answer a questions

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16.1

Control: When Managers Monitor Performance

MAJOR QUESTION Why is control such an important managerial function?

THE BIG PICTURE

Controlling is monitoring performance, comparing it with goals, and taking corrective action. This section describes six reasons control is needed and four steps in the control process.

Control is making something happen the way it was planned to happen.  Controlling  is defined as monitoring performance, comparing it with goals, and taking corrective action as needed. Controlling is the fourth management function, along with planning, organizing, and leading, and its purpose is plain: to make sure that performance meets objectives.

· Planning is setting goals and deciding how to achieve them.

· Organizing is arranging tasks, people, and other resources to accomplish the work.

· Leading is motivating people to work hard to achieve the organization’s goals.

· Controlling is concerned with seeing that the right things happen at the right time in the right way.

All these functions affect one another and in turn affect an organization’s performance and productivity. (See  Figure 16.1 .)

FIGURE 16.1  Controlling for effective performance What you as a manager do to get things done, with controlling shown in relation to the three other management functions. (These are not lockstep; all four functions happen concurrently.)

Why Is Control Needed?

Lack of control mechanisms can lead to problems for both managers and companies. For example, in the wake of 11 reported deaths and dozens of injuries, more than 100 million autos have been recalled in the United States and worldwide due to faulty airbags manufactured by Takata, a Japanese auto parts maker.10 As the company’s CEO resigned and the scope of the ongoing recall grew,11 The New York Times reported that faulty airbags continued to be installed in new U.S. cars, including Fiat Chrysler, Toyota, Volkswagen, and Mitsubishi.12 Could greater control have helped avoid or reduce the consequences of these situations? Of course. Control can save lives!

Page 547 Control matters. The National Highway Traffic Safety Administration (NHTSA) concluded that the airbag recall from 14 different automarkers is the largest and most complex in U.S. history. The airbags, which were made by Takata, involved car models from 2002 through 2015. The purpose of management control system is to prevent mistakes, errors, and design flaws from reaching consumers.© Jochen Tack/Alamy

There are six reasons control is needed.

1. To Adapt to Change and Uncertainty

Markets shift. Consumer tastes change. New competitors appear. Technologies are reborn. New materials are invented. Government regulations are altered. All organizations must deal with these kinds of environmental changes and uncertainties. Control systems can help managers anticipate, monitor, and react to these changes.

Example: Self-driving cars are in the testing stage at many companies around the world. Early indications, including the recent death of a driver in a collision on a Florida highway, suggest that autonomous cars are probably years away from becoming a reality.13 But if successful, they are sure to bring changes in traffic patterns, safety regulations, road use and signage, insurance policies, auto design, and even car ownership patterns and customer expectations. As one writer predicts, “Driving is still going to be about the experience, but not the experience of driving.”14 

2. To Discover Irregularities and Errors

Small problems can mushroom into big ones. Cost overruns, manufacturing defects, employee turnover, bookkeeping errors, and customer dissatisfaction are all matters that may be tolerable in the short run. But in the long run, they can bring about even the downfall of an organization.

Example: The National Highway Traffic Safety Administration (NHTSA) and Tesla Motors are both investigating the causes of the 2016 crash that killed the driver of a self-driving Tesla car on a Florida highway. Tesla says the car’s camera, part of its beta-phase Autopilot system, failed to spot the white tractor-trailer crossing the driver’s path on a bright day. NHTSA wants to know why. The agency, which is developing standards for self-driving cars, has also asked Tesla to share its reconstruction of the accident and has imposed a deadline to be enforced by the prospect of thousands of dollars in fines. If defects in the Autopilot system are found, a product recall could follow.15 

3. To Reduce Costs, Increase Productivity, or Add Value

Control systems can reduce labor costs, eliminate waste, increase output, and increase product delivery cycles. In addition, controls can help add value to a product so that customers will be more inclined to choose them over rival products.

Example: Simple changes to an office environment can change employee attitudes and have a positive impact on productivity.16 The use of color, arrangement of space,Page 548 type of seating and lighting, and presence or absence of music can all affect productivity, perhaps by as much as 20%. Control mechanisms to monitor the results of such changes can be as simple as periodic employee satisfaction surveys.17 

4. To Detect Opportunities and Increase Innovation

Hot-selling products. Competitive prices on materials. Changing population trends. New overseas markets. Controls can help alert managers to innovative opportunities that might have otherwise gone unnoticed.18

Example: Uniqlo, the big Asian apparel retailer, is locked in competition for global market share with “fast fashion” clothiers Zara (from Spain), H&M (Sweden), and online stores. Like those at most businesses, Uniqlo managers look at a monthly metric called EBIDTA, earnings before interest, depreciation, taxes, and amortization, to gauge their success in each new market they enter.19  

5. To Provide Performance Feedback 

Can you improve without feedback? When a company becomes larger or when it merges with another company, it may find it has several product lines, materials-purchasing policies, customer bases, and worker needs that conflict with each other. Controls help managers coordinate these various elements by providing feedback.20

Example: Global companies like Pepsi-Cola must manage broad and diverse arrays of brands and products at locations around the world. To ensure the same high level of quality everywhere despite dealing with a virtual army of suppliers, Pepsi relies on an interlocking set of sustainability and quality control policies covering everything from ingredients to packaging. It must abide by regulations imposed by the U.S. Food and Drug Administration and by agencies around the globe, including the European Food Safety Authority and Health Canada, for instance.21

6. To Decentralize Decision Making and Facilitate Teamwork

Controls allow top management to decentralize decision making at lower levels within the organization and to encourage employees to work together in teams. Facing a possible shortage of doctors in some areas of medicine, for instance, health care professionals are anticipating a rise in teamwork, small group practices, and the delegation of some routine patient services to nurse practitioners.22 Controls, including secure digital patient records, will be important in ensuring high-quality and personalized care.

The six reasons are summarized below. (See  Figure 16.2 .)

FIGURE 16.2  Six reasons control is needed Page 549

Steps in the Control Process

Control systems may be altered to fit specific situations, but generally they follow the same steps. The four  control process steps  are (1) establish standards; (2) measure performance; (3) compare performance to standards; and (4) take corrective action, if necessary. (See  Figure 16.3 .)

FIGURE 16.3  Steps in the control process Paying attention to the feedback is particularly important because of its dynamic nature.

Let’s consider these four steps.

1. Establish Standards: “What Is the Outcome We Want?”

A  control standard, or performance standard or simply standard, is the desired performance level for a given goal. Standards may be narrow or broad, and they can be set for almost anything, although they are best measured when they can be made quantifiable.

Nonprofit institutions might have standards for level of charitable contributions, number of students or volunteers retained, or degree of legal compliance. For-profit organizations might have standards of financial performance, employee hiring, manufacturing defects, percentage increase in market share, percentage reduction in costs, number of customer complaints, and return on investment. Service organizations may look at number of customers, clients, or patients served; time spent with each; and resulting level of satisfaction. More subjective standards, such as level of employee satisfaction, can also be set, although they may have to be expressed more quantifiably in terms of, say, reduced absenteeism and sick days and increased job applications.

One technique for establishing standards is to use the balanced scorecard, as we explain later in this chapter.

2. Measure Performance: “What Is the Actual Outcome We Got?”

The second step in the control process is to measure performance, such as by number of products sold, units produced, or cost per item sold.23

Example: Some performance goals may seem difficult to quantify and therefore measure, but the key is to make them concrete. For instance, “Be on time for all meetings” and “Update your team members once a week on the status of your project” are more measurable standards than “Be punctual” and “Keep everyone informed.”24 

Performance data are usually obtained from three sources: (1) employee behavior and deliverables; (2) peer input or observations; and (3) personal observation, as when a manager takes a stroll on the factory floor to see what employees are doing.

As we’ve hinted, measurement techniques can vary for different industries, such as for manufacturing industries versus service industries. We discuss this further later in the chapter.

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3. Compare Performance to Standards: “How Do the Desired and Actual Outcomes Differ?”

The third step in the control process is to compare measured performance against the standards established. Most managers are delighted with performance that exceeds standards, which becomes an occasion for handing out bonuses, promotions, and perhaps offices with a view. For performance that is below standards, they need to ask: Is the deviation from performance significant? The greater the difference between desired and actual performance, the greater the need for action.

How much deviation is acceptable? That depends on the range of variation built in to the standards in step 1. In voting for political candidates, for instance, there is supposed to be no range of variation; as the expression goes, “every vote counts.” In political polling, however, a range of 3%–4% error is considered an acceptable range of variation. In machining parts for the solar-powered space probe Juno, currently orbiting Jupiter after a five-year journey, NASA engineers could tolerate a range of variation a good deal smaller than someone machining parts for a power lawnmower.

Control and space flight. The Juno space probe was built by Lockheed Martin and is operated by NASA. It began an orbit of Jupiter in July 2016 and is expected to conduct a 20 month scientific investigation. It uses very sophisticated equipment to measure the planet’s gravity field, magnetic field, and polar magnestosphere. This type of equipment requires high levels of accuracy.Source: NASA/JPL-Caltech

The range of variation is often incorporated in computer systems into a principle called management by exception.  Management by exception  is a control principle that states that managers should be informed of a situation only if data show a significant deviation from standards.

4. Take Corrective Action, If Necessary: “What Changes Should We Make to Obtain Desirable Outcomes?”

This step concerns feedback—modifying, if necessary, the control process according to the results or effects. This might be a dynamic process that will produce different effects every time you put the system to use. There are three possibilities here: (1) Make no changes. (2) Recognize and reinforce positive performance. (3) Take action to correct negative performance.

When performance meets or exceeds the standards set, managers should give rewards, ranging from giving a verbal “Job well done” to more substantial payoffs such as raises, bonuses, and promotions to reinforce good behavior.

When performance falls significantly short of the standard, managers should carefully examine the reasons and take the appropriate action. Sometimes the standards themselves were unrealistic, owing to changing conditions, in which case the standardsPage 551 need to be altered. Sometimes employees haven’t been given the resources for achieving the standards. And sometimes the employees may need more attention from management as a way of signaling that their efforts have been insufficient in fulfilling their part of the job bargain.

EXAMPLE

Steps in the Control Process: What’s Expected of UPS Drivers?

To help younger drivers train for successful careers, UPS worked with a U.S. Department of Labor financial grant and research gleaned from studying the way people who grew up with video games and smartphones learn. The result was a high-tech training center called Integrad®, which now operates in locations in seven different states. The program has so far trained more than 7,500 drivers and more than 1,500 managers in “safe work methods, safe driving methods, customer service methods, training in using the handheld computer (DIAD—acronym for Delivery Information Acquisition Device) for recording delivery information, proper package selection, and UPS history.”25   

Establishing Standards. UPS establishes standards for its drivers that project the number of miles driven, deliveries, and pickups. A typical day for a driver in Louisville, Kentucky, might include driving 60 miles to make 125 deliveries.26

Measuring Performance. UPS managers get a constant stream of feedback about drivers’ performance from the DIAD device and from two onboard computer systems. ORION optimizes the drivers’ routes, and Telematics relays information about how often drivers back up and whether they are wearing seat belts. “Everything the driver does is being measured,” says the company’s business manager in Louisville.27 

Comparing Performance to Standards. UPS managers compare a driver’s performance (miles driven and number of pickups and deliveries) with the standards that were set for his or her particular route. A range of variation may be allowed to take into account such matters as winter or summer driving or traffic conditions that slow productivity. 

Taking Corrective Action. When a UPS driver fails to perform according to the standards set for him or her, a supervisor then rides along and gives suggestions for improvement. If drivers are unable to improve, they are warned, then suspended, and then dismissed. Sometimes performance problems can be system-wide, and then solutions must be as well. After unexpected volume left the company with 1 million undelivered packages on Christmas Eve in 2013, the company invested $150 million in better preparing for the holiday rush and hired more than 100,000 temporary employees, which proved to be too many and had a negative impact on fourth-quarter earnings.28  

YOUR CALL

The UPS controls were devised by industrial engineers based on experience. Do you think the same kinds of controls could be established for, say, filling out tax forms for H&R Block?

Types of Controls 

There are three types of control: feedforward, concurrent, and feedback. They vary based on the timing of when control takes place.    

Feedforward Control

Feedforward control  focuses on preventing future problems. It does this by collecting performance information about past performance and then planning to avoid pitfalls or roadblocks prior to starting a task or project.29 Nestle is a global food and nutrition company that uses feedforward control.

Nestle’s quality management system “starts on farms.” The company works with local farmers to improve “the quality of their produce and adopt environmentally sustainable farming practices.” Doing this helps provide Nestle with high-quality raw materials, and it “enables farmers to protect or even increase their income,” according to corporate documents.30

Concurrent Control

Concurrent control entails collecting performance information in real time. This enables managers to determine if employee behavior and organizational processes conform to regulations and standards. Corrective action can then be taken immediately when performance is not meeting expectations. For instance,Page 552 trucking companies use GPS tracking to monitor “where company vehicles go, when they get there and how fast they move between destinations. It helps managers plan more efficient routes and alerts drivers to adjust routes in the event of an accident ahead. It also encourages employees to stay on task rather than running personal errands.”31

Technology is typically used for concurrent control. Word-procesing software is a good example. It immediately lets us know when we misspell words or use incorrect grammar. Corporate online monitoring of our e-mail and Internet use is another example of concurrent control.

Feedback Control

This form of control is extensively used by supervisors and managers.  Feedback control  amounts to collecting performance information after a task or project is done. This information then is used to correct or improve future performance. Classic examples include receiving test scores a week after taking the test, receiving customer feedback after purchasing a product, receiving student ratings of a teaching performance weeks after teaching a class, rating the quality of a movie after watching it, and participating in a performance review at work.

The problem with feedback control is that it occurs too late. For instance, if an instructor is doing a bad job in the classroom, he or she needs to make changes right away. Learning 10 weeks later that his or her performance was ineffective does not help current students. The same is true when it comes to customer satisfaction and quality. On the positive side, many people want feedback, and late is better than never. 

IBM recognized the limitations of providing feedback in annual performance reviews. The company scrapped its 10-year-old system, called Personal Business Commitments, and replaced it with one called Checkpoint. The new system requires employees to set short-term goals, and managers provide quarterly feedback on their progress.32

Small business. What type of control is most important for small businesses? Do you think employees in small companies, such as a garden pots store, need less control than employees in large companies?© Don Mason/Blend Images/Getty Images RF

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16.2

Levels and Areas of Control

MAJOR QUESTION How do successful companies implement controls?

THE BIG PICTURE

This section describes three levels of control—strategic, tactical, and operational—and six areas of control: physical, human, informational, financial, structural (bureaucratic and decentralized), and cultural. We also look at the supply chain and special considerations for control mechanisms in service firms.

How are you going to apply the steps of control to your own management area? Let’s look at this in several ways: First, you need to consider the level of management at which you operate—top, middle, or first level. Second, you need to consider the areas that you draw on for resources—physical, human, information, and/or financial. Finally, we look at the type of firm. If you manage a manufacturing firm, you will have supply chain issues that require controls at many points, while if your firm is a service provider, you still require controls, but of a different type.

Levels of Control: Strategic, Tactical, and Operational

There are three levels of control, which correspond to the three principal managerial levels: strategic planning by top managers, tactical planning by middle managers, and operational planning by first-line (supervisory) managers and team leaders.

1. Strategic Control by Top Managers

Strategic control  is monitoring performance to ensure that strategic plans are being implemented and taking corrective action as needed. Strategic control is mainly performed by top managers, those at the CEO and VP levels, who have an organizationwide perspective.33 

For example, former Ford Motor Company CEO Alan Mulally (who retired in 2014) brought the company back from the financial brink by instituting a weekly meeting with senior managers. Each manager presented a report on his or her areas, coded in green, yellow, or red to indicate whether business was on target or needed improvement. 34

2. Tactical Control by Middle Managers

Tactical control  is monitoring performance to ensure that tactical plans—those at the divisional or departmental level—are being implemented and taking corrective action as needed. Tactical control is done mainly by middle managers, those with such titles as “division head,” “plant manager,” and “branch sales manager.” Reporting is done on a weekly or monthly basis.

3. Operational Control by First-Line Managers

Operational control  is monitoring performance to ensure that operational plans—day-to-day goals—are being implemented and taking corrective action as needed. Operational control is done mainly by first-line managers, those with titles such as “department head” or “supervisor.” It also includes team leaders. Reporting is done on a daily basis.

Considerable interaction occurs among the three levels, with lower-level managers providing information upward and upper-level managers checking on some of the more critical aspects of plan implementation below them.

Six Areas of Control

The six areas of organizational control are physical, human, informational, financial, structural, and cultural.

1. Physical Area

The physical area includes buildings, equipment, and tangible products.

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Examples: Equipment controls monitor the use of computers, cars, HVAC equipment, and other machinery. The speedometer in your car is a physical control. Quality controls ensure that products are being built according to certain acceptable standards. Inventory-management controls keep track of how many products are in stock, how many will be needed, and what their delivery dates are. If you have ever searched for a popular item on  Amazon.com , for instance, you may have seen a notification like “Only 5 left in stock (more on the way).” The company’s sophisticated inventory controls supply the information that makes these notifications possible. Lowe’s, a home improvement retailer, is experimenting with robot inventory checkers that roam the aisles, deftly avoiding shoppers while scanning product bar codes on the shelves.35   

2. Human Resources Area

The controls used to monitor employees include personality tests and drug testing for hiring, performance tests during training, performance evaluations to measure work productivity, and employee surveys to assess job satisfaction and leadership. Airbnb’s human resource function has expanded its role and likely its control functions as well, as the following Example box describes.

EXAMPLE

Airbnb Revolutionizes Human Resources

Mark Levy is the Global Head of Employee Experiences at Airbnb, the online company that brought sharing to the business of finding a place to stay when traveling. Airbnb has more than 1 million listings in 34,000 cities around the world; they range from a fold-out couch in someone’s living room to a 17-bedroom private chateau in France. The company’s innovation was to use the Internet to put hosts and guests in touch.  

When Levy was hired, the company had a human resources department split into several functions reporting to one overall leader. Levy did not like this structure. He preferred a structure organized around “employee experiences,” to parallel the company’s existing customer experience group. Among the new function’s responsibilities are traditional HR concerns like recruiting, development, and compensation benefits, but also “facilities, food, global citizenship,” and employee events and recognition. “Every aspect of creating the employee experience is focused on designing an extraordinary physical, emotional, intellectual, virtual, and aspirational experience for Airbnb employees.”

One HR innovation is the company’s use of storyboarding to map the ideal recruiting experience and ways in which recruiters can serve as “the ideal host.” Another is using crowdsourcing to poll employees on what new skills and knowledge they need to develop in their careers, instead of imposing career development from the top down. Airbnb’s goal is to refashion the workplace as “an experience.”36 

YOUR CALL

What traditional control functions does Airbnb’s Employee Experience Group fulfill? What new responsibilities has the group taken on? How can it measure its own performance in recreating “the workplace as an experience”?

3. Informational Area

Production schedules, sales forecasts, environmental impact statements, analyses of competition, and public relations briefings all are controls on an organization’s various information resources. Among the factors that will govern a decision about whether a high-speed passenger-rail line is to be built in Oregon, for instance, is an environmental impact statement being prepared by the state’s Department of Transportation.37  

4. Financial Area

Are bills being paid on time? How much money is owed by customers? How much money is owed to suppliers? Is there enough cash on hand to meet payroll obligations? What are the debt-repayment schedules? What is the advertising budget? Clearly, the organization’s financial controls are important because they can affect the preceding three areas. If Oregon’s high-speed rail line becomes a reality, one of the major tasks for project managers will be controlling the cost of building it, which estimates say could rise as high as $4.5 billion.38 

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5. Structural Area

How is the organization arranged from a hierarchical or structural standpoint? 39  Two examples are bureaucratic control and decentralized control.

· Bureaucratic control.  Bureaucratic control  is an approach to organizational control that is characterized by use of rules, regulations, and formal authority to guide performance. This form of control attempts to elicit employee compliance, using strict rules, a rigid hierarchy, well-defined job descriptions, and administrative mechanisms such as budgets, performance appraisals, and compensation schemes (external rewards to get results). The foremost example of use of bureaucratic control is the traditional military organization.

Bureaucratic control works well in organizations in which the tasks are explicit and certain. While rigid, it can be an effective means of ensuring that performance standards are being met. However, it may not be effective if people are looking for ways to stay out of trouble by simply following the rules, or if they try to beat the system by manipulating performance reports, or if they try to actively resist bureaucratic constraints.

· Decentralized control.  Decentralized control  is an approach to organizational control that is characterized by informal and organic structural arrangements, the opposite of bureaucratic control. This form of control aims to get increased employee commitment, using the corporate culture, group norms, and workers taking responsibility for their performance. Decentralized control is found in companies with a relatively flat organization.

6. Cultural Area

The cultural area is an informal method of control. It influences the work process and levels of performance through the set of norms that develop as a result of the values and beliefs that constitute an organization’s culture. If an organization’s culture values innovation and collaboration, as at many tech start-ups, for instance, then employees are likely to be evaluated on the basis of how much they engage in collaborative activities and enhance or create new products.

Bureaucratic control. In businesses such as construction of large subdivisions, tasks are explicit and certain, and employees are expected to perform them the same way each time. However, a small contractor, such as one building custom houses, need not be bureaucratic.© MyLoupe/Universal Images Group/UIG/Getty Images

Controlling the Supply Chain

The  supply chain is the sequence of suppliers that contribute to creating and delivering a product, from raw materials to production to final buyers. Supply chains are a major cost center for most companies, and the way firms structure the distribution of their productsPage 556 can have enormous financial impact. In recognition of this impact, companies are paying closer attention to the sourcing, shipping, and warehousing of their products and of the ingredients and component parts they require. Many organizations are creating specialized supply chain departments that look specifically at cost and quality control in these areas and the way they contribute to the cost and quality of finished products. Managing supply chain functions has become so important that some academic management departments now offer undergraduate and master’s degrees in supply chain management, including at Arizona State University, for example.

At Hostess Brands, a dramatic change in the way products are delivered to stores is credited with helping the snack food company recover from bankruptcy. Hostess used to follow the traditional model for perishable items, sending 8,000 of its own drivers out to deliver Twinkies and other products directly to store shelves. After declaring bankruptcy, however, the firm revamped its process and adopted a much less expensive distribution plan. Now it delivers goods only as far as retailers’ distribution centers, and retailers take on the job of stocking their own individual stores. After also drastically cutting the size of its workforce, the company recently took in revenues of $650 million under new ownership. 40  

At Target, with annual sales in the $75 billion range,41 the supply chain has evolved with advances in online shopping. Where the goal was once to deliver goods from suppliers to regional warehouses in a straight line, now, says the company’s CIO, Mike McNamara, “All of our inventory is available to all our guests, all the time. We will ship from a point to a guest that makes the most economic sense, or gives the guest the shortest lead time. That means that the thing that was once linear is now a network.”42  

Amazon has been experimenting with using drones as “the delivery truck of the future.” The company hopes drones will someday be able to accurately deliver packages weighing up to five pounds (“the vast majority of the things we sell at Amazon”) within 30 minutes in both cities and rural areas. It warns that drones won’t become a reality anytime soon, however.43  

Control in Service Firms

Service providers, such as income-tax preparers, hospitals and dental practices, consultants, accountants, hair and nail salons, stockbrokers, hotels, and airlines, differ from manufacturers in several ways. The most obvious is that service companies cannot hold any inventory of their services, which are intangible; instead they provide these services only on demand. Your new haircut does not exist until you sit down in the stylist’s chair, for example. 

Another difference is that service firms usually develop a personal, if temporary, relationship with their client or customer. Your haircut or flu shot is provided only to you, in other words, and the seat you buy on a plane heading to Amsterdam can be filled only by you. Some services are highly perishable. If you don’t show up for your flight to Amsterdam, your ability to occupy that particular seat on that particular plane vanishes forever, along with your chance to sleep in the hotel room you reserved at your destination. The education you acquire in college is another example of the personal nature of service; that education is yours alone.44  

The U.S. service industry has grown considerably in the last few decades as a great deal of manufacturing activity has moved overseas. Before World War II, there were about two service-industry jobs for every manufacturing job in the United States. Today the ratio of service to manufacturing employment is almost seven to one.45

Since services are provided by humans (for the most part), everything we have outlined in this chapter that relates to measuring and controlling employee behavior applies to the role of control in service organizations. Clearly, training and education affect the quality of any service. Health care organizations operate under high control standards, for example, as evidenced by the many years of education and training required to obtain a license to practice medicine or dentistry. The same holds for the practice of law. Ongoing training and certification are a form of control for airline pilots, tax accountants (CPAs), teachers, physical therapists, and personal trainers. 

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16.3

The Balanced Scorecard and Strategy Maps

MAJOR QUESTION How can the balanced scorecard and strategy maps help me establish standards and measure performance?

THE BIG PICTURE

The balanced scorecard helps managers establish goals and measures for four strategic perspectives. A visual representation of the relationships among balanced scorecard perspectives is the strategy map. 

Wouldn’t you, as a top manager, like to have displayed in easy-to-read graphics all the information on sales, orders, and the like assembled from data pulled in real-time from corporate software? The technology exists and it has a name: a dashboard, like the instrument panel in a car.

Bob Parsons, founder of GoDaddy, believed in dashboards. “Measure everything of significance. Anything that is measured and watched improves,” he said.46

Throughout this book we have stressed the importance of evidence-based management—the use of real-world data rather than fads and hunches in making management decisions. When properly done, the dashboard is an example of the important tools that make this kind of management possible. The balanced scorecard is another.

The Balanced Scorecard: A Dashboard-like View of the Organization

Robert Kaplan is a professor of accounting at the Harvard Business School and a leading authority on strategic performance measurement. David Norton is co-founder of Balanced Scorecard Collaborative. Kaplan and Norton developed what they call the  balanced scorecard, which gives top managers a fast but comprehensive view of the organization via four indicators: (1) customer satisfaction, (2) internal processes, (3) innovation and improvement activities, and (4) financial measures.

“Think of the balanced scorecard as the dials and indicators in an airplane cockpit,” write Kaplan and Norton. For a pilot, “reliance on one instrument can be fatal. Similarly, the complexity of managing an organization today requires that managers be able to view performance in several areas simultaneously.” 47  It is not enough, say Kaplan and Norton, to simply measure financial performance, such as sales figures and return on investment. Operational matters, such as customer satisfaction, are equally important. 48

The Balanced Scorecard: Four “Perspectives”

The balanced scorecard establishes (a) goals and (b) performance measures according to four “perspectives,” or areas—financial, customer, internal business, and innovation and learning. (See  Figure 16.4 )

FIGURE 16.4  The balanced scorecard: Four perspectives Source: Adapted from R. S. Kaplan and D. P. Norton, “The Balanced Scorecard—Measures That Drive Performance,” Harvard Business Review, January–February 1992, pp. 71–79.

1. Financial Perspective: “How Do We Look to Shareholders?”

Corporate financial strategies and goals generally fall into two buckets: revenue growth and productivity growth. Revenue growth goals might focus on increasing revenue fromPage 558 both new and existing customers. Equipment manufacturer John Deere, for instance, is pursuing new revenue by developing software services that provide information and guidance to farmers in the field. It is doing this to offset a recent 5% decrease in revenue.49 Productivity metrics like revenue per employee or total output produced divided by number of employees are common organization-level goals. We can also measure productivity in terms of costs. For example, Bob Evans Farms, Inc., is closing 27 underperforming restaurants in an attempt to decrease costs and improve profitability. 50

2. Customer Perspective: “How Do Customers See Us?”

Many companies view customers as one of their most important constituents. The balanced scorecard translates this belief into measures such as market share, customer acquisition, customer retention, customer satisfaction/loyalty, product/service quality, response time (the time between order and delivery), and percentage of bids won.

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Sunnybrook Health Sciences Centre, part of the University of Toronto Faculty of Medicine, has 1.2 million patient visits a year. The four “quality of care” goals in its balanced scorecard all relate to the ways in which its constituents—patients and partners—experience the organization. The goals are: 

· Goal 1   Improve the patient experience and outcomes through inter-professional, high quality care.

· Goal 2   Focus on the highest levels of specialized care in support of our Academic Health Sciences Centre definition.

· Goal 3   Work with system partners and government to build an integrated delivery system in support of our communities and our Academic Health Sciences Centre definition.

· Goal 4   Achieving excellence in clinical care associated with our strategic priorities.51

3. Internal Business Perspective: “What Must We Excel At?”

The internal business perspective focuses on “what the organization must excel at” to effectively meet its financial objectives and customers’ expectations. A team of researchers identified four critical high-level internal processes that managers are encouraged to measure and manage:

1. Innovation.

2. Customer service and satisfaction.

3. Operational excellence, which includes safety and quality.

4. Good corporate citizenship.52

These processes influence productivity, efficiency, quality, safety, and a host of other internal metrics. Companies tend to adopt continuous improvement programs in pursuit of upgrades to their internal processes. Consider how Citi modified its workflow processes to reduce costs.  

Example: Citi recently worked with commercial vehicle manufacturer Navistar to eliminate the need for thousands of paper checks it was sending its suppliers. The bank used its Citi Payment Exchange system to set up a secure, cloud-based accounts payable function for Navistar. Andrew Bernardi, cash operations director at Navistar, says the effect was to “convert more than 1,100 suppliers to electronic payments and eliminate more than 70,000 check payments handled by our A/P (accounts payable) group.” Since it can cost companies anywhere from $30 to $60 to process a single paper check, taking a large company’s payment process paperless can save millions of dollars a year.53 

4. Innovation and Learning Perspective: “Can We Continue to Improve and Create Value?”

Learning and growth of employees are the foundation for all other goals in the balanced scorecard. The idea here is that capable and motivated employees, who possess the resources and culture needed to get the job done, will provide higher-quality products and services in a more efficient manner. Making this happen requires a commitment to invest in progressive human resource practices and technology. Typical metrics in this perspective are employee satisfaction/engagement, employee retention, employee productivity, training budget per employee, technologyPage 560 utilization, and organizational climate and culture. Many are tracked with employee surveys to gauge attitudes and opinions.  

To what extent is/was your current or past employer committed to the innovation and learning of its employees? You can find out by completing  Self-Assessment 16.1 .

SELF-ASSESSMENT 16.1  

Assessing the Innovation and Learning Perspective of the Balanced Scorecard

The following survey was designed to assess the innovation and learning perspective of the balanced scorecard. Please be prepared to answer these questions if your instructor has assigned Self-Assessment 16.1 in Connect.

1. Where does the company stand in terms of commitment to innovation and learning? Are you surprised by the results?

2. Use the three highest and lowest scores to identify the strengths and weaknesses of this company’s commitment to innovation and learning.

3. Based on your answer to question 2, provide three suggestions for what management could do to improve its commitment to innovation and learning.

Strategy Mapping: Visual Representation of the Path to Organizational Effectiveness 

Have you ever worked for a company that failed to effectively communicate its vision and strategic plan? If yes, then you know how it feels to be disengaged because you don’t know how your work contributes to organizational effectiveness. Kaplan and Norton recognized this common problem and developed a tool called a strategy map.  

A  strategy map  is a “visual representation of a company’s critical objectives and the crucial relationships among them that drive organizational performance.” Maps show relationships among a company’s strategic goals. This helps employees understand how their work contributes to their employer’s overall success.54 They also provide insight into how an organization creates value to its key constituents. For example, a map informs others about the knowledge, skills, and systems that employees should possess (innovation and learning perspective) to innovate and build internal capabilities (internal business perspective) that deliver value to customers (customer perspective), which eventually creates higher shareholder value (financial perspective).

We created an illustrative strategy map in  Figure 16.5 . Starting with learning and growth, the arrows in the diagram show the logic that connects goals to internal processes, to customers, to financial goals, and finally to the long-term goal of providing shareholder value. For example, you can see that organizational culture affects the internal process goals related to innovation, operational improvements, and good corporate citizenship. This causal structure provides a strategic road map of how the company plans to achieve organizational effectiveness.  

FIGURE 16.5  Sample strategy map for Dr Pepper Snapple Group  Sources: This map was based on information in “Dr Pepper Snapple Group to Boost Container Recycling, and More … ,” TheShelbyReport.com, February 12, 2016; C. Choi, “Dr Pepper to Test Naturally Sweetened Sodas,” FoodManufacturing.com, February 13, 2014; A. Gasparro and M. Esterl, “Keurig Reels In Dr Pepper for Its Coming Soda Machine,” TheWallStreetJournal.com, January 7, 2015; S. Frizell, “Coke and Pepsi Pledge to Cut Calories,” Time.com, September 23, 2014; M. Esterl, “How Dr Pepper Cuts Costs. And Then Cuts Costs Some More,” The Wall Street Journal, February 16, 2016, p R2; “Vision—Call to Breakthrough ACTION,” DrPepperSnappleGroup.com, accessed May 12, 2016.

You can also detect which of the four perspectives is most important by counting the number of goals in each perspective. For this sample map, there are four, five, eight, and four goals for the financial, customer, internal processes, and learning and growth perspectives, respectively. You can also see that internal process goals affect eight other goals—count the number of arrows coming from internal process goals. All told, the beauty of a strategy map is that it enables leaders to present a strategic road map to employees on one page. It also provides a clear statement about the criteria used to assess organizational effectiveness.  

There is one final benefit to strategy maps. They serve as the starting point for any organization that wants to implement goal cascading or management by objectives.

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16.4

Some Financial Tools for Control

MAJOR QUESTION Financial performance is important to most organizations. What are the financial tools I need to know about?

THE BIG PICTURE

Financial controls are especially important. These include budgets, financial statements, and audits.

At some point in your career, you may very well be your own boss. That doesn’t mean you have to become a high-flying entrepreneur or found an amazing start-up. It simply means that in today’s “gig economy,” young workers are much more likely than ever before to join the approximately 53 million U.S. adults who work on-demand as freelancers or independent contractors for at least part of their working life.55 If this happens to be you, knowledge about financial tools will serve you well.

Financial control and contract employees. Five young coworkers meeting to discuss a project. One or more are likely freelancers given the increasing trend of companies hiring them. Hiring freelancers can save labor costs but it also can leave them feeling outside the normal comings and goings of the work environment.© Ingram Publishing RF

Hiring freelancers can save companies as much as a third of normal payroll costs, because most freelancers aren’t eligible for expensive employee benefits like paid time off, company medical coverage, and pensions.56 Nor do they experience the convenience of having their income taxes automatically withheld from their pay. At the same time, however, freelancers enjoy the freedom to work from home, make their own hours, choose their assignments, work on multiple assignments in different industries, and, yes, be their own boss. That includes being responsible for managing their cash flow and business expenses, as well as for setting money aside to pay their own income taxes, both of which can be a challenge when income is seasonable, variable, or both.

With this in mind, you can probably appreciate how important it is for you to understand the basics of financial controls. Whether as the manager of your own small “gig economy” business or as a manager on staff in an organization, you will need to monitor finances and be sure revenues are covering costs.

There are a great many kinds of financial controls, but here let us look at the following: budgets, financial statements, and audits. (Necessarily, this is merely an overview of this topic. Financial controls are covered in detail in other business courses.)

Budgets: Formal Financial Projections

A  budget  is a formal financial projection. It states an organization’s planned activities for a given period of time in quantitative terms, such as dollars, hours, or number of products. Budgets are prepared not only for the organization as a whole but alsoPage 563 for the divisions and departments within it. The point of a budget is to provide a yardstick against which managers can judge how well they are controlling monetary expenditures.   

Various software tools are also available to help you manage personal or freelance budgeting, such as QuickBooks and apps like Mint and Venmo.57 

Historically, managers have used three budget-planning approaches. Two of them—the Planning Programming Budgeting System and Zero Base Budgeting—are no longer favored and are now infrequently used. The dominant approach today is incremental budgeting.58

Incremental Budgeting

Incremental budgeting  allocates increased or decreased funds to a department by using the last budget period as a reference point; only incremental changes in the budget request are reviewed. One difficulty is that incremental budgets tend to lock departments into stable spending arrangements; they are not flexible in meeting environmental demands. Another difficulty is that a department may engage in many activities—some more important than others—but it’s not easy to sort out how well managers performed at the various activities. Thus, the department activities and the yearly budget increases take on lives of their own.

Fixed versus Variable Budgets

In general, we can identify two types of incremental budgets: fixed and variable.

· Fixed budgets—where resources are allocated on a single estimate of costs. Also known as a static budget, a  fixed budget  allocates resources on the basis of a single estimate of costs. That is, there is only one set of expenses; the budget does not allow for adjustment over time. For example, you might have a budget of $50,000 for buying equipment in a given year—no matter how much you may need equipment exceeding that amount. 

· Variable budgets—where resources are varied in proportion with various levels of activity. Also known as a flexible budget, a  variable budget  allows the allocation of resources to vary in proportion with various levels of activity. That is, the budget can be adjusted over time to accommodate pertinent changes in the environment. For example, you might have a budget that allows you to hire temporary workers or lease temporary equipment if production exceeds certain levels. As a freelancer, you might set up your budget to allow for the unexpected, like the purchase of a second monitor for your laptop if you accept an assignment that requires it.

Financial Statements: Summarizing the Organization’s Financial Status

A  financial statement  is a summary of some aspect of an organization’s financial status. The information contained in such a statement is essential in helping managers maintain financial control over the organization.

There are two basic types of financial statements: the balance sheet and the income statement.

The Balance Sheet: Picture of Organization’s Financial Worth for a Specific Point in Time

A  balance sheet  summarizes an organization’s overall financial worth—that is, assets and liabilities—at a specific point in time.

Assets are the resources that an organization controls; they consist of current assets and fixed assets. Current assets are cash and other assets that are readily convertible to cash within one year’s time. Examples are inventory, sales for which payment has not been received (accounts receivable), and U.S. Treasury bills or money market mutual funds.Page 564 Fixed assets are property, buildings, equipment, and the like that have a useful life that exceeds one year but that are usually harder to convert to cash. Liabilities are claims, or debts, by suppliers, lenders, and other nonowners of the organization against a company’s assets. If you are a member of the gig economy, the quarterly estimated federal and local taxes you will need to pay on your annual income are a financial liability of your business.  

The Income Statement: Picture of Organization’s Financial Results for a Specified Period of Time

The balance sheet depicts the organization’s overall financial worth at a specific point in time. By contrast, the  income statement  summarizes an organization’s financial results—revenues and expenses—over a specified period of time, such as a quarter or a year.

You will need to understand an income statement if you end up self-employed or start a business. We created a sample profit and loss statement for a two-person operation consisting of an owner and one employee (see  Table 16.1 ). The company is doing quite well with $204,357 of net income, computed by subtracting total expenses fromPage 565 gross profit. You can also see the types of expenses that confront any small business. You have expenses for insurance, payroll and payroll taxes, accounting, auto, rent, supplies, and other expenses.

TABLE 16.1 Sample Profit and Loss Statements

LACI, THE COMPUTER DOCTOR PROFIT & LOSS JANUARY 1 THROUGH DECEMBER 31, 2016
Income:		Jan 1–Dec 31, 16
Sales		481,219.00
Services Income		23,050.00
Total Income		504,269.00
Parts and Materials	45,711.60
Gross Profit		458,557.40
Expenses:
Bank Service Charges		150.00
Charitable Donations		2,000.00
Dues and Subscriptions		1,520.88
Insurance:
General Liability Insurance	1,925.00
Workman’s Compensation Insurance	1,016.00
Total Insurance Expense:		2,941.00
Payroll Taxes:
Payroll 941	13,992.76
Federal Unemployment Tax	103.00
State Unemployment Tax	210.00
Total Payroll Taxes:		14,305.76
Payroll:
Officer Wages	150,000.00
Salary and Wages	49,896.50
Total Payroll:		199,896.50
Accounting and Legal		1,402.75
Automobile Expenses:
Maintenance	140.16
Gas	1,012.92
License	828.31
Total Automobile Expenses:		1,981.39
Office Rent		24,000.00
Office supplies		1,775.00
Repairs and Maintenance		285.19
Telephone and Internet		1,856.25
Utilities		2,085.09
TOTAL EXPENSE:		254,199.81
NET INCOME:		204,357.59

Source: Angelo Kinicki.

Audits: External versus Internal

When you think of auditors, do you think of grim-faced accountants looking through a company’s books to catch embezzlers and other cheats? That’s one function of auditing, but besides verifying the accuracy and fairness of financial statements, the audit also is intended to be a tool for management decision making.  Audits  are formal verifications of an organization’s financial and operational systems.

You can imagine that audits of medium and large companies entail collecting, analyzing, and interpreting large amounts of information. Because of this, more and more companies are using data analytics to conduct audits; we discussed data analytics in  Chapter 7 . Regarding the use of analytics, one expert concluded, “The use of analytics in the audit process results in better audit planning, focus, and recommendations.”59 

Audits are of two types—external and internal.   

External Audits—Financial Appraisals by Outside Financial Experts

An  external audit  is a formal verification of an organization’s financial accounts and statements by outside experts. The auditors are certified public accountants (CPAs) who work for an accounting firm (such as PricewaterhouseCoopers) that is independent of the organization being audited. Their task is to verify that the organization, in preparing its financial statements and in determining its assets and liabilities, followed generally accepted accounting principles.60

Accountants at the Academy Awards? Brie Larson on the left with Leonardo DiCaprio holding their Academy Awards in 2016. Every year since 1929 the secret ballots for Oscar nominees voted on by members of the Academy of Motion Picture Arts and Sciences have been tabulated by accountants from the firm now known as PricewaterhouseCoopers. The accounting firm takes this event very seriously; secrecy is tight, and there is no loose gossip around the office water cooler. Two accountants tally the votes, stuff the winners’ names in the envelopes—the ones that will be handed to award presenters during the Academy Awards—and then memorize the winners’ names, just in case the envelopes don’t make it to the show. Accounting is an important business because investors depend on independent auditors to verify that a company’s finances are what they are purported to be.© Helga Esteb/Shutterstock RF

Internal Audits—Financial Appraisals by Inside Financial Experts

An  internal audit  is a verification of an organization’s financial accounts and statements by the organization’s own professional staff. Their jobs are the same as those of outside experts—to verify the accuracy of the organization’s records and operating activities. Internal audits also help uncover inefficiencies and thus help managers evaluate the performance of their control systems.

We would like to end this section on financial tools in a more personal manner by assessing your financial literacy.  Self-Assessment 16.2  evaluates your knowledge in matters associated with interest-bearing accounts, investments, inflation, pensions, creditworthiness, and insurance. It’s a fun way to find out if your financial literacy is up to speed.

SELF-ASSESSMENT 16.2  

Assessing Your Financial Literacy

The following survey was designed to assess your financial literacy. Please be prepared to answer these questions if your instructor has assigned Self-Assessment 16.2 in Connect.

1. Where do you stand in terms of financial literacy?

2. Look at the statements you got incorrect, and identify the specific aspects of financial knowledge that you may be lacking.

3. What can you do to improve your financial literacy? Be specific.

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16.5

Total Quality Management

MAJOR QUESTION How do top companies improve the quality of their products or services?

THE BIG PICTURE

Total quality management (TQM) is dedicated to continuous quality improvement, training, and customer satisfaction. Two core principles are people orientation and improvement orientation. Some techniques for improving quality are employee involvement, benchmarking, outsourcing, reduced cycle time, and statistical process control.

In 2015, Midway USA, a fast-growing online retailer of equipment for hunting, shooting, and outdoor sports, became one of the rare two-time winners of the prestigious Baldrige Award. This award is “given by the President of the United States to businesses and to education, health care, and nonprofit organizations that apply and are judged to be outstanding in seven areas of performance excellence.” The seven areas are leadership; strategy; customers, analysis, and knowledge management; workforce; operations; and results. 61   

Customer satisfaction is Midway’s No. 1 goal. Thus, the company, headquartered in Missouri, has incorporated customer data into its performance improvement system, and results are impressive. With more than 1.2 million active customers visiting its site, Midway has succeeded in earning a consistent customer approval rating of over 90%, beating out its top competitors for two years in a row. At the same time, Midway has boosted its employee satisfaction rating from 76% to 83% over the last 11 years, in part by asking employees to identify and prioritize what they need in order to achieve job satisfaction. Company managers are then able to help meet those requirements. Career development at the company is a given; more than 80 management positions are filled from within, because nearly 40% of its 350 employees participate in a formal leadership training program that includes mentoring and attendance at strategy meetings.62   

Midway excels in managing its supply chain as well. It ships out inventory more efficiently than 10 years ago (as measured by a statistic known as “inventory turns”) yet keeps up an in-stock rate for its products of almost 83%. The company’s seven-step strategy development process begins with a performance review and an analysis of itsPage 567 strengths, weaknesses, challenges, and opportunities. Finally, Midway has donated more than $100 million to charity since 2008, enforces waste recovery and recycling practices, helps send local children to conventions where they learn about environmental management, and runs a virtually paperless operation. No mail orders are accepted.63   

Quality control at Midway. MidwayUSA is a privately held retailer of hunting and outdoor-related products. It’s business requires the accurate application of management control systems. Here we see the outbound shipping lanes of a large system of conveyors the company uses to manage distribution of its products from the receiving docks to the UPS trucks. In order to maintain accuracy and efficiency, the company relies on a variety of tools associated with total quality management.MidwayUSA

As we saw in  Chapter 2 , two strategies for ensuring quality are quality control, the strategy for minimizing errors by managing each stage of production, and quality assurance, focusing on the performance of workers and urging them to strive for “zero defects.”

Deming Management: The Contributions of W. Edwards Deming to Improved Quality

Previously, Frederick Taylor’s scientific management philosophy, designed to maximize worker productivity, had been widely instituted. But by the 1950s, scientific management had led to organizations that were rigid and unresponsive to both employees and customers. W. Edwards Deming’s challenge, known as  Deming management, proposed ideas for making organizations more responsive, more democratic, and less wasteful. These included the following principles.

1. Quality Should Be Aimed at the Needs of the Consumer

“The consumer is the most important part of the production line,” Deming wrote. 64  Thus, the efforts of individual workers in providing the product or service should be directed toward meeting the needs and expectations of the ultimate user.

2. Companies Should Aim at Improving the System, Not Blaming Workers

Deming suggested that U.S. managers were more concerned with blaming problems on individual workers rather than on the organization’s structure, culture, technology, work rules, and management—that is, “the system.” By treating employees well, listening to their views and suggestions, Deming felt, managers could bring about improvements in products and services.

3. Improved Quality Leads to Increased Market Share, Increased Company Prospects, and Increased Employment

When companies work to improve the quality of goods and services, they produce less waste, experience fewer delays, and are more efficient. Lower prices and superior quality lead to greater market share, which in turn leads to improved business prospects and consequently increased employment.

4. Quality Can Be Improved on the Basis of Hard Data, Using the PDCA Cycle

Deming suggested that quality could be improved by acting on the basis of hard data. The process for doing this came to be known as the  PDCA cycle, a Plan-Do-Check-Act cycle using observed data for continuous improvement of operations. (See  Figure 16.6 .) Like the steps in the control process in  Figure 16.3 , step 3 (“Check”) is a feedback step, in which performance is compared to goals. Feedback is instrumental to control.

FIGURE 16.6  The PDCA cycle: Plan-Do-Check-Act The four steps continuously follow each other, resulting in continuous improvement. Source: From W. Edwards Deming. Out of the Crisis, Plan Do Study Act Cycle, page 88, © 2000 Massachusetts Institute of Technology, by permission of MIT Press.

Core TQM Principles: Deliver Customer Value and Strive for Continuous Improvement

Total quality management (TQM)  is defined as a comprehensive approach—led by top management and supported throughout the organization—dedicated to continuous quality improvement, training, and customer satisfaction. In  Chapter 2  we said there are four components to TQM:

1. Make continuous improvement a priority.

2. Get every employee involved.

3. Listen to and learn from customers and employees.

4. Use accurate standards to identify and eliminate problems.

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These may be summarized as  two core principles of TQM—namely, (1) people orientation—everyone involved with the organization should focus on delivering value to customers—and (2) improvement orientation—everyone should work on continuously improving the work processes. 65  Let’s look at these further.

1. People Orientation—Focusing Everyone on Delivering Customer Value

Organizations adopting TQM value people as their most important resource—both those who create a product or service and those who receive it. Thus, not only are employees given more decision-making power, so are suppliers and customers.

This people orientation operates under the following assumptions.

· Delivering customer value is most important. The purpose of TQM is to focus people, resources, and work processes to deliver products or services that create value for customers. Toyota is a long-time practitioner of TQM; its Lexus plant in Georgetown, Kentucky, produces about half a million cars a year. The 750 employees who worked on the first Lexus line to be built in the United States received millions of hours of special sensory training ”so they could see, hear, feel and smell what a Lexus should be.” Some repeatedly took apart and rebuilt a small fleet of cars to understand thousands of parts, and they studied with master craftsmen in Japan.66 The Example box on Kia explains how the company focuses on this proposition.

· People will focus on quality if given empowerment. TQM assumes that employees (and often suppliers and customers) will concentrate on making quality improvements if given the decision-making power to do so. The reasoning here is that the people actually involved with the product or service are in the best position to detect opportunities for quality improvements. In support of this conclusion, research shows lack of employee involvement as the biggest obstacle to successful TQM implementation.67

· TQM requires training, teamwork, and cross-functional efforts. Employees and suppliers need to be well trained, and they must work in teams. Teamwork is considered important because many quality problems are spread across functional areas. For example, if cell-phone design specialists conferred with marketing specialists (as well as customers and suppliers), they would find that the challenge of using a cell phone for older people is pushing 11 tiny buttons to call a phone number.

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EXAMPLE

Kia Vaults to Highest Quality Rating

The small Korean automaker Kia Motors recently surprised car buyers and the entire auto industry by taking the No. 1 spot in J.D. Power and Associates’s annual Initial Quality Survey, the first time in 27 years that a non-luxury brand came in ahead of past winners like Porsche and Lexus as well as beating out closer competitors like Toyota and Hyundai. “Ranking number one in the entire industry for initial quality is the result of Kia’s decade-long focus on craftsmanship and continuous improvement, and reflects the voice of our customers, which is the ultimate affirmation,” said Michael Sprague, chief operating officer and executive vice president of Kia Motors America.

Auto industry analysts say Kia’s accumulating quality improvements over the last few years have not gone unnoticed. Better interiors and higher-than-expected ride quality were cited, along with “top notch” quality for the price and a low incidence of problems in the first 90 days of ownership (an industry standard in which Porsche has previously excelled).

Despite massive and widely reported airbag recalls that have affected many of the big automakers, Kia is not alone in achieving quality improvements, analysts say. According to Renee Stephens, J.D. Power’s vice president of U.S. automotive quality, “Tracking our data over the past several years, it has become clear that automakers are listening to the customer, identifying pain points and are focused on continuous improvement. Even as they add more content, including advanced technologies that have had a reputation for causing problems, overall quality continues to improve.”

Kia cites its focus on customers’ needs and the challenge to achieve “the highest possible level of customer satisfaction” as the guiding forces behind its “most stringent quality controls.” It boasts having “one of the most state-of-the-art, ecologically compatible, and productive auto plants in Europe,” with high technology standards and efficient monitoring. Its head designer is an award winner, and many new Kia models have earned international design recognition—more “vivid evidence of our high standards.” The company also promises high fuel efficiency and an “EcoDynamics” label on some models that signifies reduced CO2 emissions.68  

YOUR CALL

What internal factors do you think account for Kia’s reaching the top of the J.D. Power survey? Have any external factors like improving competition played a role?

2. Improvement Orientation—Focusing Everyone on Continuously Improving Work Processes

Although big schemes, grand designs, and crash programs have their place, the lesson of the quality movement from overseas is that the way to success is through continuous, small improvements.  Continuous improvement  is defined as ongoing, small, incremental improvements in all parts of an organization—all products, services, functional areas, and work processes.

This improvement orientation focuses on increasing operational performance and makes the following assumptions.69

· It’s less expensive to do it right the first time. TQM assumes that it’s better to do things right the first time than to do costly reworking. To be sure, creating high-quality products and services requires a costly investment in training, equipment, and tools, for example. But it is less expensive than dealing with poor quality and the poor customer relationships that result.

· It’s better to make small improvements all the time. This is the assumption that continuous improvement must be an everyday matter, that no improvement is too small, that there must be an ongoing effort to make things better a little bit at a time all the time. At Daimler, for instance, finished cars are packed so tightly together in storage yards that it’s difficult for workers to read the RFID (radio frequency identification) tags used to control inventory. That’s where drones come in, reading the tags quickly and inexpensively and at any hour when humans are not in the lot. The next small improvement? Smaller drones.70  

· Accurate standards must be followed to eliminate small variations. TQM emphasizes the collection of accurate data throughout every stage of the work process. It also stresses the use of accurate standards (such as benchmarking)Page 570 to evaluate progress and eliminate small variations, which are the source of many quality defects.

· There must be strong commitment from top management. Employees and suppliers won’t focus on making small, incremental improvements unless managers go beyond lip service to support high-quality work, as do the top managers at Ritz-Carlton,  Amazon.com , and Ace Hardware.

Continuous improvement. Instead of making a walkway or street by laying bricks one at a time, how about using something like this? Dave Dyer of Swiss firm ABB Consulting points to this brick-laying machine as a great example of continuous improvement, one of the two core principles of TQM. The operators, he writes, “feed the bricks into the machine via gravity, there are no moving parts, and the path is laid as the machine moves. It’s amazing!” What examples of continuous improvement can you think of?© epa european pressphoto agency b.v./Alamy

Kaizen is a Japanese philosophy of small continuous improvement that seeks to involve everyone at every level of the organization in the process of identifying opportunities and implementing and testing solutions. 71 It offers advantages for large and small companies alike, whether manufacturers or service firms, as the Example box shows.

EXAMPLE

Kaizen Principles in Action

Herman Miller, the U.S. manufacturer of office equipment and chairs, has increased productivity 500% and quality 1,000% in the years since adopting Kaizen methods. The company’s renowned Aeron chairs are now produced in 17 seconds, compared to 82 before Kaizen.72   

At Studio 904, a Seattle hair salon, Kaizen principles led to a change in work flow so that everyone on staff can provide all styling services. Thus, customers no longer have to wait for each step during their visit to be performed by a dedicated stylist who may be working with more than one client at a time.73  

Wagamama, a trendy UK restaurant chain expanding to the United States, saw early adoption of technology as the improvement identified by Kaizen principles. The company was years ahead of its competition in building an iPhone app and developing the Qkr! app, which allows customers to split the bill with friends by paying for specific menu items on their iOS and Android phones. Wagamama has issued wireless handheld devices to staff for taking diners’ orders and accepting payments and is now moving most of its tools to a cloud-based system.74  

YOUR CALL

Some recommended tips for implementing Kaizen methods include actively looking for unconventional ideas, thinking about how to do something instead of why it can’t be done, and avoiding both excuses and perfection.75 Do you think this is good advice for Herman Miller, Studio 904, and Wagamama? Why or why not?

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Applying TQM to Services

Manufacturing industries provide tangible products (think jars of baby food); service industries provide intangible products (think child care services). Manufactured products can be stored (such as dental floss in a warehouse); services generally need to be consumed immediately (such as dental hygiene services). Services tend to require a good deal of people effort (although some services can be provided by machines, such as vending machines and ATMs). Finally, services are generally provided at locations and times convenient for customers; that is, customers are much more involved in the delivery of services than they are in the delivery of manufactured products.

One clear prerequisite for providing excellent service is effective training. Isadore Sharp, founder and chair of Four Seasons Hotels and Resorts, recently experienced outstanding room service while visiting one of the chain’s new facilities, in a location where few employees could have been expected to have prior experience of hospitality industry standards. When he asked the server where she had learned to perform so well, she replied, “They let me take everything home for me to practice with my family.”76 It takes more than training, however, to provide high-quality service (see the Practical Action box).77

PRACTICAL ACTION

What Makes a Service Company Successful? Four Core Elements

With services now employing more than 75% of U.S. workers, universities are bringing more research attention to what is being called “services science.” This is a field that uses management, technology, mathematics, and engineering expertise to improve the performance of service businesses, such as retailing and health care. 78

Harvard Business School scholar Frances X. Frei has determined that a successful service business must make the right decisions about four core elements and balance them effectively. 79

The Offering: Which Features Are Given Top-Quality Treatment? Which service attributes, as informed by the needs of customers, does the company target for excellence and which does it target for inferior performance? Does a bank, for example, offer more convenient hours and friendlier tellers (excellence) but pay less attractive interest rates (inferior performance)?

The Funding Mechanism: Who Pays for the Service? How should the company fund its services? Should it have the customer pay for them? This can be done in a palatable way, as when Starbucks funds its stuffed-chair ambience by charging more for coffee. Or it can be done by making savings in service features, as when Progressive Casualty Insurance cuts down on frauds and lawsuits by deploying its own (rather than independent) representatives to the scene of an auto accident.

Or should the company cover the cost of excellence with operational savings, as by spending now to save later or having the customer do the work? Call centers usually charge for customer support, but Intuit offers free support and has product-development people, as well as customer-service people, field calls so that subsequent developments in Intuit software are informed by direct knowledge of customer problems. Other companies, such as most gas stations, save money by having customers pump their own gas.

The Employee Management System: How Are Workers Trained and Motivated? Service companies need to think about what makes their employees able to achieve excellence and what makes them reasonably motivated to achieve excellence. For instance, bank customers may expect employees to meet a lot of complex needs, but the employees aren’t able to meet these needs because they haven’t been trained. Or they aren’t motivated to achieve excellence because the bank hasn’t figured out how to screen in its hiring, as in hiring people for attitude first and training them later versus paying more to attract highly motivated people.

The Customer Management System: How Are Customers “Trained”? Like employees, customers in a service business must also be “trained” as well, as the airlines have done with check-in. At Zipcar, the popular car-sharing service, the company keeps its costs low by depending on customers to clean, refuel, and return cars in time for the next user. In training customers, service companies need to determine which customers they’re focusing on, what behaviors they want, and which techniques will most effectively influence customer behavior.

YOUR CALL

Pick a services company you’re familiar with, such as Domino’s, Starbucks, Amazon, REI, or the college bookstore. In integrating the four core features just discussed, a service company needs to evaluate itself on the following: Are the decisions it makes in one area supported by those it makes in the other areas? Does the service model create long-term value for customers, employees, and shareholders? Is the company trying to be all things to all people or specific things to specific people? How do you think the company you picked rates?

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Perhaps you’re beginning to see how judging the quality of services is a different animal from judging the quality of manufactured goods, because it comes down to meeting the customer’s satisfaction, which may be a matter of perception. (After all, some hotel guests, restaurant diners, and supermarket patrons, for example, are more easily satisfied than others.)

Some people view college students as customers. Do you? For those schools that care about the quality of what they offer, it is important to assess student satisfaction with the college or university as a whole. If you are curious about your level of satisfaction with your college or university, then complete  Self-Assessment 16.3 .

SELF-ASSESSMENT 16.3  

Assessing Your Satisfaction with Your College or University Experience

The following survey was designed to assess the extent to which you are satisfied with your college experience. Please be prepared to answer these questions if your instructor has assigned Self-Assessment 16.3 in Connect.

1. What is your level of satisfaction? Are you surprised by the results?

2. Based on your scores, identify three things that your college or university might do to improve student satisfaction. Be specific.

3. Are students really customers? Explain your rationale.

Some TQM Tools, Techniques, and Standards

Several tools and techniques are available for improving quality. We described benchmarking in  Chapter 10 . Here we describe outsourcing, reduced cycle time, statistical process control, Six Sigma, and quality standards ISO 9000 and ISO 14000.

Outsourcing: Let Outsiders Handle It

Outsourcing  (discussed in detail in  Chapter 4 ) is the subcontracting of services and operations to an outside vendor. Usually, this is done to reduce costs or increase productivity.80 Outsourcing short-term and project work to freelance or contract workers in the so-called gig economy also saves companies many employee-related expenses.

Outsourcing is also being done by many state and local governments, which, under the banner known as privatization, have subcontracted traditional government services such as fire protection, correctional services, and medical services.

Reduced Cycle Time: Increasing the Speed of Work Processes

Another TQM technique is the emphasis on increasing the speed with which an organization’s operations and processes can be performed. This is known as  reduced cycle time, or reduction in steps in a work process, such as fewer authorization steps required to grant a contract to a supplier. The point is to improve the organization’s performance by eliminating wasteful motions, barriers between departments, unnecessary procedural steps, and the like.

At Ralph Lauren, a recent slowdown in sales and an increase in inventory prompted the company to look for ways to reduce production time for its high-fashion products from 15 months to 9, which will help it better match supply to demand, reduce excess inventory, and lower the volume of goods that need to be sold at marked-down prices.81 

Bar-code scanners, not the type used at checkout counters to track inventory, are increasingly used to decrease the time it takes for employees to select, pack, and ship products. Exel Logistics, for example, found that bar-code scanners decreased the rate of assembling orders by 10%–20%.82

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Statistical Process Control: Taking Periodic Random Samples

As the pages of this book were being printed, instruments called densitometers and colorimeters were used to measure ink density and trueness of color, taking samples of printed pages at fixed intervals. This is an ongoing check for quality control.

All kinds of products require periodic inspection during their manufacture: hamburger meat, breakfast cereal, flashlight batteries, wine, and so on. The tool often used for this is  statistical process control, a statistical technique that uses periodic random samples from production runs to see if quality is being maintained within a standard range of acceptability. If quality is not acceptable, production is stopped to allow corrective measures.

Statistical process control is the technique that McDonald’s uses, for example, to make sure that the quality of its burgers is always the same, no matter where in the world they are served. Companies such as Intel and Motorola use statistical process control to ensure the reliability and quality of their products.

Six Sigma and Lean Six Sigma: Data-Driven Ways to Eliminate Defects

Sigma is the Greek letter statisticians use to define a standard deviation. In the quality-improvement process known as Six Sigma, the higher the sigma, the fewer the deviations from the norm—that is, the fewer the defects. Developed by Motorola in 1985, Six Sigma has since been embraced by General Electric, Allied Signal, American Express, 3M, and other companies. 83  There are two variations, Six Sigma and Lean Six Sigma.

· Six Sigma.  Six Sigma  is a rigorous statistical analysis process that reduces defects in manufacturing and service-related processes. By testing thousands of variables and eliminating guesswork, a company using the technique attempts to improve quality and reduce waste to the point where errors nearly vanish. In everything from product design to manufacturing to billing, the attainment of Six Sigma means there are no more than 3.4 defects per million products or procedures.84

Six Sigma may also be thought of as a philosophy—to reduce variation in your company’s business and make customer-focused, data-driven decisions. The method preaches the use of Define, Measure, Analyze, Improve, and Control (DMAIC). Team leaders may be awarded a Six Sigma “black belt” for applying DMAIC.

· Lean Six Sigma. More recently, companies are using an approach known as  Lean Six Sigma, which focuses on problem solving and performance improvement—speed with excellence—of a well-defined project. 85

3M Company’s latest five-year plan includes improvements to its supply chain and an increased focus on Lean Six Sigma in order to bring about “improved customer service, operational efficiencies, and an increased cash flow.”86  

 Six Sigma and Lean Six Sigma may not be perfect, since they cannot compensate for human error or control events outside a company.87 Still, they let managers approach problems with the assumption that there’s a data-oriented, tangible way to approach problem solving.

ISO 9000 and ISO 14000: Meeting Standards of Independent Auditors

If you’re a sales representative for Du Pont, a U.S. chemical company, how will your overseas clients know your products have the quality they are expecting? If you’re a purchasing agent for an Ohio-based tire company, how can you tell whether the synthetic rubber you’re buying overseas is adequate?

At one time, buyers and sellers simply had to rely on a supplier’s past reputation or personal assurances. In 1979, the International Organization for Standardization (ISO),Page 574 based in Geneva, Switzerland, created a set of quality standards known as the 9000 series. There are two such standards:

· ISO 9000. The  ISO 9000 series  consists of quality-control procedures companies must install—from purchasing to manufacturing to inventory to shipping—that can be audited by independent quality-control experts, or “registrars.” The goal is to reduce flaws in manufacturing and improve productivity by adopting eight “big picture” Quality Management Principles:

· Customer focus.

· Leadership.

· Involvement of people.

· Process approach.

· System approach to management.

· Continual improvement.

· Factual approach to decision making.

· Mutually beneficial supplier relationships.88  

Companies must document their ISO 9000 procedures and train their employees to use them. The ISO 9000 series of standards was expanded to include ISO 9001:2008. “ISO 9001 is the only standard within the ISO 9000 family that an organization can become certified against, because it is the standard that defines the requirements of having a Quality Management System.”89 This global management standard is adopted by over 1 million companies in 176 countries worldwide.90

· ISO 14000. The  ISO 14000 series  extends the concept, identifying standards for environmental performance. ISO 14000 dictates standards for documenting a company’s management of pollution, efficient use of raw materials, and reduction of the firm’s impact on the environment.

Takeaways from TQM Research

TQM principles have been used by thousands of organizations through the years. Although companies do not always use the tools, techniques, and processes as suggested by experts, a team of researchers concluded that the far majority of TQM adopters follow its general principles, which in turn fosters improved operational performance.91 Researchers also identified four key inhibitors to successfully implementing TQM: (1) the failure to provide evidence supporting previous improvement activities, (2) the lack of a champion who is responsible for leading the implementation, (3) the inability to measure or track results of the program, and (4) the failure to develop a culture of quality or continuous learning.92 Managers need to overcome these roadblocks for TQM to deliver its intended benefits.

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16.6

Managing Control Effectively

MAJOR QUESTION What are the keys to successful control, and what are the barriers to control success?

THE BIG PICTURE

This section describes four keys to successful control and five barriers to successful control.

How do you as a manager make a control system successful, and how do you identify and deal with barriers to control? We consider these topics next.

The Keys to Successful Control Systems

Successful control systems have a number of common characteristics: (1) They are strategic and results oriented. (2) They are timely, accurate, and objective. (3) They are realistic, positive, and understandable and they encourage self-control. (4) They are flexible.

1. They Are Strategic and Results Oriented

Control systems support strategic plans and are concentrated on significant activities that will make a real difference to the organization. Thus, when managers are developing strategic plans for achieving strategic goals, that is the point at which they should pay attention to developing control standards that will measure how well the plans are being achieved.

Example: Companies whose strategies include a commitment to sustainable methods can be guided by standards set by the Sustainability Accounting Standards Board, which sets reporting guidelines for “[disclosing] sustainability performance information to stakeholders.”93 

Charity control. Laura Arrillaga-Andreessen (shown here with husband Marc Andreessen, left, and Facebook CEO Mark Zuckerberg at a 2012 conference in Sun Valley, Idaho) is a Stanford University professor of philanthropy who aims to make giving not only more effective and wide ranging but also more accessible to people of all ages and income levels, including Millennials. Part of her vision is to enable donations through mobile microfinancing and smartphone money transfers. Do you think philanthropic organizations should use the same type of control mechanisms as for-profit organizations?© Paul Sakuma/AP PhotoPage 576

2. They Are Timely, Accurate, and Objective

Good control systems—like good information of any kind—should be

· Timely—meaning when needed. The information should not necessarily be delivered quickly, but it should be delivered at an appropriate or specific time, such as every week or every month. And it certainly should be often enough to allow employees and managers to take corrective action for any deviations.

· Accurate—meaning correct. Accuracy is paramount, if decision mistakes are to be avoided. Inaccurate sales figures may lead managers to mistakenly cut or increase sales promotion budgets. Inaccurate production costs may lead to faulty pricing of a product.

· Objective—meaning impartial. Objectivity means control systems are impartial and fair. Although information can be inaccurate for all kinds of reasons (faulty communication, unknown data, and so on), information that is not objective is inaccurate for a special reason: It is biased or prejudiced. Control systems need to be considered unbiased for everyone involved so that they will be respected for their fundamental purpose—enhancing performance.

3. They Are Realistic, Positive, and Understandable and Encourage Self-Control

Control systems have to focus on working for the people who will have to live with them. Thus, they operate best when they are made acceptable to the organization’s members who are guided by them.94 Thus, they should

· Be realistic. They should incorporate realistic expectations. If employees feel performance results are too difficult, they are apt to ignore or sabotage the performance system.

· Be positive. They should emphasize development and improvement. They should avoid emphasizing punishment and reprimand.

· Be understandable. They should fit the people involved, be kept as simple as possible, and present data in understandable terms. They should avoid complicated computer printouts and statistics.

· Encourage self-control. They should encourage good communication and mutual participation. They should not be the basis for creating distrust between employees and managers.

4. They Are Flexible

Control systems must leave room for individual judgment, so that they can be modified when necessary to meet new requirements.

Barriers to Control Success

Among the several barriers to a successful control system are the following.

1. Too Much Control

Some organizations, particularly bureaucratic ones, try to exert too much control. They may try to regulate employee behavior in everything from dress code to timing of coffee breaks. This leads to micromanagement, which frustrates employees and may lead them to ignore or try to sabotage the control process.

Among the telltale signs that you (or your boss) might be a micromanager, someone who is unable to delegate tasks and decisions and insists on taking an inappropriately detailed focus on subordinates’ work, are

1. Working excessive hours and weekends and skipping vacation.

2. Checking everyone’s work because no one else can do things right.

3. Needing to be copied on and approve everything.

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Requiring others to continually check in and be constantly available.

5. Having to hire new people all the time because turnover is so high.95 

Micromanagement is a form of overcontrol that is counterproductive for several reasons. Employees are more effective and achieve greater job satisfaction if they feel empowered to use their own judgment as far as possible to get the job done. And micromanagers can become bottlenecks who actually slow the flow of work and decisions, if not stop it altogether. Some solutions, if you recognize yourself in this profile, are to start by delegating small decisions, recognizing that the worst-case scenario you likely imagine if you let go is probably not going to happen, and accepting that some degree of uncertainty is inevitable in management, and in life.96  

2. Too Little Employee Participation

As highlighted by W. Edwards Deming, which was discussed in  Chapter 2 , employee participation can enhance productivity. Involving employees in both the planning and the execution of control systems can bring legitimacy to the process and heighten employee morale.

3. Overemphasis on Means Instead of Ends

We said that control activities should be strategic and results oriented. They are not ends in themselves but the means to eliminating problems. Too much emphasis on accountability for weekly production quotas, for example, can lead production supervisors to push their workers and equipment too hard, resulting in absenteeism and machine breakdowns. Or it can lead to game playing—“beating the system”—as managers and employees manipulate data to seem to fulfill short-run goals instead of the organization’s strategic plan.

4. Overemphasis on Paperwork

A specific kind of misdirection of effort is management emphasis on getting reports done, to the exclusion of other performance activity. Reports are not the be-all and end-all. Undue emphasis on reports can lead to too much focus on quantification of results and even to falsification of data.

5. Overemphasis on One Instead of Multiple Approaches

One type or method of control may not be enough. By having multiple control activities and information systems, an organization can have multiple performance indicators, thereby increasing accuracy and objectivity. A recent study found that control systems affect each other and thus must be integrated.97  

Temptation. Because legal gambling is a heavy cash business, casinos need to institute special controls against employee theft, including extensive human resource controls like a criminal background check and character, reference, and credit checks.98 An operational control casinos also implement is the “eye in the sky” closed-circuit camera over card and craps tables. © Hispanolistic/iStock/Getty Images

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16.7

Managing for Productivity

MAJOR QUESTION How do managers influence productivity?

THE BIG PICTURE

The purpose of a manager is to make decisions about the four management functions—planning, organizing, leading, and controlling—to get people to achieve productivity and realize results. Productivity is defined by the formula of outputs divided by inputs for a specified period of time. Productivity matters because it determines whether the organization will make a profit or even survive.

In  Chapter 1 , we pointed out that as a manager in the 21st century you will operate in a complex environment in which you will need to deal with seven challenges—managing for (1) competitive advantage, (2) diversity, (3) globalization, (4) information technology, (5) ethical standards, (6) sustainability, and (7) your own happiness and life goals.

Within this dynamic world, you will draw on the practical and theoretical knowledge described in this book to make decisions about the four management functions of planning, organizing, leading, and controlling. The purpose is to get the people reporting to you to achieve productivity and realize results. This process is diagrammed below, pulling together the main topics of this book. (See  Figure 16.7 .)

FIGURE 16.7  Managing for productivity and results

What Is Productivity?

Productivity can be applied at any level, whether for you as an individual, for the work unit you’re managing, or for the organization you work for. Productivity is defined by the formula of outputs divided by inputs for a specified period of time. Outputs are allPage 579 the goods and services produced. Inputs are not only labor but also capital, materials, and energy. That is,

Productivity=OutputsInputsorGoods+ServicesLabor+Capital+Materials+EnergyProductivity=OutputsInputsorGoods+ServicesLabor+Capital+Materials+Energy

What does this mean to you as a manager? It means that you can increase overall productivity by making substitutions or increasing the efficiency of any one element: labor, capital, materials, energy. For instance, you can increase the efficiency of labor by substituting capital in the form of equipment or machinery, as in employing a backhoe instead of laborers with shovels to dig a hole. 99  Or you can increase the efficiency of materials inputs by expanding their uses, as when lumber mills discovered they could sell not only boards but also sawdust and wood chips for use in gardens. Or you can increase the efficiency of energy by putting solar panels on a factory roof so the organization won’t have to buy so much electrical power from utility companies.

Why Increasing Productivity Is Important

The more goods and services that are produced and made easily available to us and for export, the higher our standard of living. Increasing the gross domestic product (GDP)—the total dollar value of all the goods and services produced in the United States—depends on raising productivity, as well as on a growing workforce.

Table 16.2  shows the GDP for the U.S. and 11 other countries in 2005 and 2015. As you might expect, China showed the greatest increase over time, followed byPage 580 India and the U.S. Some of this growth is due to increased investments in information technology.100

TABLE 16.2 Global Gross Domestic Product (GDP)

COUNTRY	2005	2015	%CHANGE
Brazil	2208.7	1772.6	–25%
Canada	1613.5	1552.4	–4%
China	6005.2	10,982.8	+45%
Denmark	319.8	295.0	–8%
France	2651.8	2421.6	–10%
Germany	3423.5	3357.6	–2%
India	1708.5	2090.7	+18%
Singapore	236.4	292.7	+19%
Sweden	488.4	492.6	+1%
United Kingdom	2403.0	2849.3	+16%
United States	14,964.4	17,947.0	+17%
Venezuela	294.5	239.6	–23%

Note: All numbers shown in Billion US Dollars. Source:  Knoema, GDP by Country, https://knoema.com/tbocwag/gdp-by-country-1980-2015?country+United%20States, accessed July 20, 2016.

The U.S. Productivity Track Record

During the 1960s, productivity in the United States averaged a hefty 2.9% a year, then sank to a disappointing 1.5% right up until 1995. Because the decline in productivity no longer allowed the improvement in wages and living standards that had benefited so many U.S. workers in the 1960s, millions of people took second jobs or worked longer hours to keep from falling behind. From 1995 to 2000, however, during the longest economic boom in U.S. history, the productivity rate jumped to 2.5% annually, as the total output of goods and services rose faster than the total hours needed to produce them. From the business cycle peak in the first quarter of 2001 to the end of 2007, productivity grew at an annual rate of 2.7%. 101  

Then came the recession year 2008, when it fell to 2%. Then, from the fourth quarter of 2008 to the fourth quarter of 2009, productivity rose 5.4%—“a turnaround unprecedented in modern history,” said Newsweek—it also rose an impressive 4.1% in 2010. 102  Recently, however, productivity has been declining globally, not only in developed economies such as the United States, Japan, and Europe but also in China, which had been growing rapidly for some time. Productivity has even been zero or negative in some countries. Gains in productivity are expected to remain small for the short term.103

Globalization, which has made national economies far more interconnected and dependent on one another, helps increase the ripple effects of any country’s economic downturns on its neighbors and trading partners. Climate change is also affecting productivity as extreme weather becomes more common, bringing droughts, floods, and other uncommon events to areas unused to dealing with them.104  

Wind farms. This aerial view of a wind farm in Altamont Pass, California, is a great illustration of how the energy industry is changing in response to climate change. Wind farms consist of a group of turbines used to generate electricity. They are located on land and offshore. The largest onshore wind farms are located in Germany, and Europe leads the world in creating offshore wind energy. © Kim Steele/Getty Images RF

The Role of Information Technology

As many industrialized countries continue to struggle with recovery from the 2008–2009 global financial crisis, wages have stagnated for most of their workers, even as productivity gains from informationPage 581 technology—automation and the Internet, shareware, cloud computing, and other communication technologies, for example—have slowed. Financial rewards for tech innovation have concentrated among a very few inventors and entrepreneurs, while wage gains even in the United States and the UK are stalled at about 1% a year, less in Germany, Italy, and Japan.105  

Some observers say the problem is not a lack of productivity growth but a measurement error. New technologies are difficult to value, and new companies that charge users nothing and try to earn revenue from advertising (that users can sometimes avoid) are entering a new world we may be incorrectly assessing with old tools.106 

 In particular, many companies have implemented  enterprise resource planning (ERP)  software systems, information systems for integrating virtually all aspects of a business, helping managers stay on top of the latest developments.

Managing Individual Productivity

Individual employees, managers, and organizations all share responsibility for increasing individual productivity. Individuals contribute by proactively bringing their skills, energy, talents, and motivation to work on a daily basis. They also can increase productivity by engaging in self-development and organizational citizenship. This is most likely to happen, however, when employees work for supportive and talented managers. This is where managers enter the productivity equation.

Managers need to bring their “best selves” to work just like any other employee. In addition, they can use many of the concepts, tools, and techniques discussed throughout this book to help develop their managerial and leadership skills. Managerial behavior is a key input to individual productivity. We believe it is essential for managers to take a learning orientation toward their jobs. This implies that managers will attempt to continuously improve their leadership skills. This might involve taking courses at a local college or university, enrolling in company sponsored training programs, obtaining advice from an executive coach or mentor, or reading relevant books.  

Organizations contribute to individual productivity by providing positive work environments and cultures that promote employee engagement, satisfaction, and flourishing. This ultimately involves investing in training and development for all employees. It also entails investing in resources people need to increase their productivity. Companies can invest in information technology that helps people to reduce distractions and focus on completing tasks. Cloud computing tools, for example, are a way to reduce manual tasks, share responsibility, and eliminate most paperwork.107 

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Epilogue: The Keys to Your Managerial Success

MAJOR QUESTION What are nine keys to personal managerial success?

THE BIG PICTURE

As we end the book, this section describes some life lessons to take away.

We have come to the end of the book, our last chance to offer some suggestions to take with you that we hope will benefit you in the coming years. Following are some life lessons pulled from various sources that can make you a “keeper” in an organization and help you be successful.

· Find your passion and follow it. Jane Chen is the founder and CEO of Embrace Innovations, which markets to developing countries a line of inexpensive, portable incubators for premature babies. Chen’s inspiration is the great medieval and Renaissance cathedrals in Europe. Unlikely? Not really. These architectural wonders, which took generations to build, were created by people inspired to contribute to something greater than themselves, even if they would not live to see it.108 Find something that inspires you, that you love to do, and do it vigorously.

· Encourage self-discovery, and be realistic. To stay ahead of the pack, you need to develop self-awareness, have an active mind, and be willing to grow and change. Legendary designer Diane von Furstenberg recalls the lesson she learned from early mistakes that reduced her control over her business and diluted her brand: “Your worst moments are your best souvenirs.”109  

· Every situation is different, so be flexible. No principle, no theory will apply under all circumstances. Industries, cultures, supervisors, employees, and customers will vary. It’s not a sign of weakness to be willing to change something that isn’t working or to try something new.110 Justin Tobin, founder and president of consultancy firm DDG, credits his mother with teaching him that “experimentation leads to the discovery of a unique identity and that everything in life and work is completely subjective. What one person likes, another might not, and that’s not only okay, it’s encouraged inside innovative organizations.”111

· Fine-tune your soft skills—your people skills. Today we live and work in a team universe. Try getting feedback on your interpersonal skills from friends, colleagues, and team members and develop a plan for improvement. Even nonverbal communication is a people skill. Dave Kerpen, CEO of Likeable Local, once made an important contact with someone who started a conversation with him at a crowded event because he was wearing distinctive orange shoes. Now Kerpen wears orange shoes every day.112  

· Learn how to develop leadership skills. Every company should invest in the leadership development of its managers if it is to improve the quality of its future leaders. But you can also work to develop your own leadership skills. For instance, offer to help others, take the initiative when action is needed (sometimes called being a self-starter), and don’t be afraid to ask for more responsibility to demonstrate what you’re capable of.113 Another life lesson: If you set the bar high, even if you don’t reach it, you end up in a pretty good place—that is, achieving a pretty high mark.

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Treat people as if they matter, because they do. If you treat employees, colleagues, and customers with dignity, they respond accordingly. Bryce Drew, head coach of the Valparaiso men’s basketball team, the Crusaders, says this about his players: “The person is more important than the result. We’re going to recruit families. We’re going to recruit players that want to be part of our family here. That’s how we live our daily life and that’s how we treat our team. I think when people sign on to come here, they know they’re coming to be more than basketball players. They’re coming to be cared for and develop into men.”114 

· Draw employees and peers into your management process. The old top-down, command-and-control model of organization is moving toward a flattened, networked kind of structure. Managers now work more often with peers, where lines of authority aren’t always clear or don’t exist, so that one’s persuasive powers become key. Power has devolved to front-line employees who are closest to the customer and to small, focused, self-managed teams that have latitude to pursue new ideas. Ask them what they think are the best ways to get things done.115

· Keep your cool, and take yourself lightly. The more unflappable you appear in difficult circumstances, the more you’ll be admired by your bosses and coworkers. Having a sense of humor helps. There may be no more serious workplace in the United States than the White House, but President Obama brought a gentle streak of wry humor to many informal occasions.116 At the 2015 White House correspondents’ dinner, he quipped, “After the midterm elections, my advisers asked me, ‘Mr. President, do you have a bucket list?’ And I said, ‘I have something that rhymes with bucket.’”117 

· Go with the flow, and stay positive. Life has its ebbs and flows. You’ll have good times and bad. During this journey, don’t focus too heavily on negative events and thoughts. Negative thoughts rob you of positive energy and your ability to perform at your best. In contrast, a positive approach toward life is more likely to help you flourish.118  

We wish you the very best of luck. And we mean it!

· Angelo Kinicki

· Brian K. Williams

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