CHAPTER 2Section 2.4 Purposes of Organizations

To contribute to human welfare by application of biomedical engineering in the research, design, manufacture and sale of instruments or appliances that allevi- ate pain, restore health, and extend life (George, 2003).

Vention Medical’s statement of purpose is its vision statement:

To partner with companies as the engine of innovation for the components and devices that save and enhance lives (Vention Medical, n.d.).

Notice that these overarching purposes don’t mention profit, shareholder value, market share, or even the products the companies produce. They are bigger than that. They motivate employees because they express values with which employees identify. Statements of purpose differ from vision statements in that they convey core values of the company now and in the future, whereas vision statements describe a future state that companies are trying to achieve 5–10 years into the future.

Purposeful Behavior

Organizations that have a clear, overarching purpose are more likely to appeal to all their stake- holders and not just a subset. Purposeful behavior is performed by an organization consistent or aligned with a common purpose that is meaningful and important to that organization’s stake- holder groups. For example, to specify “increasing shareholder value” as the company’s purpose aligns primarily with the interests of management and investors and not with those of employees (unless they happen to participate in an Employee Stock Ownership Plan). According to Paul Ratoff (2007), four conditions must be present for an organization to demonstrate purposeful behavior:

• The larger purpose must be clearly stated. • Stakeholder interests must be aligned with that purpose. • The company’s strategies must be aligned with its purpose. • The results achieved must be measured and stakeholders informed of progress.

Not only is having a larger purpose good for any company but also if more companies would consciously choose to achieve something larger than their mission statements would suggest, businesses might then be better corporate citizens. More people would be passionate about their work, and organizations could become more productive as a result and make contributions to the betterment of society.

Discussion Questions

1. Develop an overall purpose for a high school and one for a college/university. What would be their similarities or differences?

2. Can any organization have a purpose? Can different levels in an organization each have a purpose (e.g., a department or functional unit within a corporation)?

3. Where do overarching purposes come from? If you had to develop one for an organization, how would you go about it? How would you know when you had the “right” purpose?

4. Many companies have mission and vision statements and strategies. Does having an overarching purpose make a difference? In what way?

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CHAPTER 2Section 2.5 Governance and the Role of the Board of Directors

© Scott Barrow, Inc./SuperStock

When a company “goes public,” it means that the general public can purchase, sell, and trade shares on several stock exchanges, like the New York Stock Exchange and NASDAQ.

2.5 Governance and the Role of the Board of Directors Privately held and publicly held companies are governed differently. They do share one similarity and that is that all decisions made and actions taken benefit the owner(s) of the company. We now take a closer look at the main differences.

Privately Held Companies

Privately held companies are governed or run by either one person, as in the case of a startup entrepreneurial venture, or a group of people in a larger company, like a top-management group. An autocratic CEO will make all decisions of consequence for the company whether the top- management group is consulted or not. A democratic or participative leader will make decisions only with the consensus of the other top managers. Typically, in privately held companies, the CEO and often some key managers are the owners of the company, so decisions that benefit the company also automatically benefit them as owners.

In cases where outsiders have invested capital in the company, the investor receives a negotiated percentage share of the equity in return as well as a seat on the board of directors. This gives the investor a say in making strategic decisions as a way to safeguard the investment. In these cases, such a board shares the governance of the company with the CEO and the top-management team. The CEO makes decisions only after consulting with such a board.

Publicly Held Companies

To explain how publicly held companies are governed differently, one has to appreciate what being a pub- lic company means. A public company is one whose shares can be publicly traded on a U.S. stock exchange and that is regulated by the United States Securities and Exchange Commission (SEC) to ensure accurate and responsible financial reporting. The SEC was formed to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. An organizing principle is that all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment before buying it and as long as they hold it. To achieve this, the SEC requires public companies to disclose meaningful financial and other information to the public. Only through the steady flow of timely, comprehensive, and accurate information can people make sound investment deci- sions (U.S. Securities and Exchange Commission).

The SEC oversees the key participants in the securi- ties world, including securities exchanges, securities brokers and dealers, investment advisors, and mutual

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CHAPTER 2Section 2.5 Governance and the Role of the Board of Directors

funds. Here the SEC is concerned primarily with promoting the disclosure of important market- related information, maintaining fair dealing, and protecting against fraud.

Once a company “goes public,” it means that the public can purchase and trade its shares on one of several stock exchanges such as the NYSE or NASDAQ. In carrying out its responsibilities, the SEC also oversees the public-accounting profession and the rules it creates, the generally accepted accounting principles (GAAP) to promote honest and uniform reporting by public companies as a basis for investors to buy or sell shares. In fact, the SEC requires that the financial statements and computer systems of public companies be audited by a CPA firm every year to guarantee the information as a basis for decision making (Abraham, 1978).

In addition, the SEC requires all publicly held companies in the United States to have a board of direc- tors to fulfill a fiduciary duty to the company’s shareholders.¢Ω That duty is to act solely on behalf of the shareholders and in their best interest. Why was this found to be necessary when a capable CEO and management team exist to make the key strategic and operational decisions for the company?

The truth is that publicly held companies typically have shareholders that number in the hundreds of thousands or millions, and the visceral connection that owners, managers, and investors enjoy in a small company is lost. People buy shares in a public company for monetary gain, nothing else. Their objective is to receive either regular dividends for current income or capital gains when the value of the company rises over time. As a result, top managements of companies have come to make decisions and take actions that benefit themselves more and not the larger group of share- holders. For example, they pay themselves high salaries, high bonuses, and high severance pack- ages, oftentimes without regard to the way the company performs. They have come to behave selfishly in this way not out of any ill will toward shareholders, but rather because they can.

According to a New York Times study of executive pay, the median pay in 2010 for CEOs was $10.8 million, a 23% gain from 2009 (Joshi, 2011), 343 times the median pay of American workers in nonsupervisory positions (AFL/CIO, n.d.). One view for this disparity is that few people have the talent and ability to lead large, often global public companies successfully, which means they are in short supply and so command generous compensation packages.

While it may be true that capable leaders are in high demand, one of the insidious reasons for CEOs’ large compensation packages is the reinforcing cycle that sets and approves such pay. A board’s compensation committee often engages a human-resources-consulting firm to deter- mine whether the salary and compensation proposed is in line with what is paid other CEOs. The response in virtually all cases is that it is. The board is thus supported with evidence when it gives the CEO the salary and compensation package negotiated. The CEO contract often includes a defined employment period like five years, stock, bonuses, severance packages, and other ben- efits. The next time a CEO is hired, the cycle is repeated, the one certainty being that the size of the total compensation package always increases and never decreases.

The SEC must have recognized this tendency to reward insiders a long time ago, and so requires public companies to have a board of directors elected by the shareholders at their annual meet- ing. The role of the board is to represent shareholder interests and oversee the strategic decisions that the CEO and management team take and, when necessary, to reclaim decision-making power and make the crucial decisions itself. This is most evident when the company is trying to acquire another company or fend off an unwanted takeover attempt. In both situations it is the board that takes the lead in deciding what to do.

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CHAPTER 2Section 2.5 Governance and the Role of the Board of Directors

© Kablonk/SuperStock

Boards of Directors are required to have three standing com- mittees: an Audit Committee, Compensation and Benefits Com- mittee, and a Nominating and Corporate Governance Commit- tee. These committees will report directly to the board.

Boards of directors are comprised of three types of directors (Hitt, Ireland, & Hoskisson, 2007):

• Insiders—the firm’s CEO and other top-level executives • Related outsiders—individuals not involved with the firm’s day-to-day operations but who

have a relationship with the company such as a major stockholder • Outsiders or independents—individuals who have no relationship to the firm at all

Boards of directors are required to have three standing committees to help them to fulfill their obligations: The Audit Committee is responsible for hiring and reviewing the performance of the independent public accountants that audit the company’s financial systems and reports. The committee ensures the integrity of the accounting practices and controls and reviews significant changes in accounting policies. In addition, it helps the company comply with the requirements of the Sarbanes-Oxley Act of 2002. The Compensation and Benefits Committee is responsible for determining compensation packages for the CEO, president, key top managers, and board mem- bers. In addition, it oversees pension and other welfare policies for all employees. The Nominat- ing and Corporate Governance Committee reviews possible candidates for board membership and recommends nominees for election. It oversees the process for performance evaluations of the board and its committees, and reviews the company’s executive-succession plans. These three standing committees are legally required of all public companies.

Corporate boards of directors may choose to establish other commit- tees. A strategic-planning com- mittee is not mandated but may be created by some boards. Its role is to keep the board informed about strategic decisions the com- pany might take and to make sure that the board’s input is taken into account in the company’s strategic- planning process. A public-policy committee is not a legal require- ment but many boards choose to have one. These bodies oversee the company’s efforts at protect- ing the environment, promoting health issues, and other public poli- cies that might affect the company.

The Sarbanes-Oxley Act (SOX) introduced new standards of

accountability for the boards of publicly traded companies. The Act makes internal control the direct responsibility of directors and imposes large fines and even prison sentences in the case of accounting crimes. After the Sarbanes-Oxley Act was passed, the New York Stock Exchange and the American Exchange required independent directors to head the major standing committees (Petra, 2005). Today, boards of directors of companies trading on those exchanges are required to have a majority of the board be independent and the audit committee to be composed entirely of independent directors (Hitt, Ireland, & Hoskisson, 2007). Even so, in some cases, the CEO is pow- erful enough to offset the independence of the board. Some companies have countered this with

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CHAPTER 2Section 2.6 Organizational Designs and Strategy

efforts to prevent the same person being chairman of the board and CEO concurrently (Lorsch & Zelleke, 2005).

The downside to having more independent directors is that they have, by definition, less informa- tion about the day-to-day operations of the company. But the issue is a red herring; they can get all the information they need from interactions with and requests of the insider directors, who are on the board because they can share with the board all the strategic, financial, and operational information the board needs.

With all of these committees and regulatory bodies in place, it’s easy to see how governing a publicly held company is more complicated than, and substantially different from, governing a privately held company. In later chapters, the strategic-management process will be described in more detail in a way that applies equally well to both kinds of company. The emphasis will be placed on what the management team must do to make and act on its strategic decisions. Bear in mind that, for public companies, the board plays a critical role in overseeing and sometimes taking control of what management does.

2.6 Organizational Designs and Strategy The process of organization is the deployment of resources to achieve strategic objectives. It entails dividing the workforce into specific departments and jobs, identifying formal lines of authority, and creating mechanisms for coordinating diverse organizational tasks. Organizational design is thus a major determinant of whether the strategy can be implemented effectively. Strategy execution depends on competent people who have the resources and the knowledge, and who know what to do and how their jobs relate to everyone else’s. Additionally they require information where and when they need it. How the company is staffed and organized becomes critical. Over time, as the organization grows, the difficulties of implementing the strategy increase. For example, as it grows to become an international organization, or broadens its product line, or acquires other companies, of necessity will its organizational design evolve. While details about executing strate- gies come later in the book, this section introduces the different kinds of organizational design and the reasons each one is effective.

Discussion Questions

1. Discuss some ways in which a board of directors might maintain its independence from management.

2. Sometimes, stockholders are not satisfied with a company’s financial performance, how the com- pany is being managed, and even how effective the board is. What can they do about the situa- tion, especially when some stockholders hold few shares in the company?

3. In the case of very large corporations, institutional stockholders hold substantial blocs of stock in the company. Is it possible that they wield too much influence in stockholder voting? Should this be cause for concern on the part of a small stockholder?

4. Shareholder “activists” who hold stock in many companies are particularly vocal about “keep- ing corporations honest” and ethical and making sure they represent all stockholders’ interests. Often, such dissatisfaction takes the form of coming up with an alternative slate of directors to be voted on at the annual general meeting, thus making the process very political. Is this a good thing for corporations and their stockholders?

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CHAPTER 2Section 2.6 Organizational Designs and Strategy

Comstock/Getty Images

Functional organizations are usually led by a CEO, with posi- tions for a VP of Finance, VP of Marketing, VP of Production, VP of Human Resources, VP of Research and Development, and possibly a VP of Engineering.

Functional Organizational Design

The functional organizational design is the most common design used by business single-companies (Figure 2.1). It groups employees together according to discrete functional activ- ities in the belief that the work will be done more effectively. Employees of small companies organized this way generally aren’t aware they are using a specific “design” because it happens to be so common.

Functional organizational designs are variants of the following struc- ture. At the top of the hierarchy sits the CEO or president. In public companies this includes the chair- man of the board of directors and office of legal counsel. Below the CEO are a number of vice pres- idents, each responsible for one or more functional areas. Some companies have a chief operating officer (COO) or executive VP, who has the authority to act as CEO in the latter’s absence. That executive sometimes oversees the functional vice presidents. Reporting to most vice presidents are C-level officers, with responsibilities for their functional area. Examples include the CFO (chief financial officer), CMO (chief marketing officer), CTO (chief technology officer), and newer ones like CIO (chief information officer) and CSO (chief strategy officer). Figure 2.1 illustrates the basic functional organization design.

VP Marketing VP Human Res.VP Finance VP Production VP R&D VP Engineering

Legal CounselChairman of the Board

Chief Operating Officer

CEO

Figure 2.1: Functional organization design

The principal disadvantage of this form of organizational design is that it discourages horizontal communication, that is, across functions. For example, a situation might arise in which a company’s marketing department advertises the benefits of a particular product and delivers a dramatic sales

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CHAPTER 2Section 2.6 Organizational Designs and Strategy

AP Images/Mark Lennihan

A matrix organizational design is usually preferred when a company produces dis- tinct brands or product lines. For example, Proctor & Gamble has 96 brands of prod- ucts, including Tide detergent—one of its most popular brands.

increase only to discover it could not fulfill the new orders because production wasn’t prepared to keep up with demand. In another scenario, efforts to cut manufacturing costs might dictate automating part of the production process, but if the finance department had not been informed of this possibility and set aside funds accordingly, the company might not have the money to fund the initiative. To get around this, a company might form cross-functional teams composed of members from each affected functional area. Special task forces might also be established to tackle a problem that only occurs once such as business-process reengineering. Cross-functional teams are rarely fulltime activities, but must be done in addition to members’ regular jobs and responsibilities.

Matrix Organizational Design

Whereas a functional organizational design is the most common design used by companies, matrix organiza- tional designs are preferred when a company encoun- ters a more specific set of circumstances or challenges. Companies that serve the functions described in the following sections may consider using a matrix organi- zational design.

Many Projects for Clients Companies that provide consulting services or perform research for multiple clients may choose a matrix orga- nizational structure. An example of this is the RAND Corporation, a “think tank” in Santa Monica, Califor- nia, that undertakes research and policy projects for all agencies of the federal government, especially the military, as well as state and local government. RAND is organized by intellectual discipline and by project teams that propose, carry out, and report on par- ticular contracts for individual clients. In effect, any member of the professional staff working there has a “home”—say, in the economics or computer-science group—and works on one or more projects. Most indi- viduals have two or more overseers; but the depart- ment head is more of a resource than a manager, thus removing a potential conflict. Figure 2.2 represents a simple matrix organizational structure.

Producing Distinct Brands or Product Lines A large enterprise that produces many established brands for discrete markets may be suited to a matrix design. Proctor & Gamble, one of the largest and most innovative consumer-product corporations in the world, produces no fewer than 52 brands of beauty and grooming products such as Tampax, Gillette, Oral B, Crest, and Pert, and 46 brands of household-care products such as Tide, Bounty, Pampers, and Comet (Proctor & Gamble, n.d.). Organizationally, every brand is called

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CHAPTER 2Section 2.6 Organizational Designs and Strategy

a global business unit (GBU), which focuses solely on consumers, brands, and competitors around the world. The GBU is also responsible for the innovation pipeline, profitability, and shareholder returns. Market-development organizations (MDOs) are charged with knowing consumers and retailers in each market where Proctor & Gamble competes and integrating the innovations flow- ing from the GBUs into business plans that work in each country. Finally, Global Business Services (GBS) utilizes Proctor & Gamble talent and expert partners to provide business-support services at the lowest possible costs.

Figure 2.2: RAND Corporation matrix organization

Head, Computer Sci.

Head, Political Sci.

Head, Economics

Head, Mgmt. Science

Director, Project A

Director, Project B

Director, Project C

Legal Counsel

Computer services, Security, Other

Support Fuctions

HR Director

President

Editing Dept.

Vice President

Managing International Operations Large multinational corporations with business interests in many countries may be organized in a matrix structure. The organizational matrix could be two-dimensional; think of a spreadsheet in which product managers are column headings and country managers are row headings, or even three-dimensional with the third dimension being disciplines like chemists, engineers, statisti- cians, computer scientists, and so forth. Proctor & Gamble has refined an incredible organizational design for what is a very complex organization, but most such organizations experience many dif- ficulties. Even simple organizations that market only a few products internationally have conflicts with country managers. It is not uncommon for managers employed by international corporations to complain that, although they know their own domestic market and how to run the local office better than the executives at the home office, they still get told how to do their job.

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CHAPTER 2Section 2.6 Organizational Designs and Strategy

Divisional Organizational Design

Much like functional and matrix organizational designs, the divisional organizational design works better for some companies and industries than others. A divisional organization is most effective when a company is in several businesses. A company with a broad product line or that serves several vertical markets could still be in one business. Honeywell International is an example of a business with a divisional organizational design. Honeywell is an enormous conglomerate that has evolved through numerous mergers and acquisitions. It does business in a variety of industries ranging from defense contracting to consumer products with divisions dedicated to aerospace, automotive products, specialized materials, and research and develop- ment among others.

The test to determine if a divisional organizational structure is the best choice for a company is whether each of the businesses has quite different customers, competitors, and strategies and therefore needs to be run by a separate manager. In such a case, one would find many func- tions such as engineering, sales, and manufacturing duplicated in each business. In a diversified or multi-business company (discussed in Chapter 11), its different businesses can be divisions that still retain the corporate name and have developed organically or “subsidiaries” that have differ- ent names as a result of having been acquired.

The divisions or subsidiaries are considered “line departments” as they continue the chain of com- mand up to the CEO and overall board of directors. Staff departments such as human resources, labor-relations, finance, and legal counsel exist at the corporate office and serve all divisions and subsidiaries. An international department would coordinate the operations of each division in different countries, allowing for contacts that one division had developed to be accessed by the other divisions. As you may well imagine, divisional organizations, while simple in concept, can become complex in an international corporation.

Chief Executive Officer

Staff Departments

Labor Relations Department

International Department

Finance Department

Line Departments

(Divisions)

Electrical Products Division

Medical Products Division

Industrial Products Division

Engineering Sales Manufacturing

Figure 2.3: Divisional organization

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CHAPTER 2Section 2.7 The Role of Top Management

2.7 The Role of Top Management As the name implies, a corporation’s top management is the group that runs the company under the guidance of the CEO. Depending on the management style of the CEO, the relationship could be highly participative and democratic, so strategic decisions are made jointly. However, if the CEO is more dogmatic or autocratic, top managers may be asked for their input but would not be involved in making any strategic decisions.

Composition and Authority

In a functional organization, the top-management team typically comprises all of the vice presi- dents and C-level executives. In a matrix organization, it would include the department heads and key staff directors and sometimes the managers of large and critically important projects. In a divisional organization, it would comprise key staff directors and all divisional and subsidiary presidents. The same would hold true in international organizations. Country managers are usu- ally not members of the top-management team. Having said that, some global organizations are extremely complex, conducting purchasing, manufacturing, R&D, and sales and marketing in dif- ferent countries. For these corporations, like the Proctor & Gamble example cited earlier, the key executives in their top-management teams could be located in different countries.

The degree of decision-making authority varies also with the kind of organizational design followed. For example, in a functional organization, a vice president or C-level executive has authority only in the functional area in question. A vice president of marketing can decide tactical questions only in areas including marketing, customer relations, sales, advertising and promotions, and market research. On the other hand, a divisional president acts like a CEO within the division in question, overseeing all business activities of the division. In that structure, however, all functional areas of the division must be compatible with their corporate counterparts.

Building Capability

Decisions are not easily compartmentalized into “strategic” and “tactical” or non-strategic. Imple- menting a strategy doesn’t mean just doing the tasks that have always been done and in the same

Discussion Questions

1. Describe how a small company’s organization might change from a functional organizational design to one that might better support a new product it had just developed for a new market.

2. Imagine you are working for a company that had a matrix form of organization, and you had pro- gressed to being one of the project managers. The client for your project suddenly changed the terms of your project, and you needed more support in computer modeling as a result. The depart- ment head for computer science claims that the person already on your project could handle the extra load, but you feel you need an additional person. How might you resolve this conflict?

3. As an international company expands to a particular country, would you hire someone from that country to run the office there but train them in the company’s culture and products, or have someone set up shop in that country from the home country and have him learn about the mar- ket in that country? Discuss the reasons for your choice.

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CHAPTER 2Section 2.7 The Role of Top Management

way as before. Strategy implementation over time becomes more demanding as competition inten- sifies. For that reason, top management must do more than simply keep the company running.

To build the necessary capabilities required for effective strategy implementation, the company must continually recruit the kinds of people it needs and train others in newer systems, processes, products, and technologies. It must develop and keep full a pipeline of potential management and leadership talent that can fill higher-level positions as they become available. It must strive to develop a core competence if it doesn’t have one already or strengthen the one it has. If it does not, the business will erode over time. Part of building capability is to push decision-making authority down to lower-level managers so they can prove themselves worthy of taking on more responsibility (Thompson, Strickland, & Gamble, 2004).

Top management must also be effective at evaluating and developing managers and supervisors at lower levels. It becomes a top-management issue in larger companies where internal demand for good managers and leaders is high and the positions varied. In such a corporation, potential leaders need to be cross-trained in different functional areas or different brands, product lines, or countries as well as develop their problem-finding and -solving capabilities.

Case Study How GE Develops Its Future Management Needs

General Electric (GE), a highly diversified global corporation, is one of the best managed companies in the world judging by the results it, along with its divisions and subsidiaries, has achieved over time. It has pioneered leadership-development methods that have been widely emulated. The critical first step is to recruit people with high leadership potential. The corporation then goes to great lengths to develop that potential. GE’s leadership development includes cross-training for sustained periods of time, not only to provide managers with broad experience, but also to develop relationships and learn best practices.

When filling key positions, the selection criteria include “the four Es”: enormous personal energy, the ability to motivate and energize others, edge (a GE code meaning the ability to make tough deci- sions quickly—yes or no, not maybe), and execution or carrying things to fruition. One trait executives look for when assessing managers is proficiency at what GE calls “workout” by which is meant an abil- ity to confront issues as they come up, diagnose the root causes, and bring about resolution so that the company can move forward.

Each year roughly 10,000 newly hired and longtime managers are sent to GE’s Leadership Development Center, one of the best corporate training centers in the world, for a three-week course on six-sigma quality. Six-sigma quality training, which focuses on reducing errors/failures, improving cycle time, and reducing costs, is an absolute requirement for pro- motion to any professional and managerial position at GE and any stock-option award.

AP Images/Paul Sakuma

General Electric develops future manage- ment by cross-training employees—sending new hires and longtime managers to their Leadership Development Center for execu- tive training.

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CHAPTER 2Section 2.8 Organizational Values

2.8 Organizational Values According to authors Thompson, Strickland, and Gamble (2004, p. 27), a company’s values are “the beliefs, traits, and behavioral norms that company personnel are expected to display in conducting the company’s business and pursuing its strategic vision and strategy.” In some organizations, such norms are democratically derived and clearly stated, if not rigorously followed. In many other organizations, no explicit values statement exists. Does it matter? In today’s business world, whether a formal state- ment of organizational values exists, individual executives may feel at liberty to behave any way they want. It is more the rule than the exception that money and greed are what drive such behavior.

The corporate graveyard is littered with companies whose executives acted unethically and when caught brought the company down with them. The high profile cases of Enron, Arthur Andersen, WorldCom, Adelphia Communications, Qwest, and Tyco International, are but a few examples. Enron, for example, had publicly stated values of respect, integrity, communication, and excel- lence; yet its executives violated every one of them. The values were not sufficiently ingrained to prevent the unethical, even criminal, behaviors that were eventually exposed. In fact, corporate corruption is widespread. According to a 2011 survey conducted by the Ethics Resource Center (2011), 45% of U.S. employees observed wrongdoing within their organizations. We can assume that public exposure of these incidents would erode consumer perceptions of credibility and trust in those companies—and that would be disastrous for brand reputation.

Stop and think for a moment about all the places where you shop or do business and why you do. Which ones get your patronage because of how they treat you? Do you buy their products

Finally, GE has developed a grading system for evaluating its 85,000 managers and professionals every year, placing them into one of five tiers: the top 10%, the next 15%, the middle 50%, the next 15%, and the bottom 10%. Everyone in the top tier gets stock options, no one in the fourth tier gets any, and those in the bottom 10% are weeded out of the company. The CEO personally reviews the performance of the top 3,000 managers. According to Jack Welch, GE’s CEO from 1980 to 2001, “The reality is, we simply cannot afford to field anything but teams of ‘A’ players” (Thompson, Strickland, & Gamble, 2004).

Discussion Questions

1. What steps might be taken if one or more members of the top-management team were sus- pected of withholding information or pursuing a hidden personal agenda?

2. Members of the top-management team were appointed to their positions because of their lead- ership and take-charge abilities yet must behave more like team players when helping to make strategic decisions. How might such a seeming disparity be handled?

3. As CEO of a company, how would you handle high turnover in your top-management team? How could you or should you influence such change?

4. Would a top-management team be better if its members had experiences with other companies before having been promoted internally? Why or why not?

5. Sometimes, a former CEO becomes a member of the top-management team by way of his com- pany having been acquired. Is adjusting to this new role easy? What problems, if any, might it present for existing team members?

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CHAPTER 2Section 2.8 Organizational Values

AP Images/Reed Saxon

Amgen’s list of corporate values includes being science-based and intensely competitive, while ensuring quality, encouraging patient creation, team spirit, and trust and respect for each other.

because of their generous return policy? Is it the company’s commitment to preserving the envi- ronment that attracts you? Companies that actually hold themselves to meaningful norms and values derive significant benefits from how their customers and the world at large regard them.

What should a statement of values contain? Ideally it should summarize the culture and state how the company wants everyone to behave. For instance, Yahoo! pursues values of excellence, inno- vation, customer respect, teamwork, community, and fun. Curiously, at the end of its list of values, there is another list of 54 things it doesn’t value, including “bureaucracy, losing, good enough, arrogance, the status quo, following, formality, quick fixes, passing the buck, micro managing, 20/20 hindsight, missing the boat, playing catch-up, punching the clock, and ‘shoulda coulda woulda’” (Thompson, Strickland, & Gamble, 2004, p. 30).

The values statement should state as accurately as possible what the values are and what is meant in observing them. This is hard to do if the company wants buy-in from all the employees. The lan- guage should be concise and clear. Typically the key values are fewer than 10 in number; a longer list would fail to get people’s atten- tion and would intimidate rather than motivate them to model the behaviors. More importantly, everyone from the CEO on down should model the behaviors and attitudes set forth. People should not only be accountable to the company but also to themselves. This means that the company

should be extremely careful in hiring people. Fortunately, companies do exist that “do well by doing good.”

Commonly Held Corporate Values

The following are commonly held company values:

• Accountability • Celebrating company and personal achievements • Citizenship • Community • Compassion • Continual improvement • Continual learning • Creating shareholder value • Credibility • Customer service • Doing the “right” thing

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CHAPTER 2Section 2.9 Organizational Culture

2.9 Organizational Culture The values statement sets forth what is expected of employees, and in turn, what they can expect from the company. When observed, the shared values contribute to the organizational culture of a workplace. Much has been written about what corporate culture is. Kilmann, Saxton, and Serpa state that culture “is defined as the set of key values, beliefs, understandings, and norms shared by members of an organization” (1986, p. 87). Because of this last characteristic, norms, it is incumbent on top managers to have a thorough understanding of the company’s culture and evaluate the extent to which the culture can become a strategic enabler or hindrance (Prahalad, 2010). Consider, for example, Microsoft and Apple or United Airlines and Southwest airlines—two

• Embracing change • Empowerment • Entrepreneurial spirit and innovation • Environmental stewardship • Excellence • Getting it right the first time • Passion • Personal renewal • Quality • Respect for people and self • Safety • Taking care of people • Teamwork • The customer is always right • Tolerance for risk • Trust • Uncompromising integrity

Which values should be on your company’s statement? Which ones match its vision, strategy, and brand and should therefore be adopted? Which ones are paramount? Which ones does everyone agree on?

Discussion Questions

1. Can a company be successful without a formal values statement? Discuss. 2. Describe a process you would use to develop a statement of values to which everyone in the

company subscribes. 3. What would you do—indeed, what can you do—if you notice someone in the company violating

a strongly held company value (anything from padding an expense report to overbilling a cus- tomer to lying)?

4. Is the initial employee contract an individual signs on joining the company enough to guaran- tee honest behavior? How might a company monitor employee behavior and become aware of violations?

5. How can you ensure that all employees really understand and accept the company’s values state- ment? Would they know what “integrity” and “accountability” mean in this context, and how might you explain these?

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CHAPTER 2Section 2.9 Organizational Culture

sets of organizations with vastly different cultures rooted in different values. Apple and Southwest are two organizations that have differentiated themselves from their competitors. Their cultural differences in the areas of values, beliefs, and vision are evident in their business practices, prod- ucts, and services.

Culture has the ability to enhance or impede the implementation of a particular strategy. Just as form follows function, so also does structure follow strategy. Changing the structure involves changing the culture (Schein, 2010). Many failures in corporate strategy can be traced to a new strategy being imposed on the organization without considering whether the culture should also be changed. Sometimes a new strategy proves impossible to implement because the culture will not change. As an example of this, for years before General Motors actually went bankrupt, it resisted manufacturing and selling smaller, more fuel-efficient cars primarily because executives’ bonuses were still based on selling the large gas-guzzlers that commanded high profit margins.

Jerome Want has laid out a hierarchy of corporate cultures, in order of least desirable to most desirable (Table 2.3). The last two, Service and New Age, are considered high-performing cultures.

Table 2.3: Hierarchy of corporate cultures

Culture Characteristics Some Examples

Predatory Punitive, alienating, exploitive WorldCom, Enron, Global Crossing, HMOs

Frozen Gridlock, denial, authoritarian, unresponsive to change

Telecoms, airlines, Kmart, cable companies, steel industry

Chaotic Fragmented, unfocused, no mission AOL, advertising, software industry

Political Balkanized, retaliatory Universities, large partnerships, law firms

Bureaucratic Procedural, rigid, regimented, authoritarian, demands conformity

Utilities, government agencies, insurance companies, banks

Service Customer focus, quality, authoritative focus, responsive to change

Harley-Davidson, Edward Jones, Jet Blue, Target, Westin Hotels

New Age Creates change, innovative, egalitarian, consensual, long-term focus, entrepreneurial

Southwest Air, Nucor, Google, Johnson Controls, Patagonia

Source: Jerome Want. (2006, p. 86). Corporate culture: Illuminating the black hole—Key strategies of high-performing business culture. New York, NY: St. Martin’s Press.

At times, strategic changes implemented by top management can have an effect on the organi- zational culture as a whole. There are many common strategic changes that companies undergo that require the corporate culture also to change. High-growth companies will eventually make a transition to maturity and slower growth. The primary emphases of the organization then shifts from market share and sales commissions to cost cutting and cost savings. Companies that have declining or flat profits may be obliged to turn to lowering costs in all phases of their operations and develop a low-cost mentality. When a company is in the midst of a turnaround, losses have finally been stemmed, operations stabilized, and the new strategy has begun to take effect, a new culture will be vital to sustaining the progress.

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CHAPTER 2Section 2.9 Organizational Culture

© Bill Cobb/Superstock

Southwest Airlines’ corporate culture is considered New Age because it creates change and is innovative, customer oriented, and has a long-term focus.

Some companies may make a stra- tegic decision to be innovative as a way of keeping up with the competition. This transition can be difficult because an innovative culture demands a different style of managing—one that rewards failure instead of punishing it (Sut- ton, 2009).

Unless done carefully, people in organizations, and especially cul- tures that have evolved over time, resist change. The way to succeed is to get those who must change involved in the change process from the very beginning. They should be told what the problem is or why the change is necessary and be given an opportunity to come

up with solutions. Any change forced on them will produce resistance, either overt or tacit. The change process should be planned carefully with participation by all affected. Implementation should take place in stages and be accompanied by any necessary education or training and sup- port. The process may be smoothed with the assistance of a skilled consultant.

The extent to which a strategic alternative fits with the existing corporate culture, or the extent to which a company’s culture might be required to change, are key criteria in choosing the best strat- egy. Changing the culture is very difficult to do and so should be taken into account when making strategic choices. This is discussed in Chapter 6, when we consider how to decide which of several strategic alternative choices to adopt.

Case Study Culture Change at the Pacifica Corporation

Some years ago during a strong real estate market, the Pacifica Corporation acquired a real estate development company through a leveraged buyout where most of the purchase price was financed through debt. For this reason, the CEO was under intense pressure to repay much of the debt very quickly. To do so would require doubling the company’s sales the very next year.

This would be quite a challenge under the best of circumstances, but was this company that had been acquired prepared to deliver the results needed? In the preceding three years it had purchased no new land on which to build homes and was coasting on money made from selling houses built on existing lots. Employees were in the habit of arriving late, taking long lunch breaks, and leaving early. The acquisitions manager responsible for finding new parcels of land to buy was routinely out of the office five days a week. When confronted, he could not produce a list of parcels on which the company might bid, had no records of contacts or meetings attended, and had never held debriefing meetings to recommend parcels to bid on at what price. No one had held him accountable. “Country club” would best describe the culture existing when the company was acquired. The CEO engaged a consultant to help him change the culture in a hurry and get the company to double sales in one year.

(continued)

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CHAPTER 2Section 2.10 Managing Organizational Change

2.10 Managing Organizational Change Change management is “a systematic approach to dealing with change, both from the perspective of an organization and on the individual level . . . proactively addressing adapting to change, controlling change, and effecting change” (Change-Management-Coach.Com, n.d., a.). It is “the coordination

The consultant held a series of meetings with the staff to lay out the problem and to discuss possible solutions. These meetings and an accompanying survey revealed the following attitudes:

• Company operating nowhere near its potential (average assessment 46%) • An absence of trust • No incentives in place • No strategy or direction • No one cares (so why bother?) • An absence of information about economic changes

As a consequence of having been asked, the employees’ attitude toward attending workshops and changing the way work was done markedly improved. Land parcels were identified, bids placed, and several bought. The process of getting permits and utilities to the parcels was accelerated. An economic expert was brought in, and the group became educated about how to obtain forecasts and assess what they meant for the business. Alternative strategies were debated and decided and reward systems put in place. The culture was now decidedly collaborative. By mid-year, solid progress had been made, and everyone knew what was expected of them.

Before the process was complete, however, five original managers including the acquisitions man- ager were replaced. The CFO was let go because he had never understood the concept of budgeting but for six months was able to fool the CEO into thinking he did. When asked if everything was “on budget,” the CFO would reply, “Yes,” and people believed him. After about six months, the consultant noticed that costs were really out of control, and asked, “Is everything still on track with the original budget that was set?” Of course, they weren’t. Each month, when expenses had exceeded the bud- get, the CFO had simply adjusted the budget amount to match. He then told everyone that things were “on budget,” instead of taking steps to reduce expenses.

Pacifica did double its sales that first year of new ownership, primarily because its culture was turned around. The footnote to the story is that the CEO shrewdly sold the company a few years later, shortly before the real-estate market took a downturn.

Discussion Questions

1. Every four years, Americans vote for who gets to be president of the United States. In cases where a new president represents a change in political party, what sort of culture change has to take place in the Executive Branch of government? How is it done?

2. Can an organization with a bureaucratic culture ever change? Why or why not? 3. Some companies replace their CEO as a way of changing their culture quickly. Is this a good idea?

Why or why not? 4. How exactly does an organization realize that its culture is the reason its strategy is not working?

If you, as someone working in the company, noticed this, what would you do? 5. A company needs to change its culture. Which is better—replacing enough people to sever conti-

nuity with the old culture, or going through a culture-change process?

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CHAPTER 2Section 2.10 Managing Organizational Change

AP Images/Ed Reinke

Car manufacturer Toyota started a suggestion box for employ- ees to generate ideas. Toyota reads every employee suggestion and thanks them, encouraging them to suggest another.

of a structured period of transi- tion from situation A to situation B in order to achieve lasting change within an organization” (Change- Management-Coach.Com, n.d., b). These are two of many definitions; together, they effectively and con- cisely define a complex process.

To keep pace with external changes going on and to compete effectively, organizations must embrace change. Given the complexity of today’s large and international corporations, managing such continual change is difficult. Not to do so, however, would be to lose competitive viabil- ity and market share, thus corpora- tions have no option but to accept the need to change. Section 1.4 discussed the accelerating pace of change to which all organizations are subject. More than being reactive, corporations need to change proactively to get ahead of their competitors and survive competitive pressures in the long term.

Why Organizational Change Is Necessary

Organizational change is difficult because, unless handled properly, it poses a threat to the sta- tus quo and creates immediate resistance. Changes can impact every aspect of organizational life including strategies, culture, structure, control systems, and groups and teams. Vital processes such as communications, motivation, and leadership are also affected. Resistance to change can take many forms, both passive and active, such as blaming others, poisoning the culture, and so on.

Prerequisites to change include recognizing that there is a problem, identifying it correctly, and figuring out how to resolve it. The problem might be something simple such as taking too long to pay vendors, or it could be more complex and dangerous like losing one’s lead in innovation. Per- haps something is not happening the way it should or performance is deteriorating in some way. The need to improve performance and lower costs is unrelenting. The more urgent motivation for change stems from a strategic consideration. A company might need to develop a new technology, adopt a new production process, enter a new market, develop a core competence, or take other vital actions to improve the company’s position in the market, its market share, and performance on other key indicators. In such cases, the status quo is not an option; change is inevitable.

Companies that can manage change, therefore, are ahead of the game. Researchers believe that the highest-performing organizations are those that are constantly changing and have become experienced at doing so (Jones & George, 2007). These organizations’ cultures are either innova- tive, adaptive, or both. They have learned to identify goals and ways of achieving those goals as a result of participative discussions and then pursued them enthusiastically. Any attempt to force doing something or how to do it on a work group will be met with resistance thereby jeopardizing the change process or even preventing it.

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CHAPTER 2Section 2.10 Managing Organizational Change

Implementing Change

Managers introduce and implement change from either the top down or the bottom up. Top- down change is autocratic; that the need for change and how it is to be implemented is decided at the top of the organization and relayed to those lower down in the hierarchy to implement. Top-down change is valuable when the company needs to act quickly and decisively. It is typically instigated by the CEO. It works because managers at each level of the hierarchy have the author- ity to tell their staffs what to do and what results are expected. For example, the Transportation Security Administration (TSA) is widely recognized as an autocratic, top-down style organization. Airport TSA officers must react and carry out mandates from the agency’s top leaders and have very little to no involvement in change (Jamieson, 2011).

Bottom-up change is more gradual, complex, and evolutionary, but no less effective. More than top-down change, it gets everyone involved, confirms to workers that the “higher-ups” are listen- ing to their ideas and sometimes acting on them. This sense of being a participant in the process minimizes resistance to change. Who else is in a better position to see the need for change or how something can be done better or more efficiently than front-line workers? Bottom-up change can originate anywhere in the organization. For example, Google gives its staff freedom, time, and resources to work on their own ideas and innovations that might be of interest to consumers. In fact, the company reports that about half of its new products and features result from “per- sonal project” time. Instead of change and innovation being created at the top, with lower level employees carrying out the plan, new ideas emanate from the ground up. In some traditional organizations that encourage bottom-up innovation, progress is critically evaluated at each stage of development through a “stage-gate” process where progress is critically evaluated and the proj- ect may be terminated at any stage (Cooper, 1993).

Bottom-up change is facilitated when a company has an adaptive culture and when its employees are empowered, i.e., when they are intentionally encouraged to act autonomously, with little or no direct control, because they can be trusted to do the right thing and to benefit the organization.

Monetary rewards for coming up with ideas, especially in innovative companies, are relatively uncommon because such behavior is expected as part of a person’s job. Moreover, if the idea results in a successful product line or business within the company, there is the potential for the creator of the idea to be put in charge of that product line or division. In other words, it can be a fast track to promotion (Block & MacMillan, 1993).

Many companies also have suggestion schemes. If no one reads the suggestions and gets back to the idea-generator, however, people will eventually stop suggesting ideas. Suggestion boxes have been known to gather dust from disuse. Toyota, on the other hand, has become famous for read- ing every single suggestion and replying one way or the other to the senders, thanking them for submitting the idea and encouraging them to submit others.

Managing change demands a high degree of communication and coordination among all organi- zational units. A new technology may require a change in product design, production, and other functional areas. All activities related to the adoption of the new technology must be coordi- nated, as must all the other change processes that may be ongoing. Change can quickly become

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CHAPTER 2Section 2.10 Managing Organizational Change

Case Study Bottom-Up Suggestions at Toyota

Toyota implements more than 700,000 improvement ideas each year worldwide. This is a staggering number when you consider that Toyota has been lowering cost and improving quality for nearly 50 years. If each of these ideas were to save the company just $100, the savings add up to an impressive $70 million.

By lowering its costs through improvement ideas and efficiencies on the shop floor, these savings are passed on to customers through price reduction. During the period 2000–2003, Toyota actually reduced prices on major models of vehicles, even while adding more features, making it a formidable competitor indeed.

Toyota gives cash rewards (from $5 to $2,000 per idea implemented) based on the impact the idea has on cost savings. The idea generator fills out a form and submits it to a supervisor. Once the impact of the idea is assessed by the supervisor or manager, the information is entered into an infor- mation system, and the reward money is added to the employee’s paycheck. This process is the result of 50 years of refinement.

The vast majority of rewards are in the $5 range. This money comes out of the training budget, because Toyota believes this autonomous improvement activity is a better way to provide training than lectures or classroom work. The reward does not come out of the improvement budget, so there is no pressure to produce savings from the ideas. Toyota’s belief is that through further educa- tion and training, better ideas will result naturally in savings.

Because employees’ ideas are created and documented not during regular work hours but on per- sonal time during breaks and after hours, the bounty that Toyota pays is its way of thanking employ- ees for spending their own time for thinking of ways to improve the company.

Discussion Questions

1. You are in charge of a small company and want to institute many changes. Compare the approaches of telling your employees what you want them to do versus asking them for their ideas before deciding on what to do.

2. You are interviewing for a job in a company. How would you discover whether it had an innova- tive or adaptive culture? If it didn’t, would that be a deal breaker for you? Why or why not?

3. A company is considering whether to install a new technology into its production process. Top management wants to do this because of large savings estimated to accrue in future years, but the functional departments of engineering and production say the difficulties of doing so are huge, and it should not be done. Suggest a way out of this impasse.

a way of life in organizations that embrace change and want to become stronger competitors. As Hiroshi Okuda, Chairman of Toyota Motor Corporation, has said, “Failure to change is a vice” (Miller, 2003).

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CHAPTER 2Summary

Summary An understanding of the human side of corporations is essential to managing strategically. Strate- gic planning and strategic management are the principal drivers of change.

Leaders create change; managers implement change. Leaders are visionary, while managers get things done through other people. Both are responsible for getting things done, but leaders see where change is needed and the direction in which the company should go. Companies run lead- ership-development programs to identify, develop, and evaluate potential leaders and ensure that a qualified person will be available to fill a leadership role when needed. Leaders are best trained in the crucible of experience rather than by attending courses.

Leaders’ power derives from legitimate authority by virtue of their position in the organization, from specialized knowledge, respect and charisma, and the ability to give or withhold rewards. Strategic leaders are most concerned with the long-term survival and success of the whole com- pany. They take the lead in creating a vision statement that articulates where the company should be 5 to 10 years in the future and are responsible for motivating the company to achieve the vision. Vision statements should be concise, inspiring, memorable, and achievable.

The effectiveness of a CEO is measured by corporate success over an extended period, the state of the company at the end of the CEO’s tenure, and the preparedness of the CEO’s successor and succession plan. CEO’s compensation packages tend to emphasize short-term results except for the stock they are given.

Organizations need an overarching purpose other than profits, market share, shareholder value, or traditional measure of corporate success. A purpose statement can motivate employees by expressing values with which employees readily identify (e.g., to save and enhance lives). Employ- ees are more inspired to work for a company whose raison d’etre expresses their own values than they are to achieve traditional measures.

Companies are governed by CEOs and their top-management teams. Public companies are required to elect a board of directors to represent the interests of stockholders. Boards of public companies are further required to have an audit committee composed of independent directors, a compensation and benefits committee, and a nominating and corporate governance commit- tee. Boards are comprised of inside members (the CEO and key executives), related outsiders, and independent members. Keeping the board informed and being responsive to its wishes regarding strategic direction is a challenge for the chairman and CEO.

As a company evolves and expands, its organizational design also evolves. In other words, struc- ture follows strategy. Unless the company is organized appropriately, it will not be able to execute its strategies effectively. There are three basic forms of organizational design. Functional organiza- tion is the most common for single-business companies. A matrix organization may be suitable when a company handles many projects or brands and may conduct business in several countries. Divisional organization is primarily for diversified companies and conglomerates.

Besides the CEO and president, top-management teams in a functional organizational design typically consist of all vice presidents and C-level officers. In a matrix organization, top manage- ment includes department heads and key staff directors. In a divisional organization, key staff directors and all divisional and subsidiary presidents are members of the management team.

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CHAPTER 2Summary

Top-management teams are involved in strategic planning and making strategic decisions for the whole corporation. In addition, as the company’s leadership pipeline is a resource for top execu- tives, they have an obligation to keep it full and give those in it as much cross training as possible.

How people behave in a company and how they treat customers and suppliers is of the utmost importance. Company compliance with all laws and regulations is imperative. Not doing so could be fatal to the enterprise. The company has to treat people fairly, motivate them to be good and to do good. Thus promoting values and making them explicit and modeling them are critical. A culture based on good values will endure, because it will attract people who share those values.

Organizational cultures are built values or “how we do things around here.” Once established, cultures are self-perpetuating and therefore hard to change. When a new strategy is chosen or changing times demand different goals, implementation is hindered if the culture doesn’t change appropriately. Innovative and adaptive cultures are, by their nature, used to constant change and are the kind of cultures companies should strive to develop when their environment and competi- tion is changing rapidly.

In order for a company to transition from its current state to a desired new state, myriad changes may be necessary, and they have to be managed well. The single biggest mistake is not giving those who will be most affected by the change an opportunity to participate in effecting the change. Excluding front-line workers from the process leads to resistance, both passive and overt, making the change process more costly and even impossible. If there’s a problem, it must first be identified before a solution can be crafted. If change is required that is not a direct response to a problem, the reason for the change must be clearly explained before being implemented.

Sometimes change is dictated from the top down. This is particularly true if the issue is urgent, as top-down change can be implemented rapidly. Bottom-up changes take longer but involve those most affected by the change, thus minimizing resistance and increasing the chances of successful implementation. Suggestion schemes can be useful but only if suggestions are read and contribu- tors receive a response.

Key Terms

administrator One who directs others in the pursuit of ends by the use of means, both of which are determined by a third party.

audit committee A standing committee of the board of directors responsible for hiring and reviewing the performance of the independent public accountants that audit the company’s financial systems and reports, for ensuring the integrity of its accounting practices and controls, and for reviewing significant changes in account- ing policies. In addition, it helps the company comply with the Sarbanes-Oxley Act of 2002.

bottom-up change A change process that can begin with anyone in the company (and need not travel upward more than one or two levels), gets results gradually over time, and involves employees, thus minimizing their resistance to change.

change management A structured approach to shifting or transitioning individuals, teams, and organizations from a current state to a desired future state. It is an organizational process aimed at empowering employees to accept

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CHAPTER 2Summary

and embrace changes in their current business environment.

C-level officers Executives that are on a par with vice presidents in the organizational hierarchy. “C-level” is shorthand for CFO (chief financial officer), CMO (chief marketing offi- cer), CIO (chief information officer), CSO (chief strategy officer), and so on.

coercive power The ability of a leader or man- ager to punish a subordinate; this could take the form of firing someone, denying a raise or bonus, or reassigning the person to an undesir- able location.

Compensation and Benefits Committee A standing committee of the board of directors responsible for determining compensation packages for the CEO, president, and key top managers and board members, and pension and other welfare policies for all employees.

corporate culture The set of key values, beliefs, understandings, and norms shared by members of an organization.

division A strategic business unit of the com- pany that nevertheless does business using the corporate name.

divisional organization design A design that is most common in diversified companies, where each division or subsidiary has its own presi- dent and functional organization but reports up the chain of command to the CEO.

expert power Power based on the special knowledge, skills, and expertise that a leader possesses.

functional organizational design A design that groups employees together according to dis- crete functional activities in the belief that by so doing the work will be done more effectively.

governance The mechanism by which a com- pany is steered, managed, and safeguarded. Public companies must be governed by a board of directors as well as by a CEO and top management.

insider A member of the board of directors with substantial day-to-day experience of running the company, like the CEO and certain other top-level executives appointed by the board.

leader One who induces and guides others in the voluntary pursuit of ends by the use of means that they, the followers, select or approve of.

leadership pipeline A cadre of highly devel- oped potential leaders capable of filling slots in the organizational hierarchy as and when they become vacant; ideally, this pipeline should be “full” at all times.

legitimate power The authority derived by vir- tue of occupying a position in the organization; the higher the position the greater the author- ity or legitimate power.

level-5 leadership A leader that builds endur- ing greatness (for the company) through a paradoxical blend of personal humility and professional will.

manager One who directs others in the pursuit of ends by the use of means that the manager selects. (A more general definition is someone that gets work done through others.)

matrix organizational design A design with both vertical (skills or disciplines) and hori- zontal chains of command (such as projects, distinct brands or product lines, or countries).

Nominating and Corporate Governance Com- mittee A standing committee of the board of directors responsible for reviewing possible candidates to join the board and recommend- ing nominees for election, overseeing the process for performance evaluations of the board and its committees, and reviewing the company’s executive-succession plans.

organizing The deployment of organizational resources to achieve strategic objectives.

outsider or independent A member of the board of directors that has no relationship to the company at all.

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overarching purpose A statement that is big- ger than profit or shareholder value or mar- ket share, or even the products the company produces. It motivates employees because it expresses values with which employees identify.

public company A company whose shares can be publicly traded on a U.S. stock exchange and that is regulated by the SEC to ensure accurate and responsible financial reporting.

public-policy committee An optional commit- tee of the board of directors responsible for overseeing the company’s efforts at protecting the environment, health issues, and other pub- lic policies that might affect the company.

referent power Power that comes from sub- ordinates’ or followers’ respect, admiration, and loyalty, and is a function of the personal characteristics of the leader.

related outsider A member of the board of directors not involved with the firm’s day-to- day operations but who may have a relation- ship with the company (for example, a major stockholder).

reward power Based on the ability to give or withhold tangible rewards (like pay raises, bonuses, preferred job assignments) or intan- gible rewards (like verbal praise or respect).

Securities and Exchange Commission (SEC) A federal agency that holds primary responsibil- ity for enforcing the federal securities laws and regulating the securities industry, the nation’s stock and options exchanges, and other elec- tronic securities markets in the United States.

servant leadership A form of leadership that focuses on removing obstacles that prevent employees from doing their jobs, thus enabling them to realize their full potential.

stock exchange An independently run exchange that enables the stock of public com- panies to be bought or sold at a price dictated by demand and the performance of those companies.

strategic leadership Involves creating a vision and strategy that, in both the short term and the long run, helps the company succeed through becoming a stronger competitor.

strategic-planning committee An optional committee of the board of directors respon- sible for keeping the board informed about strategic decisions the company might take and for making sure that the board’s input is taken into account (for example, in the com- pany’s annual strategic-planning process).

top management Typically comprises all the vice presidents and C-level executives in a functional organization, the department heads and key staff directors in a matrix organiza- tion, and key staff directors and all divisional and subsidiary presidents in a divisional organization.

top-down change Change instigated by the CEO when the company needs to act quickly and decisively.

transforming (or transformational) leader A leader that satisfies the higher needs of the followers and who interacts with followers to raise the organization to a higher moral plane.

vision statement A concise statement of where the organization would like to see itself 5 or 10 years (sometimes longer) in the future.

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