Sources of Leader Power

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Management_-Leading-_-Collaborating-in-a-Competitive-World-13th-Edition-B078STLP981.pdf

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Thomas S. Bateman McIntire School of Commerce

University of Virginia

Scott A. Snell Darden Graduate School of Business

University of Virginia

Robert Konopaske McCoy College of Business

Texas State University

13e

MANAGEMENT Leading & Collaborating in a Competitive World

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MANAGEMENT: LEADING & COLLABORATING IN A COMPETITIVE WORLD, THIRTEENTH EDITION Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2019 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. Previous editions © 2017, 2015, and 2013. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning. Some ancillaries, including electronic and print components, may not be available to customers outside the United States.

This book is printed on acid-free paper.

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All credits appearing on page or at the end of the book are considered to be an extension of the copyright page.

Library of Congress Cataloging-in-Publication Data

Names: Bateman, Thomas S., author.|Snell, Scott, 1958- author.|Konopaske, Robert, author. Title: Management: leading & collaborating in a competitive world/Thomas S. Bateman, McIntire School of Commerce, University of Virginia, Scott A. Snell, Darden Graduate School of Business, University of Virginia, Robert Konopaske, McCoy College of Business, Texas State University. Description: Thirteenth edition.|New York, NY: McGraw-Hill Education, [2019] Identifiers: LCCN 2017048278|ISBN 9781259927645 (alk. paper) Subjects: LCSH: Management. Classification: LCC HD31.2 .B36 2019|DDC 658–dc23 LC record available at https://lccn.loc.gov/2017048278

The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites.

mheducation.com/highered

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For my parents, Tom and Jeanine Bateman, and Mary Jo, Lauren, T.J., and James

and

My parents, John and Clara Snell, and Marybeth, Sara, Jack, and Emily

and

My parents, Art and Rose Konopaske, and Vania, Nick, and Isabella

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THOMAS S. BATEMAN Thomas S. Bateman is Bank of America pro- fessor in the McIntire School of Commerce at the University of Virginia, teaching leadership and organizational behavior at undergraduate and graduate levels. For many years prior to joining the University of Virginia, he taught organizational behavior at the Kenan- Flagler Business School of the University of North Carolina to undergraduates, MBA students, PhD students, and practicing managers. He taught for two years in Europe as a visiting professor at the Institute for Management Development (IMD), one of the world’s leaders in the design and delivery of executive education. Professor Bateman earned his doctorate in business administration at Indiana University, and his BA from Miami University.

Professor Bateman is an active management researcher, writer, and consultant. He serves on the editorial boards of the Academy of Management Review, the Academy of Management Journal, and the Asia Pacific Journal of Business and Management. His articles appear in professional jour- nals such as the Academy of Management Journal, Academy of Management Review, Journal of Applied Psychology, Organizational Behavior and Human Decision Processes, Journal of Organizational Behavior, Human Relations, Journal of Macromarketing, and Proceedings of the National Academy of Sciences. His recent work on leadership and psychology in the domain of climate change appears in Nature Climate Change, Global Environmental Change, and The Conversation.

Tom’s long-time research interests center on proactive behavior (including leadership) by employees at all levels, with a recent turn toward scientists and public leadership. His consulting work has included a variety of organizations includ- ing Singapore Airlines, the Brookings Institution, the U.S. Chamber of Commerce, the Nature Conservancy, LexisNexis, Weber Shandwick, the Association of Climate Change Officers, and Chicago’s Field Museum of Natural History.

SCOTT A. SNELL Scott Snell is professor of business administration at the University of Virginia’s Darden Graduate School of Business. He teaches courses in leadership, organizational capability development, and human capital consulting. His research focuses on human resources and the mecha- nisms by which organiza- tions generate, transfer, and integrate new knowledge for competitive advantage.

He is co-author of four books: Managing People and Knowledge in Professional Service Firms, Management: Leading & Collaborating in a Competitive World, M: Management, and Managing Human Resources. His work has been published in a number of journals such as the Academy of Management Journal, Academy of Management Review, Strategic Management Journal, Journal of Management, Journal of Management Studies, and Human Resource Management, and he was recently listed among the top 100 most-cited authors in scholarly journals of management. He has served on the boards of the Strategic Management Society’s human capi- tal group, the Society for Human Resource Management Foundation, the Academy of Management’s human resource division, the Human Resource Management Journal, the Academy of Management Journal, and the Academy of Management Review. Professor Snell has worked with com- panies such as AstraZeneca, Deutsche Telekom, Shell, and United Technologies to align strategy, capability, and invest- ments in talent. Prior to joining the Darden faculty in 2007, he was professor and director of executive education at Cornell University’s Center for Advanced Human Resource Studies and a professor of management in the Smeal College of Business at Pennsylvania State University. He received a BA in psychology from Miami University, as well as MBA and PhD degrees in business administration from Michigan State University.

About the Authors

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ROBERT KONOPASKE Rob Konopaske is an associate professor of management and prin- ciples of management course coordinator in the McCoy College of Business at Texas State University. At the College, he also serves as the Director of the Institute for Global Business. A passionate educator who cares deeply about providing students with an excep- tional learning experience, Rob has taught numerous under- graduate, graduate, and executive management courses, including Introduction to Management, Organizational Behavior, Human Resource Management, International Human Resources Management, and International Business. He has received numerous teaching honors while at Texas State University, most recently the 2016 Presidential Distinction Award, 2014 Gregg Master Teacher Award, and 2012–2013 Namesake for the PAWS Preview new student socialization program (an honor bestowed annually upon eight out of approximately 2,000 faculty and staff). Rob earned his doctoral degree in business adminis- tration (management) at the University of Houston, a mas- ter in international business studies (MIBS) degree from the University of South Carolina, and a bachelor of arts

degree (Phi Beta Kappa) from Rutgers University. He has taught at the University of Houston, the University of North Carolina at Wilmington, and Florida Atlantic University.

Rob is co-author of several recent editions of six books: Management: Leading & Collaborating in a Competitive World, M: Management, Organizational Behavior and Management, Human Resource Management, Global Management and Organizational Behavior, and Organizations: Behavior, Structure, Processes. The eleventh edition of Organizations won a McGuffey Award (for longevity of textbooks and learning materials whose excellence has been demonstrated over time) from the national Text and Academic Authors’ Association.

Rob’s research has been published in such outlets as the Journal of Applied Psychology, Academy of Management Executive, Management International Review, Business Horizons, Human Resource Management, Journal of Business Research, Journal of Management Education, Nonprofit Management and Leadership, Journal of Managerial Psychology, and Human Resource Management Review. Dr. Konopaske currently serves on the editorial board of the International Journal of Human Resource Management.

Rob has lived and worked internationally, speaks three languages, and has held management positions with a large nonprofit organization and a Fortune 500 multinational firm. He consults, trains, and conducts research projects for a wide range of companies and industries. Current or for- mer clients include Credit Suisse, PricewaterhouseCoopers, Buffalo Wings & Rings, KPMG, New Braunfels Utilities, and Johnson & Johnson.

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Our goal is to keep you focused on delivering important “bottom line” results—to make sure you think continually about delivering the goods that make both you and your organization successful. Good management practices and processes are the keys to delivering the results that you want and your employer wants. This results-oriented focus of Management, 13th edition, is a unique highlight you will take away from this book.

Leading & Collaborating Yes, business is competitive. But it’s not that simple. In fact, to think strictly in terms of competition is overly cynical, and such cynicism can sabotage your performance. Along with a realistic perspective on competitive realities, important action elements in managerial success are collaboration and leadership. To succeed, teams and organizations need people to work with rather than against one another, Put another way, you can’t perform alone—the world is too complex, and business is too challenging.

You need to work with your teammates. Leaders and fol- lowers need to work as collaborators more than as adver- saries. Work groups throughout your organization need to cooperate with one another. Business and government, often viewed as antagonists, can work productively together. And today more than ever, companies that traditionally were competitors engage in joint ventures and find other ways to collaborate on some things even as they compete in others. Leadership is needed to make these collaborations work.

How does an organization create competitive advan- tage through collaboration? It’s all about the people, and it derives from good leadership.

Three stereotypes of leadership are that it comes from the top of the company, that it comes from one’s immedi- ate boss, and that it means being decisive and issuing com- mands. These stereotypes contain some truth, but realities are much more complex and challenging.

First, the person at the top may or may not provide effec- tive leadership—in fact, truly good leadership is far too rare. Second, organizations need leaders at all levels, in every team and work unit. This includes you, beginning early in your career, and this is why leadership is a vital theme in this book. Third, leaders should be capable of decisiveness and of giving commands, but relying too much on this tra- ditional approach isn’t enough. Great leadership is far more inspirational than that, and helps people both to think

Welcome to our 13th edition! Thank you to everyone who has used and learned from previous editions. We are proud to present to you our best-ever edition.

Our Goals Our mission with this text is to inform, instruct, and inspire. We hope to inform by providing descriptions of the impor- tant concepts and practices of modern management. We hope to instruct by describing how you can identify options, make decisions, and take effective action. We hope to inspire not only by writing in an interesting way but also by provid- ing a real sense of the challenges and fascinating opportuni- ties ahead of you. Whether your goal is starting your own company, leading a team to greatness, building a strong orga- nization, delighting your customers, or generally forging a positive and sustainable future, we want to inspire you to take meaningful action.

We hope to inspire you to be both a thinker and a doer. We want you to know the important issues, consider the con- sequences of your actions, and think before you act. But good thinking is not enough; management is a world of action. It is a world for those who commit to high performance.

Competitive Advantage The world of management is competitive, while also rich with important collaborative opportunities. Never before has it been so imperative to your career that you learn the skills of management. Never before have people had so many opportu- nities and challenges with so many potential risks and rewards.

You will compete with other people for jobs, resources, and promotions. Your employer will compete with others for contracts, clients, and customers. To survive the compe- tition, and to thrive, you must perform in ways that give you an edge that makes others want to hire you, buy from you, and do repeat business with you. Now and over time, you will want them to choose you, not the competition.

By this standard, managers and organizations must perform. Six essential performance dimensions are cost, quality, speed, innovation, service, and sustainability. When managed well, these performance dimensions deliver value to your customer and competitive advantage to you and your organization. Lacking performance on one or more of them puts you at a disadvantage. We elaborate on them all, throughout the book.

Preface

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differently and to work differently—including working col- laboratively toward outstanding results.

True leadership—from your boss as well as from you— inspires collaboration, which in turn generates results that are good for you, your employer, your customer, and all the people involved.

As Always, Currency and Variety in the 13th Edition It goes without saying that this textbook, in its 13th edition, remains on the cutting edge of topical coverage, updated throughout with both current business examples and recent management research. We continue to emphasize real results, sustainability, and diversity, themes on which we were early and remain current leaders.

While still organizing the chapters around the clas- sic management functions, we modernize those functions with a far more dynamic orientation. Looking constantly at change and the future, we describe the management func- tions as Delivering Strategic Value (for Planning), Building a Dynamic Organization (for Organizing), Mobilizing People (for Leading), and last but hardly least, Learning and Changing (for Controlling).

Special Features Every chapter offers a fascinating and useful portfolio of spe- cial boxed features that bring the subject matter to life in real time:

1. Management in Action, a hallmark feature, presents unfolding contemporary three-part cases about today’s business leaders and companies. The first part, “Manager’s Brief,” encourages students at the start of each chapter to begin thinking about one or more of that chapter’s major themes in the context of the current business scene. For example, Chapter 1 introduces Facebook’s Mark Zuckerberg and some of the challenges his company faces. The second Management in Action element, “Progress Report,” appears about halfway through each chapter and incorporates addi- tional chapter themes into the narrative. At each stage of this unfolding feature, we offer suggestions or questions for classroom discussion, in-class group work, or simply reflec- tion. Closing out the Management in Action three-part series is “Onward,” at the end of each chapter, which distills key aspects of the chapter and challenges students with questions for further consideration. Chapter 1’s closing “Onward” seg- ment reflects on what it might be like to work at Facebook.

2. Social Enterprise boxes offer examples illustrating chapter themes from outside the private sector. Many students are deeply interested in social entrepreneurs and enterprises, inherently and for future employment possi- bilities. Examples include: “Ashoka’s Bill Drayton, Pioneer of Social Entrepreneurship” (Chapter 1), “Are Business School Graduates Willing to Work for Social Enterprises?”

(Chapter 10), and “Piramal Sarvajal Provides Clean Water via ‘Water ATMs,’” (Chapter 17).

3. Multiple Generations at Work boxes discuss chapter themes from multigenerational perspectives, based on data rather than stereotypes, with a goal of strengthening what too often are difficult workplace relationships. Examples include: “Are ‘Portfolio Careers’ the New Normal?” (Chapter 2), “Crowdsourcing: An Inexpensive Source of Creative Ideas” (Chapter 3), and “Tech-Savvy Gen Z Is Entering the Workforce” (Chapter 17).

4. The Digital World feature offers unique examples of how companies and other users employ digital/social media in ways that capitalize on various ideas in each chapter. Students of course will relate to the social media but also learn of interesting examples and practice that most did not know before. Instructors will learn a lot as well!

That’s the big picture. We believe the management sto- ries in the boxed features light up the discussion and con- nect the major themes of the new edition with the many real worlds students will enter soon.

Up next is just a sampling of specific changes, updates, and new highlights in the 13th edition—enough to convey the wide variety of people, organizations, issues, and man- agement challenges represented throughout the text.

Chapter 1 • New Management in Action about Mark Zuckerberg of

Facebook.

• New Social Enterprise about Bill Drayton of Ashoka.

• New example of Yum! Brands having 43,000 restaurants in 135 countries.

• New Exhibit 1.1: “Staying Ahead of the Competition.”

• New example of entrepreneurial college students pitch- ing sustainable business ideas.

• New passage about artificial intelligence simplifying human-technology interfaces.

• New example of Quicken Loans Rocket Mortgage appli- cations taking minutes to complete.

• New passage about Facebook entering the job posting space to compete against LinkedIn.

Chapter 2 • New Management in Action about Jeff Bezos creating

Amazon’s organizational environment.

• New Multiple Generations at Work about “portfolio careers” becoming the new normal.

• New Social Enterprise about the Paris Agreement and combating climate change.

• New example of Microsoft’s HoloLens teaching medical students about human anatomy.

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• New passage about Wells Fargo’s incentive system lead- ing to a major corporate scandal.

• New example about Amazon suing companies that sell false positive reviews on its site.

• Revised Exhibit 5.2: “Examples of Decisions Made under Different Ethical Systems.”

• New example about Nabisco’s utilitarian decision to lay off 1,200 workers at a Chicago plant.

• Updated Exhibit 5.3: “Current Ethical Issues in Business.”

• New Exhibit 5.6: “A Process for Ethical Decision Making.”

• New example about Starbucks building Leadership Energy and Environmental Design (LEED) stores in 20 countries.

Chapter 6 • New Management in Action about Alibaba’s evolution

to a global brand.

• New example of Harley-Davidson’s marketing of motor- cycles to riders in international markets.

• New example of Chinese companies purchasing U.S. firms and divisions like Starwood Hotels, Smithfield Foods, and GE’s appliance business.

• Updated Exhibit 6.1: “Top 10 Global Firms.”

• New example of a small business, AppIt, expanding internationally by acquiring a software development company in India.

• New example about the Philippines becoming a popular location for outsourcing.

• New passage about McDonald’s collaborating with an Indian entrepreneur to adapt its menu (e.g., “Chicken Maharajah Mac”) to the vegetarian country.

Chapter 7 • New Management in Action about Starbucks’ entrepre-

neurial beginnings.

• New example about 28 million small businesses generat- ing over half of all jobs in the U.S.

• Updated Exhibit 7.2: “Successful Entrepreneurs Who Started in Their 20s.”

• New examples of franchises including Jimmy John’s and Jazzercise.

• Updated Multiple Generations at Work: “Millennial Entre- preneurs Can Learn from Others with More Experience.”

• New passage about Barbara Nascimento, founder of The Traveller Tours in Portugal, describing how to start a business.

• New example of Gordon Logan, CEO of Sports Clips, leveraging the skills of a top management team.

• Revised Exhibit 2.5: “Potential Substitutes and Complements.”

• New example of AstraZeneca losing patent protection of its $5 billion product, Crestor.

• New passage on organizational challenges associated with acquisitions.

• New example of Target investing in “green chemistry innovation.”

Chapter 3 • New Management in Action about Uber’s questionable

decision making.

• New example of General Electric using data analytics to improve efficiencies of digital wind farms.

• Updated Exhibit 3.2: “Comparison of Types of Decisions.”

• New passage about National Geographic’s “Wanderlust” social media photo competition.

• New Exhibit 3.3: “The Phases of Decision Making.”

• New example about IDEO suggesting ways to encourage employee creativity.

• New Exhibit 3.8: “Managing Group Decision Making.”

• New example about Havenly crowdsourcing feedback on its pricing and new product ideas.

Chapter 4 • Updated Management in Action about Walt Disney

scripting its own success.

• Revised Exhibit 4.1: “Decision-Making Stages and Formal Planning Steps.”

• New passage about General Motors and Lyft forming an alliance to create a fleet of on-demand autonomous vehicles.

• Revised Exhibit 4.3: “Hierarchy of Goals and Plans.”

• New passage about Chipotle’s challenges with recent food-safety events.

• New Exhibit 4.5: “The Strategic Management Process.”

• New passage about Elon Musk committing to enable human travel to Mars.

• New example of the U.S. Environmental Protection Agency’s methane-to-energy projects.

Chapter 5 • New Multiple Generations at Work about Millennials

being bullish on business.

• New Social Enterprise about India’s Barefoot College, a college for the poor by the poor.

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• New example of the U.S. government considering major changes to the H-1B temporary visa program.

• New passage on companies settling discrimination law- suits brought by employees.

Chapter 11 • New Management in Action about diversity and inclu-

sion at Apple.

• Updated Social Enterprise about managing diversity at Change.org.

• Updated example about changing workforce demographics.

• Updated Exhibit 11.3: “Top Ten Most Powerful Women Executives.”

• New example of Kaiser Permanente, AT&T, and MasterCard continuing their strong commitment to diversity.

• Updated example of the number of women in leadership positions in S&P 500 companies.

• New example of percentage of individuals with disabili- ties who are employed.

• Updated Exhibit 11.6: “Some Top Executives of Color.”

Chapter 12 • Updated Management in Action about Indra Nooyi’s

leading PepsiCo to perform with purpose.

• New Social Enterprise about Elizabeth Hausler’s engi- neering of disaster-proof homes.

• New example of Richard Branson, CEO of Virgin Group, envisioning a world powered by renewable energy by 2050.

• New Exhibit 12.4: “Sources of Leader Power.”

• Updated example of famous leaders including Margaret Thatcher, Nelson Mandela, Julius Caesar, and George Washington.

• New example of servant leadership philosophies at Zappos, Whole Foods Market, and the Container Store.

• New example of how Cheryl Bachelder, CEO of Popeye’s Louisiana Kitchen, used active listening to increase store sales by 25 percent.

• New passages about lateral, intergroup, and shared leadership.

Chapter 13 • Updated Management in Action about what makes soft-

ware company, SAS, such a great place to work.

• Updated Multiple Generations at Work about Millennials wanting to fulfill higher-order needs.

• Updated Social Enterprise about giving veterans a renewed sense of purpose.

Chapter 8 • Updated Management in Action about leadership and

structural changes at General Motors.

• Updated Social Enterprise about Kiva’s approach to organizing.

• Updated Multiple Generations at Work about online networks replacing traditional hierarchies.

• New examples of Shake Shack, Microsoft, and Sanofi using top management teams.

• New Exhibit 8.2: “Examples of Differentiation.”

• New Exhibit 8.13: “A Network Organization.”

• New examples of how Southwest Airlines, MasterCard, SAP, and Target are integrating marketing and commu- nications functions.

• New example of how the Internal Revenue Service is organized around customer groups.

Chapter 9 • New passages about organizing around ordinary and

dynamic capabilities.

• New example of Canon’s core capability in innovative image technology.

• New example about Dr Pepper Snapple Group, Coca- Cola, and PepsiCo forming an alliance to cut by 25 percent the amount of sugar in their soft drinks by 2025.

• Revised Exhibit 9.2: “How I’s Can Become We’s.”

• New example of Walmart’s CEO trying to reduce bureaucracy while encouraging employees to take more initiative.

• New example of Capital One using predictive analytics to make credit card offers to customers.

• New examples of small and large batch technologies.

Chapter 10 • Updated Management in Action about Google’s ability

to hire top talent.

• Updated Social Enterprise about business school gradu- ates working for social enterprises.

• Updated Multiple Generations at Work about college students needing soft skills.

• New example about Kayak, Etsy, and W. L. Gore creat- ing unique organization cultures.

• New Exhibit 10.1: “An Overview of the HR Planning Process.”

• New examples about John Deere and Siemens Energy finding creative ways to train young employees through a combination of academic and hands-on training.

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• Updated Multiple Generations at Work about companies shifting to more frequent performance reviews.

• New passage about Chipotle Mexican Grill trying to cor- rect its food-safety challenges.

• New example of Home Depot using six sigma to improve customer checkout processes.

• New passage about the role of board members in rela- tion to governance of companies.

• New passage about feedback control and its relationship to employee performance.

• New example of Toyota asking “Why?” to identify root causes of problems.

Chapter 17 • New Management in Action about Elon Musk being an

innovator extraordinaire.

• New Social Enterprise about India-based Piramal Sarvajal providing clean water via “Water ATMs.”

• New Multiple Generations at Work about tech-savvy Gen Z entering the workforce

• New Exhibit 17.1: “Innovation Types with Examples.”

• New passage about retailers like Macy’s in New York attracting young shoppers to stores.

• New example of virtual health care for annual patient visits reducing costs.

• New example of biosensor patches being applied to patients’ skin to monitor vital signs.

• New passage about Google’s FaceNet research team winning a facial recognition competition.

Chapter 18 • Updated Management in Action about Shell Oil’s lead-

ers facing off with investors over climate change.

• Updated Multiple Generations at Work about Millennials being ready for the future of work.

• New example of Sears losing its dominance in retail.

• New example of world-class centers in San Francisco, London, Munich, Warsaw, and Shenzen.

• New Exhibit 18.3: “Reasons for Resistance to Change.”

• New example of a manager at John Deere implementing change in a gradual manner.

• New Exhibit 18.8: “Opportunity Is Finding Ways to Meet Customers’ Needs.”

• New passage about big data, Internet of Things, and arti- ficial intelligence combining to make cities smarter.

• New Exhibit 18.9: “Learning Cycle: Explore, Discover, Act.”

• New example of the U.S. Department of Homeland Security setting cyber security goals.

• New example of Colorado-based New Belgium Brewery engaging in environmental and sustainability initiatives.

• New passage about how Ryan LLC rewards its employ- ees with 12 weeks of paid pregnancy leave and paid 4-week sabbaticals.

• New passage about Menlo Innovations offering employ- ees creative nonmonetary rewards.

• Updated passages about extrinsic rewards, empower- ment, and quality of work life.

Chapter 14 • Updated Management in Action about self-managed

teams working at Whole Foods Market.

• New Social Enterprise about co-working becoming more popular.

• Updated Multiple Generations at Work about preparing for global virtual teamwork.

• New passage about Cisco Systems relying on employee teams to remain competitive.

• New Exhibit 14.6: “A Four-Stage Model of Dispute Resolution.”

• New example of parallel teams and team-based rewards being used by organizations.

Chapter 15 • New Management in Action about music-sharing plat-

form SoundCloud encouraging the free flow of informa- tion among employees.

• Updated Social Enterprise about when the message is the story.

• New example of company review sites like Glassdoor. com and Salary.com attracting negative posts from employees.

• Updated passage about digital communication and social media.

• Updated passage about communication flowing through all parts of organizations.

• New example of Hilcorp, an oil and gas exploration company, using open book management.

• Updated passage about upward communication and open-door policies.

Chapter 16 • New Management in Action about electronic monitor-

ing of employees' health to control costs.

• Updated Social Enterprise about using multiple ways to measure social impact.

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Many individuals contributed directly to our develop- ment as textbook authors. Dennis Organ provided one of the authors with an initial opportunity and guidance in textbook writing. Jack Ivancevich did the same for one of the other authors. John Weimeister has been a friend and adviser from the very beginning. Thanks also to Christine Scheid for so much good work on previous editions and for continued friendship.

Enthusiastic gratitude to the entire McGraw-Hill Education team, starting with director Mike Ablassmeir, who—and this is more than an aside—spontaneously and impressively knew Rolling Stone’s top three drummers of all time. Mike has long provided deep expertise and an informed perspective, not to mention friendship and managerial cool in everything we do. Not technically an author, Mike is most certainly an educator for us and for the instructors and students who learn from the products he leads.

Special thanks to teammates without whom the book would not exist, let alone be such a prideworthy product:

Jamie Koch: so helpful, resourceful, enthusiastic, fast, and on top of everything;

Christine Vaughan: knowledgeable, tech-savvy, patient, always available to help us navigate the online authoring platform;

Debbie Clare: so creative, energetic, always thinking of unique ideas, and encouraging us to engage in new ways of sharing how much the 13th edition means to us;

Claire Hunter: positive, patient, easily amused (thank- fully), amazingly effective at keeping us on track and focused;

Kerrie Carfagno: great depth and breadth, in both expe- rience and knowledge, thanks for teaching even more stu- dents about our digital world;

Elisa Adams: eloquent, passionate, expressive, and remarkably good at meeting (or beating) deadlines.

Thanks to you all for getting some of our jokes, for being polite about the others, and for being fun as well as talented and dedicated throughout the project.

Finally, we thank our families. Our parents, Jeanine and Tom Bateman, Clara and John Snell, and Rose and Art Konopaske, provided us with the foundation on which we have built our careers. They continue to be a source of great support. Our wives, Mary Jo, Marybeth, and Vania, were encouraging, insightful, and understanding throughout the process. Our children, Lauren, T.J., and James Bateman; Sara, Jack, and Emily Snell; and Nick and Isabella Konopaske, provided an unending source of inspiration for our work and our nonwork. Thank you.

Thomas S. Bateman Charlottesville, VA

Scott A. Snell Charlottesville, VA

Robert Konopaske San Marcos, TX

A Team Effort This book is the product of a fantastic McGraw-Hill team. Moreover, we wrote this book believing that we are part of a team with the course instructor and with students. The entire team is responsible for the learning process.

Our goal, and that of your instructor, is to create a posi- tive learning environment in which you can excel. But in the end, the raw material of this course is just words. It is up to you to use them as a basis for further reflection, deep learn- ing, and constructive action.

What you do with the things you learn from this course, and with the opportunities the future holds, counts. As a man- ager, you can make a dramatic difference for yourself and for other people. What managers do matters tremendously.

Acknowledgments This book could not have been written and published with- out the valuable contributions of many individuals.

Special thanks to Lily Bowles, Taylor Gray, and Meg Nexsen for contributing their knowledge, insights, and research. Thanks to Michael Dutch for his contributions to the Instructor’s Manual and PowerPoint Presentations, as well as providing insights whenever we call upon him.

Our reviewers over the last 12 editions contributed time, expertise, and terrific ideas that significantly enhanced the quality of the text. The reviewers of the 13th edition are

Germaine Albuquerque Essex County College

Derek B. Bardell Delgado Community College

Andrew A. Bennett Old Dominion University

Harry Bernstein Essex County College

Jennifer Blahnik Lorain County Community College

Karen Bridgett Essex County College

Angela Bruns Baton Rouge Community College

John Ephraim Butt University of North Carolina–Charlotte

Holly A. Caldwell Bridgewater College

Frank Carothers Somerset Community College

Robert Cote Lindenwood University

Darrell Cousert University of Indianapolis

Tony Daniel Shorter University

John T. Finley Columbus State University

Roy Lynn Godkin Lamar University

Dan Hallock University of North Alabama

Anne Kelly Hoel University of Wisconsin–Stout

Carrie S. Hurst Tennessee State University

Sridharan Krishnaswami Old Dominion University

Debra D. Kuhl Pensacola State College

Thomas Norman California State University

Shane Spiller Western Kentucky University

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In this ever more competitive environment, there are six essential types of performance on which the organization beats, equals,

or loses to the competition: cost, quality, speed, innovation, service, and sustainability. These six performance dimensions,

when done well, deliver value to the customer and competitive advantage to you and your organization.

Throughout the text, Bateman, Snell, and Konopaske remind students of these six dimensions and their impact on the bottom

line with marginal icons. This results-oriented approach is a unique hallmark of this textbook.

New questions in this edition further emphasize the bottom line. The Instructor’s Manual has answers to these questions.

Bottom Line

First Pages

The External and Internal Environments  Chapter 2 51

bat27644_ch02_038-071.indd 51 10/19/17 02:39 PM

representatives before selling them to their customers, and industrial buyers, who buy raw materials (such as chemicals) before converting them into final products. Selling to inter- mediate customers is often called business-to-business (B2B) selling. Notice in these B2B examples that the intermediate customer eventually goes on to become a seller.

Like suppliers, customers are important to organizations for reasons other than the money they provide for goods and services. Customers can demand lower prices, higher qual- ity, unique product specifications, or better service. They also can play competitors against one another, as occurs when a car buyer (or a purchasing agent) collects different offers and negotiates for the best price. Customers want to be actively involved with their products, as when the buyer of an iPhone customizes it with ring tones, wallpaper, and a variety of apps.

Dell Inc. took customer input a step further by asking customers what they want the company to develop next. At Dell’s IdeaStorm website (www.ideastorm.com), visitors can post ideas and comments about products. One of IdeaStorm’s most enthusiastic customer- users became so involved with the community that he was hired as the project’s manager and helped expand the site’s customer interactions.34

The Internet empowers customers. It provides easy information about product features and pricing. In addition, Internet users informally create and share messages about a prod- uct, providing flattering free “advertising” at best or embarrassing and even erroneous bad publicity at worst. Companies try to use this to their advantage by creating opportunities for consumers and the brand to interact.

Another way companies connect with customers is through social media sites like LinkedIn Company Pages, which allows companies to invite individuals to join company- related groups. Online retailer Zappos uses LinkedIn to answer questions about its prod- ucts and the company’s culture. Similarly, Google+ Communities offers companies a way to interact with individuals who might be interested in their products or services while increas- ing its visibility and brand awareness.35

As we discussed in Chapter 1, customer service means giving customers what they want or need, the way they want it, the first time. This usually depends on the speed and depend- ability with which an organization can deliver its products. Exhibit 2.6 shows several actions and attitudes that contribute to excellent customer service.

Bottom Line In all businesses—services as well as manufacturing— strategies that emphasize

good customer service provide a critical

competitive advantage. Identify some excellent and poor customer service that

you have received.

FedEx partners with many health care companies to provide logistics of all types from factory floor to a patient’s front door. ©Bloomberg/Bloomberg/Getty Images

EXHIBIT 2.6 Actions and Attitudes = Excellent Customer ServiceSpeed of filling and

delivering normal orders.

Willingness to meet emergency needs.

Merchandise delivered in good

condition.

Readiness to take back defective

goods and resupply quickly.

Availability of installation and

repair services and parts.

Service charges, whether free or

priced separately.

g

SOURCE: Adapted from Kotler, P., Marketing Management: Analysis, Planning, Implementation and Control, 9th ed. Englewood Cliffs, NJ: Prentice Hall, 1990.

First Pages

The External and Internal Environments  Chapter 2 51

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representatives before selling them to their customers, and industrial buyers, who buy raw materials (such as chemicals) before converting them into final products. Selling to inter- mediate customers is often called business-to-business (B2B) selling. Notice in these B2B examples that the intermediate customer eventually goes on to become a seller.

Like suppliers, customers are important to organizations for reasons other than the money they provide for goods and services. Customers can demand lower prices, higher qual- ity, unique product specifications, or better service. They also can play competitors against one another, as occurs when a car buyer (or a purchasing agent) collects different offers and negotiates for the best price. Customers want to be actively involved with their products, as when the buyer of an iPhone customizes it with ring tones, wallpaper, and a variety of apps.

Dell Inc. took customer input a step further by asking customers what they want the company to develop next. At Dell’s IdeaStorm website (www.ideastorm.com), visitors can post ideas and comments about products. One of IdeaStorm’s most enthusiastic customer- users became so involved with the community that he was hired as the project’s manager and helped expand the site’s customer interactions.34

The Internet empowers customers. It provides easy information about product features and pricing. In addition, Internet users informally create and share messages about a prod- uct, providing flattering free “advertising” at best or embarrassing and even erroneous bad publicity at worst. Companies try to use this to their advantage by creating opportunities for consumers and the brand to interact.

Another way companies connect with customers is through social media sites like LinkedIn Company Pages, which allows companies to invite individuals to join company- related groups. Online retailer Zappos uses LinkedIn to answer questions about its prod- ucts and the company’s culture. Similarly, Google+ Communities offers companies a way to interact with individuals who might be interested in their products or services while increas- ing its visibility and brand awareness.35

As we discussed in Chapter 1, customer service means giving customers what they want or need, the way they want it, the first time. This usually depends on the speed and depend- ability with which an organization can deliver its products. Exhibit 2.6 shows several actions and attitudes that contribute to excellent customer service.

Bottom Line In all businesses—services as well as manufacturing— strategies that emphasize

good customer service provide a critical

competitive advantage. Identify some excellent and poor customer service that

you have received.

FedEx partners with many health care companies to provide logistics of all types from factory floor to a patient’s front door. ©Bloomberg/Bloomberg/Getty Images

EXHIBIT 2.6 Actions and Attitudes = Excellent Customer ServiceSpeed of filling and

delivering normal orders.

Willingness to meet emergency needs.

Merchandise delivered in good

condition.

Readiness to take back defective

goods and resupply quickly.

Availability of installation and

repair services and parts.

Service charges, whether free or

priced separately.

g

SOURCE: Adapted from Kotler, P., Marketing Management: Analysis, Planning, Implementation and Control, 9th ed. Englewood Cliffs, NJ: Prentice Hall, 1990.

First Pages

The External and Internal Environments  Chapter 2 51

bat27644_ch02_038-071.indd 51 10/19/17 02:39 PM

representatives before selling them to their customers, and industrial buyers, who buy raw materials (such as chemicals) before converting them into final products. Selling to inter- mediate customers is often called business-to-business (B2B) selling. Notice in these B2B examples that the intermediate customer eventually goes on to become a seller.

Like suppliers, customers are important to organizations for reasons other than the money they provide for goods and services. Customers can demand lower prices, higher qual- ity, unique product specifications, or better service. They also can play competitors against one another, as occurs when a car buyer (or a purchasing agent) collects different offers and negotiates for the best price. Customers want to be actively involved with their products, as when the buyer of an iPhone customizes it with ring tones, wallpaper, and a variety of apps.

Dell Inc. took customer input a step further by asking customers what they want the company to develop next. At Dell’s IdeaStorm website (www.ideastorm.com), visitors can post ideas and comments about products. One of IdeaStorm’s most enthusiastic customer- users became so involved with the community that he was hired as the project’s manager and helped expand the site’s customer interactions.34

The Internet empowers customers. It provides easy information about product features and pricing. In addition, Internet users informally create and share messages about a prod- uct, providing flattering free “advertising” at best or embarrassing and even erroneous bad publicity at worst. Companies try to use this to their advantage by creating opportunities for consumers and the brand to interact.

Another way companies connect with customers is through social media sites like LinkedIn Company Pages, which allows companies to invite individuals to join company- related groups. Online retailer Zappos uses LinkedIn to answer questions about its prod- ucts and the company’s culture. Similarly, Google+ Communities offers companies a way to interact with individuals who might be interested in their products or services while increas- ing its visibility and brand awareness.35

As we discussed in Chapter 1, customer service means giving customers what they want or need, the way they want it, the first time. This usually depends on the speed and depend- ability with which an organization can deliver its products. Exhibit 2.6 shows several actions and attitudes that contribute to excellent customer service.

Bottom Line In all businesses—services as well as manufacturing— strategies that emphasize

good customer service provide a critical

competitive advantage. Identify some excellent and poor customer service that

you have received.

FedEx partners with many health care companies to provide logistics of all types from factory floor to a patient’s front door. ©Bloomberg/Bloomberg/Getty Images

EXHIBIT 2.6 Actions and Attitudes = Excellent Customer ServiceSpeed of filling and

delivering normal orders.

Willingness to meet emergency needs.

Merchandise delivered in good

condition.

Readiness to take back defective

goods and resupply quickly.

Availability of installation and

repair services and parts.

Service charges, whether free or

priced separately.

g

SOURCE: Adapted from Kotler, P., Marketing Management: Analysis, Planning, Implementation and Control, 9th ed. Englewood Cliffs, NJ: Prentice Hall, 1990.

First Pages

The External and Internal Environments  Chapter 2 51

bat27644_ch02_038-071.indd 51 10/19/17 02:39 PM

representatives before selling them to their customers, and industrial buyers, who buy raw materials (such as chemicals) before converting them into final products. Selling to inter- mediate customers is often called business-to-business (B2B) selling. Notice in these B2B examples that the intermediate customer eventually goes on to become a seller.

Like suppliers, customers are important to organizations for reasons other than the money they provide for goods and services. Customers can demand lower prices, higher qual- ity, unique product specifications, or better service. They also can play competitors against one another, as occurs when a car buyer (or a purchasing agent) collects different offers and negotiates for the best price. Customers want to be actively involved with their products, as when the buyer of an iPhone customizes it with ring tones, wallpaper, and a variety of apps.

Dell Inc. took customer input a step further by asking customers what they want the company to develop next. At Dell’s IdeaStorm website (www.ideastorm.com), visitors can post ideas and comments about products. One of IdeaStorm’s most enthusiastic customer- users became so involved with the community that he was hired as the project’s manager and helped expand the site’s customer interactions.34

The Internet empowers customers. It provides easy information about product features and pricing. In addition, Internet users informally create and share messages about a prod- uct, providing flattering free “advertising” at best or embarrassing and even erroneous bad publicity at worst. Companies try to use this to their advantage by creating opportunities for consumers and the brand to interact.

Another way companies connect with customers is through social media sites like LinkedIn Company Pages, which allows companies to invite individuals to join company- related groups. Online retailer Zappos uses LinkedIn to answer questions about its prod- ucts and the company’s culture. Similarly, Google+ Communities offers companies a way to interact with individuals who might be interested in their products or services while increas- ing its visibility and brand awareness.35

As we discussed in Chapter 1, customer service means giving customers what they want or need, the way they want it, the first time. This usually depends on the speed and depend- ability with which an organization can deliver its products. Exhibit 2.6 shows several actions and attitudes that contribute to excellent customer service.

Bottom Line In all businesses—services as well as manufacturing— strategies that emphasize

good customer service provide a critical

competitive advantage. Identify some excellent and poor customer service that

you have received.

FedEx partners with many health care companies to provide logistics of all types from factory floor to a patient’s front door. ©Bloomberg/Bloomberg/Getty Images

EXHIBIT 2.6 Actions and Attitudes = Excellent Customer ServiceSpeed of filling and

delivering normal orders.

Willingness to meet emergency needs.

Merchandise delivered in good

condition.

Readiness to take back defective

goods and resupply quickly.

Availability of installation and

repair services and parts.

Service charges, whether free or

priced separately.

g

SOURCE: Adapted from Kotler, P., Marketing Management: Analysis, Planning, Implementation and Control, 9th ed. Englewood Cliffs, NJ: Prentice Hall, 1990.

The External and Internal Environments  Chapter 2 51

bat27644_ch02_038-071.indd 51 10/19/17 02:39 PM

representatives before selling them to their customers, and industrial buyers, who buy raw materials (such as chemicals) before converting them into final products. Selling to inter- mediate customers is often called business-to-business (B2B) selling. Notice in these B2B examples that the intermediate customer eventually goes on to become a seller.

Like suppliers, customers are important to organizations for reasons other than the money they provide for goods and services. Customers can demand lower prices, higher qual- ity, unique product specifications, or better service. They also can play competitors against one another, as occurs when a car buyer (or a purchasing agent) collects different offers and negotiates for the best price. Customers want to be actively involved with their products, as when the buyer of an iPhone customizes it with ring tones, wallpaper, and a variety of apps.

Dell Inc. took customer input a step further by asking customers what they want the company to develop next. At Dell’s IdeaStorm website (www.ideastorm.com), visitors can post ideas and comments about products. One of IdeaStorm’s most enthusiastic customer- users became so involved with the community that he was hired as the project’s manager and helped expand the site’s customer interactions.34

The Internet empowers customers. It provides easy information about product features and pricing. In addition, Internet users informally create and share messages about a prod- uct, providing flattering free “advertising” at best or embarrassing and even erroneous bad publicity at worst. Companies try to use this to their advantage by creating opportunities for consumers and the brand to interact.

Another way companies connect with customers is through social media sites like LinkedIn Company Pages, which allows companies to invite individuals to join company- related groups. Online retailer Zappos uses LinkedIn to answer questions about its prod- ucts and the company’s culture. Similarly, Google+ Communities offers companies a way to interact with individuals who might be interested in their products or services while increas- ing its visibility and brand awareness.35

As we discussed in Chapter 1, customer service means giving customers what they want or need, the way they want it, the first time. This usually depends on the speed and depend- ability with which an organization can deliver its products. Exhibit 2.6 shows several actions and attitudes that contribute to excellent customer service.

Bottom Line In all businesses—services as well as manufacturing— strategies that emphasize

good customer service provide a critical

competitive advantage. Identify some excellent and poor customer service that

you have received.

FedEx partners with many health care companies to provide logistics of all types from factory floor to a patient’s front door. ©Bloomberg/Bloomberg/Getty Images

EXHIBIT 2.6 Actions and Attitudes = Excellent Customer ServiceSpeed of filling and

delivering normal orders.

Willingness to meet emergency needs.

Merchandise delivered in good

condition.

Readiness to take back defective

goods and resupply quickly.

Availability of installation and

repair services and parts.

Service charges, whether free or

priced separately.

g

SOURCE: Adapted from Kotler, P., Marketing Management: Analysis, Planning, Implementation and Control, 9th ed. Englewood Cliffs, NJ: Prentice Hall, 1990.

First Pages

The External and Internal Environments  Chapter 2 51

bat27644_ch02_038-071.indd 51 10/19/17 02:39 PM

representatives before selling them to their customers, and industrial buyers, who buy raw materials (such as chemicals) before converting them into final products. Selling to inter- mediate customers is often called business-to-business (B2B) selling. Notice in these B2B examples that the intermediate customer eventually goes on to become a seller.

Like suppliers, customers are important to organizations for reasons other than the money they provide for goods and services. Customers can demand lower prices, higher qual- ity, unique product specifications, or better service. They also can play competitors against one another, as occurs when a car buyer (or a purchasing agent) collects different offers and negotiates for the best price. Customers want to be actively involved with their products, as when the buyer of an iPhone customizes it with ring tones, wallpaper, and a variety of apps.

Dell Inc. took customer input a step further by asking customers what they want the company to develop next. At Dell’s IdeaStorm website (www.ideastorm.com), visitors can post ideas and comments about products. One of IdeaStorm’s most enthusiastic customer- users became so involved with the community that he was hired as the project’s manager and helped expand the site’s customer interactions.34

The Internet empowers customers. It provides easy information about product features and pricing. In addition, Internet users informally create and share messages about a prod- uct, providing flattering free “advertising” at best or embarrassing and even erroneous bad publicity at worst. Companies try to use this to their advantage by creating opportunities for consumers and the brand to interact.

Another way companies connect with customers is through social media sites like LinkedIn Company Pages, which allows companies to invite individuals to join company- related groups. Online retailer Zappos uses LinkedIn to answer questions about its prod- ucts and the company’s culture. Similarly, Google+ Communities offers companies a way to interact with individuals who might be interested in their products or services while increas- ing its visibility and brand awareness.35

As we discussed in Chapter 1, customer service means giving customers what they want or need, the way they want it, the first time. This usually depends on the speed and depend- ability with which an organization can deliver its products. Exhibit 2.6 shows several actions and attitudes that contribute to excellent customer service.

Bottom Line In all businesses—services as well as manufacturing— strategies that emphasize

good customer service provide a critical

competitive advantage. Identify some excellent and poor customer service that

you have received.

FedEx partners with many health care companies to provide logistics of all types from factory floor to a patient’s front door. ©Bloomberg/Bloomberg/Getty Images

EXHIBIT 2.6 Actions and Attitudes = Excellent Customer ServiceSpeed of filling and

delivering normal orders.

Willingness to meet emergency needs.

Merchandise delivered in good

condition.

Readiness to take back defective

goods and resupply quickly.

Availability of installation and

repair services and parts.

Service charges, whether free or

priced separately.

g

SOURCE: Adapted from Kotler, P., Marketing Management: Analysis, Planning, Implementation and Control, 9th ed. Englewood Cliffs, NJ: Prentice Hall, 1990.

Q

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In CASE You Haven’t Noticed . . . Bateman, Snell, and Konopaske have put together an outstanding selection of case studies of various lengths that highlight companies’ ups and downs, stimulate learning and understanding, and challenge students to respond.

Instructors will find a wealth of relevant and updated cases in every chapter, using companies—big and small—that students will enjoy learning about.

CHAPTER UNFOLDING CASES

Each chapter begins with a “Management in Action: Manager’s Brief” section that describes an actual organizational situation, leader, or company. The “Manager’s Brief” is referred to again within the chapter in the “Progress Report” section, showing the student how the chapter material relates back to the company, situation, or leader highlighted in the chapter opener. At the end of the chapter, the “Onward” section ties up loose ends and brings the material full circle for the student. Answers to Management in Action section questions can be found in the Instructor’s Manual.

SOCIAL ENTERPRISE

Social Enterprise boxes have been updated in each chapter to familiarize students with this fast-growing sector. Answers to Social Enterprise questions are included in the Instructor’s Manual.

MULTIPLE GENERATIONS AT WORK

In each chapter, a Multiple Generations at Work box has been updated added to highlight some of the intergenerational challenges faced by managers and employees today.

THE DIGITAL WORLD

The Digital World feature offers unique examples of how companies and other users employ digital/social media in ways that capitalize on various ideas in each chapter.

CONCLUDING CASES

Each chapter ends with a case based on disguised but real companies and people that reinforces key chapter elements and themes.

SUPPLEMENTARY CASES

At the end of each part, an additional case is provided for professors who want students to delve further into part topics.

Outstanding Pedagogy Management: Leading & Collaborating in a Competitive World is pedagogically stimulating and is intended to maximize student learning. With this in mind, we used a wide array of pedagogical features—some tried and true, others new and novel:

END-OF-CHAPTER ELEMENTS

• Key terms are page-referenced to the text and are part of the vocabulary-building emphasis. These terms are defined again in the glossary at the end of the book.

• Retaining What You Learned provides clear, concise responses to the learning objectives, giving students a quick reference for reviewing the important concepts in the chapter.

• Discussion Questions, which follow, are thought-provoking questions on concepts covered in the chapter and ask for opinions on controversial issues.

• Experiential Exercises in each chapter bring key concepts to life so students can experience them firsthand.

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Assurance of Learning This 13th edition contains revised learning objectives and learning objectives are called out within the chapter where the content begins. The Retaining What You Learned for each chapter ties the learning objectives back together as well. And, finally, our test bank provides tagging for the learning objective that the question covers, so instructors will be able to test material covering all learning objectives, thus ensuring that students have mastered the important topics.

Comprehensive Supplements INSTRUCTOR’S MANUAL

The Instructor’s Manual was revised and updated to include thorough coverage of each chapter as well as time-saving features such as an outline, key student questions, class prep work assignments, guidance for using the unfolding cases, video supplements, and, finally, PowerPoint slides.

TEST BANK

The Test Bank includes more than 100 questions per chapter in a variety of formats. It has been revised for accuracy and expanded to include a greater variety of comprehension and application (scenario-based) questions as well as tagged with Bloom’s Taxonomy levels and AACSB requirements.

POWERPOINT PRESENTATION SLIDES

The PowerPoint presentation collection contains an easy-to-follow outline including figures downloaded from the text. In addition to providing lecture notes, the slides also include questions for class discussion as well as company examples not found in the textbook. This versatility allows you to create a custom presentation suitable for your own classroom experience.

McGraw-Hill Customer Experience At McGraw-Hill, we understand that getting the most from new technology can be challenging. That’s why our services don’t stop after you purchase our products. You can e-mail our product specialists 24 hours a day to get product training online. Or you can search our knowledge bank of frequently asked questions on our support website. For customer support, call 800-331-5094, submit a support request using our contact us form, http://mpss.mhhe.com/contact.php, or visit www.mhhe.com/support. One of our technical support analysts will be able to assist you in a timely fashion.

MANAGER’S HOT SEAT

This interactive, video-based application puts students in the manager’s hot seat, building critical thinking and decision-making skills and allowing students to apply concepts to real managerial challenges. Students watch as 21 real managers apply their years of experience when confronting unscripted issues such as bullying in the workplace, cyber loafing, globalization, intergenerational work conflicts, workplace violence, and leadership versus management. In addition, Manager’s Hot Seat interactive applications, featuring video cases and accompanying quizzes, can be found in Connect.

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CREATE

Instructors can now tailor their teaching resources to match the way they

teach! With McGraw-Hill Create, www.mcgrawhillcreate. com, instructors can easily rearrange chapters, combine material from other content sources, and quickly upload and integrate their own content, such as course syllabi or teaching notes. Find the right content in Create by searching through thousands of leading McGraw-Hill textbooks. Arrange the material to fit your teaching style. Order a Create book and receive a complimentary print review copy in three to five business days or a complimentary electronic review copy via e-mail within one hour. Go to www.mcgrawhillcreate.com today and register.

TEGRITY CAMPUS

Tegrity makes class time available 24/7 by automatically capturing

every lecture in a searchable format for students to review when they study and complete assignments. With a simple one-click start-and-stop process, you capture all computer screens and corresponding audio. Students can replay any part of any class with easy-to-use browser-based viewing on a PC or Mac. Educators know that the more students can see, hear, and experience class resources, the better they learn. In fact, studies prove it. With patented Tegrity “search anything” technology, students instantly recall key class moments for replay online or on iPods and mobile devices. Instructors can help turn all their students’ study time into learning moments immediately supported by their lecture. To learn more about Tegrity, watch a twominute Flash demo at http://tegritycampus.mhhe.com.

BLACKBOARD® PARTNERSHIP

McGraw-Hill Education and Blackboard have teamed up to simplify your life. Now you and your students can access Connect and Create right from within your Blackboard course—all with one single sign-on. The grade books are

seamless, so when a student completes an integrated Connect assignment, the grade for that assignment automatically (and instantly) feeds your Blackboard grade center. Learn more at www.domorenow.com.

McGRAW-HILL CAMPUSTM

McGraw-Hill Campus is a new one-stop teaching and learning experience available to users of any

learning management system. This institutional service allows faculty and students to enjoy single sign-on (SSO) access to all McGraw-Hill Higher Education materials, including the award-winning McGraw-Hill Connect platform, from directly within the institution’s website. With McGraw-Hill Campus, faculty receive instant access to teaching materials (e.g., eTextbooks, test banks, PowerPoint slides, animations, learning objectives, etc.), allowing them to browse, search, and use any instructor ancillary content in our vast library at no additional cost to instructor or students. In addition, students enjoy SSO access to a variety of free content (e.g., quizzes, flash cards, narrated presentations, etc.) and subscription-based products (e.g., McGraw-Hill Connect). With McGraw-Hill Campus enabled, faculty and students will never need to create another account to access McGraw-Hill products and services. Learn more at www.mhcampus.com.

ASSURANCE OF LEARNING READY

Many educational institutions today focus on the notion of assurance of learning, an important element of some accreditation standards. Management: Leading & Collaborating in a Competitive World is designed specifically to support instructors’ assurance of learning initiatives with a simple yet powerful solution. Each test bank question for Management: Leading & Collaborating in a Competitive World maps to a specific chapter learning objective listed in the text. Instructors can use our test bank software, EZ Test, to easily query for learning objectives that directly relate to the learning outcomes for their course. Instructors can then use the reporting features of EZ Test to aggregate student results in similar fashion, making the collection and presentation of assurance of learning data simple and easy.

AACSB TAGGING

McGraw-Hill Education is a proud corporate member of AACSB International.

Understanding the importance and value of AACSB accreditation, Management: Leading & Collaborating in a Competitive World recognizes the curricula guidelines detailed in the AACSB standards for business

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McGRAW-HILL CUSTOMER EXPERIENCE GROUP CONTACT INFORMATION

At McGraw-Hill Education, we understand that getting the most from new technology can be challenging. That’s why our services don’t stop after you purchase our products. You can e-mail our Product Specialists 24 hours a day to get product training online. Or you can search our knowledge bank of Frequently Asked Questions on our support website. For Customer Support, call 800-331-5094 or visit www.mhhe.com/support. One of our Technical Support Analysts will be able to assist you in a timely fashion.

accreditation by connecting selected questions in the text and the test bank to the eight general knowledge and skill guidelines in the AACSB standards. The statements contained in Management: Leading & Collaborating in a Competitive World are provided only as a guide for the users of this product. The AACSB leaves content coverage and assessment within the purview of individual schools, the mission of the school, and the faculty. While the Management: Leading & Collaborating in a Competitive World teaching package makes no claim of any specific AACSB qualification or evaluation, we have within Management: Leading & Collaborating in a Competitive World labeled selected questions according to the eight general knowledge and skills areas.

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©McGraw-Hill Education

McGraw-Hill Connect® is a highly reliable, easy-to- use homework and learning management solution that utilizes learning science and award-winning adaptive tools to improve student results.

73% of instructors who use Connect

require it; instructor satisfaction increases by 28% when Connect

is required.

Over 7 billion questions have been answered, making McGraw-Hill

Education products more intelligent, reliable, and precise.

Using Connect improves retention rates by 19.8%, passing rates by 12.7%, and exam scores by 9.1%.

▪ Connect content is authored by the world’s best subject matter experts, and is available to your class through a simple and intuitive interface.

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Quality Content and Learning Resources

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▪ SmartBook helps students study more efficiently by delivering an interactive reading experience through adaptive highlighting and review.

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©Hero Images/Getty Images

▪ Connect Insight® generates easy-to-read reports on individual students, the class as a whole, and on specific assignments.

▪ The Connect Insight dashboard delivers data on performance, study behavior, and effort. Instructors can quickly identify students who struggle and focus on material that the class has yet to master.

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www.mheducation.com/connect

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Brief Contents

PREFACE VII

PART ONE FOUNDATIONS OF MANAGEMENT 2

1. Managing and Performing 2

2. The External and Internal Environments 38

3. Managerial Decision Making 72

PART TWO PLANNING: DELIVERING STRATEGIC VALUE 102

4. Planning and Strategic Management 102

5. Ethics, Corporate Responsibility, and Sustainability 130

6. International Management 158

7. Entrepreneurship 188

PART THREE ORGANIZING: BUILDING A DYNAMIC ORGANIZATION 222

8. Organization Structure 222

9. Organizational Agility 250

10. Human Resources Management 276

11. Managing the Diverse Workforce 310

PART FOUR LEADING: MOBILIZING PEOPLE 340

12. Leadership 340

13. Motivating for Performance 370

14. Teamwork 402

15. Communicating 428

PART FIVE CONTROLLING: LEARNING AND CHANGING 458

16. Managerial Control 458

17. Managing Technology and Innovation 488

18. Creating and Leading Change 516

Notes 547

Glossary/Subject Index 594

Name Index 620

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Actively Manage Your Relationship with Your Organization 20 Survive and Thrive 21

MANAGEMENT IN ACTION ONWARD 22 Key Terms 23

Retaining What You Learned 23

Discussion Questions 24

Experiential Exercises 25

CONCLUDING CASE 27

APPENDIX A 28

KEY TERMS 34

DISCUSSION QUESTIONS 35

CHAPTER 2

The External and Internal Environments 38 MANAGEMENT IN ACTION MANAGER’S BRIEF 39 The Macroenvironment 41

The Economy 41 Technology 42 Laws and Regulations 43

MULTIPLE GENERATIONS AT WORK 44 Demographics 44 Social Issues 45 Sustainability and the Natural Environment 45

SOCIAL ENTERPRISE 46 The Competitive Environment 46

Competitors 47 New Entrants 48 Substitutes and Complements 49 Suppliers 50 Customers 50

MANAGEMENT IN ACTION PROGRESS REPORT 52 Environmental Analysis 52

CHAPTER 1

Managing and Performing 2 MANAGEMENT IN ACTION MANAGER’S BRIEF 3 Managing in a Competitive World 4

Globalization 4 Technological Change 5 Knowledge Management 6 Collaboration across Boundaries 6

MULTIPLE GENERATIONS AT WORK 7

THE DIGITAL WORLD 7 Managing for Competitive Advantage 8

Innovation 8 Quality 8 Service 9 Speed 9 Cost Competitiveness 10 Sustainability 11 Delivering All Types of Performance 11

The Functions of Management 12 Planning: Delivering Strategic Value 12 Organizing: Building a Dynamic Organization 12

SOCIAL ENTERPRISE 13 Leading: Mobilizing People 13 Controlling: Learning and Changing 14 Performing All Four Management Functions 14

MANAGEMENT IN ACTION PROGRESS REPORT 15 Management Levels and Skills 15

Top-Level Managers 15 Middle-Level Managers 16 Frontline Managers 16 Working Leaders with Broad Responsibilities 16 Must-Have Management Skills 17

You and Your Career 18 Be Both a Specialist and a Generalist 19 Be Self-Reliant 19 Connect with People 20

Contents

PART ONE FOUNDATIONS OF MANAGEMENT

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Identifying and Diagnosing the Problem 77 Generating Alternative Solutions 77 Evaluating Alternatives 78 Making the Choice 80 Implementing the Decision 80

MANAGEMENT IN ACTION PROGRESS REPORT 81 Evaluating the Decision 82

The Best Decision 82 Barriers to Effective Decision Making 83

Psychological Biases 83 Time Pressures 84

THE DIGITAL WORLD 85 Social Realities 85

Decision Making in Groups 85 Potential Advantages of Using a Group 85 Potential Problems of Using a Group 86

Managing Group Decision Making 87 Leadership Style 87 Constructive Conflict 87 Encouraging Creativity 89 Brainstorming 90

MULTIPLE GENERATIONS AT WORK 91 Organizational Decision Making 91

Constraints on Decision Makers 91 Organizational Decision Processes 92 Decision Making in a Crisis 92

MANAGEMENT IN ACTION ONWARD 94 Key Terms 95

Retaining What You Learned 95

Discussion Questions 96

Experiential Exercises 96

CONCLUDING CASE 98

PART ONE SUPPORTING CASE 99

Environmental Scanning 53 Scenario Development 53 Forecasting 54 Benchmarking 54

Actively Managing the External Environment 55 Changing the Environment You Are In 55 Influencing Your Environment 55 Adapting to the Environment: Changing the Organization 56 Choosing an Approach 58

The Internal Environment of Organizations: Culture and Climate 58

Organization Culture 58

THE DIGITAL WORLD 60

MANAGEMENT IN ACTION ONWARD 61 Organizational Climate 61

Key Terms 62

Retaining What You Learned 62

Discussion Questions 64

Experiential Exercises 64

CONCLUDING CASE 67

APPENDIX B 68

KEY TERMS 70

CHAPTER 3

Managerial Decision Making 72 MANAGEMENT IN ACTION MANAGER’S BRIEF 73 Characteristics of Managerial Decisions 74

Lack of Structure 74 Uncertainty and Risk 75

SOCIAL ENTERPRISE 76 Conflict 76

The Phases of Decision Making 77

PART TWO PLANNING: DELIVERING STRATEGIC VALUE

CHAPTER 4

Planning and Strategic Management 102 MANAGEMENT IN ACTION MANAGER’S BRIEF 103 An Overview of Planning Fundamentals 104

The Basic Planning Process 104

SOCIAL ENTERPRISE 107

Levels of Planning 108 Strategic Planning 108 Tactical and Operational Planning 109 Aligning Tactical, Operational, and Strategic Planning 110

Strategic Planning 111

MANAGEMENT IN ACTION PROGRESS REPORT 112 Step 1: Establishing Mission, Vision, and Goals 113 Step 2: Analyzing External Opportunities and Threats 114

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THE DIGITAL WORLD 116 Step 3: Analyzing Internal Strengths and Weaknesses 116 Step 4: SWOT Analysis and Strategy Formulation 118

MULTIPLE GENERATIONS AT WORK 120 Step 5: Strategy Implementation 123 Step 6: Strategic Control 124

MANAGEMENT IN ACTION ONWARD 125 Key Terms 126

Retaining What You Learned 126

Discussion Questions 127

Experiential Exercises 128

CONCLUDING CASE 129

CHAPTER 5

Ethics, Corporate Responsibility, and Sustainability 130 MANAGEMENT IN ACTION MANAGER’S BRIEF 131

It’s a Big Issue 132 It’s a Personal Issue 133

MULTIPLE GENERATIONS AT WORK 134 Ethics 135

Ethical Systems 135 Business Ethics 137 The Ethics Environment 137

THE DIGITAL WORLD 140 Ethical Decision Making 141 Courage 142

MANAGEMENT IN ACTION PROGRESS REPORT 143 Corporate Social Responsibility 144

Contrasting Views 146 Reconciliation 146

The Natural Environment and Sustainability 147 A Risk Society 147

SOCIAL ENTERPRISE 148 Ecocentric Management 149 Environmental Agendas for the Future 150

MANAGEMENT IN ACTION ONWARD 151 Key Terms 151

Retaining What You Learned 152

Discussion Questions 153

Experiential Exercises 154

CONCLUDING CASE 155

CHAPTER 6

International Management 158 MANAGEMENT IN ACTION MANAGER’S BRIEF 159 Managing in Today’s (Global) Economy 160

International Challenges and Opportunities 160 Outsourcing and Jobs 162

The Geography of Business 163 Western Europe 164 Asia: China and India 165 The Americas 166

SOCIAL ENTERPRISE 167 Africa and the Middle East 167

Global Strategy 168 Pressures for Global Integration 168 Pressures for Local Responsiveness 169 Choosing a Global Strategy 170

MANAGEMENT IN ACTION PROGRESS REPORT 172 Entry Mode 173

Exporting 173 Licensing 174 Franchising 174 Joint Ventures 175 Wholly Owned Subsidiaries 175

Working Overseas 176 Skills of the Global Manager 177 Understanding Cultural Issues 177

MULTIPLE GENERATIONS AT WORK 180 Ethical Issues in International Management 181

THE DIGITAL WORLD 182

MANAGEMENT IN ACTION ONWARD 182 Key Terms 183

Retaining What You Learned 183

Discussion Questions 184

Experiential Exercises 185

CONCLUDING CASE 186

CHAPTER 7

Entrepreneurship 188 MANAGEMENT IN ACTION MANAGER’S BRIEF 189 Entrepreneurship 192

Why Become an Entrepreneur? 192 What Does It Take to Succeed? 193 What Business Should You Start? 194

SOCIAL ENTERPRISE 197 What Does It Take, Personally? 199 Success and Failure 200

MANAGEMENT IN ACTION PROGRESS REPORT 201

THE DIGITAL WORLD 202 Common Management Challenges 202 Increasing Your Chances of Success 204

MULTIPLE GENERATIONS AT WORK 209 Corporate Entrepreneurship 209

Building Support for Your Idea 210 Building Intrapreneurship 210 Management Challenges 210 Entrepreneurial Orientation 211

MANAGEMENT IN ACTION ONWARD 212

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CHAPTER 8

Organization Structure 222 MANAGEMENT IN ACTION MANAGER’S BRIEF 223 Fundamentals of Organizing 224

Differentiation 224 Integration 225

The Vertical Structure 226 Authority in Organizations 226 Hierarchical Levels 227 Span of Control 228 Delegation 229 Decentralization 230

The Horizontal Structure 232 The Functional Organization 232

SOCIAL ENTERPRISE 234 The Divisional Organization 234 The Matrix Organization 236

MANAGEMENT IN ACTION PROGRESS REPORT 237 The Network Organization 239

MULTIPLE GENERATIONS AT WORK 241 Organizational Integration 241

THE DIGITAL WORLD 242 Coordination by Standardization 242 Coordination by Plan 242 Coordination by Mutual Adjustment 243 Coordination and Communication 243

Looking Ahead 245

MANAGEMENT IN ACTION ONWARD 245 Key Terms 246

Retaining What You Learned 246

Discussion Questions 247

Experiential Exercises 247

CONCLUDING CASE 249

CHAPTER 9

Organizational Agility 250 MANAGEMENT IN ACTION MANAGER’S BRIEF 251 The Responsive Organization 252 Strategy and Organizational Agility 253

MULTIPLE GENERATIONS AT WORK 254 Organizing around Core Capabilities 254 Strategic Alliances 255 The Learning Organization 256 The High-Involvement Organization 256

Organizational Size and Agility 257 The Case for Big 257 The Case for Small 257 Being Big and Small 258

SOCIAL ENTERPRISE 259

MANAGEMENT IN ACTION PROGRESS REPORT 260 Customers and the Responsive Organization 260

Customer Relationship Management 260

THE DIGITAL WORLD 262 Quality Initiatives 262 Reengineering 264

Technology and Organizational Agility 265 Types of Technology Configurations 265 Organizing for Flexible Manufacturing 266 Organizing for Speed: Time-Based Competition 268

Final Thoughts on Organizational Agility 270

MANAGEMENT IN ACTION ONWARD 271 Key Terms 271

Retaining What You Learned 272

Discussion Questions 272

Experiential Exercises 273

CONCLUDING CASE 274

PART THREE ORGANIZING: BUILDING A DYNAMIC ORGANIZATION

Key Terms 212

Retaining What You Learned 212

Discussion Questions 214

Experiential Exercises 214

CONCLUDING CASE 217

PART TWO SUPPORTING CASE 217

APPENDIX C 219

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CHAPTER 10

Human Resources Management 276 MANAGEMENT IN ACTION MANAGER’S BRIEF 277 Strategic Human Resources Management 278

The HR Planning Process 279

SOCIAL ENTERPRISE 280 Staffing 282

Recruitment 282 Selection 283

THE DIGITAL WORLD 284 Workforce Reductions 286

Developing the Workforce 290 Training and Development 290

MULTIPLE GENERATIONS AT WORK 291

MANAGEMENT IN ACTION PROGRESS REPORT 292 Performance Appraisal 292

What Do You Appraise? 293 Who Should Do the Appraisal? 294 How Do You Give Employees Feedback? 295

Designing Reward Systems 296 Pay Decisions 296 Incentive Systems and Variable Pay 297 Executive Pay and Stock Options 298 Employee Benefits 299 Legal Issues in Compensation and Benefits 299 Health and Safety 300

Labor Relations 300 Labor Laws 301 Unionization 301 Collective Bargaining 302 What Does the Future Hold? 303

MANAGEMENT IN ACTION ONWARD 304 Key Terms 304

Retaining What You Learned 305

Discussion Questions 306

Experiential Exercises 306

CONCLUDING CASE 308

CHAPTER 11

Managing the Diverse Workforce 310 MANAGEMENT IN ACTION MANAGER’S BRIEF 311 Diversity: A Brief History 312 Diversity Today 313

The Changing Workforce 314

MULTIPLE GENERATIONS AT WORK 316 The Age of the Workforce 320

Managing Diversity and Affirmative Action 321 Advantage through Diversity and Inclusion 321 Challenges of Diversity and Inclusion 322

MANAGEMENT IN ACTION PROGRESS REPORT 325 Multicultural Organizations 325 How to Cultivate a Diverse Workforce 326

Top Management’s Leadership and Commitment 326

SOCIAL ENTERPRISE 327 Organizational Assessment 327 Attracting Employees 328 Training Employees 329 Retaining Employees 329

THE DIGITAL WORLD 330

MANAGEMENT IN ACTION ONWARD 332 Key Terms 332

Retaining What You Learned 332

Discussion Questions 334

Experiential Exercises 334

CONCLUDING CASE 336

PART THREE SUPPORTING CASE 337

PART FOUR LEADING: MOBILIZING PEOPLE

CHAPTER 12

Leadership 340 MANAGEMENT IN ACTION MANAGER’S BRIEF 341

What Do We Want from Our Leaders? 342

MULTIPLE GENERATIONS AT WORK 343 Vision 343 Leading and Managing 345

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Leading and Following 346

Power and Leadership 346 Sources of Power 346

Traditional Approaches to Understanding Leadership 348 Leader Traits 348 Leader Behaviors 349 The Effects of Leader Behavior 351 Situational Approaches to Leadership 353

MANAGEMENT IN ACTION PROGRESS REPORT 357 Contemporary Perspectives on Leadership 358

Charismatic Leadership 358 Transformational Leadership 359 Authenticity 360 Opportunities for Leaders 361

SOCIAL ENTERPRISE 362 A Note on Courage 362

Developing Your Leadership Skills 363 How Do I Start? 363

THE DIGITAL WORLD 364 What Are the Keys? 364

MANAGEMENT IN ACTION ONWARD 364 Key Terms 365

Retaining What You Learned 365

Discussion Questions 367

Experiential Exercises 367

CONCLUDING CASE 368

CHAPTER 13

Motivating for Performance 370 MANAGEMENT IN ACTION MANAGER’S BRIEF 371 Motivating for Performance 372 Setting Goals 373

Goals That Motivate 373 Stretch Goals 374 Limitations of Goal Setting 374 Set Your Own Goals 375

Reinforcing Performance 375 (Mis)Managing Rewards and Punishments 376 Managing Mistakes 378 Providing Feedback 378

Performance-Related Beliefs 378 The Effort-to-Performance Link 379 The Performance-to-Outcome Link 379 Impact on Motivation 380 Managerial Implications of Expectancy Theory 380

MANAGEMENT IN ACTION PROGRESS REPORT 381 Maslow’s Need Hierarchy 381

Understanding People’s Needs 381

MULTIPLE GENERATIONS AT WORK 383

Alderfer’s ERG Theory 383 McClelland’s Needs 384 Need Theories: International Perspectives 384

Designing Motivating Jobs 385 Job Rotation, Enlargement, and Enrichment 385

SOCIAL ENTERPRISE 386 Herzberg’s Two-Factor Theory 387 The Hackman and Oldham Model of Job Design 387 Empowerment 388

Achieving Fairness 390 Assessing Equity 390 Restoring Equity 391 Procedural Justice 391

Employee Satisfaction and Well-Being 392

THE DIGITAL WORLD 393 Quality of Work Life 393

MANAGEMENT IN ACTION ONWARD 394 Psychological Contracts 394

Key Terms 395

Retaining What You Learned 395

Discussion Questions 396

Experiential Exercises 397

CONCLUDING CASE 399

CHAPTER 14

Teamwork 402 MANAGEMENT IN ACTION MANAGER’S BRIEF 403 The Contributions of Teams 404 Types of Teams 404

MULTIPLE GENERATIONS AT WORK 406 Self-Managed Teams 406

MANAGEMENT IN ACTION PROGRESS REPORT 407 How Groups Become Real Teams 408

Group Processes 408 Critical Periods 409

THE DIGITAL WORLD 410 Teaming Challenges 410 Why Groups Sometimes Fail 410

Building Effective Teams 411 Performance Focus 411 Motivating Teamwork 412 Member Contributions 412

SOCIAL ENTERPRISE 413 Norms 413 Roles 414 Cohesiveness 414 Building Cohesiveness and High-Performance Norms 416

Managing Lateral Relationships 417 Managing Outward 417

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PART FIVE CONTROLLING: LEARNING AND CHANGING

CHAPTER 16

Managerial Control 458 MANAGEMENT IN ACTION MANAGER’S BRIEF 459 Bureaucratic Control Systems 461

The Control Cycle 461

SOCIAL ENTERPRISE 463 Approaches to Bureaucratic Control 465

MULTIPLE GENERATIONS AT WORK 467 Management Audits 468 Budgetary Controls 469 Financial Controls 471 Problems with Bureaucratic Control 474

MANAGEMENT IN ACTION PROGRESS REPORT 475 Designing Effective Control Systems 476

The Other Controls: Markets and Clans 480 Market Control 480

Clan Control: The Role of Empowerment and Culture 482

MANAGEMENT IN ACTION ONWARD 483 Key Terms 483

Retaining What You Learned 483

Discussion Questions 485

Experiential Exercises 485

CONCLUDING CASE 487

CHAPTER 17

Managing Technology and Innovation 488 MANAGEMENT IN ACTION MANAGER’S BRIEF 489 Technology and Innovation 490

Technology Life Cycle 491 Diffusion of Technological Innovations 492

Lateral Role Relationships 418 Managing Conflict 418 Conflict Styles 419 Being a Mediator 420 Electronic and Virtual Conflict 421

MANAGEMENT IN ACTION ONWARD 422 Key Terms 422

Retaining What You Learned 423

Discussion Questions 424

Experiential Exercises 424

CONCLUDING CASE 425

CHAPTER 15

Communicating 428 MANAGEMENT IN ACTION MANAGER’S BRIEF 429 Interpersonal Communication 430

One-Way versus Two-Way Communication 430 Communication Pitfalls 431 Mixed Signals and Misperception 432 Oral and Written Channels 433 Digital Communication and Social Media 433

MULTIPLE GENERATIONS AT WORK 436

THE DIGITAL WORLD 437 Media Richness 437

MANAGEMENT IN ACTION PROGRESS REPORT 438 Improving Communication Skills 438

Improving Sender Skills 438

SOCIAL ENTERPRISE 442 Improving Receiver Skills 442

Organizational Communication 444 Downward Communication 445 Upward Communication 447 Horizontal Communication 448 Informal Communication 448 Boundarylessness 449

MANAGEMENT IN ACTION ONWARD 450 Key Terms 450

Retaining What You Learned 450

Discussion Questions 451

Experiential Exercises 452

CONCLUDING CASE 454

PART FOUR SUPPORTING CASE 455

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MULTIPLE GENERATIONS AT WORK 493

SOCIAL ENTERPRISE 494 Technology Leadership and Followership 495

Technology Leadership 495 Technology Followership 497

Assessing Technology Needs 498 Measuring Current Technologies 498 Assessing External Technological Trends 499

Making Technology Decisions 499 Anticipated Market Receptiveness 499 Technological Feasibility 500 Economic Viability 501 Anticipated Capability Development 501 Organizational Suitability 502

MANAGEMENT IN ACTION PROGRESS REPORT 503 Sourcing and Acquiring New Technologies 504

Internal Development 504 Purchase 504 Contracted Development 504 Licensing 504

THE DIGITAL WORLD 505 Technology Trading 505 Research Partnerships and Joint Ventures 505 Acquiring a Technology Owner  505

Technology and Managerial Roles 506 Organizing for Innovation 507

Unleashing Creativity 508 Bureaucracy Busting 509 Design Thinking 509 Implementing Development Projects 510 Technology, Job Design, and Human Resources 511

MANAGEMENT IN ACTION ONWARD 511 Key Terms 512

Retaining What You Learned 512

Discussion Questions 513

Experiential Exercises 514

CONCLUDING CASE 514

CHAPTER 18

Creating and Leading Change 516 MANAGEMENT IN ACTION 517 Becoming World Class 518

Sustainable, Great Futures 518 The Tyranny of the Or 519 The Genius of the And 520 Achieving Sustained Greatness 520 Organization Development 521

Managing Change 522 Motivating People to Change 522

MULTIPLE GENERATIONS AT WORK 524 A General Model for Managing Resistance 524 Enlisting Cooperation 526 Harmonizing Multiple Changes 528

MANAGEMENT IN ACTION PROGRESS REPORT 529 Leading Change 529

Shaping the Future 532 Thinking about the Future 532 Creating the Future 532

THE DIGITAL WORLD 533

SOCIAL ENTERPRISE 534 Shaping Your Own Future 535 Learning and Leading 536

MANAGEMENT IN ACTION ONWARD 538 A Collaborative, Sustainable Future? 539

Key Terms 539

Retaining What You Learned 539

Discussion Questions 540

Experiential Exercises 540

CONCLUDING CASE 542

PART FIVE SUPPORTING CASE 543

CASE INCIDENTS

Notes 547

Glossary/Subject Index 594

Name Index 620

Photo on pages xxiii, xxiv, xxvi, xxvii, and xxix: ©zlikovec/Shutterstock.com RF.

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Foundations of Management

• Managing and Performing • The External and Internal

Environments • Managerial Decision

Making

Planning: Delivering Strategic Value

• Planning and Strategic Management

• Ethics and Corporate Responsibility

• International Management • Entrepreneurship

Strategy Implementation

Organizing: Building a Dynamic Organization

• Organization Structure • Organizational Agility • Human Resources

Management • Managing the Diverse

Workforce

Leading: Mobilizing People

• Leadership • Motivating for Performance • Teamwork • Communicating

Controlling: Learning and Changing

• Managerial Control • Managing Technology and

Innovation • Creating and Leading

Change

The Management Process

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22

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Managing in a Competitive World Globalization Technological Change Knowledge Management Collaboration across Boundaries

Managing for Competitive Advantage Innovation Quality Service Speed Cost Competitiveness Sustainability

Delivering All Types of Performance

The Functions of Management Planning: Delivering Strategic Value Organizing: Building a Dynamic Organization Leading: Mobilizing People Controlling: Learning and Changing Performing All Four Management Functions

Management Levels and Skills Top-Level Managers Middle-Level Managers Frontline Managers Working Leaders with Broad Responsibilities Must-Have Management Skills

You and Your Career Be Both a Specialist and a Generalist Be Self-Reliant Connect with People Actively Manage Your Relationship with Your Organization Survive and Thrive

After studying Chapter 1, you will be able to:

Summarize the major challenges of managing in the new competitive landscape.

Describe the sources of competitive advantage for a company.

Explain how the functions of management are evolving in today’s business environment.

Compare how the nature of management varies at different organizational levels.

Define the skills you need to be an effective manager.

Understand the principles that will help you manage your career.

LO 1

LO 2

LO 3

LO 4

LO 5

LO 6

CHAPTER 1

Managing and Performing

Management means, in the last analysis, the substitution of thought for brawn and muscle, of knowledge for folklore and tradition, and of

cooperation for force.

—PETER DRUCKER

CHAPTER OUTLINELEARNING OBJECTIVES

PART ONE FOUNDATIONS OF MANAGEMENT

©Jirsak/Shutterstock.com RF

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3

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What does a manager do? Dream up a bold new mis- sion for the company? Build a corporate structure that ensures success? Lead and inspire others? Keep the company on track toward its goals?

Most managers perform all these basic functions to some degree, perhaps none more publicly or suc- cessfully than Mark Zuckerberg, founder and CEO of Facebook Inc. Zuckerberg has seen his company grow into a unique worldwide phenomenon with almost 2  billion active users, more than 600 times as many people as the average daily viewership of CNN, Fox, and MSNBC combined. Given that the company reported $8.8 billion in revenue in 2016, it seems Zuckerberg’s passion for connecting people with one another has more than paid off. Facebook’s unparal- leled success does not mean Zuckerberg has no man- agement challenges left, however.

Past hurdles that Zuckerberg had to deal with included the need for cash to fund Facebook’s rapid growth. In 2012 he announced an initial public offering of stock to attract that cash, and then saw the company go through a damaging initial drop in its stock price. Next came the soaring popularity of smartphones, encouraging Facebook users to go mobile in droves. Facebook was forced to quickly develop its capability to carry advertising on its mobile app. Those mobile ads now bring in 80 percent of the company’s reve- nue, up from zero in 2012.

More recent hurdles include charges that Facebook aided the spread of fake news during the 2016 U.S. presidential election campaign. Zuckerberg responded by developing partnerships with outside fact-checking groups to flag stories of questionable reliability. He

directed upgrades of Facebook’s user data tracking to counter problems of misreporting results to adver- tisers, and he wants to focus on artificial intelligence to prevent the sharing of inappropriate content. That story continues to unfold. Meanwhile Facebook teams are working to keep up with newer competitors like Snapchat by adding to the video capabilities of its Instagram platform.

While he is organizing and leading the company and refining its operations, Zuckerberg, ranked #1 in 2017 among the top 50 business people by Fortune magazine, is also still shaping plans for what he hopes Facebook can be. He recently released a bold state- ment of his views on its next big goal: to bring all of humanity together in a safe and informed “global community.”1

Management in Action ONE WELL-KNOWN MANAGER: FACEBOOK’S MARK ZUCKERBERG

Management challenges are ever-changing. What is going on now for Facebook

and Mark Zuckerberg? As you read this chapter, notice the wide variety of skills

that Zuckerberg needs to help Facebook meet its goals. Also, think about how

managing people, money, and other resources enables Facebook and other

organizations to accomplish far more than individuals acting independently could

ever achieve.

M A

N A

G E

R ’S

B R

IE F

P R

O G

R E

S S

R E

P O

R T

O N

W A

R D

©Frederic Legrand - COMEO/Shutterstock.com RF

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Facebook’s CEO, Mark Zuckerberg, is one of the most interesting leaders in business today. He is an innovator who combines technological know-how with a vision for the future and an obsessive drive to please customers. Together, those qualities have helped him build a business idea into a major corporation that continues to transform how people connect with one another.2

Zuckerberg is a standout among other top business leaders. Named 2016 Businessperson of the Year by Fortune magazine, he has successfully navigated the $350 billion media com- pany through challenging times, as when Facebook was slow to respond to the shift to mobile, and the clumsy handling of its initial public offering.3

Consider the department store Macy’s as a contrasting example. Following weaker than expected 2016 holiday sales, Macy’s announced that it would close 63 stores and cut 10,000 jobs.4 Terry Lungren, who stepped down as CEO in February 2017, was replaced by Jeff Gennette, who has the daunting task of turning around seven straight quarters of sales declines.5 Time will tell whether Macy’s can compete effectively against changing shopping habits driven by online retail giants like Amazon.

In business, there is no alternative to managing well. Companies may fly high for a while, but they cannot do well for very long without good management. It’s the same for individu- als: the best performers succeed by focusing on fundamentals, knowing what’s important, and managing well. The aim of this book is to help you succeed in those pursuits.

Management is a challenge requiring

knowledge and skills to adapt to new

circumstances.

When the economy is soaring, business seems easy. Starting an Internet company looked easy in the 1990s, and ventures related to the real estate boom looked like a sure thing just a few years ago. But investors grew wary of dot-com start-ups, and the demand for new homes dropped off the table when the economy crashed in late 2008. At such times, it becomes evident that management is a challenge requiring knowledge and skills to adapt to new circumstances.

What defines the competitive landscape of today’s business? You will be reading about many relevant issues in the coming chapters, but we begin here by highlighting four ongoing challenges that character- ize the business landscape: globalization, technologi- cal change, the importance of knowledge and ideas, and collaboration across organizational boundaries.

Globalization Far more than in the past, today’s enterprises are global, with offices and production facili- ties in countries all over the world. Corporations operate worldwide, transcending national borders. Companies that want to grow often need to tap international markets. The change from a local to a global marketplace is irreversible.6

Fortune magazine annually publishes a list of the world’s most admired companies. Whereas U.S. companies used to dominate, Switzerland-based Nestlé was the most admired maker of consumer food products in 2016, Germany’s BMW was the most admired pro- ducer of motor vehicles, and Singapore Airlines was the most admired airlines company.7 According to Fortune’s 2016 Global 500 list, the five largest firms are Walmart (U.S.), State Grid (China), China National Petroleum (China), Sinopec Group (China), and Royal Dutch Shell (British-Dutch).8

Globalization also means that a company’s talent and competition can come from any- where. As with its sales, more than half (60 percent) of GE’s 333,000 employees live out- side the United States.9 Kentucky-based Yum! Brands (KFC, Pizza Hut, and Taco Bell) has over 43,000 restaurants in more than 135 countries. In 2016, about half of its profits came from outside the United States. On average, Yum! Brands opens six stores per day in inter- national locations.10

LO 1

Managing in a Competitive World

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PepsiCo’s chief executive, Indra Nooyi, brought a much- needed global viewpoint to a company whose international business was growing three times faster than sales in the United States. Nooyi, who was raised in India and educated there and in the United States, steered the company toward more “better for you” and “good for you” snacks such as a Quaker beverage in China, Natural Balance snack bar in Mexico, and KeVita probiotic drinks in the United States.11

Globalization affects small companies as well as large. Many small companies export their goods. Many domestic firms assemble their products in other countries. And com- panies are under pressure to improve their products in the face of intense competition from foreign manufacturers. Firms today must ask themselves, “How can we be the best in the world?”

For students, it’s not too early to think globally. Participating in the Global Business Institute program at Indiana University, one hundred students from North Africa, South Asia, and the Middle East came to the United States to pitch entrepreneurial business ideas to a panel of experts. The panel consisted of officials from Coca-Cola and the U.S. Department of State. The most recent winner was Team Pakistan, who proposed a business model that reduces waste by reselling used clothing.12

Technological Change The Internet of Things, artificial intelligence, mobile applications, Big Data analytics, and cloud computing are only some of the ways that technology is vitally important in the busi- ness world. Technology both complicates things and creates new opportunities. The chal- lenges come from the rapid rate at which communication, transportation, information, and other technologies change.13 For example, after just a couple of decades of widespread desk- top use, customers switched to laptop models, which require different accessories. Then, users turned to mini-laptops, tablets, smartphones, and smartwatches to meet their mobility technology needs.14 Any company that served desktop users had to rethink its customers’ wants and needs.

Later chapters discuss technology further, but here we highlight the rise of the Internet and its effects. How is the Internet so critical to business?15 It is a digital marketplace, a means for manufacturing goods and services, a distribution channel, an information service, an arena for social activism,16 and more. It drives down costs and speeds up globalization. It improves efficiency of decision making. Managers can watch and learn what companies around the world are doing in real time.

Although these advantages create business opportunities, they also create threats, not just from hackers but from competitors as they capitalize sooner on new developments than you do.

Things continue to change at breakneck speed. About 15 years ago, tech guru Tim O’Reilly coined the term “Web 2.0” to describe the exciting new wave of social networking start-ups that allow users to publish and share information. But most failed or stalled; very few, other than Facebook, made a profit.17 Web 2.0 redefined the ways in which customers and sellers, employees and employers shared knowledge.

Next came Web 3.0, described as a “read-write-execute” web where applications, search findings, and online services are more tailored, integrated, and relevant to users.18 Think about the last time you searched for a product on Amazon and a list of related products appeared on the screen as alternatives. Web 3.0 is giving way to the Internet of Things, where smartphones, home thermostats, weight scales, wearable fitness trackers, and so forth sense human activities and communicate this information wirelessly through networks to be used in myriad ways (regulate home temperature, check body weight, and tally miles walked).19

Globalization has changed the face of the workforce. Managers in this competitive environment needs to attract and effectively manage a talent pool from all over the globe.

©geopaul/E+/Getty Images RF

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What’s next for the digital frontier? It’s hard to predict with precision, but as billions of people and businesses worldwide demand more personalized and connected experiences, artificial intelligence will simplify the interfaces between humans and technology. Instead of people adapting to new technologies as in the past, technology will adapt to people’s preferences.20

Knowledge Management Companies and managers need good new ideas. Because companies in advanced economies have become so efficient at producing physical goods, most workers have been freed up to provide services or “abstract goods” such as software, entertainment, data, and advertising. These workers, whose primary contributions are ideas and problem-solving expertise, are often referred to as knowledge workers. Managing these workers poses some particular chal- lenges,21 which we examine throughout this book.

Because the success of modern businesses so often depends on the knowledge used for innovation and the delivery of services, organizations need to manage that knowledge.22 Knowledge management is the set of practices aimed at discovering and harnessing an organization’s intellectual resources—fully using the intellects of the organization’s people. Knowledge management is about finding, unlocking, sharing, and capitalizing on the most precious resources of an organization: people’s expertise, skills, wisdom, and relationships. The nearby “Multiple Generations at Work” box explores how important knowledge trans- fer is to organizational survival.

Knowledge managers find these human assets, help people collaborate and learn, gener- ate new ideas, and harness those ideas into successful innovations.

Collaboration across Boundaries One of the most important processes of knowledge management is to ensure that people in different parts of the organization collaborate effectively with one another. This requires productive communications among different departments, divisions, or other subunits of the organization. For example, “T-shaped” managers break out of the traditional corporate hierarchy to share knowledge freely across the organization (the horizontal part of the T) while remaining committed to the bottom-line performance of their individual business units (the vertical part).23 Consulting firm McKinsey originally developed this T-shaped concept as a way for its employees to view clients’ problems from both broad and deep perspectives.24

Toyota keeps its product development process efficient by bringing together design engineers and manufacturing employees from the very beginning. Often, manufacturing employees can see ways to simplify a design so that it is easier to make without defects or unnecessary costs. Toyota expects its employees to listen to input from all areas of the organization, so this type of collaboration is a natural part of the organization’s culture. Employees use software to share their knowledge—best practices they have developed for design and manufacturing.25 Thus, at Toyota, knowledge management supports collabora- tion and vice versa.

Collaboration across boundaries occurs even beyond the boundaries of the organization itself. Companies today must motivate and capitalize on the ideas of people outside the organization. Customers, for instance, can be collaborators. Companies must realize that the need to serve the customer drives everything else.

In this digitally connected era, customers expect to offer their ideas and be heard. Companies collaborate with their customers by actively and continuously listening and responding. L.L.Bean tracks customer comments and reviews on its website; if any product averages fewer than three stars out of five, the company removes it and directs the product manager to resolve the problem.26 Businesses pay attention to customer comments on Amazon, Zappos, Yelp, TripAdvisor, Facebook, Twitter, and many more sites. Customer feedback management software can search these and other sites and generate statistics and reports. Companies can respond to negative online reviews with the goal of winning over their critics.27

knowledge management

Practices aimed at discovering and harnessing an organization’s intellectual resources.

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Multiple Generations at Work Move over Boomers, Here Comes the Next Generation of Leaders

The workforce is changing rapidly. A large number of Baby Boomers (born 1946–1964) will be exiting the workforce over the next 15 years. According to the Pew Research Center, approximately 10,000 Boomers turn 65 each day in the United States. Though some Boomers work into their later years, others step out of the workforce to enjoy hobbies, travel opportunities, and family time.

The talent exodus of top-level executives, managers, and leaders will translate into career opportunities for younger generations. Gen Xers (born 1965–1979) occupy many middle-level jobs, but there are not enough of them to fill all of the soon-to-be-vacant senior positions. Enter the Millennial generation (born 1980–2000), who make up the largest demographic cohort on record.28 These early 30- and 20-somethings are flooding into the job market and will be needed to move quickly from team leader and frontline managerial positions to even higher responsibility.

Before Gen Xers and Millennials can assume higher- level positions in businesses, schools, government agen- cies, and nonprofits, organizational knowledge must be transferred from senior management to the less experi- enced Gen Xers and Millennial employees. Senior man- agers and leaders possess “know-how” and “know-who”

that are critical to the long-term success of their organiza- tions. Prior to retirement, senior talent will look to trans- fer their knowledge to younger employees.

Complicating this need is the fact that generations, like individuals, sometimes differ in their attitudes, per- sonalities, and behaviors. This can affect everything from communication, customer service, teamwork, job satis- faction, morale, and retention to overall organizational performance.

©Bike_Maverick/Getty Images RF

The Digital World Collaboration across boundaries now includes instant communication with stakeholders around the world. Humanitarian organizations are at the forefront of this col- laboration. You can sign up online as a Red Cross digital advocate (redcross.org/volunteer/volunteer- opportunities /be-a-digital-advocate). Volunteers go online and monitor social media for tweets, Facebook posts, and other social media communication that can provide useful informa- tion to Red Cross workers. Volunteers also provide direct support by responding on social media with information about basic first aid and shelter locations, and for emo- tional support. One example was reminding a young teen who had tweeted she was home alone as a tornado was touching down that she needed to get in the bathtub if she didn’t have a basement.

Online collaboration allows managers to manage many demands in a brief amount of time during crises. The United Nations (OCHA) uses trained volunteers called the Stand By Task Force (SBTF). They collaborate online from all over the world. When one group sleeps, another group in another part of the world is waking up and ready to help. This provides 24-hour support to lead- ership in the crucial hours of a crisis.

Businesses are learning from humanitarian organi- zations and are using online collaboration or crowd- sourcing. GlaxoSmithKline (GSK) is crowdsourcing its malaria research by sharing its data online and allowing the public to collaborate. You will learn details of how GSK and others are using technology to support and accelerate management goals later in the text.

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The early Internet years turned careers (and lives) upside down. Students dropped out of school to join Internet start-ups or start their own. Managers in big corporations quit their jobs to do the same. Investors salivated, and invested heavily. The risks were often ignored or downplayed—sometimes tragically as the boom went bust in 2000.

And consider an earlier industry with similar transforming power: automobiles. There have been at least 2,000 carmakers—how many remain?

What is the lesson to be learned from the failures in these important transformational industries? A key to understanding the success of a company is the competitive advantage it holds and how well it can sustain that advantage.

To survive and win over time, you have to gain and sustain advantages over your competi- tors. You gain competitive advantage by being better than your competitors at doing valu- able things for your customers. But what does this mean, specifically? To succeed, managers must deliver performance. The fundamental success drivers of performance are innovation, quality, service, speed, cost competitiveness, and sustainability.

Innovation Companies must continually innovate. Innovation is the introduction of new goods and ser- vices. Your firm must adapt to changes in consumer demands and to new competitors.

Products don’t sell forever; in fact, they don’t sell for nearly as long as they used to because competitors are continuously introducing new products. Your firm must innovate, or it will die.

In 2000, Blockbuster was the market leader of the video rental industry. It didn’t see the need to offer customers an alternative to driving to their retail stores to rent a movie, nor did the company eliminate late charges because they were a major source of revenue. Reed Hastings, founder of Netflix, displaced Blockbuster by allowing customers to order videos that would be delivered by mail. Customers could watch a video for as long as they wanted, then mail it back to Netflix. In 2010, Blockbuster filed for bankruptcy. Netflix has become a successful $8.8 billion company.29

The need for innovation is driven in part by globalization. One important reason is that facilities in other countries can manufacture appliances or write software code at a lower cost than facilities in the United States; U.S. facilities thus operate at a disadvan- tage. Therefore, they must provide something their foreign competitors can’t—and often that requires delivering something new.

Nevertheless, as labor and other costs rise overseas, and as U.S. companies find ways to improve efficiency at home, the future for North American facilities may brighten. Nissan has expanded production in Smyrna, Tennessee, including assembly of its Infiniti JX luxury car and Leaf electric car. Other companies like BMW have announced plans to expand

manufacturing operations in the United States. In 2016, the German auto maker completed its $1 billion expansion to its Spartanburg, South Carolina, plant, bringing annual pro- duction capacity to 450,000 vehicles.30

Innovation is today’s holy grail (2017’s number-one most-admired company in Fortune’s innovativeness cat- egory was Starbucks).31 Like the other sources of competi- tive advantage, innovation comes from people, it must be a strategic goal, and it must be managed properly. Later chap- ters show you how great companies innovate.

Quality Most companies claim that they are committed to qual- ity. In general, quality is the excellence of your product. Customers expect high-quality goods and services, and often they will accept nothing less.

LO 2

innovation

The introduction of new goods and services; a change in method or technology; a positive, useful departure from previous ways of doing things.

quality

The excellence of your product (goods or services).

Managing for Competitive Advantage

Bottom Line Because it’s easy for managers to be so busy that they lose sight of what really drives performance, you will periodically see icons as bottom-line reminders of the need for innovation, quality, service, speed, cost competitiveness, and sustainability. Which two or more of these advantages do you think would be hardest to deliver at the same time?

Q

©Trevor Lush/Purestock/Superstock RF

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Historically, quality pertained primarily to the physical goods that customers bought; it referred to attractiveness, lack of defects, and dependability. The traditional approach to quality was to check work after it was completed and then eliminate defects, using inspec- tion and statistical data to determine whether products were up to standards. But then W. Edwards Deming, J. M. Juran, and other quality gurus convinced managers to take a more complete approach to achieving total quality. This includes preventing defects before they occur, achieving zero defects in manufacturing, and designing products for quality. The goal is to solve and eradicate from the beginning all quality-related problems and to live a philoso- phy of continuous improvement in the way the company operates.32

Quality is further provided when companies customize goods and services to the wishes of the individual consumer. Choices at Starbucks give consumers thousands of variations on the drinks they can order. NikeID allows customers to customize their athletic shoes, Coca-Cola’s Freestyle vending machines empower thirsty consumers to create over 100 soft- drink mixes, and Panera Breads permits visitors to its restaurants to enter custom orders via self-service kiosks.33

Providing world-class quality requires a thorough understanding of what quality really is.34 Quality can be measured in terms of product performance, customer service, reliability (avoidance of failure or breakdowns), conformance to standards, durability, and aesthetics. Only when you move beyond broad, generic concepts such as “quality” and identify specific quality requirements can you identify problems, target needs, set precise performance stan- dards, and deliver world-class value.

By the way, Fortune magazine’s 2017 number-one company for quality of products and services was also Starbucks.

Service Important quality measures often pertain to the ser- vice customers receive. This dimension of quality is particularly important because the ser- vice sector has come to dominate the U.S. economy. In recent years, the fastest-growing job categories have been almost entirely health care services, and the jobs with the greatest declines are primarily in mining, logging, and manufacturing (although some manufactur- ing returns to the United States).35 Services include intangible products such as insurance, hotel accommodations, medical care, and haircuts.

Service means giving customers what they want or need, when they want it. So, service is focused on continually meeting the needs of customers to establish mutually beneficial long-term relationships. Thus cloud computing companies, in addition to providing online access to software, applications, and other computer services, also help their customers store and analyze large amounts of customer and employee data.

An important dimension of service quality is making it easy and enjoyable for custom- ers to experience a service or to buy and use products. The Detroit Institute of Arts hired a manager formerly with the Ritz-Carlton hotel chain, noted for its exceptional level of ser- vice, to be vice president of museum operations. As the art museum prepared for a grand reopening following a major renovation, the manager analyzed the types of customer inter- actions that occur in a museum, identifying ways to make the experience more pleasant. He also worked with his staff to identify ways to customize services, such as offering tours tailored to the interests of particular groups.36

Speed Google constantly improves its search product at a rapid rate. In fact, its entire culture is based on rapid innovation. Sheryl Sandberg, chief operating officer of Facebook, made a mistake early in her previous position as vice president of Google because she was moving too fast to plan carefully. Although the mistake cost the company a few million dollars, Google cofounder Larry Page responded to her explanation and apology by saying he was actually glad she had made the mistake. It showed that she appreciated the company’s val- ues. Page told Sandberg, “I want to run a company where we are moving too quickly and

service

The speed and dependability with which an organization delivers what customers want.

The result of long-term relationships is better

and better quality, and lower and lower costs.

—W. Edwards Deming

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doing too much, not being too cautious and doing too little. If we don’t have any of these mistakes, we’re just not taking enough risks.”37

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

Speed isn’t everything—you can’t get sloppy in your quest to be first. But other things being equal, faster compa- nies are more likely to be the winners, slow ones the losers. Even pre-Internet, companies were getting products to mar- ket and in the hands of customers faster than ever. Now the speed requirement has increased exponentially. Everything, it seems, is on fast-forward.

Speed is no longer just a goal of some companies; it is a strategic imperative. Quicken Loans (owned by Intuit) is currently the second-largest provider of mortgage loans in the United States, with Wells Fargo being the top issuer.38 In an ad during the 2016 Superbowl, Quicken announced its new mortgage service, Rocket Mortgage.39 The online, self-service mortgage application is mar- keted as cutting the approval time from days to minutes.40

Cost Competitiveness Walmart keeps driving hard to find new ways to cut billions of dollars from its already very low distribution costs. It leads the industry in efficient distribution, but competitors are copying Walmart’s methods, so the efficiency no longer gives it as much of an advantage.41

Walmart’s efforts are aimed at cost competitiveness, which means keeping costs low enough so that the company can realize profits and price its products (goods or services) at levels that are attractive to consumers. Needless to say, if you can offer a desirable product at a lower price, it is more likely to sell.

Singapore Airlines, one of the world’s most admired companies, kept profiting during the economic recession while the global airline industry lost money. It did so by cutting costs more strategically than the competition. SA slashed flights, parked planes, and reduced salaries, including the CEO’s.42

In contrast to the high-quality, even luxurious flying experience offered by Singapore Airlines, Ryanair is a European low-cost airline. CEO Michael O’Leary launched the “no frills” airline with the sole goal of flying people to their destination cheaply and with their luggage intact.43 His vision is for profits to come from in-flight sales, high luggage fees, low-cost secondary airports, and commissions on travel products sold through the airline’s website.44 O’Leary’s no-frills business model appears to be working. In 2016, Ryanair reported a 43 percent increase in net profit to $1.4 billion by carrying over 106 million passengers.45

One reason every company must worry about cost is that consumers can use the Internet to easily compare prices from thousands of competitors. Consumers looking to buy popular items, such as cameras, printers, and plane fares, can go online to research the best models and the best deals. If you can’t cut costs and offer attractive prices, you can’t compete.

speed

Fast and timely execution, response, and delivery of products.

cost competitiveness

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

Quicken Loans became quicker than before and quicker than many others when it introduced Rocket Mortgage.

©dpa picture alliance/Alamy Stock Photo

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Sustainability Avoiding wasteful use of energy can bolster a company’s financial performance while being kind to the environment. Efforts to cut energy waste are just one way to achieve an important form of competitive advantage: sustainability, which at its most basic is the effort to mini- mize the use and loss of resources, especially those that are polluting and nonrenewable.

Although sustainability means different things to different people,46 in this text we emphasize a long-term perspective on sustaining the natural environment and building tomorrow’s business opportunities while effectively managing today’s business.47

In the United States, corporate efforts aimed at sustainability have fluctuated as environ- mental laws are strengthened or loosened; overall, the worldwide trend has been in the direc- tion of greater concern for sustainability. Many companies have discovered that addressing sustainability issues often produces bottom-line benefits. Companies with strong sustain- ability performance that have also become financial winners include athletic-shoe maker Adidas, Spanish fashion group Inditex, French luxury-goods maker Hermès International, and Eaton, a power management company.48

Patagonia Sur is a for-profit company that has created the first private land trust in Patagonia to protect the company’s land permanently; it plans to create up to 10 profitable, environmentally sustained businesses on that land.49 The goals are to apply free-market forces to develop the land for profit, do no harm, and spread this radically different land management model to developing nations around the world.

Sustainability is about protecting our options.50 Done properly, sustainability allows people to live and work in ways that can be maintained over the long term (generations) without depleting or harming our environmental, social, and economic resources.

Delivering All Types of Performance Don’t assume that you can settle for delivering just one of the six competitive advantages: low cost alone, or quality alone, for example. As illustrated in Exhibit 1.1, the best managers and companies deliver on all of these performance dimensions.

Some trade-offs will occur among the six sources of competitive advantage, but this doesn’t need to be a zero-sum game in which improving one requires weakening another. The best managers try to optimize among multiple performance dimensions over time.

sustainability

Minimizing the use of resources, especially those that are polluting and nonrenewable.

EXHIBIT 1.1 Staying Ahead of the Competition

Innovation

Quality

Service

Speed

Cost e�ectiveness

Managers develop

performance

Sustainability

Bottom Line Don’t focus on one aspect

of performance and neglect the others. You might be

better at or more interested in one than the others, but you should strive for all six. Imagine you’re in your first

management job, supervising a team. What would be your

natural tendency? Which performance measures

would you focus on, and why? How can you be sure

to pay attention to all of them?

Q

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The Functions of Management Management is the process of working with people and resources to accomplish organiza- tional goals. Good managers do those things both effectively and efficiently. To be effective is to achieve organizational goals. To be efficient is to achieve goals with minimal waste of resources—that is, to make the best possible use of money, time, materials, and people. Some managers fail on both criteria, or focus on one at the expense of another. The best managers achieve high performance by focusing on both effectiveness and efficiency.

These definitions have been around for a long time. But as you know, business is chang- ing radically. The real issue is how to do these things.51

Although the context of business and the specifics of doing business are changing, there are still plenty of timeless principles that make great managers, and great companies, great. While fresh thinking and new approaches are required now more than ever, much of what has already been learned about successful management practices remains relevant, useful, and adaptable, with fresh thinking, to the 21st-century business environment.

In the business world today, great executives not only adapt to changing conditions but also apply—fanatically, rigorously, consistently, and with discipline—the fundamental man- agement principles.

These fundamentals include the four traditional functions of management: planning, organizing, leading, and controlling. These are used in organizations of every type (see the nearby “Social Enterprise” feature). They remain as relevant as ever, and they are needed in start-ups as much as in established corporations. But their form has evolved.

Planning: Delivering Strategic Value Planning is specifying the goals to be achieved and deciding in advance the appropriate actions needed to achieve those goals. Planning activities include analyzing current situa- tions, anticipating futures, determining objectives, deciding the types of activities in which the company will engage, choosing corporate and business strategies, and determining the resources needed to achieve the organization’s goals. Plans set the stage for action and for major achievements.

The planning function for the new business environment, as discussed in Part 2 of this book, is more dynamically described as delivering strategic value. Value is an important con- cept.52 Fundamentally, it describes the monetary amount associated with how well a job, task, good, or service meets users’ needs. Those users might be business owners, customers, employees, society, and even nations.53 The better you meet those needs (in terms of quality, speed, efficiency, and so on), the more value you deliver.

That value is strategic when it contributes to meeting the organization’s goals. On a more personal level, you will do well to periodically ask yourself and your boss, “How can I add

value?” Answering that question will enhance your contributions, your job performance, and your career.

Delivering strategic value is a continual process of identifying opportunities to create, seize, strengthen, and sustain competitive advantage. Effectively creat- ing value requires fully considering a new and chang-

ing set of stakeholders and issues, including the government, the natural environment, globalization, and the dynamic economy in which ideas are king and entrepreneurs are both formidable competitors and potential collaborators. You learn about these and related topics in Chapter 4 (planning and strategic management), Chapter 5 (ethics, corporate responsibility, and sustainability), Chapter 6 (international management), and Chapter 7 (entrepreneurship).

Organizing: Building a Dynamic Organization Organizing is assembling and coordinating the human, financial, physical, informational, and other resources needed to achieve goals. Organizing activities include attracting people

management

The process of working with people and resources to accomplish organizational goals.

LO 3

planning

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

value

The monetary amount associated with how well a job, task, good, or service meets users’ needs.

organizing

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

You will do well to periodically ask yourself and

your boss, “How can I add value?”

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to the organization, specifying job responsibilities, grouping jobs into work units, marshaling and allocating resources, and creating conditions so that people and things work together to achieve maximum success.

Part 3 of the book describes the organizing function as building a dynamic organization. Historically, organizing involved creating an organization chart by identifying busi- ness functions, establishing reporting relationships, and having a human resources department that administered plans, programs, and paperwork. Now and in the future, effective managers will be using new forms of organizing and viewing their people as their most valuable resources. They will build organizations that are flexible and adaptive, particularly in response to competitive threats and customer needs. Progressive human resource practices that attract and retain the very best of a highly diverse population will be essential aspects of the successful company. You will learn about these topics in Chapter 8 (organization structure), Chapter 9 (organizational agility), Chapter 10 (human resources management), and Chapter 11 (managing the diverse workforce).

Leading: Mobilizing People Leading is stimulating people to be high performers. It includes motivating and communi- cating with employees, individually and in groups. Leading involves connecting directly with people, helping to guide and inspire them toward achieving team and organizational goals.

leading

The management function that involves the manager’s efforts to stimulate high performance by employees.

Social Enterprise Ashoka’s Bill Drayton, Pioneer of Social Entrepreneurship

Can a company do well and do good at the same time? The idea that business success and positive social change can and indeed should happen together is the driving force behind social enterprise, or social entrepreneurship. Think of social entrepreneurs as change agents, manag- ers who commit themselves and their organizations to creating not only private value in the form of profit, but also social value in various forms including innovation, sustainability, and accountability. In fact, social entre- preneurs use the same management functions to achieve business excellence and to advance positive social goals.

A leading force behind the growing strength of social enterprise is Ashoka, founded by Bill Drayton in 1980 as a group of Fellows, or social entrepreneurs, then mostly in developing countries. Since its founding, the group has grown to include more than 3,000 social entrepreneurs around the world. Thanks to its efforts, by the late 1990s social enterprise programs were available in business schools and public policy schools around the world.

Ashoka works worldwide to enable everyone to be a “changemaker” by identifying and supporting Fellows, creating communities for them, and helping build busi- ness, social, and financial systems to encourage even

more social innovation. (Ashoka was an Indian emperor of the third century BC who renounced violence. His name means “the absence of sorrow.”)

Fellows in the United States work on problems in edu- cation, women’s health, the environment, justice, obesity, mental health, and human trafficking, among many oth- ers. In addition, there are almost 30 designated “change- maker campuses” in the United States, where “social innovation [is] an embedded core value.” You can check https://www.ashoka.org/en/our-network to see whether your college or university is among them.

In Drayton’s view, anyone can be a social entrepre- neur. All it takes, he says, is the ability to see a problem, put others’ skepticism aside, and allow yourself the time to inch your way first toward a vision and then to a solu- tion that works. You’ll read about social entrepreneurs in every chapter of this book.54

Questions:

• Do you think every manager should have the respon- sibility to do good and do well? Why or why not?

• What other means to create social innovation besides efforts like Ashoka’s do you think can be effective?

Rosalind Brewer, former president and CEO of Sam’s Club, focused on building a dynamic organization. She was recently appointed COO and group president of Starbucks.

©Sarah Bentham/AP Images

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Leading takes place in teams, departments, and divisions as well as at the tops of large organizations.

In earlier textbooks, the leading function described how managers motivate workers to come to work and execute top management’s plans by doing their jobs. Today and in the future, managers must be good at mobilizing people to contribute their ideas—to use their brains in ways never needed or dreamed of in the past.

As described in Part 4, managers must rely on a very different kind of leadership (Chapter 12) that empowers and motivates people (Chapter 13). More now than ever, great work must be done via great teamwork (Chapter 14), both within work groups and across group boundaries. Ideally, underlying these processes will be effective interpersonal and organizational communication (Chapter 15).

Controlling: Learning and Changing Planning, organizing, and leading do not guarantee success. The fourth function, controlling, monitors performance and implements necessary changes. By controlling, managers make sure the organization’s resources are being used properly and that the organization is meet- ing its goals such as quality and worker safety.

When managers implement their plans, they often find that things are not working out as planned. The controlling function makes sure that goals are met. It asks and answers the question, “Are our actual outcomes consistent with our goals?” It then makes adjustments as needed.

Successful organizations, large and small, pay close attention to the controlling function. But Part 5 of the book makes it clear that today and for the future, the key managerial chal- lenges are far more dynamic than in the past; they involve continually learning and changing. Controls must still be in place, as described in Chapter 16. But new technologies and other innovations (Chapter 17) make it possible to control more effectively and to help people use their brains, learn, make a variety of new contributions, and help the organization change in ways that forge a successful future (Chapter 18).

The four management functions apply to you personally as well. You must find ways to create value; organize for your own personal effectiveness; mobilize your own talents and skills as well as those of others; monitor performance; and constantly learn, develop, and change for the future. As you proceed through this book and this course, we encourage you not merely to read as if management were an impersonal course subject but to reflect on it from a personal perspective as well, using the ideas for your own personal and professional development.

Performing All Four Management Functions As a manager, your typical day will not be neatly divided into the four functions. You will be doing many things more or less simultaneously.55 Your days will be busy and fractionated, spent dealing with interruptions, meetings, and firefighting. There will be plenty to do that you wish you could be doing but can’t seem to get to. These activities will include all four management functions.

Some managers are particularly interested in, devoted to, or skilled in one or two of the four functions but not in the others. But you should devote adequate attention and resources to all four functions. You can be a skilled planner and controller, but if you organize your people improperly or fail to inspire them to perform at high levels, you will not be realizing your potential as a manager. Likewise, it does no good to be the kind of manager who loves to organize and lead, but who doesn’t really understand where to go or how to determine whether you are on the right track. Good managers don’t neglect any of the four manage- ment functions. Knowing what they are, you can periodically ask yourself whether you are devoting adequate attention to all of them.

controlling

The management function of monitoring performance and making needed changes.

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R D

Controlling performance at Facebook takes many forms. One is Mark Zuckerberg’s creation of new partnerships with third-party companies like Nielsen and comScore to ensure that his company reports accurate data about users’ responses to advertising, such as the average time they spend looking at videos. These data help advertisers decide where and how to spend their ad dollars, based on the ads’ measured effectiveness. Some data reported in the fall of 2016 were inaccurate, and advertisers have asked Facebook to be more accountable.

Another means of control is Facebook’s new partner- ships with outside fact checkers, who are empowered to flag questionable stories as “disputed” to alert read- ers to possible hoaxes and false reports. This move is in response to charges that Facebook’s hands-off editorial policy allowed fake news stories to go viral during the 2016 presidential campaign. The company also promotes greater media literacy with its new Journalism Project,

which, among other goals, offers both practical and ethi- cal advice for eyewitnesses uploading breaking news and videos.

Zuckerberg also is betting on artificial intelligence (AI) to help Facebook filter content users don’t want to see. “I’m really focused on making sure that our company gets faster at taking the bad stuff down,” Zuckerberg said. “The best thing we can do is create AI systems that watch a video and understand that it’s problematic and not show it to people.”56

• Mark Zuckerberg’s original vision of Facebook was an interactive message board to help his Harvard class- mates keep in touch with each other. Do you think he had to consider many control mechanisms at that time? Why does the site need them now?

• What other aspects of Facebook’s performance prob- ably have control mechanisms in place?

Management in Action CONTROL SYSTEMS AT FACEBOOK

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Organizations—particularly large organizations—have many levels. In this section, you learn about the types of managers found at three broad organizational levels: top level, middle level, and frontline.

Top-Level Managers Top-level managers are the senior executives of an organization and are responsible for its overall management. Top-level managers, often referred to as strategic managers, are sup- posed to focus on long-term issues and emphasize the survival, growth, and overall effective- ness of the organization.

Top managers are concerned not only with the organization as a whole but also with the interaction between the organization and its external environment. This interaction often requires managers to work extensively with outside individuals and organizations.

The chief executive officer (CEO) is the key top-level manager found in large corpora- tions. This individual is the primary strategic manager of the firm and has authority over everyone else. Others include the chief operating officer (COO), company presidents, and other members of the top management team (TMT).

In the 1970s, finance was by far the most common single function represented in the TMT. The top team now typically includes the chief executive officer (CEO), Chief Operating Officer (COO), chief information (or technology, or knowledge) officer, and other chiefs in the C-suite, including ethics, strategy (or corporate development), human resources, and marketing (or branding). Functional chiefs sometimes have the title of senior vice president (SVP).57 A likely role for the modern C-suite could well be chief sustainability officer or even climate change officer.58

LO 4

top-level managers

Senior executives responsible for the overall management and effectiveness of the organization.

Management Levels and Skills

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Traditionally, the role of top-level managers has been to set overall direction by formulating strategy and controlling resources. But now top managers are increasingly called upon to be not only strategic architects but also true organizational leaders. As

leaders, they must create and articulate a broader corporate purpose with which people can identify—and one to which people will enthusiastically commit.

Middle-Level Managers Middle-level managers are located in the organization’s hierarchy below top-level man- agement and above the frontline managers. Sometimes called tactical managers, they are responsible for translating the general goals and plans developed by strategic managers into more specific objectives and activities.

Traditionally, the role of the middle manager is to be an administrator who bridges the gap between higher and lower levels. Middle-level managers break down corporate objec- tives into business unit targets; put together separate business unit plans from the units below them for higher-level corporate review; and serve as translators of internal communi- cation, interpreting and broadcasting top management’s priorities downward and channel- ing and translating information from the front lines upward.

Not long ago the stereotype of the middle manager connoted mediocrity: unimagina- tive people behaving like bureaucrats and defending the status quo. But middle managers are closer than top managers to day-to-day operations, customers, frontline managers, and employees—so they know the problems and opportunities. They also have many creative ideas—often better than their bosses’. Middle managers can play crucial roles in determin- ing which entrepreneurial ideas are blocked and which are supported,59 and how well they integrate with top management is crucial to formulating and implementing strategy.60 Good middle managers provide the operating skills and practical problem solving that keep the company working.61

Frontline Managers Frontline managers, or operational managers, are lower-level managers who supervise the operations of the organization. These managers often have titles such as supervisor, team leader, or assistant manager. They are directly involved with nonmanagement employees, implementing the specific plans developed with middle managers. This role is critical in the organization because operational managers are the link between management and non- management personnel. Your first management position probably will fit into this category.

Traditionally, frontline managers have been directed and controlled from above to make sure that they successfully implement operations in support of company strategy. But in leading companies, their roles have expanded. Whereas the operational execution aspect of the role remains vital, in leading companies frontline managers are increasingly called on to be innovative and entrepreneurial, managing for growth and new business development.

Managers on the front line are crucial to creating and sustaining quality, innovation, and other drivers of financial performance.62 In outstanding organizations, talented frontline managers are not only allowed to initiate new activities but are expected to by their top- and middle-level managers. And they are given freedom, incentives, and support to find ways to do so.63

Working Leaders with Broad Responsibilities In small firms—and in those large companies that have adapted to the times—managers have strategic, tactical, and operational responsibilities. They are complete business people; they have knowledge of all business functions, are accountable for results, and focus on serving customers both inside and outside their firms. All of this requires the ability to think strate- gically, translate strategies into specific objectives, coordinate resources, and do real work with lower-level people.

middle-level managers

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

frontline managers

Lower-level managers who supervise the operational activities of the organization.

Top managers are increasingly called upon to

be not only strategic architects but also true

organizational leaders.

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In short, today’s best managers can do it all; they are working leaders.64 They focus on relationships with other people and on achieving results. They don’t just make decisions, give orders, wait for others to produce, and then evaluate results. They get dirty, do hard work themselves, solve problems, and produce value.

What does all of this mean in practice? How do managers spend their time—what do they actually do? A classic study of top executives found that they spend their time engaging in 10 key activities or roles, falling into three categories: interpersonal, informational, and deci- sional.65 Exhibit 1.2 summarizes these roles. Even though the study was done decades ago, it remains highly relevant as a description of what executives do. And even though the study focused on top executives, managers at all levels engage in all these activities. As you study the table, you might ask yourself, “Which of these activities do I enjoy most (and least)? Where do I excel (and not excel)? Which would I like to improve?” Whatever your answers, you will be learning more about these activities throughout this course.

Must-Have Management Skills Performing management functions and roles, and achieving competitive advantage, are the cornerstones of a manager’s job. However, understanding this does not ensure success. Managers need a variety of skills to do these things well. Skills are specific abilities that result from knowledge, information, practice, and aptitude. Although managers need many individual skills, which you will learn about throughout this textbook, there are three broad, essential categories: technical skills, conceptual and decision skills, and interpersonal and communication skills.66

First-timers can underestimate the challenges of management and the many skills required.67 But when managers apply these three critical management skills to the four man- agement functions, the result is high performance.

Technical A technical skill is the ability to perform a specialized task that involves a certain method or process. The technical skills you learn in school will provide you with the opportunity to get an entry-level position; they will also help you as a manager. For

LO 5

technical skill

The ability to perform a specialized task involving a particular method or process.

Decisional Roles Informational Roles Interpersonal Roles

Entrepreneur: Searching for new business opportunities and initiating new projects to create change.

Monitor: Seeking information to understand the organization and its environment; serving as the center of communication.

Leader: Staffing, developing, and motivating people.

Disturbance handler: Taking corrective action during crises and other conflicts.

Disseminator: Transmitting information from source to source, sometimes interpreting and integrating diverse perspectives.

Liaison: Maintaining a network of outside contacts that provide information and favors.

Resource allocator: Providing funding and other resources to units or people; includes making significant organizational decisions.

Spokesperson: Speaking on behalf of the organization about plans, policies, actions, and results.

Figurehead: Performing symbolic duties (for example, ceremonies) and serving other social and legal demands.

Negotiator: Engaging in negotiations with parties outside the organization as well as inside (for example, resource exchanges).

n/a n/a

EXHIBIT 1.2 Managerial Roles: What Managers Do

SOURCE: Adapted from Mintzberg, H., The Nature of Managerial Work. New York: Harper & Row, 1973, pp. 92–93.

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example, your accounting and finance courses will develop the technical skills you need to understand and manage the financial resources of an organization.

Conceptual and Decision Conceptual and decision skills involve the ability to identify and resolve problems for the benefit of the organization and everyone concerned. Managers use these skills when they consider the overall strategy of the firm, the interactions among different parts of the organization, and the role of the business in its external environment. As you acquire greater responsibility, you must exercise your conceptual and decision skills with increasing frequency. Much of this book is devoted to enhancing your conceptual and decision skills, but experience also plays an important part in their development.

Interpersonal and Communication Interpersonal and communication skills influ- ence the manager’s ability to work well with people. These skills are often called people skills. Managers spend the great majority of their time interacting with people,68 and they must develop their abilities to lead, motivate, and communicate effectively with those around them.

The importance of these skills varies by managerial level. Technical skills are most important early in your career. Conceptual and decision skills become more important than technical skills as you rise higher in the company. But interpersonal skills such as commu- nicating effectively with customers and being a good team player are important throughout your career, at every level of management.

An example of a manager with these skills is Mark Bertolini, chief executive of Aetna, which provides health insurance and related services. As a young man doing assembly work for Ford Motor Company, Bertolini acquired an interest in union management, so he decided to study business and earned a degree in accounting and then a master’s degree in finance. Those two specialties involve valuable technical skills, but Bertolini rose through the management ranks at a series of insurance companies because he also has a passion for people. He is constantly engaged in learning about people and forging networks with them. He sees tapping into networks and learning about how to lead people as the key skills that allow managers to get results. At Aetna, Bertolini is not only an expert at insurance matters, but also a promoter of employee health, yoga, and meditation. Furthermore, challenges in his personal life—he survived a spinal cord injury and donated a kidney to his son—help him to empathize with others, including clients.69

conceptual and decision skills

Skills pertaining to abilities that help to identify and resolve problems for the benefit of the organization and its members.

interpersonal and communication skills

People skills; the ability to lead, motivate, and communicate effectively with others.

You and Your Career At the beginning of your career, your contribution to your employer depends on your own performance; often that’s all you’re responsible for. But on becoming a manager, you are responsible for a group. To use an orchestra analogy, instead of playing an instrument, you’re

a conductor, coordinating others’ efforts.70 The challenge is much greater than most first-time managers expect it to be.

Throughout your career, you’ll need to lead teams effec- tively as well as influence people over whom you have no authority; thus the human skills are especially important. Business people often talk about emotional intelligence,71 or EQ—the skills of understanding yourself (including strengths and limitations), managing yourself (dealing with emotions, making good decisions, seeking and using feedback, exercis- ing self-control), and dealing effectively with others (listen- ing, showing empathy, motivating, leading, and so on).

Executives who score low on EQ are less likely to be rated as excellent on their performance reviews, and their divisions tend not to perform as well.72 But please take note: the common phrase “emotional intelligence” is con- troversial.73 You should not consider EQ to be a type of

LO 6

©Dmytro Sidelnikov/Alamy Stock Photo RF

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intelligence but as a set of skills that you can learn and develop. The issue is not lack of abil- ity to change (you can), but the lack of motivation to learn and apply such skills.74

A common complaint about leaders, especially newly promoted ones who had been out- standing individual performers, is that they lack what is perhaps the most fundamental of EQ skills: empathy with other people. William George, former chair and CEO of Medtronic, says some people can go a long way in their careers based on sheer determination and aggressiveness, but personal development—including EQ—ultimately becomes essential.75

What should you do to forge a successful, gratifying career? You are well advised to be both a specialist and a generalist, to be self-reliant and connected, to actively manage your relationship with your organization, and to know what is required not only to survive but also to thrive in today’s world.

Be Both a Specialist and a Generalist If you think your career will be as a specialist, think again. Chances are, you will not want to stay forever in strictly technical jobs with no managerial responsibilities. Accountants are promoted to team leaders and accounting department heads, sales representatives become sales managers, writers become editors, and nurses become nursing directors. As your responsibilities increase, you must deal with more people, understand more about other aspects of the organization, and make bigger and more complex decisions. Beginning to learn now about these managerial challenges will yield benefits sooner than you think.

So, it will help if you can become both a specialist and a generalist.76 Seek to become a specialist: you should be an expert in something useful. This will give you specific skills that help you provide concrete, identifiable value to your organization and to customers. And over time, you should learn to be a generalist, knowing enough about a variety of subject matters so that you can think strategically and work with different perspectives. Exhibit 1.3 gives you more career advice from experts.

Putting this another way, exploit (use, apply, take advantage of) what you know, and explore (search) for new experiences, ideas, knowledge, and perspectives. To both exploit and explore is to be ambidextrous;77 organizations should do this, and so should we all.78

Be Self-Reliant To be self-reliant means to take full responsibility for yourself and your actions. You cannot count on your boss or your company to take care of you. A useful metaphor is to think of yourself as a business, with you as president and sole employee.

emotional intelligence

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

Escape the industry-specific silo. Develop a skill set that transcends a single function, industry, or career path.

Know what you know. And find ways to apply it.

Keep learning throughout your life. No one can rest on what they already know.

Manage your online presence. Expand your network, and post about your industry and functional expertise.

Never compromise your integrity. Succumbing to temptations can destroy a career.

Take a long view. Look at your career as a whole, and stay true to yourself.

Prevent obsolescence. Job security comes from transportable skills.

Zig-zag strategically. Job changing can be high-risk but not if you have measurable accomplishments.

Be willing to take on tough jobs. Continually challenge yourself.

EXHIBIT 1.3 Career Advice from the Experts

SOURCES: “Need a New Year’s Resolution? 10 Ideas for a Stronger Career in 2017,” American Recruiters, January 2, 2017, www.americanrecruiters.com; Kennedy, Joyce Lain, “Best Career Advice for 2013,” Chicago Tribune, December 23, 2012, http://www.chicagotribune.com; Sanders, Lorraine, “Hilary Novelle Hahn’s Zig-Zag Career Guide,” Fast Company, November 13, 2012, http://www.fastcompany.com; Kadlec, Dan, “Graduation Day Advice: 5 Steps to a Great Career,” Time, May 9, 2012, http://business.time.com.

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To be self-reliant, find new ways to make your overall performance better. Take responsibil- ity for change; be an innovator.79 Don’t just do your work and wait for orders; look for oppor- tunities to contribute in new ways, to develop new products and processes, and to generate constructive change that strengthens the company and benefits customers and colleagues.

Success requires more than talent; you also have to be willing to work hard. The elite, world-class performers in many fields (including managers and leaders) reach the top tier only after 10 years or more of hard work and skillful coaching.80 The key is to engage in consistent practice, looking at the results and identifying where to improve.

It’s easy to see how this works for violinists or basketball players, but what about business managers? The answer is to focus on getting better results each time you try any business task, whether it’s writing a report, chairing a meeting, or interpreting a financial statement. To know whether you’re getting better, make a point of asking for feedback from customers, colleagues, and bosses.

To develop your full potential, assess yourself, includ- ing your interests, aptitudes, and personal character strengths. Think about it, ask others who know you well, conduct a formal exercise in which you learn what others consider to be your “best self,”81 and use recent advances

in psychology to identify your signature strengths.82 Consider the professional image and reputa- tion you would like to develop,83 and continue building your capabilities. Consider the suggestions found throughout this book, and your other coursework, as you pursue these objectives.

Connect with People Being connected means having many good working relationships and interpersonal contacts. For example, those who want to become partners in professional service organizations, such as social media marketing, accounting, advertising, and consulting firms, strive constantly to build a network of contacts. Their connectedness goal is to work not only with multiple cli- ents but also with a half dozen or more senior partners, including several from outside their home offices and some from outside their country. Social relationships improve newcomers’ knowledge of the organization and their jobs, their social integration into the firm, and their commitment to the organization.84 Networks of diverse individuals can make huge contribu- tions to your professional development no matter what your career—even if you hope to be inducted into the Major League Baseball Hall of Fame on the first ballot.85

Social capital is the goodwill stemming from your social relationships, and you can mobi- lize it on your behalf. It aids career success, compensation, employment, team effectiveness, the success of new ventures, entrepreneurship, and relationships with suppliers and other outsiders.86 Today much of that social capital can be tapped online at social networking websites. Besides the social sites such as Facebook, some of these sites are aimed at helping people tap business networks. For example, LinkedIn has more than 467 million registered members worldwide, with total revenue from premium subscriptions, and marketing and talent solutions of $960 million.87

LinkedIn is not the only large player in the online job market space. In early 2017, Facebook announced that it would be providing a free service to enable companies to post job openings on their pages and applicants (FB members) to apply for those positions. The social media giant is hoping that companies and applicants will use Messenger to communi- cate during the recruitment process.88

All business is a function of human relationships.89 Building competitive advantage depends not only on you but on other people. Management is personal. Commercial deal- ings are personal. Purchase decisions, repurchase decisions, and contracts all hinge on rela- tionships. Even the biggest business deals—takeovers—are intensely personal and emotional. Without good work relationships, you will not achieve your potential as a manager and leader.

Actively Manage Your Relationship with Your Organization We have noted the importance of taking responsibility for your own actions and your own career. Unless you are self-employed and your own boss, one way to do this is to think about

social capital

Goodwill stemming from your social relationships; a competitive advantage in the form of relationships with other people and the image other people have of you.

Don’t just do your work and wait for

instructions; look for opportunities to

contribute in new ways.

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the nature of the relationship between you and your employer. Exhibit 1.4 shows two possible relationships—and you have some control over which relationship develops.

Relationship #1 is one in which you view yourself as an employee and passively expect your employer to tell you what to do and give you pay and benefits. Your employer is in charge, and you are a passive recipient of its actions. Your contributions are likely to be adequate but minimal—you won’t make the added contributions that strengthen your orga- nization, and if all organizational members take this perspective, the organization is not likely to be strong for the long run. Personally, you may lose your job, or keep your job in a declining organization, or receive few positive benefits from working there and either quit or become cynical and unhappy in your work.

In contrast, relationship #2 is a two-way relationship in which you and your organization both benefit from one another. The mind-set is different: Instead of doing what you are told, you think about how you can contribute—and you act accordingly. To the extent that your orga- nization values your contributions, you are likely to benefit in return by receiving full and fair rewards, support for further personal development, and a more gratifying work environment. If you think in broad terms about how you can help your company, and if others think like this as well, there is likely to be continuous improvement in the company’s ability to innovate, cut costs, and deliver quality products quickly to an expanding customer base. As the company’s bottom line strengthens, benefits accrue to shareholders as well as to you and other employees.

What contributions can you make? You can do your basic work. But you can, and should, go further. You can figure out new ways to add value—by thinking of and implementing new ideas that improve processes and results. You can do this by using your technical knowl- edge and skills, as in developing a better information system, accounting technique, or sales strategy.

You also can contribute with your conceptual and human skills and your managerial actions (see Exhibit 1.5). You can execute the essential management functions and deliver competitive advantage. You can deliver strategic value (Part 2 of this book). You can take actions that help build a more dynamic organization (Part 3). You can mobilize people to contribute to their fullest potential (Part 4). And you can learn and change—and help your colleagues and company learn and change—to adapt to changing realities and forge a suc- cessful future (Part 5).

Survive and Thrive You will be accountable for your actions and for results. In the past, people at many com- panies could show up, do an OK job, get a decent evaluation, and get a raise equal to the cost of living and maybe higher. Today, managers must do more, better. Eminent manage- ment scholar Peter Drucker, in considering what makes managers effective, noted that some are charismatic whereas some are not, and some are visionary whereas others are more numbers-oriented.90 But successful executives do share some common practices:

• They ask “What needs to be done?” not just “What do I want to do?” • They write an action plan. They don’t just think, they do, based on a sound, ethical

plan. • They take responsibility for decisions. This requires checking up, revisiting, and

changing if necessary.

Bottom Line If you want people who see

your LinkedIn profile to think of you as a future manager,

what should you include in the profile?

EXHIBIT 1.4 Two Relationships: Which Will You Choose?

Employer

You

#1 You as a passive

employee

#2 You as an active contributor in a productive relationship

You Your

organization

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• They focus on opportunities, not just problems. Problems have to be solved, and problem solving prevents more damage. But capturing opportunities is what creates great results.

Career success is most likely if you are flexible, creative, and motivated. You need to learn how to think strategically, make decisions, and work in teams. You will learn more about these and other topics, essential to your successful career, in the upcoming chapters.

P R

O G

R E

S S

R E

P O

R T

M A

N A

G E

R ’S

B R

IE F

O N

W A

R D

Said to be forward-looking, disciplined, inquisitive, consis- tent, and good at communicating, Mark Zuckerberg recently earned a 99.3 approval rating from Facebook employees. That’s a little less surprising when you consider that he says he is most strongly influenced by the colleagues with whom he has day-to-day contact, rather than by any outside men- tors. His office has glass walls, and he’s been known to invite new employees to present their own ideas at meetings.

Zuckerberg believes “[employees] need the ability to fully exercise all their creativity and all their capacity, or else they’re not going to be having the biggest impact that they can have on the world, and they’re going to want to go do something else.” He’s also famous for saying, “I will only hire someone to work directly for me if I would work for that person.”

Zuckerberg has delegated the commercial side of Facebook’s operations to chief operating officer Sheryl Sandberg. This leaves him free to stay focused on the technical aspects that led him to start the social media giant as a simple site he once ran from his Harvard dorm

room. Matt Cohler, an early employee and now a venture capitalist, describes Zuckerberg as “a learn-it-all person, to a level that is sometimes maddening. . . . He maintains a relentless focus on innovation, but at the same time he’s an applied-science and engineering guy.”

Mike Vernal, a former engineering employee, says of Zuckerberg, “Most people think day to day or week to week. Mark thinks century to century.”

In his spare time, Zuckerberg is learning Mandarin and programming an AI personal assistant for his home. With his wife, he recently began a tour with the goal of visiting all 50 of the United States.91

• As an early career employee at Facebook, what steps could you take to get noticed and position yourself for promotion to frontline manager?

• Most of Facebook’s core top employees have been with the company for much of its 13-year life. What do you think accounts for their commitment?

Management in Action WORKING FOR FACEBOOK’S MARK ZUCKERBERG

EXHIBIT 1.5 Managerial Action Is Your Opportunity to Contribute You

Your organization

Managerial actions

1. Delivering strategic value 2. Building a dynamic organization 3. Mobilizing people 4. Learning and changing

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Managing and Performing  Chapter 1 23

conceptual and decision skills, p. 18

controlling, p. 14

cost competitiveness, p. 10

emotional intelligence, p. 19

frontline managers, p. 16

innovation, p. 8

interpersonal and communication skills, p. 18

knowledge management, p. 6

leading, p. 13

management, p. 12

middle-level managers, p. 16

organizing, p. 12

planning, p. 12

quality, p. 8

service, p. 9

social capital, p. 20

speed, p. 10

sustainability, p. 11

technical skill, p. 17

top-level managers, p. 15

value, p. 12

KEY TERMS

You learned that change is the only constant for manag- ers in today’s business world. You also learned that high- performance managers seek to deliver superior value to customers by providing high-quality, innovative services or products in a timely, cost-effective, and sustainable man- ner. The fundamental functions and activities of manage- ment are just as important as they were “back in the day.” However, their forms have evolved greatly and their strat- egies and tactics continue to change. Depending on your organizational level, you’ll be expected to engage in certain roles and master a variety of managerial skills. Your career, and your professional and personal development along the way, are primarily in your hands.

Summarize the major challenges of managing in the new competitive landscape.

• In business, there is no alternative to managing well. The best managers succeed by focusing on the fun- damentals and knowing what’s important.

• The goal of this book is to help you become an effec- tive, high-performance manager.

• Managers today must deal with dynamic forces that create greater change than ever before, including globalization, technological change (including the continuing development and new applications of the Internet), knowledge management, and collaboration across organizational boundaries.

Describe the sources of competitive advantage for a company.

• Because business is a competitive arena, you need to deliver value to customers in ways that are supe- rior to what your competitors do.

• Competitive advantages result from innovation, quality, service, speed, cost competitiveness, and sustainability.

Explain how the functions of management are evolving in today’s business environment.

• Despite massive change, management retains cer- tain functions that will not disappear.

LO 1

LO 2

LO 3

• The primary functions of management are planning, organizing, leading, and controlling.

• Planning is analyzing a situation, determining the goals that will be pursued, and deciding in advance the actions needed to pursue these goals.

• Organizing is assembling the resources needed to complete the job and coordinating employees and tasks for maximum success.

• Leading is motivating people and stimulating high performance. 

• Controlling is monitoring the progress of the organi- zation or the work unit toward goals and then taking corrective action as needed.

• In the modern business environment, these functions require creating strategic value, building a dynamic organization, mobilizing people, and learning and changing.

Compare how the nature of management varies at different organizational levels.

• Top-level, strategic managers are the senior execu- tives responsible for the organization’s overall management.

• Middle-level, tactical managers translate general goals and plans into more specific objectives and activities.

• Frontline, operational managers are lower-level man- agers who supervise operations.

• Managers at all levels must perform a variety of inter- personal, informational, and decisional roles.

• Even at the operational level, the best managers think strategically and operate like complete busi- ness people.

Define the skills you need to be an effective manager.

• To execute management functions successfully, managers need technical skills, conceptual and decision skills, and interpersonal and communica- tion skills.

LO 4

LO 5

RETAINING WHAT YOU LEARNED

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24 Part One  Foundations of Management

• A technical skill is the ability to perform a specialized task involving certain methods or processes.

• Conceptual and decision skills help the manager recognize complex and dynamic issues, analyze the factors that influence those issues or problems, and make appropriate decisions.

• Interpersonal and communication skills enable the manager to interact and work well with people.

• As you rise to higher organizational levels, technical skills tend to become less important and conceptual skills become more important, whereas interpersonal and communication skills remain extremely important at every level.

Understand the principles that will help you manage your career.

• You are more likely to succeed in your career if you become both a specialist and a generalist. You should be self-reliant but also connected.

• You should actively manage your relationship with your organization and continuously improve your skills so you can perform as needed in the changing work environment.

LO 6

The Management Process

Foundations of management

Planning: Delivering strategic value

Leading: Mobilizing people

Controlling: Learning and changing

Organizing: Building a dynamic

organization

DISCUSSION QUESTIONS 1. Identify and describe a great manager. What makes him

or her stand out from the crowd? 2. Have you ever seen or worked for an ineffective man-

ager? Describe the causes and the consequences of the ineffectiveness.

3. Describe in as much detail as possible how the Internet and globalization affect your daily life.

4. Identify some examples of how different organizations collaborate across boundaries.

5. Name a great organization. How do you think manage- ment contributes to making it great?

6. Name an ineffective organization. What can manage- ment do to improve it?

7. Give examples you have seen of firms that are out- standing and weak on each of the six pillars of competi- tive advantage. Why do you choose the firms you do?

8. Describe your use of the four management functions in the management of your daily life.

9. Discuss the importance of technical, conceptual, and interpersonal skills at school and in jobs you have held.

10. What are your strengths and weaknesses as you con- template your career? How do they relate with the skills and behaviors identified in the chapter?

11. Devise a plan for developing yourself and making your- self attractive to potential employers. How would you go about improving your managerial skills?

12. Consider the managers and companies discussed in the chapter. Have they been in the news lately, and what is the latest? If their image, performance, or for- tunes have gone up or down, what has changed to affect how they have fared?

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Managing and Performing  Chapter 1 25

EXPERIENTIAL EXERCISES 1.1 YOUR PERSONAL NETWORK

1. See the nearby figure showing primary and secondary connections. Working on your own, write down all of your primary contacts—individuals you know person- ally who can support you in attaining your professional goals. Then begin to explore their secondary connec- tions. Make assumptions about possible secondary con- nections that can be made for you by contacting your primary connections. For example, through one of your teachers (primary), you might be able to obtain some names of potential employers (secondary). (10–15 min.)

2. Then meet with your partner or small group to exchange information about your primary and second- ary networks and to exchange advice and information on how best to use these connections as well as how you could be helpful to them. (about 5 min. per person; 10–30 min. total, depending on group size)

3. Add names or types of names to your list based on ideas you get by talking with others in your group. (2–5 min.)

4. Discuss with your large group or class, using the follow- ing discussion questions. (10 min.)

QUESTIONS

1. What were some of the best primary sources identified by your group?

2. What were some of the best sources for secondary contacts identified by your group?

3. What are some suggestions for approaching primary contacts?

4. What are some suggestions for approaching secondary contacts, and how is contacting secondary sources dif- ferent from contacting primary contacts?

5. What did you learn about yourself and others from this exercise?

SOURCE: de Janasz, Suzanne C., Dowd, Karen O. and Schneider, Beth Z., Interpersonal Skills in Organizations. New York: McGraw-Hill, 2002, p. 211.

Primary and Secondary Connections

Secondary connections

Primary connections

Self

SOURCE: Excerpted from Jauch, Lawrence R., Bedeian, Arthur G., Coltrin, Sally A. and Glueck, William F., The Managerial Experience: Cases, Exercises, and Readings, 5th ed. Chicago: South-Western, 1989.

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26 Part One  Foundations of Management

OBJECTIVES

1. To recognize what behaviors contribute to being a suc- cessful manager.

2. To develop a ranking of critical behaviors that you per- sonally believe are important for becoming an effective manager. 

INSTRUCTIONS

1. Following is a partial list of behaviors in which man- agers may engage. Rank these items in terms of their importance for effective performance as a manager. Put a 1 next to the item that you think is most important, 2 for the next most important, down to 10 for the least important.

2. Bring your rankings to class. Be prepared to justify your results and rationale. If you can add any behaviors to this list that might lead to success or greater manage- ment effectiveness, write them in.

Managerial Behaviors Worksheet _____ Collaborates with people from different parts of the

organization.

_____ Looks for ways to incorporate technology into the operation.

_____ Ensures that services/products are of a high quality and delivered on time.

_____ Keeps costs down and looks for ways to be more efficient.

_____ Makes decisions to help achieve the goals of the organization.

_____ Is organized and effectively allocates resources.

_____ Motivates others to perform at a high level.

_____ Makes sure goals are met and implements changes when necessary.

_____ Exhibits good interpersonal and communication skills.

_____ Is skilled at identifying and resolving problems.

SOURCE: Adapted from Jauch, Lawrence R., Bedeian, Arthur G., Coltrin, Sally A. and Glueck, William F., The Managerial Experience: Cases, Exercises, and Readings, 5th ed. Chicago: South-Western, 1989.

1.2 ARE YOU AN EFFECTIVE MANAGER?

1.3 CAREER SKILLS DEVELOPMENT

OBJECTIVES

1. To develop an understanding of your career-related strengths.

2. To identify career-related skills and behaviors requiring development.

3. To increase confidence in your marketability.

INSTRUCTIONS Read the instructions for each activity, think about them, and then provide your response.

Career Development Worksheet Think about a part- or full-time job, or a volunteer role that you’ve held.

1. Describe activities and skills at which you excelled and which helped you succeed:

a. ________________________________________

b. ________________________________________

c. ________________________________________

d. ________________________________________

e. ________________________________________

2. Identify activities and skills that you wanted to master but were unable to do so due to lack of training or time:

a. ________________________________________

b. ________________________________________

c. ________________________________________

d. ________________________________________

e. ________________________________________

3. Referring to your list in #2, what steps could you take now to develop these important activities and skills:

a. ________________________________________

b. ________________________________________

c. ________________________________________

d. ________________________________________

e. ________________________________________

SOURCE: Adapted from Gordon, Judith R., Diagnostic Approach to Organizational Behavior. Upper Saddle River, NJ: Pearson Education, 1983.

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Managing and Performing  Chapter 1 27

As Charlie Greer drove to work, he smiled, recalling the meeting at the end of the previous day. Inez Rodriguez, the owner of the company where he worked, USA Hospital Supply, had summoned him to her office, where she warmly shook his hand and exclaimed, “Congratulations!” As they settled into chairs, Inez reviewed the conversa- tion she’d had with the company’s board of directors that morning: USA Hospital had been growing steadily for the past 10 years despite the economy’s ups and downs. As the company’s founder, Inez had always been an insightful and enthusiastic leader of the five-person sales team, but the level of activity was becoming too much of a distrac- tion. Inez needed to think about the long-range vision of the company, so she needed a leader who could focus on sales. She had interviewed several candidates outside the firm as well as Charlie and two of the other sales representatives. In the end, Inez told Charlie, the choice was obvious: Charlie was far and away the best sales rep on the team, he had extensive knowledge of the company’s product mix, and if anyone could help the sales team achieve its goals, it was Charlie. She offered him the job as the company’s first sales manager. He eagerly accepted. When he left work that eve- ning, his head was full of ideas, and his heart was full of confidence.

Now Charlie pulled into the office park where USA Hospital Supply was located and easily found a parking space in the lot outside the one-story office and ware- house facility. As usual, he was one of the first employees to arrive. By habit, he strode toward his cubicle, but after a second, he recalled that Inez had arranged for the small firm’s accountant and computer systems manager to share an office so he could have an office of his own. Charlie entered his new domain and settled into the swivel chair behind his desk.

At that instant, the eagerness to enjoy his new status and responsibility began to give way to nervousness. Charlie realized that although he knew a lot about selling supplies to hospitals and doctor’s offices, he had never given much thought to managing. Obviously, he mused, his job was to see that his department met or exceeded its sales targets. But how?

Charlie started his computer and then opened his e-mail and his word-processing software, intending to

get some ideas into writing. He typed out a list of the four sales reps: Cindy, Paula, John, and Doreen. Cindy handled the large corporate accounts, Paula covered the East Coast, John called on accounts in the South, and Doreen handled the Midwest. Until today, Charlie had been build- ing a fast-growing territory west of the Mississippi. Now who was going to do that? Charlie was tempted to keep that work for himself; he knew he could build a base of loyal clients better than anyone else. Still, he wondered whether he could excel as a manager and as a sales rep at the same time.

While he was pondering that challenge, Cindy walked past the office door and, without stopping, politely called, “Congratulations!” through the doorway. Charlie’s heart sank as he realized that Cindy had also wanted this job. They had always enjoyed a friendly rivalry as talented sales- people; now what would happen to the fun of being team members? It was easier to think about the other representa- tives at the moment. Charlie scanned his e-mail inbox and saw status reports from John and Doreen, both of them out of the office to call on clients. What about Paula? Charlie wasn’t quite sure he remembered her plans for this week. Obviously he needed to catch up on what everyone was doing, and that gave him a new idea. He could build on his strengths by traveling with each of the sales reps and coaching them. That way, he could show them all his proven methods for closing a sale, and they could learn to sell as well as he did. Charlie thought, “That’s what a good man- ager does: shows employees how to do the job right.” He was starting to feel less nervous as he began to compose an e-mail to Paula.

DISCUSSION QUESTIONS

1. How will Charlie’s approach to quality and service affect his company’s performance?

2. Which of the basic functions of management has Charlie considered? How well is he preparing to carry out these functions?

3. Which management skills does Charlie have? In what areas do you think he has the greatest need to develop skills? How can he actively manage his development as a manager?

Concluding Case A NEW MANAGER AT USA HOSPITAL SUPPLY

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APPENDIX A

The Evolution of Management For thousands of years, managers have wrestled with the same issues and problems confronting executives today. Around 1100 BC, the Chinese practiced the four man- agement functions—planning, organizing, leading, and controlling—discussed in Chapter 1. Between 400 BC and 350 BC, the Greeks recognized management as a separate art and advocated a scientific approach to work. The Romans decentralized the management of their vast empire before the birth of Christ. During medieval times, the Venetians standardized production through the use of an assembly line, building warehouses and using an inventory system to monitor the contents.1

But throughout history, most managers operated strictly on a trial-and-error basis. The challenges of the Industrial Revolution changed that. Management emerged as a for- mal discipline at the turn of the century. The first university programs to offer management and business education, the Wharton School at the University of Pennsylvania and the Amos Tuck School at Dartmouth, were founded in the late 19th century. By 1914, 25 business schools existed.2

Thus, the management profession as we know it today is relatively new. This appendix explores the roots of modern management theory. Understanding the origins of manage- ment thought will help you grasp the underlying contexts of the ideas and concepts presented in the chapters ahead.

Although this appendix is titled “The Evolution of Management,” it might be more appropriately called “The Revolutions of Management” because it documents the wide swings in management approaches over the past 100+ years. Out of the great variety of ideas about how to improve management, parts of each approach have survived and been incorporated into modern perspectives on manage- ment. Thus, the legacy of past efforts, triumphs, and failures has become our guide to future management practice.3

EARLY MANAGEMENT CONCEPTS AND INFLUENCES Communication and transportation constraints hindered the growth of earlier businesses. Therefore, improvements in management techniques did not substantially improve performance. However, the Industrial Revolution changed that. As companies grew and became more complex, minor improvements in management tactics produced impressive increases in production quantity and quality.4

The emergence of economies of scale—reductions in the average cost of a unit of production as the total volume produced increases—drove managers to strive for further growth. The opportunities for mass production created by the Industrial Revolution spawned intense and system- atic thought about management problems and issues— particularly efficiency, production processes, and cost savings.5

Exhibit A.1 provides a time line depicting the evolution of management thought through the decades. This histori- cal perspective is divided into two major sections: classical approaches and contemporary approaches. Many of these approaches overlapped as they developed, and they often had a significant impact on one another. Some approaches were a direct reaction to the perceived deficiencies of pre- vious approaches. Others developed as the needs and issues confronting managers changed over the years. All the approaches attempted to explain the real issues fac- ing managers and provide them with tools to solve future problems.

Exhibit A.1 will reinforce your understanding of the key relationships among the approaches and place each per- spective in its historical context.

CLASSICAL APPROACHES The classical period extended from the mid-19th cen- tury through the early 1950s. The major approaches that

EXHIBIT A.1 The Evolution of Management Thought

Systematic management

Contingency theory

Current and future revolutions

Classical approaches Contemporary approaches

1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2015 2025

Scientific management

Bureaucracy

Administrative management

Human relations

Quantitative management

Organizational behavior

Systems theory

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emerged during this period were systematic management, scientific management, administrative management, human relations, and bureaucracy.

Systematic Management During the 19th century, growth in U.S. business centered on manufacturing.6 Early writers such as Adam Smith believed the management of these firms was chaotic, and their ideas helped to systematize it. Most organizational tasks were subdivided and performed by specialized labor. However, poor coordination caused frequent problems and breakdowns of the manufacturing process.

The systematic management approach attempted to build specific procedures and processes into operations to ensure coordination of effort. Systematic management emphasized economical operations, adequate staffing, maintenance of inventories to meet consumer demand, and organizational control. These goals were achieved through

• Careful definition of duties and responsibilities.

• Standardized techniques for performing these duties.

• Specific means of gathering, handling, transmitting, and analyzing information.

• Cost accounting, wage, and production control systems to facilitate internal coordination and communications.

Systematic management emphasized internal operations because managers were concerned primarily with meet- ing the explosive growth in demand brought about by the Industrial Revolution. In addition, managers were free to focus on internal issues of efficiency, in part because the government did not constrain business practices signifi- cantly. Finally, labor was poorly organized. As a result, many managers were oriented more toward things than toward people.

Systematic management did not address all the issues 19th-century managers faced, but it tried to raise managers’ awareness about the most pressing concerns of their job.

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

In response, Taylor introduced a second approach to management, known as scientific management.7 This approach advocated the application of scientific methods to analyze work and to determine how to complete production tasks efficiently. For example, U.S. Steel’s contract with the United Steel Workers of America specified that sand shov- elers should move 12.5 shovelfuls per minute; shovelfuls should average 15 pounds of river sand composed of 5.5 percent moisture.8

Taylor identified four principles of scientific management:

1. Management should develop a precise, scientific approach for each element of one’s work to replace general guidelines.

2. Management should scientifically select, train, teach, and develop each worker so that the right person has the right job

3. Management should cooperate with workers to ensure that jobs match plans and principles.

4. Management should ensure an appropriate division of work and responsibility between managers and workers.

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

After the “one best way” to perform the job was iden- tified, Taylor stressed the importance of hiring and train- ing the proper worker to do that job. Taylor advocated the standardization of tools, the use of instruction cards to help workers, and breaks to eliminate fatigue.

Another key element of Taylor’s approach was the use of the differential piecerate system. Taylor assumed workers were motivated by receiving money. Therefore, he imple- mented a pay system in which workers were paid additional

An Early Labor Contract

The following rules, taken from the records of Cocheco Company, were typical of labor contract provisions in the 1850s.

1. The hours of work shall be from sunrise to sunset, from the 21st of March to the 20th of September inclusively; and from sunrise until eight o’clock, p.m., during the remainder of the year. One hour shall be allowed for dinner, and half an hour for breakfast during the first mentioned six months; and one hour for dinner during the other half of the year; on Saturdays, the mill shall be stopped one hour before sunset, for the purpose of cleaning the machinery.

2. Every hand coming to work a quarter of an hour after the mill has been started shall be docked a quarter of a day; and every hand absenting him or herself, without absolute necessity, shall be docked in a sum double the amount of the wages such hand shall have earned during the time of such absence. No more than one hand is allowed to leave any one of the rooms at the same time—a quarter of a day shall be deducted for every breach of this rule.

3. No smoking or spiritous liquors shall be allowed in the factory under any pretense whatsoever. It is also forbidden to carry into the factory, nuts, fruits, etc. books, or papers during the hours of work.

SOURCE: Sullivan, W., “The Industrial Revolution and the Factory Operative in Pennsylvania,” The Pennsylvania Magazine of History and Biography 78 (1954), pp. 478–79.

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Frederick Taylor (left) and Dr. Lillian Gilbreth (right) were early experts in management efficiency.

©George Rinhart/Getty Images ©Bettmann/Getty Images

wages when they exceeded a standard level of output for each job. Taylor concluded that both workers and manage- ment would benefit from such an approach.

Scientific management principles were widely embraced. Other proponents, including Henry Gantt and Frank and Lillian Gilbreth, introduced many refinements and tech- niques for applying scientific management on the factory floor. One of the most famous examples of the application of scientific management is the factory Henry Ford built to produce the Model T.9 The legacy of Taylor’s scientific man- agement approach is broad and pervasive. Most important, productivity and efficiency in manufacturing improved dra- matically. The concepts of scientific methods and research were introduced to manufacturing. The piecerate system gained wide acceptance because it more closely aligned effort and reward. Taylor also emphasized the need for cooperation between management and workers. And the concept of a management specialist gained prominence.

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

Scientific Management and the Model T

At the turn of the century, automobiles were a luxury that only the wealthy could afford. They were assembled by craftspeople who put an entire car together at one spot on the factory floor. These workers were not specialized, and Henry Ford believed they wasted time and energy bringing the needed parts to the car. Ford took a revolutionary approach to automobile manufacturing by using scientific management principles.

After much study, machines and workers in Ford’s new factory were placed in sequence so that an automobile could be assembled without interruption along a moving production line. Mechanical energy and a conveyor belt were used to take the work to the workers.

The manufacture of parts likewise was revolutionized. For example, formerly it had taken one worker 20 minutes to assemble a flywheel magneto. By splitting the job into 29 operations, putting the product on a mechanical conveyor, and changing the height of the conveyor, Ford cut production time to 5 minutes.

By 1914, chassis assembly time had been trimmed from almost 13 hours to 1½ hours. The new methods of production required complete standardization, new machines, and an adaptable labor force. Costs dropped significantly, the Model T became the first car accessible to the majority of Americans, and Ford dominated the industry for many years.

SOURCE: Kroos, H. and Gilbert, C., The Principles of Scientific Management. New York: Harper & Row, 1911.

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Administrative Management The administrative management approach emphasized the perspective of senior managers within the organization and argued that management was a profession and could be taught.

An explicit and broad framework for administrative man- agement emerged in 1916, when Henri Fayol, a French min- ing engineer and executive, published a book summarizing his management experiences. Fayol identified five functions and 14 principles of management. The five functions, which are very similar to the four functions discussed in Chapter 1, are planning, organizing, commanding, coordinating, and controlling. Exhibit A.2 lists and defines the 14 principles. Although some critics claim Fayol treated the principles as universal truths for management, he actually wanted them applied flexibly.10

A host of other executives contributed to the admin- istrative management literature. These writers discussed a broad spectrum of management topics, including the social responsibilities of management, the philosophy of management, clarification of business terms and concepts,

and organizational principles. Chester Barnard’s and Mary Parker Follet’s contributions have become classic works in this area.11

Barnard, former president of New Jersey Bell Telephone Company, published his landmark book The Functions of the Executive in 1938. He outlined the role of the senior executive: formulating the purpose of the organization, hir- ing key individuals, and maintaining organizational com- munications.12 Mary Parker Follet’s 1942 book Dynamic Organization extended Barnard’s work by emphasizing the continually changing situations that managers face.13 Two of her key contributions—the notion that managers desire flexibility and the differences between motivating groups and individuals—laid the groundwork for the modern contin- gency approach discussed later in this appendix.

All the writings in the administrative management area emphasize management as a profession along with fields such as law and medicine. In addition, these authors offered many recommendations based on their personal experi- ences, which often included managing large corporations. Although these perspectives and recommendations were considered sound, critics noted that they might not work in all settings. Different types of personnel, industry condi- tions, and technologies may affect the appropriateness of these principles.

Human Relations A fourth approach to management, human relations, devel- oped during the 1930s. This approach aimed at under- standing how psychological and social processes interact with the work situation to influence performance. Human relations was the first major approach to emphasize informal work relationships and worker satisfaction.

This approach owes much to other major schools of thought. For example, many of the ideas of the Gilbreths (scientific management) and Barnard and Follet (administra- tive management) influenced the development of human relations from 1930 to 1955. In fact, human relations emerged from a research project that began as a scientific management study.

Western Electric Company, a manufacturer of commu- nications equipment, hired a team of Harvard researchers led by Elton Mayo and Fritz Roethlisberger. They were to investigate the influence of physical working conditions on workers’ productivity and efficiency in one of the com- pany’s factories outside Chicago. This research project, known as the Hawthorne Studies, provided some of the most interesting and controversial results in the history of management.14

The Hawthorne Studies were a series of experiments conducted from 1924 to 1932. During the first stage of the project (the illumination experiments), various working con- ditions, particularly the lighting in the factory, were altered to determine the effects of those changes on productivity. The researchers found no systematic relationship between the factory lighting and production levels. In some cases, productivity continued to increase even when the illumina- tion was reduced to the level of moonlight. The research- ers concluded that the workers performed and reacted

1. Division of work—divide work into specialized tasks and assign responsibilities to specific individuals.

2. Authority—delegate authority along with responsibility.

3. Discipline—make expectations clear and punish violations.

4. Unity of command—each employee should be assigned to only one supervisor.

5. Unity of direction—employees’ efforts should be focused on achieving organizational objectives.

6. Subordination of individual interest to the general interest—the general interest must predominate.

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

8. Centralization—determine the relative importance of superior and subordinate roles.

9. Scalar chain—keep communications within the chain of command.

10. Order—order jobs and material so they support the organization’s direction.

11. Equity—fair discipline and order enhance employee commitment.

12. Stability and tenure of personnel—promote employee loyalty and longevity.

13. Initiative—encourage employees to act on their own in support of the organization’s direction.

14. Esprit de corps—promote a unity of interests between employees and management.

EXHIBIT A.2 Fayol’s 14 Principles of Management

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differently because the researchers were observing them. This reaction is known as the Hawthorne Effect.

This conclusion led the researchers to believe productiv- ity may be affected more by psychological and social factors than by physical or objective influences. With this thought in mind, they initiated the other four stages of the project. During these stages, the researchers performed various work group experiments and had extensive interviews with employees. Mayo and his team eventually concluded that productivity and employee behavior were influenced by the informal work group.

Human relations proponents argued that managers should stress primarily employee welfare, motivation, and communication. They believed social needs had precedence over economic needs. Therefore, management must gain the cooperation of the group and promote job satisfaction and group norms consistent with the goals of the organization.

Another noted contributor to the field of human relations was Abraham Maslow.15 In 1943, Maslow suggested that humans have five levels of needs. The most basic needs are the physical needs for food, water, and shelter; the most advanced need is for self-actualization, or personal fulfill- ment. Maslow argued that people try to satisfy their lower- level needs and then progress upward to the higher-level needs. Managers can facilitate this process and achieve organizational goals by removing obstacles and encourag- ing behaviors that satisfy people’s needs and organizational goals simultaneously.

Although the human relations approach generated research into leadership, job attitudes, and group dynamics, it drew heavy criticism.16 Critics believed that one result of human relations—a belief that a happy worker was a produc- tive worker—was too simplistic. Whereas scientific manage- ment overemphasized the economic and formal aspects of the workplace, human relations ignored the more rational side of the worker and the important characteristics of the for- mal organization. However, human relations was a significant step in the development of management thought because it prompted managers and researchers to consider the psy- chological and social factors that influence performance.

Bureaucracy Max Weber, a German sociologist, lawyer, and social his- torian, showed how management itself could be more effi- cient and consistent in his book The Theory of Social and Economic Organizations.17 The ideal model for manage- ment, according to Weber, is the bureaucracy approach.

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

A Human Relations Pioneer

In 1837, William Procter, a ruined English retailer, and James Gamble, son of a Methodist minister, formed a partnership in Cincinnati to make soap and candles. Both were known for their integrity, and soon their business was thriving.

By 1883, the business had grown substantially. When William Cooper Procter, grandson of the founder, left Princeton University to work for the firm, he wanted to learn the business from the ground up. He started working on the factory floor. “He did every menial job from shoveling rosin and soap to pouring fatty mixtures into crutchers. He brought his lunch in a paper bag . . . and sat on the floor [with the other workers] and ate with them, learning their feelings about work.”

By 1884, Cooper Procter believed, from his own experience, that increasing workers’ psychological commitment to the company would lead to higher productivity. His passion to increase employee commitment to the firm led him to propose a scandalous plan: share profits with workers to increase their sense of responsibility and job satisfaction. The surprise was audible on the first dividend day, when workers held checks equivalent to seven weeks’ pay.

Still, the plan was not complete. Workers saw the profit sharing as extra pay rather than as an incentive to improve. In addition, Cooper Procter recognized that a fundamental issue for the workers, some of whom continued to be his good friends, was the insecurity of old age. Public incorporation in 1890 gave Procter a new idea. After trying several versions, by 1903 he had discovered a way to meet all his goals for labor: a stock purchase plan. For every dollar a worker invested in P&G stock, the company would contribute four dollars’ worth of stock.

Finally, Cooper Procter had resolved some key issues for labor that paid off in worker loyalty, improved productivity, and an increasing corporate reputation for caring and integrity. He went on to become CEO of the firm, and P&G today remains one of the most admired corporations in the United States.

SOURCES: Schisgall, O., Eyes on Tomorrow. Chicago: Ferguson, J.G., 1981; Welsh, T., “Best and Worst Corporate Reputations,” Fortune, February 7, 1994, pp. 58–66.

According to Weber, bureaucracies are especially impor- tant because they allow large organizations to perform the many routine activities necessary for their survival. Also, bureaucratic positions foster specialized skills, eliminating many subjective judgments by managers. In addition, if the rules and controls are established properly, bureaucracies should be unbiased in their treatment of people—both cus- tomers and employees.

Many organizations today are bureaucratic. Bureaucracy can be efficient and productive. However, bureaucracy is not

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the appropriate model for every organization. Organizations or departments that need rapid decision making and flex- ibility may suffer under a bureaucratic approach. Some peo- ple may not perform their best with excessive bureaucratic rules and procedures.

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

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

Quantitative Management Although Taylor introduced the use of science as a manage- ment tool early in the 20th century, most organizations did not adopt the use of quantitative techniques for management problems until the 1940s and 1950s.18 During World War II, military planners began to apply mathematical techniques to defense and logistics problems. After the war, private corpo- rations began assembling teams of quantitative experts to tackle many of the complex issues confronting large organi- zations. This approach, referred to as quantitative manage- ment, emphasizes the application of quantitative analysis to management decisions and problems.

Quantitative management helps a manager make a decision by developing formal mathematical models of the problem. Computers facilitated the development of spe- cific quantitative methods. These include such techniques as statistical decision theory, linear programming, queuing theory, simulation, forecasting, inventory modeling, network modeling, and break-even analysis. Organizations apply these techniques in many areas, including production, qual- ity control, marketing, human resources, finance, distribu- tion, planning, and research and development.

Despite the promise quantitative management holds, managers do not rely on these methods as the primary approach to decision making. Typically, they use these techniques as a supplement or tool in the decision process. Many managers will use results that are consistent with their experience, intuition, and judgment, but they often reject results that contradict their beliefs. Also, managers may use the process to compare alternatives and eliminate weaker options.

Several explanations account for the limited use of quantitative management. Many managers have not been trained in using these techniques. Also, many aspects of a management decision cannot be expressed through mathe- matical symbols and formulas. Finally, many of the decisions managers face are nonroutine and unpredictable.

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

During the 1960s, organizational behaviorists heavily influenced the field of management. Douglas McGregor’s Theory X and Theory Y marked the transition from human relations.19 According to McGregor, Theory X managers assume workers are lazy and irresponsible and require con- stant supervision and external motivation to achieve organi- zational goals. Theory Y managers assume employees want to work and can direct and control themselves. McGregor advocated a Theory Y perspective, suggesting that manag- ers who encourage participation and allow opportunities for individual challenge and initiative would achieve superior performance.

Other major organizational behaviorists include Chris Argyris, who recommended greater autonomy and bet- ter jobs for workers,20 and Rensis Likert, who stressed the value of participative management.21 Through the years, organizational behavior has consistently emphasized devel- opment of the organization’s human resources to achieve individual and organizational goals. Like other approaches, it has been criticized for its limited perspective, although more recent contributions have a broader and more situ- ational viewpoint. In the past few years, many of the pri- mary issues addressed by organizational behavior have experienced a rebirth with a greater interest in leadership, employee involvement, and self-management.

Systems Theory The classical approaches as a whole were criticized because they (1) ignored the relationship between the organization and its external environment, and (2) usually stressed one aspect of the organization or its employees at the expense of other considerations. In response to these criticisms, management scholars during the 1950s stepped back from the details of the organization to attempt to understand it as a whole system. These efforts were based on a general scientific approach called systems theory.22 Organizations are open systems, dependent on inputs from the outside world, such as raw materials, human resources, and capital. They transform these inputs into outputs that (ideally) meet the market’s needs for goods and services. The environment reacts to the outputs through a feedback loop; this feedback provides input for the next cycle of the system. The process repeats itself for the life of the system, as illustrated in Exhibit A.3.

Systems theory also emphasizes that an organiza- tion is one system in a series of subsystems. For instance, Southwest Airlines is a subsystem of the airline industry, and

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the flight crews are a subsystem of Southwest. Systems the- ory points out that each subsystem is a component of the whole and is interdependent with other subsystems.

Contingency Perspective Building on systems theory ideas, the contingency perspective refutes universal principles of management by stating that a variety of factors, both internal and external to the firm, may affect the organization’s performance.23 Therefore, there is no one best way to manage and orga- nize because circumstances vary.

Situational characteristics are called contingencies. Understanding contingencies helps a manager know which sets of circumstances dictate which management actions. You will learn recommendations for the major contingencies throughout this text. The contingencies include

1. Circumstances in the organization’s external environment.

2. The internal strengths and weaknesses of the organization.

3. The values, goals, skills, and attitudes of managers and workers in the organization.

4. The types of tasks, resources, and technologies the organization uses.

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

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

CURRENT EVENTS AND AN EYE ON THE FUTURE Recent years have brought us a shrinking middle class, a struggling Eurozone, “Brexit,” cyber security breeches, Alibaba’s IP, and President Donald J. Trump. These now- historic events will continue having effects into the future. What are the most important current events unfolding as you read this? What can you learn from them, and how might they affect the future?

This appendix has summarized the major schools of management thought. Some schools offer more general courses in business history, and the subject is well worth knowing. What goes on today derives from what went on yesterday, which stemmed from what began years, decades, even centuries ago. It is reasonable to believe that if deci- sion makers paid more attention to history, the subprime mortgage crisis of 2007 and the more general financial panic of 2008 could have been avoided.24 Regardless of era and whether economies are rising or falling, it helps to examine the past for help in making good decisions today and in the future.

Knowledge of history could help with economic recov- eries and mitigate or prevent future fiascos. Knowing his- tory could—if used properly—have a positive impact on the future, and on your future.25

KEY TERMS administrative management A classical management approach that attempted to identify major principles and functions that managers could use to achieve superior organizational performance, p 31. bureaucracy A classical management approach emphasizing a structured, formal network of relationships among specialized positions in the organization, p 32. contingencies Factors that determine the appropriateness of managerial actions, p 34.

EXHIBIT A.3 Open-System Perspective of an Organization

External environment

External environment

Organization

• Raw materials • Human resources • Energy • Financial resources • Information • Equipment

OutputsInputs

• Customers react to organization’s goods and services and provide feedback for next cycle of the system

• Transformation process where inputs are converted into goods and services that (ideally) meet markets’ needs

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contingency perspective An approach to the study of management proposing that the managerial strategies, structures, and processes that result in high performance depend on the characteristics, or important contingencies, of the situation in which they are applied, p 34. economies of scale Reductions in the average cost of a unit of production as the total volume produced increases, p 28. Hawthorne Effect People’s reactions to being observed or studied resulting in superficial rather than meaningful changes in behavior, p 32. human relations A classical management approach that attempted to understand and explain how human psychological and social processes interact with the formal aspects of the work situation to influence performance, p 31. organizational behavior A contemporary management approach that studies and identifies management activities that promote employee effectiveness by examining the complex and dynamic nature of individual, group, and organizational processes, p 33. quantitative management A contemporary management approach that emphasizes the application of quantitative analysis to managerial decisions and problems, p 33. scientific management A classical management approach that applied scientific methods to analyze and determine the one best way to complete production tasks, p 29. systematic management A classical management approach that attempted to build into operations the specific procedures and processes that would ensure coordination of effort to achieve established goals and plans, p 29. systems theory A theory stating that an organization is a managed system that changes inputs into outputs, p 33.

DISCUSSION QUESTIONS 1. How does today’s business world compare with the

one of 40 years ago? What is different about today, and what is not so different?

2. What is scientific management? How might today’s organizations use it?

3. Exhibit A.2 lists Fayol’s 14 principles of management, first published in 1916. Are they as useful today as they were then? Why or why not? When are they most, and least, useful?

4. What are the advantages and disadvantages of a bureaucratic organization?

5. In what situations are quantitative management con- cepts and tools applicable?

6. Choose any organization and describe its system of inputs and outputs.

7. Why did the contingency perspective become such an important approach to management? Generate a list of contingencies that might affect the decisions you make in your life or as a manager.

8. For each of the management approaches discussed in the appendix, give examples you have seen. How effective or ineffective were they?

Experiential Exercises A.1 APPROACHES TO MANAGEMENT

OBJECTIVES

1. To help you conceive a wide variety of management approaches.

2. To clarify the appropriateness of different manage- ment approaches in different situations.

INSTRUCTIONS Your instructor will divide your class randomly into groups of four to six people. Acting as a team, with everyone offer- ing ideas and one person serving as official recorder, each group will be responsible for writing a one-page memo to your present class. The subject matter of your group’s memo will be “My advice for managing people today is . . .” The fun part of this exercise (and its creative element) involves writing the memo from the viewpoint of the person assigned to your group by your instructor.

Among the memo viewpoints your instructor may assign are

• An ancient Egyptian slave master (building the great pyramids).

• Henri Fayol.

• Frederick Taylor.

• Mary Parker Follet.

• Douglas McGregor.

• A contingency management theorist.

• A Japanese auto company executive.

• The chief executive officer of IBM in the year 2030.

• Commander of the Starship Enterprise II in the year 3001.

• Others as assigned by your instructor.

Use your imagination, make sure everyone participates, and try to be true to any historical facts you’ve encoun- tered. Attempt to be as specific and realistic as possible. Remember, the idea is to provide advice about managing people from another point in time (or from a particular point of view at the present time).

Make sure you manage your 20-minute time limit care- fully. A recommended approach is to spend 2 to 3 minutes putting the exercise into proper perspective. Next, take about 10 to 12 minutes brainstorming ideas for your memo, with your recorder jotting down key ideas and phrases. Have your recorder use the remaining time to write your group’s one-page memo, with constructive comments and help from the others. Pick a spokesperson to read your group’s memo to the class.

SOURCE: Krietner, R. and Kinicki, A.,  Organization Behavior, 3rd ed. New York: Richard D. Irwin, 1994, pp. 30–31.

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A.2 THE UNIVERSITY AS AN OPEN SYSTEM

OBJECTIVES

1. To learn to identify the components of a complex system.

2. To understand better how organizations function as systems.

INSTRUCTIONS

1. Think about your university from the perspective of being an open system.

2. Answer the questions on the University System Analysis Worksheet individually, or in small groups, as directed by your instructor.

University System Analysis Worksheet

1. Referring back to Exhibit A.3, what subsystems compose your university system? Diagram the system.

2. Identify the following in your university system: inputs, transformations, outputs, and goods or services.

3. What are the strengths of the current system? What are the weaknesses? (Is it a system failure when a student fails to graduate?)

4. What changes (if any) would you make to the transformation process?

SOURCE: Adapted from Gordon, J., A Diagnostic Approach to Organizational Behavior. Englewood Cliffs, NJ: Prentice Hall, 1983, p. 38.

Design elements: Lightbulb icon that indicates innovation: ©McGraw-Hill Education; Money icon that indicates cost: ©McGraw-Hill Education; Recycle icon that indicate sustainability: ©McGraw-Hill Education; Human head with headset that indicate service: ©McGraw-Hill Education; Letter Q icon that indicates quality: ©McGraw-Hill Education; Sand dial that indicates speed: ©McGraw-Hill Education

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The Macroenvironment The Economy Technology Laws and Regulations Demographics Social Issues Sustainability and the Natural Environment

The Competitive Environment Competitors New Entrants Substitutes and Complements Suppliers Customers

Environmental Analysis Environmental Scanning Scenario Development Forecasting Benchmarking

Actively Managing the External Environment  Changing the Environment You Are In Influencing Your Environment Adapting to the Environment: Changing the Organization Choosing an Approach

The Internal Environment of Organizations: Culture and Climate

Organization Culture Organizational Climate

After studying Chapter 2, you will be able to:

Describe how environmental forces influence organizations and how organizations can influence their environments.

Distinguish between the macroenvironment and the competitive environment.

Explain why managers and organizations should attend to economic and social developments.

Identify elements of the competitive environment.

Summarize how organizations respond to environmental uncertainty.

Define elements of an organization’s culture.

Discuss how an organization’s culture and climate affect its response to its external environment.

LO 1

LO 2

LO 3

LO 4

LO 5

LO 6

LO 7

CHAPTER 2

The External and Internal Environments

The essence of a business is outside itself.

— PETER DRUCKER

CHAPTER OUTLINELEARNING OBJECTIVES

©Kay/Getty Images RF

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Technology and global competition are just two of the forces shaping the

environment in which Amazon operates. As you study this chapter, consider what

other forces Amazon’s managers should be monitoring and engaging with.

Most managers strive to cope with their organization’s environment, but Jeff Bezos, CEO of the e-commerce and cloud computing giant Amazon.com, is busy creat- ing one.

The company Bezos founded in 1994 as an online discount bookseller is now in the business of selling virtually everything, to the tune of $100 billion in sales a year. The fourth-most valuable firm in the United States, Amazon is a pioneer in cloud computing, count- ing the CIA and Netflix among its customers. Under Bezos, the company has developed a successful e-reader, introduced the Echo as an AI voice service to compete with Google Home, patented its revolutionary 1-Click ordering technology, and explored the use of drones to facilitate same-day delivery. Its Blue Origin company is working with NASA on space travel, and in addition to winning an Emmy and a Golden Globe, Amazon recently made history by winning three of the first Academy Awards ever given for streaming ser- vices. Bezos himself owns a major daily newspaper, the multiple Pulitzer Prize–winning Washington Post. In a very real sense, he is constantly creating and recreat- ing his company’s environment.

Amazon’s success was hard-won; when it finally posted a profit in 2003, the Wall Street Journal called it “one of the most powerful survivors on the Internet.” Since then it has surpassed expectations, launching customer-friendly innovations like 1-Click ordering and Prime membership for speedier delivery and enabling the growth of an active third-party marketplace and a vibrant customer community. Many other companies now offer one or more of the services Amazon pro- vides, but none does so with the kind of market power

that has made Bezos’s company a constant threat to competitors in so many industries.

Bezos seems to possess an uncanny ability to make use of environmental forces that others can only react to. His intuition about the unrealized potential of the Internet is what led him to found an online bookstore in the first place, and he has been quick to capitalize on other tech trends like e-readers, cloud comput- ing, streaming, and drones. Although his attempt to develop a smartphone a few years ago failed, it seems likely that his company will continue to dominate its present environment and move into still more new ones. Amazon is opening a handful of bookstores, has launched several private fashion labels, and has begun quietly testing pop-up stores in malls across the United States.1

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Management in Action HOW JEFF BEZOS CREATES AMAZON’S ENVIRONMENT

©Leah Puttkammer/Getty Images Entertainment/Getty Images

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40 Part One  Foundations of Management

EXHIBIT 2.1 Open-System Perspective of an Organization

External environment

External environment

Organization OutputsInputs

• Raw materials • Human resources • Energy • Financial resources • Information • Equipment

• Customers react to organization’s goods and services and provide feedback for next cycle of the system

• Transformation process where inputs are converted into goods and services that (ideally) meet markets’ needs

EXHIBIT 2.2 The External and Internal Environments of Organizations

Internal Environment

Culture

Values

Climate

Competitive Environment

Rivals

Suppliers

Buyers

New entrants

Substitutes and complements

Macroenvironment

Economy

Technology

Legal and regulations

Demographics

Social issues

Natural ecology

In this chapter, we discuss in detail how pressures from outside the organization help create the context in which managers and their companies must operate.

Organizations are open systems—that is, they are affected by and in turn affect their exter- nal environments. For example, they take in inputs such as goods or services from their environment and use them to create products and services that are outputs to their environ- ment, as shown in Exhibit 2.1. But when we use the term external environment here, we mean more than an organization’s clients or customers; the external environment includes all relevant forces outside the organization’s boundaries.

Many of these factors are uncontrollable. Companies large and small are buffeted by recessions, government regulations, competitors’ actions, and other factors. But their lack of control does not mean that managers can ignore such forces, use them as excuses for poor performance, and try to just get by. Managers must stay abreast of external develop- ments and respond effectively. Moreover, sometimes managers can influence components of the external environment. We will examine ways in which organizations can do just that.

Exhibit 2.2 shows the external and internal environments of a business organization. The organization exists in its competitive environment, which is composed of the firm and its rivals, suppliers, customers (buyers), new entrants, and substitute or complementary

open systems

Organizations that are affected by, and that affect, their environment.

inputs

Goods and services organizations take in and use to create products or services.

outputs

The products and services organizations create.

external environment

All relevant forces outside a firm’s boundaries, such as competitors, customers, the government, and the economy.

LO 1

competitive environment

The immediate environment surrounding a firm; includes suppliers, customers, rivals, and the like.

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products. At the more general level is the macroenvironment, which includes legal, political, economic, technological, demographic, and social and natural factors that generally affect all organizations.

This chapter discusses the basic characteristics of an organization’s environment and the importance of that environment for strategic management. We also examine the internal environment, or culture, of the organization and the ways that culture may influence the organization’s response to its environment.

Later chapters delve more deeply into many of the basic environmental forces intro- duced here. For example, technology receives deeper treatment in Chapter 17. The global environment gets a thorough treatment in Chapter 6. Other chapters focus on ethics, social responsibility, and the natural environment. Chapter 18 reiterates the theme that recurs throughout this text: Organizations must change continually because environments change continually.

macroenvironment

The general environment; includes governments, economic conditions, and other fundamental factors that generally affect all organizations.

The Macroenvironment

All organizations operate in a macroenvironment, which is defined by the most general ele- ments in the external environment that can influence strategic decisions. Top management teams must consider external factors before taking action.

The Economy Although most Americans think in terms of the U.S. economy, the economic environment for organizations is much larger—created by complex interconnections among the econo- mies of different countries. Wall Street investment analysts begin their workday thinking not just about what the New York Stock Exchange did yesterday but also about how the London and Tokyo exchanges did overnight. Growth and recessions occur worldwide as well as domestically.

The economic environment dramatically affects managers’ ability to function effectively and influences their strategic choices. Interest and inflation rates affect the availability and cost of capital, growth opportunities, prices, costs, and consumer demand for products. Steeply rising energy and health care costs greatly affect companies’ hiring and cost of doing business. Changes in the value of the dollar on world exchanges make American prod- ucts cheaper or more expensive than their foreign competitors. Unemployment rates affect labor availability, the wages the firm must pay, and product demand.

During boom times, hiring accelerates, and unemployment rates fall. During the Great Recession of 2007–2009, the drop-off in employment was especially severe. Six and one-half years after the start of the Great Recession, employment levels returned to the pre-recession level.2 That is two and one-half years longer than with previous recessions.

Long periods of slow hiring pose difficult challenges for societies and their governments. In contrast, the participation rate or percentage of eligible individuals who could be working has not returned to pre-recession levels; it dropped from 66 percent in 2008 to just below 63 percent during the first quarter of 2017.3

Governments are an important economic influence. In the United States, the federal government is a major employer and customer for business and military goods and services. When it spends more money than it is receiving, it also is a major borrower in the financial markets (adding to the national debt). These government activities can increase or decrease a nation’s economic activity. To be effective, managers educate themselves about the impact of the government on the societies in which they work.

The stock market is another important economic influence. When investors bid up stock prices, the companies have more capital to fuel their strategies. Stock market observers watch trends in major indexes such as the Dow Jones Industrial Average, Standard and Poor’s 500, and NASDAQ Composite, which combine many companies’ performance into a single measure. Stock indexes tell managers about overall expectations for business value.

LO 2

LO 3

Bottom Line With increased competition from foreign and domestic

companies, managers must pay particular attention to cost. Does low cost mean

low quality? Why or why not?

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42 Part One  Foundations of Management

The stock market may have a profound effect on the behavior of individual managers. In publicly held companies, managers throughout the organization feel required to meet Wall Street’s earnings expecta-

tions. Such external pressures usually have a positive effect—they help make many firms more efficient and profitable. But failure to meet those expectations can cause a company’s stock price to drop, making it more difficult for the firm to raise additional capital for investment. Managers’ compensation also may be affected, particularly if they have been issued stock options. The net effect of these pressures often is that managers focus on short- term results at the expense of the long-term success of their organizations. Even worse, a few managers may be tempted to engage in unethical or unlawful behavior that misleads investors.4 We will discuss managerial ethics in Chapter 5 and stock options in Chapter 10.

Economic conditions change over time and are difficult to predict. Bull and bear mar- kets come and go. Periods of dramatic growth may be followed by recessions. Every trend undoubtedly will end—but when? Even when times seem good, budget deficits or other con- siderations create concern about the future.

Technology Today a company cannot succeed without incorporating into its strategy the astonishing technologies that continually evolve. Technological advances create new products, advanced

production techniques, and better ways of managing and communicating. In addition, as technologies evolve, new industries, markets, and competitive niches develop.

For example, early entrants in driverless car technology or 3D printing tried to establish dominant positions, and later entrants worked on technological advances that would give them a competitive niche. Advances in technology also permit companies to enter markets that otherwise would be unavailable to them. Advances in augmented reality led to the creation of Microsoft’s HoloLens, which allows wearers of a headset to see 3D objects as if they were part of the real world.5

Augmented reality, popularized when millions of people played Pokemon Go in the summer of 2016, now is used for more serious purposes. Case Western Reserve University Medical School and the Cleveland Clinic use HoloLens to teach their medical students about human anatomy. Instead of relying on a cadaver lab to learn the fundamentals of anatomy, students in a classroom setting observe upright human holograms complete with beating hearts, organs, and digital bodies.6

New technologies also provide new production tech- niques. In manufacturing, sophisticated robots perform jobs without suffering fatigue, requiring vacations or weekends off, or demanding wage increases. New methods, such as injecting steam into oil fields at high pressure (known as fracking), are enabling Occidental Petroleum, ExxonMobil, Shell, and other companies to extract oil from locations that had once been considered depleted. In this case, technological and economic forces overlap: the rising price of oil made it worthwhile for companies to develop the new technology.7

In addition, new technologies provide new ways to manage and communicate. Computerized management information systems (MISs) make information available when needed, and networking via the Internet makes that information available where it is needed. Computers monitor productivity and note performance deficiencies. Telecommunications allow conferences to take place without requiring people to travel to the same location. Strategies developed around new technological advances create a competitive advantage;

Bottom Line Managers with ready access to information gain a significant competitive edge. What are some technologies that have given managers fast access to information?

Economic conditions change over time

and are difficult to predict.

The 3D printing process has revolutionized design.

©Maciej Frolow/The Image Bank/ Getty Images

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strategies that ignore or lag behind competitors’ technologies lead to obsolescence and extinction. This issue is so important that we devote an entire chapter (Chapter 17) to it.

Laws and Regulations U.S. government policies impose strategic constraints on organizations but may also pro- vide opportunities.8 In the United States, the Patient Protection and Affordable Care Act, which requires businesses with 50 or more full-time employees to offer health insurance, contains such a variety of provisions that some managers see mainly the costs of compli- ance, whereas others see opportunities for their companies.9 This requirement is likely to increase an employers’ labor costs, but it also can be used more strategically than competi- tors when recruiting and retaining talent.10

Giving employees more generous benefits could add to the cost of compensating them. At this writing, Congress is debating alternative health care laws. What is happening now with this vital issue?

Other provisions, such as insurance exchanges and tax credits for small businesses, may help smaller firms compete in the market for talent. Some consequences of the law will dif- fer by industry: a retailer that needs to add an insurance benefit would see a new expense, whereas hospitals hope that broader insurance coverage will reduce the cost of providing services to patients who cannot pay. As business people, managers need to sort through the details, plan how to limit any harm, and build on any opportunities.

The government can affect business opportunities through tax laws, economic policies, and international trade rulings. For example, in some countries bribes and kickbacks are common and expected ways of doing business, but for U.S. firms, they are illegal practices. Some U.S. businesses have been fined for using bribery when competing internationally. But laws can also assist organizations. U.S. federal and state governments protect property rights, including copyrights, trademarks, and patents, making it more attractive economi- cally to start businesses in the United States than in countries where laws and law enforce- ment offer less protection.

As described in Exhibit 2.3, regulators are government agencies that have the power to investigate company practices and take legal action to ensure compliance with laws.

Agency Name Purpose

Securities & Exchange Commission (SEC) Protects investors and maintains fair, honest, and efficient markets.

Food & Drug Administration (FDA) Protects the public health by ensuring the safety and efficacy of drugs, products, and food.

Environmental Protection Agency (EPA) Protects human health and the environment.

Occupational Safety & Health Administration (OSHA)

Enforces workplace safety and health standards.

Federal Aviation Administration (FAA) Regulates civil aviation to promote safety.

Equal Employment Opportunity Commission (EEOC)

Enforces federal laws that prohibit discrimination in the workplace.

National Labor Relations Board (NLRB) Safeguards employees’ rights to organize and to determine whether to have unions as their bargaining representative.

Office of Federal Contract Compliance Programs (OFCCP)

Monitors federal contractors to make sure they take affirmative action to ensure equal employment opportunities.

EXHIBIT 2.3 Governmental Agencies That Regulate Businesses

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44 Part One  Foundations of Management

Often, the corporate community sees government as an adversary. However, many orga- nizations realize that government can be a source of competitive advantages for an indi- vidual company or an entire industry. Public policy may prevent or limit new foreign or domestic competitors from entering an industry. Government may subsidize failing compa- nies or provide tax breaks to some. Federal patents protect innovative products or produc- tion process technologies. Legislation may be passed to support industry prices, thereby guaranteeing profits or survival. The government may even intervene to ensure the survival of certain key industries or companies, as it has done to help auto companies, airlines, and agricultural businesses.

Demographics Demographics are measures of various characteristics of the people who make up groups or other social units. Managers must consider workforce demographics in formulating their human resource strategies. Population growth influences the size and composition of the labor force. Young workers are declining in numbers and the fastest-growing age group will be workers who are 55 and older, who are expected to represent over one-fourth of the labor force in 2022.

The education and skill levels of the workforce are another crucial demographic factor that managers must consider. The share of the U.S. labor force with at least some college education has been increasing steadily over the past several decades.12 Even so, many companies find that they must invest heavily in training their entry-level workers, who may not have been adequately prepared for some of the more complex tasks the modern workplace requires. Employers also are finding it difficult to recruit employees for jobs that require knowledge of a skilled trade, such as machinists, electricians, and toolmakers, especially in areas where the cost of living is so high that most residents are profession- als.13 However, as education levels increase around the globe, managers can send even technical tasks to lower-priced but highly trained workers overseas. We discuss this further in Chapter 6.

demographics

Measures of various characteristics of the people who make up groups or other social units.

Multiple Generations at Work Are “Portfolio Careers” the New Normal?

Only a decade or two ago, people who changed jobs fre- quently or took a few months off from work to travel were often perceived as unreliable or lacking dedication. The career model back then was to begin a career immediately after graduating from college, do similar work for two or three different employers, take a couple of weeks of vaca- tion during the summer, and try to retire with a pension. Now, this traditional career model is increasingly being replaced by the portfolio career.

Someone pursuing a portfolio career works multiple jobs (full-time, part-time, freelance, or contract) at a time and over the course of a lifetime. Instead of climbing a traditional career ladder, portfolio careerists seek flex- ible, engaging, and meaningful work that allows them to take frequent breaks to care for children, pursue hobbies, volunteer, or travel. Such flexible careers appeal to many Millennials. In a recent national survey, 38 percent of this

generational cohort is doing freelance work, the highest percentage of any generation.

Are portfolio careers with occasional breaks just a fad? Data suggest otherwise. In a Manpower staff- ing survey of 19,000 Millennials across 25 countries, about half reported interest in nontraditional types of employment such as working part-time, freelanc- ing, doing contract work, or being self-employed. For women, the most common reasons for wanting flex- ibility related to caring for children and aging relatives. Men reported wanting time to travel and vacation, and pursue dreams and hobbies.

Millennials aren’t the only ones who like portfo- lio work. Some organizations are turning to seasoned Boomers who want to continue working on a part-time, flexible basis to coach and mentor the next generation of leaders.11

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Immigration is another important factor affecting the U.S. population and labor force.14 Immigrants are frequently of working age but have differ- ent educational and occupational backgrounds from the rest of the labor force. Immigration is one reason the labor force continues to become more ethnically diverse. The biggest percentage employment increases will be by Hispanics and Asian Americans, followed by African Americans.

A more diverse workforce has many advantages, but managers have to make certain they provide equality for women and minorities with respect to employment, advancement opportunities, and compensation. They must make strategic plans to recruit, retain, train, motivate, and effectively use people of diverse demographic backgrounds who have the skills to achieve the company’s mission. We discuss the issue of managing the diverse work- force in greater depth in Chapter 11.

Social Issues Societal trends regarding how people think and behave have major implica- tions for management of the labor force, corporate social actions, and stra- tegic decisions about products and markets. For example, during the 1980s and 1990s, women in the workforce often chose to delay having children as they focused on their careers, but today more women are having children and then returning to the workforce. As a result, companies have introduced more supportive policies, including family leave, flexible working hours, and child care assistance.

Deloitte LLP has earned numerous awards for helping working parents balance life and work demands.15 The consulting and taxation firm sponsors a Parents Network for mem- bers to discuss topics such as child-rearing, marriage, and special needs. Employees then can customize their schedules to help achieve both work and life balance.16

Many firms extend such benefits to all employees or allow them to design their own benefits packages, where they can choose from a menu of available benefits. Domestic part- ners, whether they are in a marital relationship or not, are covered by many employee ben- efit programs. Firms provide these benefits as a source of competitive advantage: attracting and retaining an experienced workforce.

How companies respond to social issues can affect their reputations in the marketplace, which in turn can help or hinder their competitiveness. For companies in the soft-drink industry, one issue demanding a response is the epidemic of obesity and associated health problems such as diabetes. The New York City Board of Health banned sales of sweetened drinks in containers larger than 16 ounces at restaurants and other establishments inspected by the agency. In this social environment, Coke ran ads pointing out that soft drinks aren’t the only source of the problem and encouraging consumers to engage in calorie-burning exercise. All the major soft-drink makers have introduced reduced-calorie sodas, including Coca-Cola’s Life and PepsiCo’s Pepsi True, which they hope will appeal to consumers who dislike diet drinks.17

Sustainability and the Natural Environment Organizations depend on the natural environment to provide them with resources. Depending on their products and processes, they may need trees for paper, steel for manu- facturing goods, petroleum to fuel transportation or make plastics, and adequate air and water quality to maintain a healthy workforce. In addition, the ways in which organizations operate will have some impact on the quantity and quality of natural resources available. When the quantity is depleted or the quality is damaged, costs for resources skyrocket. Furthermore, the impact on natural resources—whether negatively by poisoning wells or positively by restoring forests—affects the quality of life for citizens in the areas where com- panies operate. Decisions that affect the natural environment therefore shape the climate of social issues and the political and legal environments.

As the number of people in the workforce with a college education increases, managers must consider how this affects work and careers.

©Visage/Stockbyte/Getty Images RF

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46 Part One  Foundations of Management

Tragically, the explosion of BP’s Deepwater Horizon drilling rig in the Gulf of Mexico killed 11 workers and caused millions of barrels of oil to gush into the Gulf and spread toward the coastlands of Mississippi and Louisiana. During the weeks that followed, fisher- ies closed, and tourists vacationed elsewhere. BP was forced to set aside tens of billions of dollars to cover all costs of the spill and its cleanup. In addition, the U.S. government fined the company billions of dollars. To prevent similar accidents in the future, it imposed addi- tional regulations on any oil companies that want to drill in the Gulf.19

The natural environment is so important to managerial decision making that we devote Appendix B following this chapter to that subject.

Social Enterprise Combating Climate Change

Despite its far-reaching impact, the problem of climate change has struggled to gain center stage in the United States. A landmark multination pact called the Paris Agreement took effect around the world in November 2016, calling on all participating countries, including the United States, to curb their emissions of the green- house gases that contribute to planet-wide warming tem- peratures. Left unchecked, warming trends can speed the melting of polar ice and the heating of the Earth’s oceans, bringing severe weather disruptions that could herald long-term droughts, floods, and storms; threaten crops and water supplies; and disrupt the lives and habitats of many species. Massive human migration could result if lands are made uninhabitable by drought or flood.

Arguing that controlling climate change is good for business, hundreds of U.S. companies petitioned President Trump’s White House to hold to former President Obama’s commitment to the Paris Agreement. The companies included Dannon, eBay, Gap, General Mills, Intel, Kellogg, Mars, Monsanto, Nike, Patagonia, Staples, Starbucks, and many smaller firms. Their open letter to the president said, in part, “Failure to build a low-carbon economy puts American prosperity at risk. But the right action now will create jobs and boost US

competitiveness. Implementing the Paris Agreement will enable and encourage businesses and investors to turn the billions of dollars in existing low-carbon investments into the trillions of dollars the world needs to bring clean energy and prosperity to all.”

While many countries have yet to figure out how much carbon they are producing and how to reduce that amount, one innovation that holds some promise is the electric car. Electric cars are less dependent on carbon fuels and can use renewable solar energy to recharge. Sales have increased worldwide—to 11 times what they were only five years ago—but they still represent less than 1 percent of car sales around the world. Some industry experts say it could take up to 20 years for electric cars to rise to 30 percent of all the cars on the world’s roads, and climate scientists fear that by then the pace of climate warming will be beyond human control.18

Questions

• Can most organizations really be profitable while making a positive impact on the environment and society? What challenges do they face?

• Can you envision a world that doesn’t produce waste? What changes are needed before that can happen?

The Competitive Environment

All managers are affected by the components of the macroenvironment we’ve just dis- cussed. But each organization also interacts directly with others in a closer, more immediate competitive environment. As shown in Exhibit 2.4, the competitive environment includes rivalries among current competitors and the impact of new entrants, substitute and comple- mentary products, suppliers, and customers.

The model shown in the exhibit originally was developed by Harvard professor Michael Porter, a noted authority on strategic management. According to Porter, successful manag- ers do more than simply react to the environment; they act in ways that actually shape or

LO 4

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EXHIBIT 2.4 The Competitive Environment

CustomersSuppliers

New entrants

Substitutes and

complements

Rival firms

change the organization’s environment. In strategic decision making, Porter’s model is an excellent method to help managers analyze the competitive environment and adapt to or influence the nature of their competition.

Competitors Competitors within an industry must deal with one another. When organizations compete for the same customers and try to win market share at the others’ expense, all must react to and anticipate their competitors’ actions.

The first question to consider is this: Who is the competition? Sometimes the answer is obvious. The major competitors in the market for soft drinks are Coca-Cola and PepsiCo. But consumer tastes have shifted away from soda to bottled water and other beverages. Young people, who in the past were the main consumers of soft drinks, increasingly prefer to buy water, coffee, or energy drinks, so sales of soda have declined for years. Adding to this decline, a number of cities have applied new taxes to soda purchases. Therefore, Coca-Cola and PepsiCo now compete in introducing new, less sugary products, not just in winning consumers over to their brand of cola.20

Thus, as a first step in understanding their competitive environment, organizations must identify their competi- tors. Competitors may include (1) small domestic firms, especially in tiny, premium markets; (2) strong regional competitors; (3) big new domestic companies explor- ing new markets; (4) overseas firms, especially those that try to solidify their position in small niches (a traditional Japanese tactic) or draw on an inexpensive labor force on a large scale (as in China); and (5) newer entries, such as firms offering their products on the web.

The growth in competition from other countries has been especially significant with the worldwide reduction in international trade barriers. For example, the North American Free Trade Agreement (NAFTA) sharply reduced tariffs on trade between the United States, Canada, and Mexico. Managers today confront a particular challenge from low-cost pro- ducers abroad (see Chapter 6).

The competition between Coke and Pepsi products is intense. Often, the products are found side by side, as with these vending machines.

©Alpha and Omega Collection/ Alamy Stock Photo

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48 Part One  Foundations of Management

After identifying competitors, the next step is to analyze how they compete. Competitors use tactics such as price reductions, new-product introductions, and traditional and social media advertising campaigns to gain advantage over their rivals. In its competition against PepsiCo, Coca-Cola outdoes its rival with much heavier spending on advertising.21 The emphasis on promotion helps the company win a larger share of not only the cola mar- ket but also juices (its Minute Maid outsells PepsiCo’s Tropicana) and sports drinks (its Powerade is beating PepsiCo’s Gatorade).

PepsiCo is competing in other ways. It launched a global emoji campaign featuring 70 unique emojis on PepsiCo cans, bottles, and cups.22 The innovative emoji campaign is sup- ported with digital and traditional advertising.23

It’s essential to understand what competitors are doing when you are honing your own strategy. If soft-drink consumption continues to fall, Coke cannot be complacent about its leadership over Pepsi. Most of Coke’s sales are beverages. PepsiCo, in contrast, has expanded into a broader range of products, hoping to grow sales whether consumers are looking for a fun treat or a healthful snack. Besides reducing salt and sugar in traditional snacks such as chips, the company is expanding healthful options under its Quaker brand (for example, Gluten Free oatmeal).24 Coke lacks a presence in these areas, but they are less profitable than soft drinks.25

Competition is most intense when there are many direct competitors (including foreign contenders), when industry growth is slow, and when the prod- uct or service cannot be differentiated in some way. New, high-growth industries offer enormous oppor- tunities for profits. When an industry matures and

growth slows, profits drop. Then intense competition causes an industry shakeout: weaker companies are eliminated, and the strong companies survive.26

New Entrants New entrants into an industry compete with established companies. New entrants in the market for entertainment come from unexpected quarters as increasing broadband speeds and more powerful microprocessors enable many different ways to enjoy movies, TV shows, sports, videos, and games online. Cable and satellite television saw viewers flock to Hulu, Blockbuster lost movie sales to Netflix, and the makers of video game consoles have watched sales dry up as consumers switched to playing games on apps for their smartphones.

When there are many factors that prevent new companies from entering an industry, the threat to established firms is less serious. But if there are few such barriers to entry, the threat of new entrants is more serious. Some major barriers to entry are government policy, capital requirements, brand identification, cost disadvantages, and distribution channels.

The government can limit or prevent entry, as occurs when the FDA forbids a new drug to enter the market. On the other hand, when a firm’s patent expires, other companies can enter the market and threaten once-dominant pharmaceutical companies--for example when AstraZeneca lost patent protection for its best-selling drug, Crestor. The cholesterol- lowering drug had brought in over $5 billion for the company.27 In the face of the new stiff competition from generic drug makers, AstraZeneca cut hundreds of positions to offset expected lower revenues in 2017.28

Other barriers are less formal but can have the same effect. Capital requirements may be so high that companies won’t risk such large amounts of money. Brand identification forces new entrants to spend heavily to overcome customer loyalty. Imagine the costs involved in trying to launch a new cola against Coke or Pepsi. The cost advantages that established companies hold—due to large size, favorable locations, existing assets, and so forth—can be formidable entry barriers.

Finally, existing competitors may have such tight distribution channels that new entrants have difficulty getting their goods or services to customers. For example, established food products already have supermarket shelf space. New entrants must displace existing prod- ucts with promotions, price breaks, intensive selling, and other tactics.

Bottom Line Companies often compete through innovation, quality, service, and cost. In which of these areas would you say PepsiCo tried to create a competitive advantage? We will discuss competitive strategy further in Chapter 4.

barriers to entry

Conditions that prevent new companies from entering an industry.

Bottom Line Cost is often a major barrier to entry. Would cost be a bigger barrier for someone who opens a new tattoo shop or a developer of mobile game apps? Why?

It’s essential to understand what competitors

are doing when you are honing your own

strategy.

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Substitutes and Complements Besides products that directly compete, other products can affect a company’s performance by being substitutes for or complements of the company’s offerings. A substitute is a poten- tial threat; customers use it as an alternative, buying less of one kind of product but more of another. A complement is a potential opportunity because customers buy more of a given product if they also demand more of the complementary product. Exhibit 2.5 lists a dozen products and their potential substitutes and complements.

Technological advances and economic efficiencies enable firms to develop substitutes for existing products. After Amazon introduced the Kindle e-reader and Barnes & Noble intro- duced the competing Nook—and even more so as the companies were able to lower the price of these devices—consumers began treating e-books as an attractive substitute for printed books. But even as consumers were still gravitating toward e-readers, Apple launched the iPad tablet computer. Because it is lightweight and versatile, consumers treated it as a substi- tute not only for e-readers but also in some cases as a substitute for a basic laptop computer.

Companies don’t have to be at the mercy of customers switching to a substitute. To avoid losing out when others create a new substitute, some companies try to create their own substitute products. PepsiCo’s investment in development of new sweeteners for drinks and a line of more healthful snacks offers substitutes for consumers avoiding the calories, fat, and sugar of its “fun for you” products. Anticipating that a growing share of consumers will care about healthful snacking, PepsiCo CEO Nooyi believes the company’s products should include many choices that can aid health and well-being.29

Besides identifying and planning for substitutes, companies must consider taking advan- tage of complements for their products. When people are buying new homes, they are also buying appliances and landscaping products. When customers purchase new smartphones, they may also buy new cases, screen protectors, selfie sticks, car kits, extra batteries, and insurance. And when consumers munch on Lays, Doritos, or Cheetos snacks, they are bound to get thirsty and need a complementary product—say, an ice-cold Pepsi or Sierra Mist. PepsiCo owns all these food and drink brands; thus the company sells products that are complements as well as substitutes. If PepsiCo meets its goal to shift more of its product line to healthier fare, it may become known for its complementary products, too—say, some Tropicana juice with your Quaker oatmeal.30

As with substitutes, a company needs to watch for new complements that can change the competitive landscape. Publishers that originally saw e-readers and tablet computers as a threat—as substitutes for their print publications—worked on complements for their print products such as electronic books and magazines plus apps for reading content online. Textbook and cookbook publishers teamed up with software company Inkling to prepare e-book versions that support the use of multimedia and interactive features. These books offer capabilities that would be impossible in the print versions and therefore sell at higher prices.31

If the Product Is . . . The Substitute Might Be . . .

Panera soup and salad Subway sandwich

Sony laptop computer iPad tablet computer

Face-to-face college course Online course

ScanDisk USB flash drive Dropbox

If the Product Is . . . The Complement Might Be . . .

Starbucks beverage Starbucks coffee cake

Netflix streaming video Orville Redenbacher’s popcorn

Evernote app Evernote scanner

Apartment rental IKEA furniture

EXHIBIT 2.5 Potential Substitutes and Complements

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50 Part One  Foundations of Management

Suppliers Recall from our discussion at the start of the chapter that organizations are open systems that acquire resources (inputs) from their environments and convert those resources into

products or services (outputs) that they sell. Suppliers provide the resources needed for production. Those resources include people (supplied by trade schools and universities), raw materials (from producers, wholesalers, and distributors), information (supplied by researchers and consulting firms), and financial capital (from banks and other sources).

Suppliers are important beyond the mere provision of resources. The resources they supply may be outstanding or defective. They can provide excellent or poor-quality ser- vice. Suppliers can raise their prices. Powerful suppliers’ price increases can reduce an orga- nization’s profits, particularly if the organization cannot pass them on to its customers.

Organizations are at a disadvantage if they become overly dependent on any powerful supplier. A supplier is powerful if the buyer has few other sources of supply or if the sup- plier has many other buyers. Dependence also results from high switching costs—the fixed costs buyers face if they change suppliers. For example, once a buyer learns how to operate a supplier’s equipment, such as computer software, the buyer faces both economic and psy- chological costs in changing to a new supplier.

Of course, close supplier relationships can be an advantage. Food and beverage compa- nies work closely with the makers of the flavorings and additives that make their products appealing to consumers. With companies such as PepsiCo and Coca-Cola looking to offer more healthful and natural soft drinks, suppliers such as Archer Daniels Midland answered the call. ADM bought food-ingredients maker Wild Flavors for $3 billion to supply unique blends of vitamins and minerals, sweeteners based on the stevia plant, energy boosters extracted from coffee beans, and new flavors such as ginger and chili.32

Supply chain management is a vital contributor to a company’s competitiveness and profitability. By supply chain management, also known as the extended enterprise, we mean the managing of the entire network of facilities and people that obtain raw materials from outside the organization, transform them into products, and distribute them to customers.33

Increasing competition requires managers to pay ever-closer attention to their costs. They can no longer afford to hold large and costly inventories, waiting for orders to come in; once orders do come in, some products still sitting in inventory might be outdated. Customers today look for products built to their specific needs and preferences—and they want them delivered quickly at the lowest available price. This requires the supply chain to be not only efficient but also flexible, so that the organization’s output can quickly respond to changes in demand.

Choosing the right supplier is an important strategic decision. Suppliers can affect man- ufacturing time, product quality, and inventory levels. The relationship between suppliers and the organization is changing in many companies. The close supplier relationship has become a new model for organizations using a just-in-time manufacturing approach (dis- cussed in Chapters 16 and 17). And in some companies, innovative managers form strategic partnerships with their key suppliers in developing new products or new production tech- niques. We describe this kind of strategic partnership in more detail in Chapter 9.

Customers Without customers to purchase its goods or services, a company won’t survive. Customers can be intermediate (wholesalers and retailers) or final (end users), depending on where they are in the value chain. You are a final consumer when you buy a pair of Nike running shoes or lunch at Panera Bread. Intermediate consumers buy raw materials or wholesale products and then sell to final consumers, as when Lenovo, Dell, and Hewlett-Packard buy processors from Intel to use in their laptop computers.

Intermediate customers make more purchases than individual final consumers do. Types of intermediate customers include retailers, who buy clothes from wholesalers and manufacturers’

switching costs

Fixed costs buyers face when they change suppliers.

Bottom Line The ability to manufacture customized products quickly became a competitive requirement. To meet this requirement, what behaviors would a company need from its employees?

supply chain management

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

final consumer

A customer who purchases products in their finished form.

intermediate consumer

A customer who purchases raw materials or wholesale products before selling them to final customers.

Organizations are at a disadvantage if they

become overly dependent on a single

powerful supplier.

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representatives before selling them to their customers, and industrial buyers, who buy raw materials (such as chemicals) before converting them into final products. Selling to inter- mediate customers is often called business-to-business (B2B) selling. Notice in these B2B examples that the intermediate customer eventually goes on to become a seller.

Like suppliers, customers are important to organizations for reasons other than the money they provide for goods and services. Customers can demand lower prices, higher qual- ity, unique product specifications, or better service. They also can play competitors against one another, as occurs when a car buyer (or a purchasing agent) collects different offers and negotiates for the best price. Customers want to be actively involved with their products, as when the buyer of an iPhone customizes it with ring tones, wallpaper, and a variety of apps.

Dell Inc. took customer input a step further by asking customers what they want the company to develop next. At Dell’s IdeaStorm website (www.ideastorm.com), visitors can post ideas and comments about products. One of IdeaStorm’s most enthusiastic customer- users became so involved with the community that he was hired as the project’s manager and helped expand the site’s customer interactions.34

The Internet empowers customers. It provides easy information about product features and pricing. In addition, Internet users informally create and share messages about a prod- uct, providing flattering free “advertising” at best or embarrassing and even erroneous bad publicity at worst. Companies try to use this to their advantage by creating opportunities for consumers and the brand to interact.

Another way companies connect with customers is through social media sites like LinkedIn Company Pages, which allows companies to invite individuals to join company- related groups. Online retailer Zappos uses LinkedIn to answer questions about its prod- ucts and the company’s culture. Similarly, Google+ Communities offers companies a way to interact with individuals who might be interested in their products or services while increas- ing its visibility and brand awareness.35

As we discussed in Chapter 1, customer service means giving customers what they want or need, the way they want it, the first time. This usually depends on the speed and depend- ability with which an organization can deliver its products. Exhibit 2.6 shows several actions and attitudes that contribute to excellent customer service.

Bottom Line In all businesses—services as well as manufacturing— strategies that emphasize

good customer service provide a critical

competitive advantage. Identify some excellent and poor customer service that

you have received.

FedEx partners with many health care companies to provide logistics of all types from factory floor to a patient’s front door.

©Bloomberg/Bloomberg/Getty Images

EXHIBIT 2.6 Actions and Attitudes = Excellent Customer Service

Speed of filling and delivering normal

orders.

Willingness to meet emergency needs.

Merchandise delivered in good

condition.

Readiness to take back defective

goods and resupply quickly.

Availability of installation and

repair services and parts.

Service charges, whether free or

priced separately.

g

SOURCE: Adapted from Kotler, P., Marketing Management: Analysis, Planning, Implementation and Control, 9th ed. Englewood Cliffs, NJ: Prentice Hall, 1990.

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Amazon.com is known for its focus on the customer, and it’s easy to see that focus in its online retail operations. Its famous 1-Click ordering system, its Prime memberships (offering two-day delivery of unlimited purchases plus unlimited music and video streaming services for a one- time annual fee), its enormous product range, and its fre- quently discounted prices all attest to its commitment to make online shopping as rewarding and easy as possible.

But Amazon’s view of its “customer set” is much broader than just consumers who buy things. It also includes about 2 million individuals and small companies that sell a huge array of new and used products in Amazon’s famous third- party Marketplace. Rather than competing with these sell- ers, Amazon has made them part of the family. In exchange for a cut of their proceeds, the online giant provides sell- ing space on its site, handles warehousing and logistics for many sellers, and even offers business coaching for some. The Marketplace brings in an increasingly large share of Amazon’s revenues—a record-breaking 50 percent in 2016. With the help of this core business, Amazon, already the largest online retailer in the world, is poised to soon

become the world’s second-largest retailer of any kind (trailing only Walmart).

Founder and CEO Jeff Bezos proudly credits Amazon’s success in large part to the contribution these third-party sell- ers make to the vast number and variety of products it can offer. Thanks in part to them, its nearly 340 million separate stock-keeping units (SKUs) far surpass Walmart’s 8 million and are a big reason more online shoppers go to Amazon’s site than to any other. The company has also designed Amazon Web Services (AWS), the cloud-computing software that powers the site, to supply unbeatable speed and capac- ity even during the peak holiday shopping season.36

• It’s likely that no individual member of Amazon’s Marketplace could by itself pose a serious competi- tive threat to the company’s retail business. Why do you think Jeff Bezos still thought it important to absorb these potential competitors into his own business?

• Identify as many of Amazon’s external competitors as you can in the market for retail consumer goods. What effect do you think the Marketplace has on these competitors?

Management in Action AMAZON REINVENTS THE COMPETITIVE ENVIRONMENT

P R

O G

R E

S S

R E

P O

R T

M A

N A

G E

R ’S

B R

IE F

O N

W A

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52

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A company is at a disadvantage if it depends too heavily on powerful customers. Customers are powerful if they make large purchases or if they can easily find alternative places to buy. If you are the largest customer of a firm and you can buy from others, you have power over that firm, and you likely can negotiate with it successfully. Your firm’s big- gest customers—especially if they can buy from other sources—will have the greatest negoti- ating power over you.

Customer relationship management is discussed more fully in Chapter 9. As you read “Management in Action: Progress Report,” consider how Amazon distinguishes itself with customers by seeking advantages in its relationships with other parties in the competitive environment.

Environmental Analysis

Failing to understand key environmental influences, or to identify important opportunities and threats, severely undermines managers’ ability to make decisions and execute plans. For example, if they know little about customer likes and dislikes, they cannot effectively design new products, schedule production, or develop marketing plans. Timely and accurate envi- ronmental information is crucial for running a business.

But information about the environment is not always readily available. Managers find it difficult to forecast how well their own products will sell, let alone how a competitor might respond. In other words, managers often operate under conditions of uncertainty. Environmental uncertainty means that managers do not have enough information about the environment to understand it or predict the future.

LO 5

environmental uncertainty

When managers do not have enough information about the environment to understand or predict the future.

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Uncertainty arises from two related factors: complexity and dynamism. Environmental complexity is the number of issues to which a manager must attend and their interconnect- edness. For example, industries with many firms competing in vastly different ways are more complex—and uncertain—than industries with only a few key firms competing in fewer ways. Environmental dynamism is the degree of discontinuous change occurring within the industry. High-growth industries with products and technologies that change rapidly are more uncertain than stable industries where changes are less dramatic and more predictable.37

By analyzing environmental forces—in both the macroenvironment and the competitive environment— managers can identify opportunities and threats that might affect the organization. As environmental uncertainty increases, managers must develop meth- ods like the following for collecting and interpreting information.

Environmental Scanning Managers cope with environmental uncertainty by trying to identify what might be impor- tant. Frequently, organizations and individuals act out of ignorance, only to regret those actions later. IBM had an opportunity to purchase the technology behind xerography, but turned it down. Xerox saw the potential, and the rest is history. On the other hand, Xerox researchers later developed the technology for the original computer mouse, but executives did not see the potential and the company missed a huge opportunity.

To understand and predict environmental changes, opportunities, and threats, compa- nies such as Amazon, Starbucks, and Citibank spend time and money monitoring events. Environmental scanning means both searching for useful information and interpreting what is important and what is not. Managers can ask questions such as these:

Who are our current competitors? Are there few or many entry barriers to our industry? What substitutes exist for our product or service? Is the company too dependent on powerful suppliers? Is the company too dependent on powerful customers?38

Answers to these questions help managers develop competitive intelligence, the information necessary to decide how best to manage in their competi- tive environments. You can see how Porter’s competitive analysis, discussed earlier, can guide environmental scanning. Exhibit 2.7 describes two envi- ronments: an attractive environment, which provides competitive advantage and high potential, and an unattractive environment, which puts a firm at a competitive disadvantage and offers low potential.39

Scenario Development As managers attempt to determine the effects of environmental forces on their organiza- tions, they can develop scenarios depicting possible futures. Scenarios combine different

environmental scanning

Searching for and sorting through information about the environment.

competitive intelligence

Information that helps managers determine how to compete better.

scenario

A narrative that describes a particular set of future conditions.

Managers must make important decisions

under conditions of uncertainty.

Environmental Factor Unattractive Attractive

Competitors Many; low industry growth; equal size; commodity

Few; high industry growth; unequal size; differentiated

Threat of entry High threat; few entry barriers Low threat; many entry barriers

Substitutes Many Few

Suppliers Few; high bargaining power Many; low bargaining power

Customers Few; high bargaining power Many; low bargaining power

EXHIBIT 2.7 Attractive and Unattractive Environments

©Cathy Yeulet/123RF RF

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54 Part One  Foundations of Management

factors into alternative pictures of future environments and the firm. For example, when Congress and the president forecast the size of the federal budget deficit, they develop several scenarios about what the economy is likely to do in the coming years. Managers often develop a best-case scenario (the occurrence of events favorable to the firm), a worst-case scenario (the occurrence of unfavorable events), and at least one middle- ground alternative. The formal practice of scenario development was pioneered by Royal Dutch Shell.

Scenario development helps managers develop contingency plans for what they should do given different future situations.40 For example, as a manager you will be involved in budgeting for your area. You likely will be asked to list initiatives that you would eliminate in case of an economic downturn, and new investments you would make if your firm does better than expected.

Effective managers regard the scenarios they develop as living documents: rather than preparing them once and forgetting them, they update them with relevant new factors as things change over time.

Forecasting Whereas environmental scanning identifies important influences, and scenario develop- ment generates alternative pictures of the future, a forecast is a single prediction about the future. For example, in making capital investments, firms make forecasts about future interest rates. In deciding to expand or downsize a business, firms predict the demand for goods and services or the supply and demand of required labor. Publications such as the Economist’s Global Forecasting Service, PricewaterhouseCoopers’s Trendsetter Barometer Business Outlook, Kiplinger’s Economic Outlook, and the Conference Board’s economic reports provide forecasts to businesses.

Although forecasts are designed to help executives predict the future, their accuracies vary greatly. Because they extrapolate from the past to project the future, forecasts are most accurate when the future proves to look a lot like the past. Forecasts are potentially most useful when the future will look radically different from the past, but unfortunately that is when forecasts tend to be less accurate.

The more things might change, the less confidence we have in our forecasts. The best advice for using forecasts includes the following:

Use multiple forecasts, and perhaps average their predictions. Remember that accuracy decreases the farther into the future you are trying to

predict. Forecasts are no better than the assumptions made and the data used to construct

them. Use simple forecasts (rather than complicated ones) when possible. Keep in mind that important events often are surprises and represent a departure from

predictions.41

Benchmarking In addition to trying to predict environment changes, firms can undertake intensive study of other firms’ best practices to understand their sources of competitive advantage. Benchmarking means identifying the best-in-class performance by a company in a given area, say, product development or customer service, and then comparing your processes to theirs. To accomplish this, a benchmarking team collects information on its own company’s operations and those of the other firm to determine gaps. These gaps serve as a point of entry to learn the underlying causes of performance differences. Ultimately, the team maps out a set of best practices that lead to world-class performance. We will discuss benchmark- ing further in Chapter 4 .

forecasting

Method for predicting how variables will change the future.

benchmarking

The process of comparing an organization’s practices and technologies with those of other companies.

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It is essential to manage the external environment effectively. Clothing retailers who pay no attention to changes in the public’s style preferences, or manufacturers who don’t make sure they have reliable supply sources, are soon out of business. In managing their environ- ments, managers and companies have several primary options: (1) selecting a new environ- ment, (2) influencing the environment, and (3) adapting to the environment. This section describes the options briefly; we will elaborate on them in Chapter 4.

Changing the Environment You Are In Organizations need not be stuck within some given environment; they have options for defin- ing where they operate. We refer to this as strategic maneuvering. By making a conscious effort to change the boundaries of its competitive environment, a firm can maneuver around poten- tial threats and capitalize on arising opportunities.42 Managers can use several strategic maneu- vers, including domain selection, diversification, merger and acquisition, and divestiture.43

Domain selection is the entrance by a company into another suitable market or industry. For example, a market may have limited competition or regulation, ample suppliers and customers, or high growth. PepsiCo’s decision to begin selling yogurt was based on the company’s goal of selling more healthful snacks coupled with the recent growing popularity of yogurt in the United States.44

Diversification occurs when a firm invests in different types of businesses or products or when it expands geographically to reduce its dependence on a single technology or market. Apple successfully diversified its product line when it added the iPod, iTouch, iPad, and iPhone to its offerings of personal computers. As the popularity of the devices spread, Apple identi- fied an opportunity to further diversify in order to tap the fast-growing mobile app market. In 2016, Apple’s App Store revenues jumped 40 percent from the previous year fueled by down- loads of games like Pokemon Go, Super Mario Run, and Monster Strike. The store offered about 2 million apps and reported 130 billion downloads. This part of Apple’s empire gener- ated over $20 billion for app developers, of which Apple retained 30 percent of the revenues.45

A merger or acquisition takes place when two or more firms combine, or one firm buys another, to form a single company. Mergers and acquisitions can offer greater efficiency from combined operations or can give companies relatively quick access to new markets or industries. Acquisitions also can quickly give a company access to a business, technology, or existing customer bases in different geographic markets.46 The largest deal announced in 2016 was AT&T’s plan to purchase Time Warner for over $85 billion, pending formal approval by the U.S. government.47

Divestiture occurs when a company sells one or more businesses. At Ford Motor Company, operating losses and the costs of restructuring its workforce brought about a cash shortage. To address anti-monopoly concerns over its proposed merger with U.S. Foods, Sysco sold 11 distribution centers worth $4.6 billion in revenue to a competitor, Performance Food Group.48

Some companies, called defenders, stay within a limited, stable product domain. In con- trast, prospectors, are more likely to engage in strategic maneuvering.49 Aggressive compa- nies continuously change the boundaries of their competitive environments by seeking new products and markets, diversifying, and merging or acquiring new enterprises. In these and other ways, corporations put their competitors on the defensive and force them to react.

Influencing Your Environment In addition to redefining the boundaries of their environment, managers and organizations can develop proactive responses aimed at changing the environment. Two general types of proactive responses are independent action and cooperative action.

strategic maneuvering

An organization’s conscious efforts to change the boundaries of its task environment.

domain selection

Entering a new market or industry using an existing expertise.

diversification

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

merger

One or more companies combining with another.

acquisition

One firm buying another.

divestiture

A firm selling one or more businesses.

defenders

Companies that stay within a stable product domain as a strategic maneuver.

prospectors

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

Actively Managing the External Environment

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56 Part One  Foundations of Management

Independent Action A company uses independent strategies when it acts on its own to change some aspect of its current environment.50 Exhibit 2.8 shows the definitions and uses of these strategies. For example, Southwest Airlines demonstrates competitive aggres- sion by cutting fares when it enters a new market, and Apple uses competitive aggression whenever it launches a new product such as the iPhone or iTunes to establish its dominance as a technological leader.

When Kellogg Company promotes the cereal industry as a whole, it demonstrates com- petitive pacification. Weyerhaeuser Company advertises its reforestation efforts (public rela- tions). Bank of America, Salesforce, Beats, and other companies have signed on to Product Red, a program in which they market special Red-themed products and donate a percent- age of the profits to the Global Fund, a project to help end AIDS in Africa (voluntary action).51 Viacom sued Google for allowing users to post copyrighted video clips on the Google-owned YouTube website (legal action). In 2015, the pharmaceutical industry spent $240 million to lobby members of Congress (political action).52 Each of these examples shows how single organizations can have an impact on their environments.

Cooperative Action In some situations, two or more organizations work together using cooperative strategies to influence the environment.53 Exhibit 2.9 shows several exam- ples. Contracting occurs when suppliers and customers, or managers and labor unions, sign formal agreements about the terms and conditions of their future relationships. Contracts are explicit attempts to make a future relationship predictable. An example of cooptation might occur when universities invite wealthy alumni to join their boards of directors.

Finally, examples of coalition formation are when businesses band together to curb the rise of employee health care costs and when organizations in the same industry form industry associations and special interest groups. You may have seen cooperative advertis- ing strategies, such as when dairy producers, beef producers, orange growers, and the like jointly pay for television commercials.

Adapting to the Environment: Changing the Organization To cope with environmental uncertainty, organizations frequently make adjustments in their structures and work processes. A common way to adapt is by decentralizing decision mak- ing. For example, if a company faces a growing number of competitors in various markets,

independent strategies

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

cooperative strategies

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

Strategy Definition Examples

Competitive aggression Exploiting a distinctive competence or improving internal efficiency for competitive advantage

Aggressive pricing, comparative advertising (McDonald’s)

Competitive pacification Independent action to improve relations with competitors

Helping competitors find raw materials

Public relations Establishing and maintaining favorable images in the minds of those making up the environment

Nike sponsoring a global sporting event 

Voluntary action Voluntary commitment to various interest groups, causes, and social problems

Johnson & Johnson donating supplies to tsunami victims

Legal action Engaging company in private legal battle Warner Music lawsuits against illegal music copying

Political action Efforts to influence elected representatives to create a more favorable business environment or limit competition

Issue advertising; lobbying at state and national levels

EXHIBIT 2.8  Independent Action

SOURCE: Adapted from Zeithami, C. and Zeithami, V., “Environmental Management: Revising the Marketing Perspective,” Journal of Marketing, Spring 1984.

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if different customers want different things, and if production facilities are being built in dif- ferent regions of the world, it becomes impossible for the chief executive (or a small group of top executives) to keep abreast of all activities and understand all operating details. The top management team then gives authority to lower-level managers to make decisions that will benefit the firm. The term empowerment is used frequently today to talk about this type of decentralized authority. We will address empowerment and decision making in more detail in Chapters 3 and 9.

To cope with uncertainties caused by environmental change (dynamism), organizations can establish more flexible structures. In today’s business world, the term bureaucracy gen- erally has a bad connotation. Most of us recognize that bureaucratic organizations tend to be formal and stable; frequently they are unable to adjust to changes or exceptional circum- stances that don’t “fit the rules.” Although bureaucratic organizations can be efficient if the environment is stable, they tend to be slow-moving and plodding. When products, technolo- gies, customers, or competitors are changing, organic structures give organizations the flex- ibility to adjust to change. We will discuss organic structures in more detail in Chapter 9.

Adapting at the Boundaries Because they are open systems, organizations are exposed to uncertainties from both their inputs and outputs. To compete, they can create buffers on both the input and output boundaries with the environment. Buffering creates supplies of excess resources to meet unpredictable needs.

On the input side, organizations establish relationships with employment agencies to hire part-time and temporary help during rush periods when labor demand is difficult to predict. In the U.S. these workers, known as contingent workers, buffer labor input uncertainties.54

Contingency work opportunities are growing. According to Adecco, a firm that places workers in temporary assignments, the demand for temporary workers in finance, adminis- trative support, health care, engineering, and information technology is strong.55

On the output side of the system, most organizations use inventories that allow them to keep merchandise on hand in case a rush of customers decide to buy their products. Auto dealers are a common example of this use of buffers, but we see buffer inventories in fast- food restaurants, bookstores, clothing stores, and even real estate agencies.56

Organizations also may try smoothing, or leveling normal fluctuations at environmental boundaries. For example, during winter months in the north, when automobile sales drop off, dealers cut the price of their in-stock vehicles to increase demand. At the end of each clothing season, retailers discount their merchandise to make room for incoming inventories. Such smoothing helps to level off fluctuations in demand.

empowerment

The process of sharing power with employees, thereby enhancing their confidence in their ability to perform their jobs and their belief that they are influential contributors to the organization.

buffering

Creating supplies of excess resources in case of unpredictable needs.

smoothing

Leveling normal fluctuations at the boundaries of the environment.

Strategy Definition Examples

Contraction Negotiating an agreement between the organization and another group to exchange goods, services, information, patents, and so on

Contractual marketing systems

Cooptation Absorbing new elements into the organization’s leadership structure to avert threats to its stability or existence

Consumer and labor representatives and bankers on boards of directors

Coalition Two or more group coalesce and act jointly with respect to some set of issues for some period of time

Industry associations; political initiatives of the Business Roundtable and the U.S. Chamber of Commerce

EXHIBIT 2.9 Cooperative Action

SOURCE: Adapted from Zeithami, C. and Zeithami, V., “Environmental Management: Revising the Marketing Perspective,” Journal of Marketing, Spring 1984.

In today’s business world, the term

bureaucracy generally has a bad connotation.

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58 Part One  Foundations of Management

Adapting at the Core Buffering and smoothing manage uncertainties at system boundaries, firms also can establish flexible processes that allow for adaptation in their tech- nical core. For example, firms customize their goods and services to meet the varied and changing demands of customers. Even in manufacturing, where it is difficult to change basic core processes, firms adopt techniques of mass customization that help them create flexible factories. Instead of mass-producing large quantities of a “one-size-fits-all” product, organi- zations use mass customization to produce individually customized products at low cost.

Whereas Henry Ford used to claim that “you could have a Model T in any color you wanted, as long as it was black,” auto companies now offer a wide array of colors, trim lines, options, and accessories. Mass customization uses a network of independent operating units in which each performs a specific process or task such as making a dashboard assem- bly on an automobile. When an order comes in, different modules join forces to deliver the product or service as specified by the customer.57 We will discuss mass customization and flexible factories in more depth in Chapter 9.

Choosing an Approach In choosing your approach to managing the external environment, three general consid- erations provide guidance. First, environmental actions are most useful when aimed at elements of the environment that (1) cause the company problems, (2) provide it with opportunities, and (3) allow the company to change successfully. Thus, public concern about the obesity epidemic and its impact on health could be a problem for the sales and reputation of a company that makes snacks and soft drinks. PepsiCo CEO Nooyi believed it would be irresponsible to try to change that concern, so she focused on what the company could do to address it: change its product mix to include more healthful alternatives without abandoning the idea that it’s fine to enjoy an occasional fun snack.

Second, organizations should choose responses that fit the environmental component of interest. Competitive actions help manage the competitive environment, political action influences the legal environment,58 and contracting helps manage customers and suppliers.

Third, companies should choose actions that offer the most benefit at the lowest cost. Return-on-investment calculations should incorporate short-term financial considerations as well as long-term impact. Strategic managers who consider these factors carefully will more effectively guide their organizations to competitive advantage.

Bottom Line The Internet lets customers quickly find products with the cost and quality features they want. What might “flexible processes” mean for a groceries home delivery company?

Q

flexible processes

Methods for adapting the technical core to changes in the environment.

The Internal Environment of Organizations: Culture and Climate

We have discussed the external environment, both the macroenvironment and the com- petitive environment. Managers’ actions are shaped also by forces inside the organization. These forces, creating an internal culture and climate, are conditions, routines, and beliefs that influence the decisions and behavior of employees at all organizational levels.

At Nordstrom, the fashion retailer, new employees receive a five-by-eight-inch card with one rule on it, along with a full handbook containing policies and legal regulations.

Organization Culture An organization’s culture is like an individual’s personality. Organization culture is the set of important assumptions about the organization and its goals and practices that members of the company share. It is a system of shared values about what is important and beliefs about how the world works.

A company’s culture provides a framework that guides people’s behavior on the job.59 For example, the way people dress and behave, the way they interact with each other and with

LO 6

organization culture

The set of important assumptions about the organization and its goals and practices that members of the company share.

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customers, and the work habits that managers value are usually quite different at a bank than they are at a rock music company, and different again at a law firm or an advertising agency.

Cultures can be strong or weak. Strong cultures can have great influence on how people think and behave. A strong culture is one in which people understand and strongly believe in the firm’s goals, priorities, and practices. A strong culture can be a real advantage to the organization if the behaviors it encourages and facilitates are appropriate and effective ones. As examples, the Walt Disney Company’s culture encourages extraordinary devotion to cus- tomer service, and the culture at design firm IDEO encourages world-class innovation.

But a strong culture can be counterproductive when changes become necessary. Ideas and practices that have “worked” for years can become ineffective or detrimental or when the external environment changes, as new competitors appear or new customer demands arise. Strong cultures can breed overconfidence and thoughtlessly inspire wrong-headed efforts, as recently at Wells Fargo when strong productivity incentives prompted hard-striving employ- ees to create new accounts that customers never requested.

When a merger or acquisition brings together organizations with strong cultures, long- standing habits and ingrained beliefs are likely to clash. After Cisco Systems acquired Linksys, integration of the two cultures was harder than expected. Linksys employees, accustomed to working in a smaller and less formal company, were used to bringing their new product ideas directly to the owners, a husband-and-wife team. In contrast, Cisco employees needed to obtain formal approval for new product ideas from several layers of management.60 Eventually, Cisco sold its home networking division (including the Linksys brand) to Belkin.61

In contrast, weak organizational cultures lack strong shared values and breed confusion about corporate goals. It is not clear what principles should or really do guide decisions. Some managers may pay lip service to an important behavior (“we would never cheat a cus- tomer”) but behave very differently (“don’t tell him about the bug in the software, we’ll take care of it later”). Weak and confused cultures foster poor performance and sometimes worse.

Most managers would agree that they want to create and maintain a strong culture that will make their company more effective. They encourage high values, laudable goals, and useful behaviors. They want to create a culture that is appropriate in every sense for the organization’s competitive environment.62

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©Nordstrom, Inc. ©Nordstrom, Inc.

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60 Part One  Foundations of Management

Diagnosing Culture You will find it helpful to understand organization culture. Perhaps you are thinking about working there and you want a good fit, or maybe you are working there now and want to deepen your understanding of how your employer operates and what it expects of you. How would you go about making the diagnosis? A variety of things will give you useful insights:

Corporate mission statements and official goals are a starting point because they tell you what the firm’s desired public image is. Most companies have a mission statement. Your school has one, and you can probably find it online. But are these statements a true expression of culture? Many employees are not aware of their companies’ mis- sion.63 So, even after reading mission statements or taking note of official goals, you need to figure out whether these reflect reality and how the firm actually conducts its business.

Its important business practices--how a company responds to problems and challenges, makes strategic decisions, and actually treats employees and customers--say a lot about what top management really values. Target recently announced a new strategy to invest $5 million by 2022 in “green chemistry innovation.” Working with multiple stakeholders, the retailer wants to identify and reduce the number and types of potentially harmful chemicals in the products it sells.64 You can use such decisions to assess corporate values and desired actions.

Symbols, rites, and ceremonies give further clues about culture. Status symbols, from reserved parking spaces to large corner offices, can tell you about the hierarchy and how power operates. Who is hired and fired and why, and the activities that are most rewarded, indicate the firm’s real values.

The stories people tell carry a lot of information about the company’s culture. Every company has its myths, legends, and true stories about important past decisions and actions that convey what managers respect, admire, and don’t tolerate. The stories often feature the company’s heroes, once or still active, who brought to life what the organization especially wants and depends on. A famous business hero and icon, Sam Walton, showed his frugality by driving an old pickup truck when visiting his stores; he provided a powerful role model for Walmart’s low-cost culture.

Cultural assessments can make the difference between business and personal suc- cesses and failures. As noted earlier, when two companies are considering a merger, acquisition, or joint venture, failing to consider cultural differences can sink the new arrangements.65 You are likely to be better off in a culture that (1) suits your prefer- ences and (2) you understand well rather than poorly.

Managing Culture The best managers take several approaches to managing culture. First, they articulate clearly the ideals and visions to strive for. They state these often until they become a known presence throughout the organization.

Second, executives can give constant attention to the telling details of daily affairs, such as communicating with employees regularly, being visible and active, and setting the right

Bottom Line A culture aligned with its environment helps the organization succeed. To be aligned with its environment, what values should an organic grocery store chain company have?

The Digital World As new technologies provide new ways to manage and communicate, we see some organizations provide inter- nal communication applications (apps) like Slack. Slack is a cloud-based application for team collaboration. It was originally designed for internal use at a company that was developing an online game.

Slack is a business-oriented chat app that, just over a year after product launch, was valued at $1.12 billion. The

app allows small and medium-sized teams to create group chats, send direct messages, and create private groups that branch off the main group. There are many apps, like WhatsApp and Basecamp, that help people commu- nicate within their organizations as teams, sub-teams and project-specific groups. These apps allow managers to support efficient and productive communication.

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examples. Executives should not only talk about the vision, but also embody it day in and day out. This makes executive pronouncements credible, creates personal examples others can emulate, and builds trust that progress will continue over time.

Moments of truth are decision dilemmas in which hard choices must be made. Imagine top management trumpeting a culture that emphasizes quality products, but in a moment of truth a manager makes a decision that harms quality. Perhaps a part used in a batch of assembled products is found to be defective. Whether the manager decides to replace the costly part or to ship it in order to save time and money will go a long way toward reinforc- ing or destroying a quality-oriented culture.

To reinforce a desired culture, managers should celebrate and reward those who exem- plify it. By hiring judiciously, teaching newcomers, and rewarding and promoting people on the basis of desired actions, management can ensure that the culture will strengthen and persist.

Managing culture requires time and effort, but the best managers understand its impor- tance. The potential payoffs include the performance benefits of a strong and appropriate culture, plus the avoidance of the many costs of a weak or inappropriate one.

Organizational Climate An organization’s climate is the practical, day-to-day aspect of its culture. Organizational climate consists of the patterns of attitudes and behaviors that shape people’s experience of an organization.67 Like the weather, is it sunny or dark, stormy or calm? Many tests and sur- veys measure organizational climate in terms of morale, employees’ relationships with man- agers and co-workers, handling of conflicts, openness and effectiveness of communication,

organizational climate

The patterns of attitudes and behavior that shape people’s experience of an organization.

P R

O G

R E

S S

R E

P O

R T

M A

N A

G E

R ’S

B R

IE F

O N

W A

R D

In his 2016 annual letter to shareholders, Amazon’s CEO Jeff Bezos noted correctly that corporate cultures are “enduring, stable, hard to change.” A recent New York Times investigation had publicly revealed Amazon’s cul- ture to be ruthlessly competitive and intensely stress- ful, often bringing white-collar employees at its Seattle headquarters to tears at their desks. Distribution-center workers had grievances too, as evidenced by a 2014 Supreme Court ruling that they did not have to be paid for the time it took to screen them for stolen goods every day. 

As a result of the Times story, Bezos launched his own investigation into the company culture, and firmly and pub- licly refuted the newspaper’s report. In a further response, his shareholder letter went on to say, “We never claim that our approach is the right one—just that it’s ours.”

It’s hard to argue with a related observation in Bezos’s letter about culture and performance: that people work best in a culture that suits them. Clearly, some people thrive on internal competition, others prefer camaraderie and teamwork, and still others do best when they pursue their goals alone. Bezos believes people “self-select,”

choosing to leave employers whose climates don’t suit or inspire them.

The New York Times story reported a culture that ranked employees by productivity so the lowest perform- ing could be culled, and survivors were “incentivized” to promote themselves at the expense of their colleagues. Perhaps in response, Amazon recently announced changes. It eased some policies that rewarded such com- petitive behavior, and will launch a retraining program to assign coaching and support to poor performers. Those employees can either appeal the assignment, accept and try to improve, or resign with severance.66

• Jeff Bezos’s shareholder letter called Amazon a good place to fail, since “failure and invention are inseparable twins.” What do you think is the relationship between failure and invention? What do you think, does Amazon’s culture tolerate failures?

• Is it possible for a company to be as innovative and successful as Amazon without having a particular type of culture? What would the most appropriate type of culture be?

Management in Action THE CULTURE AT AMAZON

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62 Part One  Foundations of Management

methods for measuring and rewarding performance, and how clearly people understand their work roles.

Both climate and deeper culture influence the internal work environment, how people experience their work, and organizational effectiveness. Because organizational climate is easier to measure, managers often find that dimensions of organizational climate are more manageable levers to pull. Later chapters explore a variety of management responsibili- ties that shape organizational climate, including maintaining ethical conduct (Chapter 5), appraising and rewarding performance (Chapter 10), valuing diversity (Chapter 11), leading (Chapter 12), motivating employees (Chapter 13), fostering teamwork (Chapter 14), com- municating (Chapter 15), and leading change (Chapter 18).

Capably and continually addressing key aspects of an organization’s climate enables managers to strengthen competitive advantages and develop new ones as needed. What is required is a climate that motivates and enables workers to achieve the organization’s strat- egy. As you read “Management in Action: Onward,” consider what the climate at Amazon is like under the leadership of Jeff Bezos.

acquisition, p. 55

barriers to entry, p. 48

benchmarking, p. 54

buffering, p. 57

competitive environment, p. 40

competitive intelligence, p. 53

cooperative strategies, p. 56

defenders, p. 55

demographics, p. 44

diversification, p. 55

divestiture, p. 55

domain selection, p. 55

empowerment, p. 57

environmental scanning, p. 53

environmental uncertainty, p. 52

external environment, p. 40

final consumer, p. 50

flexible processes, p. 58

forecasting, p. 54

independent strategies, p. 56

inputs, p. 40

intermediate consumer, p. 50

macroenvironment, p. 41

merger, p. 55

open systems, p. 40

organization culture, p. 58

organizational climate, p. 61

outputs, p. 40

prospectors, p. 55

scenario, p. 53

smoothing, p. 57

strategic maneuvering, p. 55

supply chain management, p. 50

switching costs, p. 50

KEY TERMS

You learned how pressures from outside the organization create the context in which managers must function. The macroenvironment includes broad forces like the economy, laws, and technology. The competitive environment is closer to the organization and includes forces like competitors, suppliers, and customers. Effective managers need to stay aware of labor force and other trends that can affect their businesses. An organization’s competitive environment can range from favorable to unfavorable. Proactive managers attempt to manage environmental uncertainty through a variety of strategies. Organization culture provides an inter- nal values framework that guides people’s behavior at work. Organizational climate is people’s day-to-day experience of a company’s business practices.

Describe how environmental forces influence organizations and how organizations can influence their environments.

• Organizations are open systems that are affected by, and in turn affect, their external environments.

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• Organizations receive financial, human, material, and information resources from the environment; transform those resources into finished goods and services; and then send those outputs back into the environment to meet market needs.

Distinguish between the macroenviroment and the competitive environment.

• The macroenvironment is the economic, legal and polit- ical, technological, demographic, social, and natural environment forces that influence strategic decisions.

• The competitive environment is composed of forces closer to the organization, such as current competi- tors, new entrants, substitute and complementary products, suppliers, and customers.

• A key distinction between the macroenvironment and the competitive environment is the amount of control a firm can exert on external forces.

• Macroenvironmental forces such as the economy and social trends are much less controllable than are

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RETAINING WHAT YOU LEARNED

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Internal Environment

Culture

Values

Climate

Competitive Environment

Rivals

Suppliers

Buyers

New entrants

Substitutes and complements

Macroenvironment

Economy

Technology

Legal and regulations

Demographics

Social issues

Natural ecology

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The External and Internal Environments  Chapter 2 63

EXHIBIT 2.2 (revisited) The External and Internal Environments of Organizations

forces in the competitive environment such as suppli- ers and customers.

Explain why managers and organizations should attend to economic and social developments.

• Developments outside the organization can have profound effects on how managers and their com- panies operate. For example, higher energy costs or increased spending on security may make it harder for managers to keep their prices low.

• The growing diversity of the labor force gives man- agers access to a much broader range of talent but also requires them to make sure different types of employees are treated equally.

• Effective managers stay aware of important trends and respond to them appropriately.

Identify elements of the competitive environment.

• Elements in the competitive environment can be favorable or unfavorable. To determine how favor- able a competitive environment is, managers should consider the nature of the competitors, potential new entrants, threat of substitutes, opportunities from complements, and relationships with suppliers and customers.

• Analyzing how these forces influence the organiza- tion provides an indication of potential threats and opportunities.

• Effective management of the firm’s supply chain is one way to achieve a competitive advantage.

• Attractive environments tend to be those with high industry growth, few competitors, products that can

be differentiated, few potential entrants, many bar- riers to entry, few substitutes, many suppliers (none with much power), and many customers.

• After identifying and analyzing competitive forces, managers formulate strategies that mini- mize the power external forces have over the organization.

Summarize how organizations respond to environmental uncertainty.

• Responding effectively to the environment often requires devising proactive strategies to change the environment.

• Strategic maneuvering involves changing the bound- aries of the competitive environment through domain selection, diversification, mergers, and the like.

• Independent strategies require not moving into a new environment but rather changing some aspect of the current environment through competitive aggression, public relations, legal action, and others.

• Cooperative strategies, such as contracting, coopta- tion, and coalition building, are those in which two or more organizations work together.

• Organizations can become better able to handle environmental change by decentralizing authority, buffering or smoothing, and establishing flexible processes.

Define elements of an organization’s culture.

• An organization’s culture is its set of shared values and practices related to what is most important and how the world works.

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64 Part One  Foundations of Management

• The culture provides a framework that guides peo- ple’s behavior at work.

• Elements of the culture may be expressed in corpo- rate mission statements and official goals, assuming these reflect how the organization actually operates.

• Business practices are a basic cultural indicator. Symbols, rites, ceremonies, and the stories people tell express and reinforce cultural values.

Discuss how an organization’s culture and climate affect its response to its external environment.

• A culture can be strong or weak. A strong culture with appropriate values and best practices is an

obvious advantage. Weak cultures lack shared val- ues and breed confusion about goals and decisions.

• Managing and changing the culture to align it with the organization’s environment requires strong, long-term commitment by the CEO and other managers.

• Managers should articulate high ideals and convey values by communicating and modeling them, mak- ing decisions that are consistent with them, and rewarding those who demonstrate them.

• An organization’s climate shapes the day-to-day atti- tudes and behaviors of its people. When the climate is positive and predictable, employees want to and are best able to carry out the organization’s strategy.

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DISCUSSION QUESTIONS 1. This chapter’s opening quote by Peter Drucker said,

“The essence of a business is outside itself.” What do you think this means? Do you agree?

2. What are the most important forces in the macroenvi- ronment facing companies today?

3. What are the main differences between the macroenvi- ronment and the competitive environment?

4. What kinds of changes do companies make in response to environmental uncertainty?

5. We outlined several proactive responses that organi- zations can make to the environment. What examples have you seen recently of an organization’s responding

effectively to its environment? Did the effectiveness of the response depend on whether the organization was facing a threat or an opportunity?

6. Select two organizations that interest you. Do some research and talk with an employee or two, if possible. How would you characterize the cultures they have? Write a paragraph that describes each culture.

7. When you visited colleges to select one to attend, were there cultural differences in the campuses that made a difference in your choice? Did these differences help you decide which college to attend?

EXPERIENTIAL EXERCISES 2.1 EXTERNAL ENVIRONMENT ANALYSIS

OBJECTIVE To give you the experience of performing an analysis of a company’s external environment

INSTRUCTIONS Select a company you want to learn more about. Using online and/or library resources, including websites on the company’s industry and its website and annual report, fill out the following External Environment Worksheet for that company:

External Environment Worksheet Laws and regulations

What are some key laws and regulations under which this company and industry must operate? ___________________________________________________________________________________________ ___________________________________________________________________________________________

The economy How does the state of the economy influence the sales of this company’s products? ___________________________________________________________________________________________ ___________________________________________________________________________________________

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The External and Internal Environments  Chapter 2 65

Technology What new technologies strongly affect the company you have selected? ___________________________________________________________________________________________ ___________________________________________________________________________________________

Demographics What changes in the population might affect the company’s customer base? ___________________________________________________________________________________________ ___________________________________________________________________________________________

Social issues What changes in society affect the market for your company’s products? ___________________________________________________________________________________________ ___________________________________________________________________________________________

Suppliers How does your company’s relationship with suppliers affect its profitability? ___________________________________________________________________________________________ ___________________________________________________________________________________________

Competitors What companies compete with the firm you have selected? Do they compete on price, on quality, or on other factors? ___________________________________________________________________________________________ ___________________________________________________________________________________________

New entrants Are new competitors to the company likely? Possible? ___________________________________________________________________________________________ ___________________________________________________________________________________________

Substitutes and complements I s there a threat of substitutes for the industry’s existing products? Are there complementary products that suggest an opportunity for collaboration? ___________________________________________________________________________________________ ___________________________________________________________________________________________

Customers What characteristics of the company’s customer base influence the company’s competitiveness? ___________________________________________________________________________________________ ___________________________________________________________________________________________

DISCUSSION QUESTIONS 1. What has the company done to adapt to its

environment? 2. How does the company attempt to influence its

environment?

SOURCE: McShane, Steven L. and Von Glinow, Mary Ann, Organizational Behavior, 3rd ed. New York: McGraw-Hill, 2005, p. 499.

2.2 CORPORATE CULTURE PREFERENCE SCALE

OBJECTIVE This self-assessment is designed to help you identify a corporate culture that fits most closely with your personal values and assumptions.

INSTRUCTIONS Read each pair of the statements in the Corporate Culture Preference Scale and circle the statement that describes the organization you would prefer to work in. This exercise is completed alone so students assess themselves honestly without concerns of social compari- son. However, class discussion will focus on the impor- tance of matching job applicants to the organization’s dominant values.

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66 Part One  Foundations of Management

1a. Where employees work well together in teams. OR 1b. That produces highly respected products or services.

2a. Where top management maintains a sense of order in the workplace.

OR 2b. Where the organization listens to customers and responds quickly to their needs.

3a. Where employees are treated fairly. OR 3b. Where employees continuously search for ways to work more efficiently.

4a. Where employees adapt quickly to new work requirements.

OR 4b. Where corporate leaders work hard to keep employees happy.

5a. Where senior executives receive special benefits not available to other employees.

OR 5b. Where employees are proud when the organization achieves its performance goals.

6a. Where employees who perform the best get paid the most.

OR 6b. Where senior executives are respected.

7a. Where everyone gets his or her job done like clockwork.

OR 7b. That is on top of new innovations in the industry.

8a. Where employees receive assistance to overcome any personal problems.

OR 8b. Where employees abide by company rules.

9a. That is always experimenting with new ideas in the marketplace.

OR 9b. That expects everyone to put in 110 percent for peak performance.

10a. That quickly benefits from market opportunities. OR 10b. Where employees are always kept informed of what’s happening in the organization.

11a. That can quickly respond to competitive threats. OR 11b. Where most decisions are made by the top executives.

12a. Where management keeps everything under control.

OR 12b. Where employees care for each other.

McShane, Steven L. and Von Glinow, Mary Ann, Organizational Behavior, 3rd ed. New York: McGraw-Hill, 2005, p. 499. Copyright ©2005 McGraw-Hill Global Education Holdings LLC. All rights reserved. Used with permission.

Corporate Culture Dimension and Definition Score Interpretation

Control culture: This culture values the role of senior executives to lead the organization. Its goal is to keep everyone aligned and under control.

High: 3 to 6

Medium: 1 to 2

Low: 0

Corporate Culture Preference Scale I would prefer to work in an organization:

Scoring Key for the Corporate Culture Preference Scale Scoring instructions: In each space, write in a “1” if you circled the statement and “0” if you did not. Then add up the scores for each subscale.

Control culture + + + + + = (2a) (5a) (6b) (8b) (11b) (12a)

Performance culture + + + + + = (1b) (3b) (5b) (6a) (7a) (9a)

Relationship culture + + + + + = (1a) (3a) (4b) (8a) (10b) (12b)

Responsive culture + + + + + = (2b) (4a) (7b) (9a) (10a) (11a)

Interpreting your score: These corporate cultures may be found in many organizations, but they represent only four of many possible organization cultures. Also, keep in mind none of these subscales is inherently good or bad. Each is effec- tive in different situations. The four corporate cultures are defined here, along with the range of scores for high, medium, and low levels of each dimension based on a sample of MBA students:

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The External and Internal Environments  Chapter 2 67

Performance culture: This culture values individual and organizational performance and strives for effectiveness and efficiency.

High: 5 to 6

Medium: 3 to 4

Low: 0 to 2

Relationship culture: This culture values nurturing and well-being. It considers open communication, fairness, teamwork, and sharing a vital part of organizational life.

High: 6

Medium: 4 to 5

Low: 0 to 3

Responsive culture: This culture values its ability to keep in tune with the external environment, including being competitive and realizing new opportunities.

High: 6

Medium: 4 to 5

Low: 0 to 3

The barriers to entry are so high in the automotive indus- try that it is rare to see a new entrant. A notable exception has been India’s Tata Motors, the country’s largest maker of commercial vehicles, which about five years ago promised to become a leading carmaker in the fast-growing econo- mies of the developing world. Comparing its ambitious plan to the iconic Volkswagen Beetle and Ford Model T, Tata launched the Nano in 2009. Branded a “people’s car,” the Nano was priced at $2,000 to $2,500 (or 1 lakh in Indian currency). Tata Motors marketed the stripped-down minicar to first-time automobile customers in rural areas. The goal was to make the Nano the standard transportation for Indian families working their way up to the middle class.

The promised launch was so ambitious that Tata could not realistically meet expectations. Production was post- poned for about a year and a half, and then the company determined it couldn’t afford to sell the Nano profitably at the promised price. The first Nanos to roll off assembly lines were priced just $800 below Suzuki’s competing Alto, which offered more storage space and a more powerful engine. The Nano’s safety performance also ran into embarrassing problems; some reportedly caught fire.

Sales of the Nano have been disappointing. After reach- ing its maximum sales of 10,000 in April 2012, recent reports of the “people’s car” indicate 2,500 units are sold each month. It has been suggested that the low sales were a result of the unacceptably low level of quality and fea- tures built into the vehicle, including an underpowered and noisy motor, no stereo or air conditioning, and wires visible in the driver’s compartment. Another reason for the Nano’s demise was a missed target market, namely young urban drivers. The cheap and unsafe image associated with the Nano turned off many of these would-be buyers.

The Nano’s failure was frustrating to Tata Motors that had invested $400 million to develop the Nano and “hundreds of millions more building a factory capable of manufacturing 15,000 to 20,000 of the tiny cars a month.” If it were to be successful in the long run, Tata Motors would need to adjust its strategy to overcome the myriad barriers to success in the Indian automotive industry.

Tata Motors has changed both its marketing and manu- facturing strategies. Shifting its focus from first-time rural buyers to young urban customers, the company recently launched the Nano Twist and Nano LX. It is trying to rebrand the Nano from “cheapest car in the world” to an “awesome” car that is also affordable. Priced as high as $3,578, these improved Nano models can include several upgrades like power steering, music system with Blue-tooth connectivity, and enhanced interior and exterior features.

Also, Tata has responded with maintenance contracts, test drives, and safety improvements. It has revenues from its commercial vehicles and its Jaguar Land Rover opera- tions to stay afloat. Perhaps the Nano will still become the people’s car. Start-ups often make mistakes, and some of them recover brilliantly. What made Tata’s stumble remark- able was its grand scale.

DISCUSSION QUESTIONS

1. Which barriers to entry contributed most to Tata Motors’ lack of success with the original Nano?

2. Which macroenvironmental factors did Tata Motors consider when adjusting the marketing and manu- facturing strategies to achieve success with the more recent Twist and LX models?

3. To what degree do you believe Tata Motors will suc- ceed in delivering a successful low-cost vehicle to con- sumers in India and other developing economies?

SOURCES:  Mahendra, A., “Tata Nano Twist Review,” Auto Tech Review (online), http://www.automotechreview.com, accessed February 26, 2015; Able, V., “Tata Nano: The Car That Was Just Too Cheap,” The Guardian (online), February 3, 2014, http://www.theguardian.com;  McClain, S., “Why the World’s Cheapest Car Flopped,” The Wall Street Journal (online), October 14, 2013; Eyring, M., “Learning from Tata Motors’ Nano Mistakes,” Bloomberg Businessweek, January 11, 2011, http://www.businessweek. com; and Philip, S., “Tata Motors Profit Rises 100-Fold on Jaguar Land Rover Sales,” Bloomberg Businessweek, November 10, 2010, http://www. business week.com.

Concluding Case TATA MOTORS: FROM CHEAP TO AWESOME?

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Managing in Our Natural Environment BUSINESS AND THE ENVIRONMENT: CONFLICTING VIEWS Some people believe everyone wins when business tackles environmental issues.1 Others disagree.

Business used to look at environmental issues as a no- win situation; you either help the environment and hurt your business or help your business only at a cost to the environ- ment. Fortunately, things have changed. “When Americans first demanded a cleanup of the environment during the early 1970s, corporations threw a tantrum. Their response ran the psychological gamut from denial to hostility, defi- ance, obstinacy, and fear. But today, when it comes to green issues, many U.S. companies have turned from rebellious underachievers to active problem solvers.”2 This appendix gives examples of things U.S. corporations are doing to help solve environmental problems.

Johan Piet said, “Only win–win companies will survive, but that does not mean that all win–win ideas will be suc- cessful.”3 In other words, rigorous analysis is essential. Thus some companies maintain continuous improvement in envi- ronmental performance but fund only projects that meet financial objectives.

Most people understand that business has the resources and the competence to bring about constructive change and that this creates great opportunity—if well managed— for both business and the environment.

WHY MANAGE WITH THE ENVIRONMENT IN MIND? Business is turning its full attention to environmental issues for many reasons, including legal compliance, cost-effectiveness, competitive advantage, public opinion, and long-term thinking.

Legal Compliance Government regulations and liability for damages provide strong economic incentives to com- ply with environmental guidelines. Most industries already have made environmental protection regulation and liabil- ity an integral part of their business planning.4 The U.S. Justice Department has handed out tough prison sentences to executives whose companies violate hazardous waste requirements.

Cost-Effectiveness Environmentally conscious strate- gies can be cost-effective.5 In the short run, company after company is realizing cost savings from repackaging, recy- cling, and other approaches. 

Environmentally conscious strategies offer long-run cost advantages as well. Companies that are functioning barely within legal limits today may incur big costs—being forced to pay damages or upgrade technologies and practices— when laws change down the road.

A few of the other cost savings include fines, cleanups, and litigation; lower raw materials costs; reduced energy

use; less expensive waste handling and disposal; lower insurance rates; and possibly higher interest rates.

Competitive Advantage Corporations gain a competi- tive advantage by channeling their environmental concerns into entrepreneurial opportunities and by producing higher- quality products that meet consumer demand. 

Companies that fail to innovate in this area will be at a competitive disadvantage. Competitive advantage can be gained by maintaining market share with old customers and by creating new products for new market opportunities. And if you are an environmental leader, you may set the stan- dards for future regulations—regulations that you are pre- pared to meet while your competitors are not.

Public Opinion The majority of the U.S. population believes business must clean up; few people think it is doing its job well. Many consumers consider environmentalism in making purchases. Consumers routinely expect companies to come up with environmentally friendly alternatives to cur- rent products and practices.6

Companies also receive pressure from local communi- ties and from their own employees. Sometimes the pressure is informal and low-key, but much pressure is exerted by environmental organizations; aroused citizen groups, soci- eties and associations; international codes of conduct; and environmentally conscious investors.7

Another important reason for paying attention to envi- ronmental impact is TRI, the Toxic Release Inventory.8 The EPA requires all the plants of approximately 10,000 U.S. manufacturers to report annual releases of 650 toxic chemi- cals into the air, ground, and water. The substances include Freon, PCBs, asbestos, and lead compounds. Hundreds of others have been added to the list. The releases are not necessarily illegal, but they provide the public with an annual environmental benchmark. TRI continues to provide a powerful incentive to reduce emissions.

Finally, it is useful to remember that companies recover very slowly in public opinion from the impact of an environ- mental disaster. Adverse public opinion may affect sales as well as the firm’s ability to attract and retain talented people. You can see why companies such as P&G consider concern for the environment a consumer need, making it a basic and critical business issue.

Long-Term Thinking Long-term thinking about resources helps business leaders understand the nature of their responsibilities with regard to environmental concerns. For example, in Chapter 5 you will read about sustainable growth.9 Seventh Generation is named after, and operates under, the ideals set by the Iroquois Indians—every decision must consider the impact it will have on the next (seven) gen- erations. Economic arguments and the tragedy of the com- mons highlight the need for long-term thinking.

Economic Arguments In Chapter 3, we will discuss long- term versus short-term decision making. We state that it is common for managers to succumb to short-term pressure

APPENDIX B

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for profits and to avoid spending now when the potential payoff is years down the road. In addition, some economists maintain that it is the responsibility of management to maxi- mize returns for shareholders, implying the preeminence of the short-term profit goal.

But other economists argue that such a strategy caters to immediate profit maximization for stock speculators and neglects serious investors who are with the company for the long haul. Attention to environmental issues enhances the organization’s long-term viability because the goal is the long-term creation of wealth for the patient, serious inves- tors in the company10—not to mention the future state of our planet and the new generations of humans and other species who will inhabit it.

The Tragedy of the Commons In a classic article in Science, Garrett Hardin described a situation that applies to all business decisions and social concerns regarding scarce resources such as clean water, air, and land.11 Throughout human history, a commons was a tract of community land on which people grazed their animals. A commons has lim- ited carrying capacity, or the ability to sustain a population, because it is a finite resource. For individual herders, short- term interest lies in adding as many animals to the commons as they can. But problems develop as more herders add more animals to graze the commons. This leads to tragedy: As each herder acts in his short-term interest, the long-run impact is the destruction of the commons. The solution is to make choices according to long-run rather than short-run consequences.

In many ways, we are witnessing this tragedy of the commons. Carrying capacities are shrinking as precious resources, water chief among them, become scarcer. Inevitably, conflict arises—and solutions are urgently needed.

The Environmental Movement The 1990s were labeled the earth decade, when a new environmentalism with new features emerged.12 For example, proponents of the new environmentalism asked companies to reduce their wastes, use resources prudently, market safe products, and take responsibility for past damages. These requests are updated and formalized in the CERES Roadmap for Sustainability.

The new environmentalism combined many diverse viewpoints, but initially it did not blend easily with traditional business values. Some of the key aspects of this philosophy are noted in the following discussion of the history of the movement.13

Conservation and Environmentalism A strand of environmental philosophy that is not at odds with business management is conservation. The conservation move- ment is anthropocentric (human centered), technologically optimistic, and concerned chiefly with the efficient use of resources. The movement seeks to avoid waste, pro- mote the rational and efficient use of natural resources, and maximize long-term yields, especially of renewable resources.

The environmental movement, in contrast, historically has posed dilemmas for business management. Following the lead of early thinkers such as George Perkins Marsh (1801– 1882), it has shown that the unintended negative effects of human economic activities on the environment often are greater than the benefits. For example, there are links between forest cutting and soil erosion and between the draining of marshes and lakes and the decline of animal life.

Other early environmentalists, such as John Muir (1838– 1914) and Aldo Leopold (1886–1948), argued that humans are not above nature but a part of it. Nature is not for humans to subdue but is sacred and should be preserved not simply for economic use but for its own sake—and for what people can learn from it.

Science and the Environment Rachel Carson’s 1962 best-selling book Silent Spring helped ignite the mod- ern environmental movement by alerting the public to the dangers of unrestricted pesticide use.14 Carson brought together the findings of toxicology, ecology, and epidemiol- ogy in a form accessible to the public. Blending scientific, moral, and political arguments, she connected environmen- tal politics and values with scientific knowledge.

Barry Commoner’s Science and Survival (1963) contin- ued in this vein. Commoner expanded the scope of ecology to include everything in the physical, chemical, biological, social, political, economic, and philosophical worlds.15 He argued that all of these elements fit together and have to be understood as a whole. According to Commoner, the symp- toms of environmental problems are in the biological world, but their source lies in economic and political organizations.

Economics and the Environment Economists promote growth for many reasons: to restore the balance of pay- ments, to make nations more competitive, to create jobs, to reduce the deficit, to provide for the elderly and the sick, and to reduce poverty. Environmentalists criticize econom- ics for its notions of efficiency and its emphasis on eco- nomic growth.16 For example, environmentalists argue that economists do not adequately consider the unintended side effects of efficiency such as negative production externali- ties, which occur when a firm’s production harms the envi- ronment or reduces the well-being of others who receive no benefit. Environmentalists hold that economists need to supplement estimates of the economic costs and benefits of growth with estimates of other factors that historically were not measured in economic terms.17

Economists and public policy analysts argue that the benefits of eliminating risk to the environment and to people must be balanced against the costs. Reducing risk involves determining how effective the proposed methods of reduc- tion are likely to be and how much they will cost. There are many ways to consider cost factors. Analysts can perform cost-effectiveness analyses, in which they attempt to figure out how to achieve a given goal with limited resources, or they can conduct more formal risk–benefit and cost–benefit analyses, in which they quantify both the benefits and the costs of risk reduction.18

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Qualitative Judgments in Cost–Benefit Analysis Formal, quantitative approaches to balancing costs and benefits do not eliminate the need for qualitative judgments. For example, how does one assess the value of a magnifi- cent vista obscured by air pollution? What is the loss to soci- ety if a particular genetic strain of grass or animal species becomes extinct? How does one assess the lost opportunity costs of spending vast amounts of money on air pollution that could have been spent on productivity enhancement and global competitiveness?

Fairness cannot be ignored when doing cost–benefit analysis.19 For example, the costs of air pollution reduc- tion may have to be borne disproportionately by the poor in the form of higher gasoline and automobile prices. Intergenerational fairness also plays a role.20 Future gen- erations have no representatives in the current market and political processes. To what extent should the current gen- eration hold back on its own consumption for the sake of posterity? This question is particularly poignant because few people in the world today are well off. To ask the poor to reduce their life’s chances for the sake of a generation yet to come is asking for a great sacrifice.

International Perspectives Environmental problems present a different face in various countries and regions of the world. Early on, the United States and Great Britain lagged behind Germany and Japan in mandated emissions standards.21 The United States took more action on climate change during President Obama’s administration. In Europe, the Dutch, the Germans, and the Danes have been among the most environmentally conscious. But public sentiment and legalities change over time, and at this writing there is some

pushback against progressive legislation in the United States and some western European countries, as well as elsewhere.

Environmentalists in Europe have long been active and sometimes successful in halting environmentally harm- ful business projects, and consumers generally have been much more resistant to genetically modified foods than in the United States.22 China has paid a high ecological price for its rapid economic growth. In addition to widespread thick smog in many Chinese cities, it is estimated that a fifth of the country’s agricultural land and 60 percent of its groundwater are polluted. In 2014, China’s Environmental Protection Law was strengthened to more effectively address these problems.23

KEY TERMS carrying capacity The ability of a finite resource to sustain a population, p. 69. conservation An environmental philosophy that seeks to avoid waste, promote the rational and efficient use of natural resources, and maximize long-term yields, especially of renewable resources, p. 69. environmental movement An environmental philosophy postulating that the unintended negative effects of human economic activities on the environment are often greater than the benefits, and that nature should be preserved, p. 69. tragedy of the commons The environmental destruction that results as individuals and businesses consume finite resources (the commons) to serve their short-term interests without regard for the long-term consequences, p. 69.

Design elements: Lightbulb icon that indicates innovation: ©McGraw-Hill Education; Money icon that indicates cost: ©McGraw-Hill Education; Recycle icon that indicate sustainability: ©McGraw-Hill Education; Human head with headset that indicate service: ©McGraw-Hill Education; Letter Q icon that indicates quality: ©McGraw-Hill Education; Sand dial that indicates speed: ©McGraw-Hill Education

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Characteristics of Managerial Decisions Lack of Structure Uncertainty and Risk Conflict

The Phases of Decision Making Identifying and Diagnosing the Problem Generating Alternative Solutions Evaluating Alternatives Making the Choice Implementing the Decision Evaluating the Decision

The Best Decision

Barriers to Effective Decision Making Psychological Biases Time Pressures Social Realities

Decision Making in Groups Potential Advantages of Using a Group Potential Problems of Using a Group

Managing Group Decision Making Leadership Style Constructive Conflict Encouraging Creativity Brainstorming

Organizational Decision Making Constraints on Decision Makers Organizational Decision Processes Decision Making in a Crisis

After studying Chapter 3, you will be able to:

Describe the kinds of decisions you will face as a manager.

Summarize the steps in making “rational” decisions.

Recognize the pitfalls you should avoid when making decisions.

Evaluate the pros and cons of using a group to make decisions.

Identify procedures to use in leading a decision-making group.

Explain how to encourage creative decisions.

Discuss the processes by which decisions are made in organizations.

Describe how to make decisions in a crisis.

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The business executive is by profession a decision maker. Uncertainty is his opponent.

Overcoming it is his mission.

— JOHN MCDONALD

CHAPTER OUTLINELEARNING OBJECTIVES

©Cultura/Image Source RF

Managerial Decision Making

CHAPTER 3

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Uber has transformed the ride-hailing and ride-sharing industries and perhaps is not

done innovating yet, but its management decisions have not always made friends for

the company. As you read this chapter, consider what makes decision making difficult,

and how managers can overcome those difficulties and make the right choices.

Uber Technologies, Inc., the app-based ride-hailing service launched in San Francisco in 2010, claimed to be “changing the logistical fabric of cities around the world” by allowing users to hail a ride via their smart- phone. Since going global in 2013, the game-changing company has provided fast access to two billion reli- able rides for passengers in more than 540 cities in 70 countries around the world and enabled thousands of independent drivers to earn a share of the fees.

Valued in early 2017 at $70 billion, Uber appears to have made some smart decisions. Its managers’ aggressive business strategy put some competitors like Sidecar out of business and put costly pressure on others like Lyft. The company took market share from many cities’ venerable public transportation and tradi- tional taxi services, often driving down the high price of taxi medallions in the process. It introduced ride-sharing options, started a delivery service, and began exploring the possibility of building a fleet of self-driving cars.

However, Uber has also made decisions that dam- aged its reputation and may threaten its future growth and profits. By insisting its drivers are independent con- tractors rather than employees, the company adopted a risky business model whose legality was questioned. It came under scrutiny in countries around the world for conducting flawed background checks on drivers, which put some riders’ safety at risk. Protests by taxi drivers forced it from some markets, such as Hungary.

In the United States, the company was charged with “fraudulent and arguably criminal conduct” for investigating a lawyer and plaintiff who were suing the company. Uber wrongly blamed human error when a self-driving test car ran a red light in San Francisco.

When local taxi drivers protested President Trump’s first immigration order and Uber appeared to capitalize by keeping its airport service rolling, criticism on social media was scathing. The backlash also forced Travis Kalanick, the company’s founder and CEO, to resign from the president’s Economic Advisory Council.

Meanwhile, allegations by a female software engi- neer at Uber about a heedless company culture rife with sexism and harassment forced the company to investigate. A report surfaced alleging that for years the company misused a data-collecting tool to engage in systematic deception intended to evade authori- ties in Boston, Las Vegas, Paris, and other cities. And a video of founder and CEO Travis Kalanick dealing angrily with an Uber driver’s complaint went viral, forc- ing Kalanick to apologize publicly.

It appears that Uber may need to reexamine its management decision-making processes.1

Management in Action CAN UBER OVERCOME ITS POOR DECISIONS?

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Bottom Line You’ll be making decisions constantly and often, under time pressure. If you know how to make good decisions in a timely manner, you’ll deliver good results. What makes a management decision a “good” decision?

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74 Part One  Foundations of Management

The best managers make decisions constantly. Some are difficult and strategic, while others are smaller decisions that affect day-to-day actions. Marie Robinson, the former chief logis- tics officer at Toys “R” Us, had to make sure toys arrived at the retailer’s 600 U.S. stores and to online customers’ homes efficiently and on schedule. For routine decisions, toys are shipped from either warehouses or stores based on which locations are most economi- cal and have enough of the item in stock. Other decisions must be made in crisis mode. When superstorm Sandy shut down transportation systems in the New York City region in October 2012, Robinson learned that a ship loaded with merchandise for the holidays was being rerouted from New Jersey to the Bahamas. She worked with the shipper, so that the toys could still reach stores in time for Black Friday.2 Robinson’s managerial led to fashion retailer Michael Kors hiring her (without any experience in the fashion industry) in 2014 as its new senior vice president of global operations.3

The typical organization has the potential to more than double its decision effectiveness in terms of impact on financial results.4 If you can’t make good decisions, you won’t be an effective manager. This chapter discusses what kinds of decisions managers face, how they often make them, and how they should make them.

EXHIBIT 3.1 Characteristics of Managerial Decisions

Risk Uncertaintytyy Lack of

structuree Conflict

programmed decisions

Decisions encountered and made before, having objectively correct answers, and solvable by using simple rules, policies, or numerical computations.

nonprogrammed decisions

New, novel, complex decisions having no proven answers.

Characteristics of Managerial Decisions

Managers face problems and opportunities constantly. Some situations that require a deci- sion are relatively simple; others seem overwhelming. Some demand immediate action; oth- ers take months or even years to unfold.

Actually, managers often ignore challenges.5 For several reasons, they avoid taking action.6 First, managers can’t be sure how much time, energy, and trouble lie ahead once they start working on an issue. Second, getting involved is risky; tackling a problem but fail- ing to solve it successfully can hurt a manager’s track record. Third, because problems can be so perplexing, it is easier to procrastinate or to get busy with less demanding activities. Managers may lack the insight, courage, or will to decide.

It is important to understand why decision making can be so challenging. Exhibit 3.1 illustrates several characteristics of managerial decisions that contribute to their difficulty and pressure. Most managerial decisions lack structure and entail risk, uncertainty, and conflict.

Lack of Structure Lack of structure is the usual state of affairs in managerial decision making.7 Although some decisions are routine and clear-cut, for most there is no automatic procedure to follow. Problems are novel and unstructured, leaving the decision maker uncertain about how to proceed.

An important distinction illustrating this point is between programmed and nonpro- grammed decisions. Programmed decisions have been encountered and made before. They have objectively correct answers and can be solved by using simple rules, policies, or numerical computations. If you face a programmed decision, a clear procedure or structure exists for arriving at the right decision. For example, if you are a small-business owner and must decide the amounts for your employees’ paychecks, you can use a formula—and if

the amounts are wrong, your employees will prove it to you. Exhibit 3.2 gives some other examples.

If most important decisions were programmed, mana- gerial life would be much easier. But managers typically face nonprogrammed decisions: new, novel, complex deci- sions having no certain outcomes. They have a variety of possible solutions, all of which have merits and drawbacks. The decision maker must create or impose a method for

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making the decision; there is no predetermined structure on which to rely. As Exhibit 3.1 suggests, important, difficult decisions tend to be nonprogrammed, and they demand cre- ative approaches.

Uncertainty and Risk If you have all the information you need and can predict precisely the consequences of your actions, you are operating under a condition of certainty.8 Managers are expressing their preference for certainty when they are not satisfied hearing about what might have hap- pened or may happen and insist on hearing what did or will happen.9 But perfect certainty is rare. For important, nonprogrammed managerial decisions, uncertainty is the rule.

Uncertainty means the manager has insufficient information to know the consequences of different actions. Business people do not like uncertainty; it can hold them back from tak- ing action. For example, uncertainty about the strength and timing of the economic recov- ery made businesses slow to start hiring.10 But economies don’t strengthen until consumer demand picks up, which doesn’t happen until employment rises.

When you can estimate the likelihood of various consequences but still do not know with certainty what will happen, you are facing risk. Risk exists when the probability of an action being successful is less than 100 percent and losses may occur. If the decision is the wrong one, you may lose money, time, reputation, or other important assets.

Risk, like uncertainty, is a fact of life in managerial decision making. But this is not the same as taking a risk. Although it sometimes seems as though risk takers are admired and entrepreneurs and investors thrive on taking risks, the reality is that good decision makers prefer to manage risk. They accept the fact that decisions have consequences entailing risk, but they do everything they can to anticipate the risk, minimize it, and control it.

The stories detailed in “The Greatest Business Decisions of All Time” are creative approaches to managing risk. A classic example is how Henry Ford, when facing high levels of employee turnover and discontent, doubled workers’ pay and switched from two 9-hour shifts to three 8-hour shifts per day. These improvements cost Ford $10 million but his gamble paid off with higher retention rates and productivity levels.11 Ford could not have known with certainty that his changes would work, but he assessed his options and took a calculated risk.

certainty

The state that exists when decision makers have accurate and comprehensive information.

uncertainty

The state that exists when decision makers have insufficient information.

risk

The state that exists when the probability of success is less than 100 percent and losses may occur.

Programmed Decisions Nonprogrammed Decisions

Problem Frequent, repetitive, routine. Much certainty regarding cause-and- effect relationships.

Novel, unstructured. Much uncertainty regarding cause-and- effect relationships.

Procedure Dependence on policies, rules, and definite procedures.

Necessity for creativity, intuition, tolerance for ambiguity, creative problem solving.

Examples

Business firm Policies to follow when posting about the company on social media.

Developing a new service for different market.

University Number of course credits that must be accumulated to graduate.

Raising funds to add new technology to classrooms.

Health care Procedure for admitting patients. Purchase of experimental equipment.

Government Merit system for promotion of state employees.

Reorganization of state government agencies.

EXHIBIT 3.2 Comparison of Types of Decisions

SOURCE: Adapted from Gibson, J., Ivancevich, J., Donnelly, J., Jr., and Konopaske, R., Organizations: Behavior, Structure, Processes, 14th ed. New York: McGraw-Hill, 2011.

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76 Part One  Foundations of Management

A more recent example is how National Geographic launched a contest over social media to gather user-generated travel content. Named the “Wanderlust” contest, over 52,000 people shared photos and videos of their travels. In exchange for this content, National Geographic offered a chance to win a photo expedition to Yosemite National Park. By involv- ing users in this contest, the organization reduced risk by learning firsthand about current travelers’ passions with regard to memorable moments. This information will help National Geographic align more precisely its content with users’ interests.13

Conflict Important decisions are even more difficult because of the conflicts managers face. Conflict, which exists when a manager must consider opposing pressures from different sources, occurs at two levels.

First, individual decision makers experience psychological conflict when several options are attractive or when none of the options is attractive. For instance, a manager may have to decide whom to lay off when she doesn’t want to lay off anyone. Or she may have three promising job applicants for one position—but choosing one means she has to reject the other two.

Second, conflict arises between people. A chief financial officer argues in favor of increasing long-term debt to finance an acquisition. The chief executive officer, however, prefers to minimize such debt and find the funds elsewhere. A marketing department wants more product lines to sell, and the engineers want higher-quality products. But the produc- tion people want to lower costs by having longer production runs of fewer products with no changes. Few decisions are without conflict.

conflict

Opposing pressures from different sources, occurring on the level of psychological conflict or conflict between individuals or groups.

Social Enterprise Saul Garlick’s Social Enterprise: Nonprofit or For-Profit?

When visiting Mpumalanga, South Africa, as a boy, Saul Garlick was shocked at the village’s lack of basic resources: “The small rural village had nothing—no class- rooms, no electricity, no water.” He decided he wanted to help. While still in high school, Garlick founded Student Movement for Real Change (SMRC), a nonprofit whose mission was to fight poverty by encouraging entrepreneur- ship in villages in Africa. The organization recruited stu- dents to “live with local families, hunt for water sources, farm alongside villages and absorb day-to-day nuances of life in a developing country with the goal of building social businesses along with the local residents.”

As a nonprofit, the organization was funded through an intermittent stream of donations from friends, family mem- bers, and donors. SMRC started to grow. As a 23-year-old who was working full time for the organization, Garlick began to draw a salary and hired a recent graduate to run the daily operations. Even with the extra help, Garlick was under constant pressure to raise enough funds to keep the operation functioning when in fact he wanted to spend more time doing the core work of the organization.

If he wanted to have a high-impact social enterprise, Garlick needed a business model that could sustain itself.

He believed that a market-based solution was his best hope to help him reduce poverty in Africa, resulting in his decision to buy out his nonprofit, SMRC, and launch a for-profit social enterprise, ThinkImpact.

By borrowing an initial $450,000 from friends, family, and angel investors, Garlick developed a growth strategy to set Denver-based ThinkImpact on a profitable course. The for-profit social enterprise developed an eight-week program that brings students and entrepreneurs together from universities and communities around the globe to work with locals in villages in Rwanda, Panama, South Africa, Kenya, and Ghana. The curriculum is designed to spark the creative talents of individuals while develop- ing their social problem-solving skills. ThinkImpact has expanded into funding, supporting, and launching new social enterprises. Since its inception, ThinkImpact’s entrepreneurs and scholars have formed 192 social enter- prises in such areas as sustainable agriculture, basic health, and engineering and tech businesses.

The belief that continues to inspire Saul Garlick and those involved in ThinkImpact is that social enterprises and the experience of building them together can change lives forever.12

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In the “Social Enterprise” feature, how much “structure” and how many programmed decisions do you see? Try to identify and describe the uncertainties, risks, and potential conflicts in the major unprogrammed decisions.

EXHIBIT 3.3 The Phases of Decision Making

Identify and diagnose the problem

S te

p 1 Generate

alternative solutionsS

te p

2 Evaluate alternatives

S te

p 3 Make the

choice

S te

p 4 Implement

the decisionS

te p

5 Evaluate the decisionS

te p

6

The Phases of Decision Making

Faced with these challenges, how can you make good decisions? The ideal decision-making process includes six phases. As Exhibit 3.3 illustrates, decision makers should (1) iden- tify and diagnose the problem, (2) generate alternative solutions, (3) evaluate alternatives, (4) make the choice, (5) implement the decision, and (6) evaluate the decision.

Identifying and Diagnosing the Problem The first phase in the decision-making process is to recognize that a problem exists and must be solved. Typically, a manager realizes some discrepancy between the current state (the way things are) and a desired state (the way things ought to be). Such discrepancies— say, in organizational or unit performance—may be detected by comparing current perfor- mance against (1) past performance, (2) the current performance of other organizations or units, or (3) future expected performance as determined by plans and forecasts.14

The “problem” may be an opportunity that can be exploited with appropriate action. In that case, decisions involve choosing how to seize the opportunity. To recognize important opportunities as a manager, you will need to understand your company’s macro- and com- petitive environments (described in Chapter 2).

Recognizing that a problem (or opportunity) exists is only the beginning of this phase. The decision maker must dig in deeper and attempt to analyze its possible causes. For example, a sales manager knows that sales have dropped drastically. If he is leaving the com- pany soon or believes the decreased sales volume is due to the economy (which he can’t do anything about), he won’t take action. But if he does try to solve the problem, he should not automatically reprimand his sales staff, add new people, or increase the advertising budget. He must analyze why sales are down and then develop a solution appropriate to his analysis. Asking why, of yourself and others, is essential to understanding the real problem.

Michael Ortner and Rakesh Chilakapati cofounded a company called Capterra, which created an online directory of companies that sell business software. Their problem was that they wanted to bring more traffic to their website; more listings would make the site more valuable to buyers, and more buyers would make the site more attractive to vendors.15

The company asked why traffic was low by surveying the directory’s users. Buyers wanted to see reviews of vendors; the underlying problem was that the website lacked a key feature that buyers would find helpful.16

Exhibit 3.4 lists some useful questions to ask and answer in this phase.17

Generating Alternative Solutions The second phase of decision making links problem diagnosis to the development of alter- native courses of action aimed at solving the problem. Managers generate at least some alternative solutions based on past experiences.18

LO 2

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78 Part One  Foundations of Management

Solutions range from ready-made to custom-made.19 Decision makers who employ ready-made solutions use ideas they have tried before or follow the advice of others who have faced similar problems. Custom-made solutions, by contrast, must be designed for specific problems. This technique often combines ideas into new, creative solutions.

For example, IDEO, a design and innovation firm, helped its start-up-in-residence, PillPack, to change how customers of advanced age, of limited mobility, or with serious ill- nesses interact with their pharmacy. PillPack launched a simple, fast home-delivery service that sorts patients’ multiple prescriptions and over-the-counter medicines into packets that are organized by the date and time they should be taken. Pills arrive in an organized, recy- clable dispenser with a label that includes an image of the pill. Customers can coordinate refills with or ask questions of PillPack’s pharmacists via phone or e-mail on a 24/7 basis. There is no charge for the packaging and delivery service.20

Potentially, custom-made solutions can be devised for any challenge. Later in the chap- ter, we will discuss how to generate creative ideas.

Often, many more alternatives are available than managers realize. For example, what would you do if one of your competitors reduced prices? Managers sometimes assume that cutting prices in response to a competitor’s price cuts is their only option, but it is not. Alternatives include conveying consumer risks of low-priced products, building awareness of your products’ features and overall quality, and communicating your cost advantage to your competitors so they realize that they can’t win a price war. If you do decide to cut your price as a last resort, do it fast; if you do it slowly, your competitors will gain sales in the meantime, which may embolden them to employ the same tactic again in the future.21

Returning to the example of Capterra, Michael Ortner was eager to launch the product reviews, but Rakesh Chilakapati, the company’s technology manager at the time, wanted to proceed cautiously because of the time and expense required to add the feature, along with

fear that some vendors would get bad reviews and leave the directory. So to generate alternatives, the two partners studied existing websites with product reviews (for example, Amazon, eBay, and Edmunds. com). They identified a variety of ways to offer reviewing features. They could simply post testimo- nials from satisfied customers. They could allow or

forbid anonymous comments. They could require reviewers to list both positive and negative points. The big question that remained was whether the features attractive to buyers would repel sellers.22

Evaluating Alternatives The third phase of decision making involves determining the value or adequacy of the alter- natives that were generated. Which solution will be the best?

Especially when decisions are important, alternatives should be evaluated with careful thought and logic. Fundamental to this process is to predict the consequences that will occur if the different options are put into effect. Managers should consider several types of consequences, including quantifiable measures of success such as lower costs, higher sales, lower employee turnover, and higher profits.

At Capterra, the evaluation of alternatives weighed the expected impact of reviews on buyers against the expected impact on vendors. Posting testimonials instead of invit- ing reviews seemed likely to protect the goodwill of vendors, but this one-sided approach seemed unlikely to satisfy buyers, so the founders doubted it would have much effect on

ready-made solutions

Ideas that have been seen or tried before.

custom-made solutions

New, creative solutions designed specifically for the problem.

When it comes to generating alternatives, the

first one that comes to mind may not be the

best one.

How can you best describe the difference between what is actually happening and what should be happening?

What is/are the cause(s) of the deviation?

What short- and long-term goals need to be met?

Which goals are absolutely critical to the success of the decision?

EXHIBIT 3.4 Questions for Problem Identification and Diagnosis 

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traffic overall. Anonymous reviews seemed risky because vendors’ competitors could abuse the system, so they dropped that alternative. Requiring both pros and cons in the reviews would encourage balanced information about vendors, an apparent plus. But Ortner knew that many vendors still worried about the risk of negative reviews.23

An important technology affecting the analysis of alternatives is the ability to collect and analyze big data. The term refers to massive amounts of structured and unstructured data that exceed the capabilities of a traditional computer database. Businesses today can gather details about Internet usage, consumer behavior, and employee skills and activities, among many other things. Organizations can store the data, search it for patterns or trends, and analyze it to identify alternatives that previously would have gone unnoticed.

Evaluation that would have relied heavily on intuition or experience now can be data- driven. For example, companies are using big data to make more effective decisions about pay. General Electric uses data analytics to help digital wind farms achieve better efficien- cies. By using data to optimize the angle of its turbines, GE can produce up to 10 percent more energy off the same amount of wind.24

To evaluate alternatives, refer to your original goals, defined in the first phase. Next, you should consider the questions in Exhibit 3.5.

Several additional questions help:25

Is our information about alternatives complete and current? If not, can we get more and better information?

Does the alternative meet our primary objectives? What problems could we have if we implement the alternative?

Of course, results cannot be forecast with perfect accuracy. But some- times decision makers can build in safeguards against an uncertain future by considering the potential consequences of several scenarios. Then they generate contingency plans—alternative courses of action that can be imple- mented depending on how the future unfolds.

For example, during an economic crisis when it is unclear when a recov- ery might begin and how strong it will be or what shape it will take, the range of potential outcomes is wide, and many companies will not survive. Firms could consider at least four scenarios:26

1. A most optimistic scenario in which trade and capital flows resume, further recession is averted, globalization stays on course, and developed and emerging economies continue to integrate as confidence rebounds quickly.

2. A battered-but-resilient scenario in which the recession continues for a long period, recovery is slow, confidence is shaken but does rebound, and globalization slowly gets back on course.

3. Stalled globalization, in which the global recession is significant, the intensity varies greatly from nation to nation, but overall growth is slow.

4. A long freeze, in which the recession lasts more than five years, economies everywhere stagnate, and globalization goes into reverse.

As you read this, what economic scenario is unfolding? What are the important current events and trends? What scenarios could evolve six or eight years from now? How will you prepare?

contingency plans

Alternative courses of action that can be implemented based on how the future unfolds.

Which goals does each alternative meet and fail to meet?

Which alternatives are most acceptable to you and to other important stakeholders?

If several alternatives might solve the problem, which can be implemented at the lowest cost or greatest profit?

If no alternative achieves all your goals, can two or more of the best ones be combined?

EXHIBIT 3.5 Questions for Evaluating Alternatives

Some decisions do not work out. Although this can surprise and frustrate, you should have contingency plans that will help you still achieve your desired goals.

©Yuri Arcurs/Alamy Stock Photo RF

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80 Part One  Foundations of Management

Making the Choice Once you have considered the possible consequences of your options, it is time to make your decision. The temptation to overanalyze can lead to paralysis by analysis—that is, inde- cisiveness caused by too much analysis. When it comes time to decide, assertive decision making can help an organization seize new opportunities or thwart challenges.

Indecisiveness became a risk at Capterra because Ortner and Chilakapati had conflict- ing worries. Ortner continued to see the lack of reviews as a missed opportunity, whereas

Chilakapati remained focused on the risks of adding this feature. Ortner further researched the situation by calling vendors who had expressed concerns about reviews; he became convinced that they, too, were simply not seeing the opportunities of this additional feature and would come around when experience showed them the value. Finally, after three months of debate, Ortner was enjoying his regular five-mile run when he concluded that the analysis had to end,

and he must make a decision. As president, he made the final call, respecting Chilakapati’s concerns but announcing that it was time to try the reviews.27

As you make your decision, important guiding concepts include maximizing, satisficing, and optimizing.28

Maximizing is achieving the best possible outcome. The maximizing decision realizes the greatest positive consequences and the fewest negative consequences. In other words, maximizing results in the greatest benefit at the lowest cost, with the largest expected total return. Maximizing requires searching thoroughly for a complete range of alternatives, care- fully assessing each alternative, comparing one to another, and then choosing or creating the very best.

Satisficing is choosing the first option that is minimally acceptable or adequate. When you satisfice, you compare your choice against your goal, not against other options. Satisficing means that a search for alternatives stops after you find one that is okay. You do not expend the time or energy to gather more information. Instead you make the expedient decision based on readily available information.

Let’s say you are purchasing new equipment, and your goal is to avoid spending too much money. You would be maximizing if you checked out all your options and their prices and then bought the cheapest one that met your performance requirements. But you would be satisficing if you bought the first adequate option that was within your budget and failed to look for less expensive options.

Satisficing is sometimes a result of laziness; other times, there is no other known option because time is short, information is unavailable, or other constraints make maximizing impossible. When the consequences are not huge, satisficing can even be the ideal approach. But in other situations, when managers satisfice, they fail to consider options that might be better.

Optimizing means that you achieve the best possible balance among several goals. Perhaps, in purchasing equipment, you are interested in quality and durability as well as price. So instead of buying the cheapest piece of equipment that works, you buy the one with the best combination of attributes, even though there may be options that are better on the price criterion and others that are better on the quality and durability criteria. The same idea applies to achieving business goals: One marketing strategy could maximize sales, whereas a different strategy might maximize profit. An optimizing strategy is the one that achieves the best balance among multiple goals.

Implementing the Decision The decision-making process does not end once you make a choice. The chosen alterna- tive must be implemented. Sometimes the people involved in making the choice are the same people who put it into effect. At other times, they delegate the responsibility for

maximizing

A decision realizing the best possible outcome.

satisficing

Choosing an option that is acceptable, although not necessarily the best or perfect.

optimizing

Achieving the best possible balance among several goals.

The process of considering multiple scenarios

raises important “what if” questions for

decision makers and highlights the need for

contingency plans.

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Bottom Line It’s easy to become so

focused on maximizing one goal that you lose sight of

other important goals. You’re optimizing if you make sure

that no important result is ignored. What could be the

negative consequences of making decisions that

maximize only quality?

Q

Susan Fowler kept meticulous records of the year she worked for Uber as a software engineer. During that time she was an exemplary employee but reportedly faced repeated instances of sexism and sexual harass- ment, only to see the offending managers let off with a reprimand at best. Sometimes her complaints to human resources were denied, sometimes they were belittled and minimized as a “first offense,” and at other times, according to the revealing blog post she wrote later, Fowler was told she herself was the problem. When she resigned in December 2016, from what she called “an organization in complete, unrelenting chaos,” it was after a transfer she requested was secretly blocked and she was told she could be fired for reporting a manager who discriminated against her. 

Such dismissal is illegal. During Fowler’s time at the ride-hailing company, she says she saw the percentage of women employees dwindle from 25 percent to about 6 percent.

Fowler’s explosive blog post also included allega- tions that brutally competitive behavior originated with the company’s top managers: “It seemed like every man- ager was fighting their peers and attempting to undermine their direct supervisor so that they could have their direct

supervisor’s job.  .  .  . They boasted about it in meetings, told their direct reports about it, and the like.”

Her accusations sparked an immediate reaction from the company’s founder, Travis Kalanick. At a meeting of all employees, Kalanick announced a thorough investigation into the company culture, to be led by former U.S. attorney general Eric Holder and board member Ariana Huffington (founder of Huffington Post). “I am authentically and fully dedicated to getting to the bottom of this,” Kalanick said. 

And in a separate meeting with female employees, Kalanick reportedly said, “There are people in this room who have experienced things that are incredibly unjust. I want to root out the injustice. I want to get at the people who are making this place a bad place. And you have my commitment.”29

• Why do you think it took so long for Uber’s manage- ment to recognize that the company had a problematic corporate culture? What indications of the problem did it apparently overlook?

• Assuming the investigation confirms that the problem is an aggressive company culture that discriminates against women, how do you think the company’s man- agers should begin to generate solutions?

Management in Action A HUGE PROBLEM AT UBER

P R

O G

R E

S S

R E

P O

R T

M A

N A

G E

R ’S

B R

IE F

O N

W A

R D

implementation to others, such as when a top management team changes a policy or operat- ing procedure and has operational managers carry out the change.

At Capterra, implementation of the decision to add customer reviews included 10 months of software development, followed by invitations to vendors to encourage their customers to submit reviews. Notice that the implementation took into account the concerns about nega- tive reviews by giving the vendors some control over who submitted the initial reviews.30

Unfortunately, sometimes managers make decisions but don’t take action. Implementing may fail to occur when talking a lot is mistaken for doing a lot; when people forget that merely making a decision changes nothing; when meetings, plans, and reports are seen as actions, even if they have no effect on what people actually do; and if managers don’t check to ensure that what was decided was actually done.31

Managers should plan implementation carefully. Adequate planning requires several steps:32

1. Determine how things will look when the decision is fully operational. 2. Chronologically order, perhaps with a flow diagram, the steps necessary to achieve a

fully operational decision. 3. List the resources and activities required to implement each step. 4. Estimate the time needed for each step. 5. Assign responsibility for each step to specific individuals.

Decision makers should assume that things will not go smoothly during implementation. It is useful to take a little extra time to identify potential problems and potential opportunities

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82 Part One  Foundations of Management

associated with implementation. Then you can take actions to prevent problems and be ready to seize unexpected opportunities. Exhibit 3.6 lists several useful questions that should be asked in the implementation stage of decision making.

Many of the chapters in this book are concerned with implementation issues: how to implement strat- egy, allocate resources, organize for results, lead and motivate people, manage change, and so on. View the chapters from this perspective and learn as much as you can about how to implement properly.

Evaluating the Decision The final phase in the decision-making process is evaluating the decision. It involves col- lecting information on how well the decision is working. Quantifiable goals—a 20 percent increase in sales, a 95 percent reduction in accidents, 100 percent on-time deliveries—can be set before implementing the solution. Then objective data can be gathered to determine its success or failure accurately.

Decision evaluation is useful whether the conclusion is positive or negative. Feedback that suggests the solution is working implies that the decision should be continued and perhaps applied elsewhere in the organization. Negative feedback means that either (1) implementation will require more time, resources, effort, or thought; or (2) the solution wasn’t good enough.

The feedback for Capterra was positive. In the first year of offering customer reviews, the site gathered about 500 reviews. A year after that, the site had 2,000 reviews, with about 40 percent of them unsolicited. Most reviews were positive. Even though some are less than glowing, traffic to the site grew to 25,000 reviews; vendors see the review feature as a benefit because they are getting more business. Revenues jumped, and the executives concluded that customer reviews were a great idea.33

If the decision appears inadequate, it’s time to adjust. The process cycles back to the first phase: (re)defining the problem. The decision-making process begins anew, preferably with more information, new suggestions, and an approach that attempts to eliminate the mistakes made the first time around.

What problems could this action cause?

What can we do to prevent the problems?

What unintended benefits or opportunities could arise?

How can we make sure they happen?

How can we be ready to act when the opportunities come?

EXHIBIT 3.6 Questions for Implementing Decisions

Decision makers should assume that things

will not go smoothly during implementation.

The Best Decision

How can managers tell whether they have made the best decision? Although nothing can guarantee a “best” decision, managers should at least be confident that they followed proper procedures that will yield the best possible decision under the circumstances. This means that the decision makers were appropriately vigilant in making the decision. Vigilance occurs when the decision makers carefully and conscientiously execute all six phases of decision making, including making provisions for implementation and evaluation.34

Even if managers reflect on their decision-making activities and conclude that they exe- cuted each step conscientiously, they still will not know whether the decision will work; after all, nothing guarantees a good outcome. But they will know that they did their best to make the best possible decision.

LO 3

vigilance

A process in which a decision maker carefully executes all stages of decision making.

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Vigilance and full execution of the six-phase decision-making process are the exception rather than the rule. But when managers use such rational processes, better decisions result.35 Managers who make sure they engage in these processes are more effective.

But it is easy to neglect or improperly execute these processes. The problem may be improperly defined or goals misidentified. Not enough solutions may be generated, or they may be evaluated incompletely. A satisficing rather than maximizing choice may be made. Implementation may be poorly planned or executed, or evaluation may be inadequate or nonexistent.

And as discussed next, decisions are influenced by subjective psychological biases, time pressures, and social realities.

Psychological Biases Decision makers are far from objective in the way they gather, evaluate, and apply informa- tion in making their choices. People have biases that interfere with objective rationality. The examples that follow represent only a few of the many documented subjective biases.36

The illusion of control is a belief that one can influence events even when one has no control over what will happen. Gambling is one example: some people believe they have the skill to beat the odds, even though most of the time they cannot. In business, such overcon- fidence can lead to failure because decision makers ignore risks and fail to evaluate the odds of success objectively.

Managers may believe they can do no wrong or hold a general optimism about the future that can lead them to believe they are immune to risk and failure.37 They may overrate the value of their experience. They may believe that a previous project met its goals because of their decisions alone, so they can succeed by doing everything the same way on the next project.

Framing effects refer to how problems or decision alternatives are phrased or presented and how these subjective influences can override objective facts. In one example, manag- ers indicated a desire to invest more money in a course of action that was reported to have a 70 percent chance of profit than in one said to have a 30 percent chance of loss.38 The choices were equivalent in their chances of success; it was the way the options were framed that determined the managers’ choices.

Managers may be quick to frame a problem as being similar to problems they have already handled, so they don’t search for new alternatives. For example, when CEO Richard Fuld tackled financial problems at Lehman Brothers as the mortgage market tumbled, he assumed that the situation was much the same as when he had handled a previous financial crisis in the late 1990s. Unfortunately for Lehman Brothers, the crisis was far worse. In late 2008, the firm declared bankruptcy—the largest in U.S. history—helping to send global financial markets into a tailspin.

Similarly, at Yahoo! people expected Marissa Mayer to turn around the failing Internet pioneer by making major strategy changes when she took over as CEO. Critics said that she made only minor tactical changes, such as changing Yahoo!’s home page layout, to an “out- dated success formula.”39 Her actions were not enough to keep the famous company from being sold to Verizon for $4.8 billion in 2017. Mayer resigned from the board of directors and the company was renamed “Altaba.”40

Often, decision makers discount the future. That is, in their evaluation of alternatives, they weigh short-term costs and benefits more heavily than longer-term costs and benefits. Consider your own decision about whether to go for a dental checkup. The choice to go poses short-term financial costs, anxiety, and perhaps physical pain. The choice not to go will inflict even greater costs and more severe pain if dental problems worsen. How do you choose? Many people decide to avoid the short-term costs by not going for regular check- ups, but end up facing greater pain in the long run.

illusion of control

People’s belief that they can influence events even when they have no control over what will happen.

discounting the future

A bias weighting short-term costs and benefits more heavily than longer-term costs and benefits.

Barriers to Effective Decision Making

framing effects

A decision bias influenced by the way in which a problem or decision alternative is phrased or presented.

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84 Part One  Foundations of Management

The same bias applies to students who don’t study, weight watchers who sneak dessert or skip an exercise routine, and people who take the afternoon off to play golf when they really need to work. It can also affect managers who hesitate to invest funds in research and development programs that may not pay off until far into the future. In all these cases, the avoidance of short-term costs or the seeking of short-term rewards results in negative long- term consequences.

Asian managers tend to think with a longer-term outlook than do American manag- ers, and many believe that this provides competitive advantage for long-term success.41 Western myopia is driven in part by Wall Street’s focus on quarterly earnings, causing managers to make decisions based primarily on short-run considerations and to neglect long-term problems and opportunities. Why is it so hard to make decisions with the long term in mind?

In contrast, when U.S. companies sacrifice present value to invest for the future—such as when Weyerhaeuser incurs enormous costs for its reforesta- tion efforts that won’t lead to harvest until 60 years in the future—it seems the exception rather than the rule. Discounting the future partly explains governmental budget deficits, environmental destruction, and decaying infrastructure.42

Time Pressures In today’s rapidly changing business environment, the premium is on acting quickly and keeping pace. The most conscientiously made business deci- sions can become irrelevant or disastrous if managers take too long to make them.

How can managers make decisions quickly? Some natural tendencies, at least for North Americans, might be to skimp on analysis (not be too vigi- lant), suppress conflict, and make decisions on one’s own without consult- ing others.43 These strategies may speed up decision making, but they reduce decision quality.

The speed trap can be as dangerous as moving too slowly.44 In an Internet start-up that went bankrupt, fast decisions initially helped the firm achieve its growth objectives. Early on, the founders did everything they could to create a sense of urgency: They planned a meeting to “light a fire under the company,” calling it a “state-of-emergency address” with the purpose of creating “the idea of panic with an emerging dead- line.” Speed became more important than content. They failed to con-

sider multiple alternatives, used little information, didn’t fully acknowledge competing views, and didn’t consult outside advisers. They never considered slowing down to be an option.

Can managers under time pressure make decisions that are both timely and high qual- ity? A study of effective decision-making processes in a fast-paced, high-tech industry

revealed the tactics that such companies use.45 First, instead of relying on old data, long-range planning, and futuristic forecasts, they focus on real-time infor- mation: current information obtained with little or no time delay. For example, they constantly monitor

daily operating measures such as work in process rather than checking periodically the traditional accounting-based indicators such as profitability.

Second, they involve people more effectively and efficiently in the decision-making pro- cess. They rely heavily on trusted experts, and this yields both good advice and the confi- dence to act quickly despite uncertainty. They also take a realistic view of conflict: they value differing opinions, but they know that if disagreements are not resolved, the top execu- tive must make the final choice in the end. Slow-moving firms, in contrast, are stymied by conflict. Like the fast-moving firms, they seek consensus; but when disagreements persist, they fail to decide.

Bottom Line When you want to pursue sustainability, think in terms of the long-term consequences of your decisions. What might be the long-term consequences of not investing in energy efficiency?

The speed trap can be as dangerous as

moving too slowly. Bottom Line You’ll feel pressure to make quick decisions, but rushing can lead to mistakes. Fortunately, you can be vigilant while moving quickly, avoiding the speed trap. When you are under time pressure, what can you do to avoid mistakes?

Q

Delaying dental checkups can have a negative impact on the future. It may save money today but lead to larger costs (and more pain) later.

©Ingram Publishing RF

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Social Realities Many decisions are made by a group rather than by an individual manager. In slow-moving firms, interpersonal factors decrease decision-making effectiveness. Even the manager act- ing alone is accountable to the boss and to others and must consider the preferences and reactions of many people. Therefore, many decisions are the result of intensive social inter- actions, bargaining, and politicking.

The remainder of this chapter focuses on the social context of decisions, including deci- sion making in groups and the realities of decision making in organizations.

Decision Making in Groups

Sometimes managers convene groups of people in order to make important decisions. Some advise that in today’s complex business environment, significant problems should always be tackled by groups.46 As a result, managers must understand how groups operate and how to use them to improve decision making.

The basic philosophy behind using a group to make decisions is captured by the adage, “two heads are better than one.” But is this statement really valid? Yes, it is—but only poten- tially, not necessarily.

If enough time is available, groups usually make higher-quality decisions than most indi- viduals acting alone. However, groups often are inferior to the best individual.47

How well the group performs depends on how effectively it capitalizes on the potential advantages and minimizes the potential problems of using a group. Exhibit 3.7 summarizes these issues.

Potential Advantages of Using a Group If other people have something to contribute, using groups to make a decision offers at least five potential advantages:48

1. More information is available when several people are making the decision. If one member doesn’t have all the facts or needed expertise, another member might.

2. A greater number of perspectives on the issues, or different approaches to solving the problem, are available. The problem may be new to one group member but familiar to another. Or the group may need to consider other viewpoints—financial, legal, marketing, human resources, and so on—to achieve an optimal solution.

LO 4

The Digital World Even as the volume of information managers have access to increases, we see a decrease in the time they have in which to make decisions. Quickly sorting through so much available information for truly useful data is a chal- lenge. During a crisis, this challenge becomes even bigger.

During natural disasters, organizations use social media as part of their decision-making process. People are asked to tweet and post pictures with descriptions of current situations. Rescue workers get real-time curated data so that rather than wait for reports about blocked routes, they can make decisions that save hours of trans- portation time.

In Kenya, real-time posts show images and reports from election polling stations. Citizens post which sta- tions are burning the paper ballots, which stations have gangs that intimidate voters not voting for the “right” candidate, and which stations are safe for one or both sides.

Kenyans are then better able to contribute to decisions that matter. They can know that if they walk a greater distance or travel to another town their vote will count, because they choose a safe location based on citizen- provided, real-time data.

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86 Part One  Foundations of Management

3. Group discussion provides an opportunity for intellectual stimulation. It can get people thinking and unleash their creativity to a far greater extent than would be possible with individual decision making.

Those three potential advantages of using a group improve the odds that a more fully informed, higher-quality decision will result. Thus managers should involve people with dif- ferent backgrounds, perspectives, and access to information. They should not involve only their colleagues who think the same way they do.

4. People who participate in a group discussion are more likely to understand why the decision was made. They will have heard the relevant arguments both for the chosen alternative and against the rejected alternatives.

5. Group discussion typically leads to a higher level of commitment to the decision. Buying into the proposed solution translates into high motivation to ensure that it is executed well.

The last two advantages improve the chances that the decision will be implemented suc- cessfully. Therefore, managers should involve the people who will be responsible for imple- menting the decision as early in the deliberations as possible.

Potential Problems of Using a Group Things can go wrong when groups make decisions. Most of the potential problems concern the processes through which group members interact with one another:49

1. Sometimes one group member dominates the discussion. When this occurs—such as when a strong leader makes his or her preferences clear—the result is the same as it would be if the dominant individual made the decision alone. Individual dominance has two disadvantages. First, the dominant person does not necessarily have the most valid opinions—and may even have the most unsound ideas. Second, even if that person’s preference leads to a good decision, convening as a group will have been a waste of everyone else’s time.

2. Satisficing is more likely with groups. Most people don’t like meetings and will do what they can to end them. This may include criticizing members who want to keep exploring new and better alternatives. The result is a satisficing rather than an optimizing or maximizing decision.

3. Pressure to avoid disagreement can lead to a phenomenon called groupthink. This occurs when people choose not to disagree or raise objections. Some groups want to think as one, tolerate no dissension, and strive to remain cordial. They can be overconfident, complacent, and perhaps too willing to take risks. Pressure to go along with the group’s preferred solution stifles creativity and other positive behaviors characteristic of vigilant decision making.

4. Goal displacement often occurs in groups. The goal of group members should be to come up with the best possible solution to the problem. But when goal displacement occurs, new goals emerge to replace the original ones. It is common for two or more group members to have different opinions and present their conflicting cases. Attempts at rational persuasion become heated disagreement. Winning the argument

Bottom Line If one person dominates a group discussion, it may feel like you’re speeding up the decision making. But one dominant person reduces decision quality, and most of you will have wasted your time. When you’re meeting with a group, how can you help to make sure everyone is contributing?

Q

groupthink

A phenomenon that occurs in decision making when group members avoid disagreement as they strive for consensus.

goal displacement

A decision-making group loses sight of its original goal and a new, less important goal emerges.

Potential Advantages Potential Disadvantages

Larger pool of information. One person dominates.

More perspectives and approaches. Satisficing.

Intellectual stimulation. Groupthink.

People understand the decision. Goal displacement.

People are committed to the decision. Social loafing.

EXHIBIT 3.7 Pros and Cons of Using Groups to Make Decisions

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becomes the new goal. Saving face and defeating the other person’s idea become more important than solving the problem.

5. When members of a group do not feel their contribution is important, they may engage in social loafing by working less hard when in a group.50 This tendency to not pull one’s own weight while working in groups poses many problems. Social loafing reduces cohesiveness between group members, resulting in lower group performance and higher absenteeism.51 Chapter 14 discusses how managers can address social loafing and other barriers to building effective teams.

Effective managers pay close attention to the group process; they manage it carefully. You have just read about the pros and cons of using a group to make decisions, and you are about to read how to manage the group’s decision-making process. Chapter 12, on leader- ship, helps you decide when to use groups to make decisions.

Heated arguments can arise when team members have differing opinions and are more concerned with winning the dispute than resolving the initial problem.

©Ingram Publishing RF

Managing Group Decision Making

As Exhibit 3.8 illustrates, effectively managing group decision making has three major requirements: (1) an appropriate leadership style, (2) the constructive use of disagreement and conflict, and (3) the enhancement of creativity.

Leadership Style The leader of a decision-making group must attempt to minimize process-related problems. The leader should avoid dominating the discussion or allowing another individual to domi- nate. Less vocal group members should be encouraged to air their opinions and suggestions, and all members should be asked for dissenting viewpoints.

At the same time, the leader should not allow the group to pressure people into conforming. The leader should be alert to the dangers of groupthink and satisficing. Also, she should be attuned to indi- cations that group members are losing sight of the primary objective: to come up with the best possible solution to the problem.

These suggestions have two implications. First, don’t lose sight of the problem and your goals. Second, make a decision! Slow-moving orga- nizations whose group members can’t come to an agreement will be standing still while their competitors move ahead.

Constructive Conflict Total and consistent agreement among group members can be destructive. It can lead to groupthink, uncreative solutions, and a waste of the knowledge and diverse viewpoints that

LO 5

First, don’t lose sight of the problem and your

goals. Second, make a decision! Don’t fall prey

to analysis paralysis.

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88 Part One  Foundations of Management

people bring to a group. Therefore, a certain amount of constructive conflict should exist.52 Pixar, which depends on creativity to make its animated films great, encourages construc- tive conflict with a standard for production meetings: Whenever someone wants to criticize an idea, the critic must attach an idea for improvement. In this way, good ideas can become great, and great ideas can become amazing. The practice is so much a part of Pixar’s cul- ture, it even has a name, “plussing.”53

The most constructive type of conflict is cognitive conflict, or differences in perspectives or judgments about issues. In contrast, affective conflict is emotional and directed at other people. Affective conflict is likely to be destructive to the group because it can lead to anger, bitterness, goal displacement, and lower-quality decisions. Cognitive conflict can air legiti- mate differences of opinion and develop better ideas and problem solutions. Conflict, then, should be task-related rather than personal.54 But even task-related conflict is good only when managed properly.55

Managers can generate constructive conflict through structured processes like devil’s advocacy, in which a group member identifies and states the problems with an idea being considered. The group leader can formally assign people to play this role. Requiring people to point out problems can reduce inhibitions about disagreeing and make the conflict less personal and emotional.

An alternative to devil’s advocacy is the dialectic. The dialectic goes a step beyond devil’s advocacy by requiring a structured debate about two conflicting courses of action.56 The philosophy of the dialectic stems from Plato and Aristotle, who advocated synthesizing the conflicting views of a thesis and an antithesis. Structured debates between plans and counterplans can be useful prior to making a strategic decision. For example, one team might present the case for acquiring a firm while another team advocates not making the acquisition.

Constructive conflict does not need to be generated on such a formal basis, and is not solely the leader’s responsibility. Any team member can introduce cognitive conflict by being honest with opinions, by being unafraid to disagree with others, by pushing the group to action if it is taking too long or making the group slow down if necessary, and by advocat- ing long-term considerations if the group is too focused on short-term results. Introducing

cognitive conflict

Issue-based differences in perspectives or judgments.

affective conflict

Emotional disagreement directed toward other people.

devil’s advocate

A person who has the job of criticizing ideas to ensure that their downsides are fully explored.

dialectic

A structured debate comparing two conflicting courses of action.

EXHIBIT 3.8 Managing Group Decision Making

Leadership

• Avoid domination

• Brainstorm

• Avoid criticizing

• Exhaust ideas

• Combine ideas

• Discuss legitimate differences

• Stay on task

• Be impersonal

• Play devil’s advocate

• Encourage input

• Avoid groupthink and satisficing

• Remember the goals

Creativity

E�ective group decision making

Constructive Conflict

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constructive conflict is a legitimate and necessary responsibility of all group members inter- ested in improving the group’s decision-making effectiveness.

Encouraging Creativity As you’ve already learned, ready-made solutions to a problem can be inadequate or unavail- able. In such cases, custom-made solutions are necessary, so the group must be creative in generating ideas.

Some say that the most fundamental unit of value is ideas. Creativity is more than just an option; it is essential to survival. Allowing people to be creative may be one of the manager’s most important and challenging responsibilities.

You might be saying to yourself, “I’m not creative.” But even if you are not an artist or a musician, you do have potential to be creative in countless other ways. You don’t need to be a genius in school either—Thomas Edison and Albert Einstein were not particularly good students. Nor does something need to change the world to be creative; the little things can always be done in new, creative ways that add value to the product and for the cus- tomer. Exhibit 3.9 describes three ways to be creative along with some ideas of college student entrepreneurs who turned their creativity into businesses.57

How do you become more creative?58 Recognize the almost infinite little opportunities to be creative. Assume you can be creative if you give it a try. Escape from work once in a while. Read widely and try new experiences. Take a course or find a good book about creative thought processes; plenty are available. Exchange ideas and seek and give feed- back.59 And be aware that creativity is social;60 your creativity will be affected by your social relationships at work, including your connections with other people outside your immedi- ate close network.61 Talk to people, often, about the issues and ideas with which you are wrestling.

How do you get creativity out of other people?62 Give creative efforts the credit they are due and don’t punish creative failures. Avoid extreme time pressure if possible.63 Stimulate and challenge people intellectually. Listen to employees’ ideas and allow enough time to explore different ideas. Put together groups of people with different styles of thinking and behaving. Get your people in touch with customers. Experiment with ways to stimulate fresh modes of thinking. Design company IDEO tells clients to install long communal tables or other spaces for employees to gather. Providing mobile chairs and desks encourages employ- ees to get out of their silos to find new people to collaborate with.64 And strive to be creative yourself—you’ll set a good example.

People are likely to be more creative if they believe they are capable, if they know that their co-workers expect creativity, and if they believe that their employer values creativity.65

LO 6

Bottom Line Most creative ideas do not come from the lone genius in the basement laboratory, but from people talking and

working together. Why is listening useful in stimulating

creativity?

EXHIBIT 3.9  Creative Actions

Creation

Synthesis

Modification

• How? Bring a new thing into being.

• Example: Develop a new energy drink from a family recipe.

• How? Join two previously unrelated things.

• Example: Personalize multimedia online assignments to teach Mandarin to college students.

• How? Improve something or give it a new application.

• Example: Refurbish cell phones and sell them on e-Bay.

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90 Part One  Foundations of Management

As a manager, you can do much to help employees develop these beliefs by how you listen, what you allow, and what you reward and punish. At a large consumer products company, management signals that it values cre- ativity by inviting managers to post stories on the compa- ny’s intranet about ideas their employees have suggested and the results of implementing them. The company also awards innovation bonuses linked to how their ideas have benefited the organization.66

Brainstorming A common technique used to elicit creative ideas is brain- storming. In brainstorming, group members generate as many ideas about a problem as they can. As the ideas are presented, they are posted so that everyone can read them, and people can use the ideas as building blocks. The group is encouraged to say anything that comes to mind, with one exception: no criticism of other people or their ideas is allowed.

In the proper brainstorming environment—free of criticism—people are less inhibited and more likely to voice their unusual, creative, or even wild ideas. By the time people have exhausted their ideas, a long list of alter- natives has been generated. Only then does the group turn to the evaluation stage. At that point, many ideas can be considered, modified, or combined into a creative, custom-made solution to the problem.

Brainstorming isn’t necessarily as effective as some people think. Sometimes in a brainstorming session, people are inhibited and anxious, they conform to oth- ers’ ideas, they set low standards, and they engage in noncreative behaviors including cocktail party–type

conversations—complimenting one another, repeating ideas, telling stories—that are nice but don’t promote creativity. Exhibit 3.10 shows how McKinsey creates effective brainstorming sessions.67

Other techniques that help include brainwriting (taking time to write down ideas silently), using trained facilitators, setting high performance goals, brainstorming electroni- cally so that people aren’t competing for air time, and even building a playground with fun elements that can foster creativity.68 The nearby “Multiple Generations at Work” box discusses an Internet-based approach to soliciting ideas and feedback from customers any- where in the world.

brainstorming

A process in which group members generate as many ideas about a problem as they can; criticism is withheld until all ideas have been proposed.

1. Choose participants based on their expertise and knowledge of the challenge.

2. Use well-thought-out questions as a platform to spark new ideas.

3. Break up large groups into subgroups of 3–5 people. 

4. Ask subgroups to think deeply to generate 2–3 solutions for each key question explored.

5. Do not have the full group evaluate the winning ideas, but rather ask subgroups to identify their top 2 or 3 ideas. Describe next steps (e.g., top management team will evaluate ideas).

6. Act quickly on key ideas and provide feedback to all participants.

EXHIBIT 3.10 Improving Brainstorming Effectiveness

Brainstorming is a technique used to generate as many ideas as possible to solve a problem. You have probably engaged in brainstorming sessions for various class or work projects.

©dotshock/123RF RF

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Individuals and groups make decisions constantly throughout every organization. To under- stand decision making in organizations, a manager should consider (1) the constraints decision makers face, (2) organizational decision processes, and (3) decision making dur- ing a crisis.

Constraints on Decision Makers Organizations—or, more accurately, the people who make important decisions—cannot do whatever they wish. Resources are scarce,70 and various constraints—financial, legal, mar- ket, human, and organizational—inhibit certain actions. Capital or product markets may make an expensive new venture impossible. Legal restrictions may constrain the kinds of international business activities in which a firm can participate. Labor unions may defeat a contract proposed by management, and managers and investors may block a takeover attempt. In strategic alliances, the allies should pursue rational decisions collaboratively, not separately.71 Even brilliant ideas must take into account the practical matters of implementation.72

LO 7

Multiple Generations at Work Crowdsourcing: An Inexpensive Source of Creative Ideas

Remember not to stereotype and that individuals differ within as well as between “generations.” But when faced with a difficult work problem to solve, Baby Boomer man- agers are more likely to seek expert opinions, whereas Millennials are more inclined to crowdsource: solicit ideas, opinions, and suggestions from members of large online networks. They may run an online contest to see which fan or customer can create the best tag line, and award them with a modest cash prize or free merchandise. The cost of crowdsourcing is usually much lower than seeking guidance from experts, such as an advertising company.

Anyone from cash-starved entrepreneurial ventures to charities to large companies can use crowdsourcing (and crowdfunding) to help them accomplish a variety of objectives and goals. Here is a sample of how organiza- tions are tapping into the creativity and funding of online crowds:

1. Havenly, an interior design website, uses crowd- sourcing to get feedback on everything from pricing to new products. According to CEO Lee Mayer: “Crowdsourcing is fast, cheap and scruffy.” By send- ing out fun and brief questionnaires to respondents, Mayer keeps down the cost of product development.

2. PepsiCo turned to the crowd for help naming the newest flavor of Frito- Lay potato chips. After launch- ing the “Do Us a Flavor” online contest, PepsiCo received 3.8 million chip flavor ideas. Celebrity chefs and other experts narrowed the list to three finalists. An online fan vote named the winner, Cheesy Garlic.

3.  Chip maker Intel partnered with Zooppa, a company that helps clients collect crowdsourced content, to tap the collective creativity of its 185,000-member online community. Together they ran an online contest to “create a print ad or a video up to 60 seconds long expressing [percep- tions] of the technology firm.”

Inspired by the Millennial generation, crowdsourcing provides a virtually limitless source of creative ideas for solving problems, building brands, and co-creating prod- ucts and services with customers around the world.69

©McGraw-Hill Education/Roberts Publishing Services

Organizational Decision Making

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92 Part One  Foundations of Management

Suppose you have a great idea that will provide a revolutionary service for your bank’s customers. You won’t be able to put your idea into action immediately. You will have to sell it to the people who can give you the go-ahead and to those whose help you will need to carry out the project. You might start by convincing your boss of your idea’s merit. Next, the two of you may have to hash it out with a vice president. Then maybe the president has to be sold. At each stage, you must listen to these individuals’ opinions and suggestions and often incorporate them into your original concept. Ultimately, you will have to derive a proposal acceptable to others.

In addition, you should carefully think through ethical and legal considerations. Decision makers must consider ethics and the preferences of many constituent groups—the realities of life in organizations. You will have plenty of opportunity to think more about ethical issues in Chapter 5.

Organizational Decision Processes Just as with individuals and groups, organizational decision making historically was described with rational models like the one depicted earlier, in Exhibit 3.3. But Nobel laure- ate Herbert Simon challenged the rational model and proposed an important alternative. Due to bounded rationality, decision makers cannot be truly rational because (1) they have imperfect, incomplete information about alternatives and consequences; (2) the problems they face are so complex; (3) human beings simply cannot process all the information to which they are exposed; (4) there is not enough time to process all relevant information fully; and (5) people, including managers within the same firm, have conflicting goals.

When these conditions hold—and they do for most consequential managerial decisions— perfect rationality will give way to more biased, subjective, messier decision processes. For example, the incremental model of decision making occurs when managers make small deci- sions, take little steps, move cautiously, and move in piecemeal fashion toward a bigger solu- tion. The classic example is the budget process, which traditionally begins with the budget from the previous period and makes incremental decisions from that starting point.

The coalition model of decision making arises when people disagree on goals or compete with one another for resources. The decision process becomes political as groups of indi- viduals band together and try collectively to influence the decision. Two or more coalitions form, each representing a different preference, and each tries to use power and negotiations to sway the decision.

Organizational politics, in which people try to influence organizational decisions so that their own interests will be served, can reduce decision-making effectiveness.73 One of the best ways to reduce such politics is to create common goals for members of the team—that is, make the decision-making process a collaborative, rather than a competitive, exercise by establishing a goal around which the group can rally. In one study, top management teams with stated goals such as “build the biggest financial war chest” for an upcoming competitive battle, or “create the computer firm of the decade,” or “build the best damn machine on the market” were less likely to have dysfunctional conflict and politics between members.74 On a personal level, if you find yourself in a conflict, you and your adversary may be focused on the wrong goals. Work to find common ground in the form of an important goal that you both want to achieve.

The garbage can model of decision making occurs when people aren’t sure of their goals, or disagree about the goals, and likewise are unsure of or in disagreement about what to do. This situation occurs because some problems are so complex that they are not well understood, and because decision makers move in and out of the decision process due to having so many other things to attend to as well. This model implies that some decisions are chaotic and almost random. You can see that this is a dramatic departure from rationality in decision making.

Decision Making in a Crisis In crises, managers must make decisions under a great deal of pressure.75 You know some of the most famous recent crises: the explosion of BP’s oil rig in the Gulf of Mexico, hurricane

Bottom Line You may be an innovator if you come up with a creative idea. But you still need to implement it. Assuming you are a frontline manager, what should you do next? With whom should you share this new idea?

bounded rationality

A less-than-perfect form of rationality in which decision makers cannot be perfectly rational because decisions are complex and complete information is unavailable or cannot be fully processed.

incremental model

Model of organizational decision making in which major solutions arise through a series of smaller decisions.

coalition model

Model of organizational decision making in which groups with differing preferences use power and negotiation to influence decisions.

garbage can model

Model of organizational decision making depicting a chaotic process and seemingly random decisions.

LO 8

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devastation along the East Coast and elsewhere, the financial crisis that brought turmoil to the housing and banking industries, and the ongoing political crises that have shaken many governments around the world.

Information technology is a new arena for crises. Businesses, homes, government agencies, hospitals, and other organizations send critical information through the Internet and private networks around the clock, and any technical failure—sometimes accidental, sometimes maliciously intentional—could be magnified by the speed and reach of information technology. One vulnerable area is the electrical grid, which links utilities and carries power to each user. Information technology systems allow utility employees to control the grid remotely. Hackers have gained access to the U.S. electrical grid, enabling them to interfere with the grid’s operations.76 It almost feels routine how often hackers gain unethical, illegal, and dangerous access to data- bases and systems of companies and government agencies.

The response to IT-related crises must involve senior executives in online communica- tion, both to protect the firm’s reputation and to communicate with outside experts, news sources, and key external and internal stakeholders. Managers can use IT to monitor and respond immediately to problems, including scandals, boycotts, rumors, cyberattacks, and other crises.77

Although many companies still don’t concern themselves with crisis management, this is a recipe for compounding disaster; it is imperative for it to be on management’s agenda. As illustrated in Exhibit 3.11, an effective plan for crisis management (CM) should include several elements.78

Ultimately, management should be able to answer the following questions:79

What kinds of crises could your company face? Can your company detect a crisis in its early stages? How will it manage a crisis if one occurs? How can it benefit from a crisis after it has passed?

Superstorm Sandy hit the East Coast with fierce devastation. Managers had to make critical decisions to keep people safe.

©Laura Ballard/123RF RF

Strategic actions such as integrating CM into strategic planning and official policies. 

Evaluation and diagnostic actions such as conducting audits of threats, and establishing tracking systems for early warning signals. 

Technical and structural actions such as creating a CM team and dedicating a budget to CM. 

Communication actions such as providing training for dealing with the media, local communities, and police and government officials. 

Psychological and cultural actions such as providing training and psychological support services regarding the human and emotional impacts of crises. 

EXHIBIT 3.11 Elements in an Effective Crisis Plan

SOURCES: Meyers, G. with Holusha J., When It Hits the Fan: Managing the Nine Crises of Business. Boston: Houghton Mifflin, 1986; Bacharach, S. and Bamberger, P., “9/11 and New York City Firefighters’ Post Hoc Unit Support and Control Climates: A Context Theory of the Consequences of Involvement in Traumatic Work-Related Events,” Academy of Management Journal 50 (2007), pp. 849–68.

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Crises can harm personal and work relationships and long-term performance. But with effective crisis management, old as well as new problems can be resolved, new strategies

and competitive advantages may appear, and posi- tive change can emerge. And if someone steps in and manages the crisis well, a hero is born.

As a leader during a crisis, don’t pretend that noth- ing happened (as did managers at one firm after a visitor died in the hallway despite employees’ efforts

to save him).81 Communicate and reinforce the organization’s values. Try to find ways for people to support one another and remember that others will take cues from your behavior. You should be optimistic but brutally honest. Show emotion, but not fear. “You have to be cooler than cool,” says Gene Krantz of Apollo 13 ground control fame.

But don’t ignore the problems or downplay them and reassure too much; don’t create false hopes. Give people the bad news straight—you’ll gain credibility, and when the good news comes, it will really mean something.

P R

O G

R E

S S

R E

P O

R T

M A

N A

G E

R ’S

B R

IE F

O N

W A

R D

There is little doubt that Uber’s innovative technology dis- rupted the taxi industry in cities around the world. While its ride-hailing service has been a boon to many a late- night partygoer and stranded office worker, the com- pany recently experienced a series of escalating crises that could imperil its future. In addition to allegations of widespread sexism and sexual harassment, Uber faced accusations from current and former employees that for years it has fraudulently applied a data-sharing program to secretly identify and evade enforcement officials in cit- ies where it had been banned or was not yet authorized to operate.

Intended as a means of identifying potentially problem- atic riders to protect its drivers, the program, called VTOS (for violation of terms of service), employs a software tool called Greyball. Together these technologies reportedly have been used to tag would-be riders Uber suspected might be municipal enforcement officers. These officials might in turn be engaging in a sting operation to locate Uber drivers, who could be issued tickets or have their cars impounded. Once identified by Uber, however, offi- cials would be given false information about whether any cars were available to respond to their hail. If any officer were accidentally picked up, Uber would alert the driver to discharge him or her.

Despite some doubts within the company about whether it was legal or ethical, the Greyballing strategy has been used in the United States and about 12 foreign countries. According to Uber, “This program denies ride requests to fraudulent users who are violating our terms of service—whether that’s people aiming to physically harm drivers, competitors looking to disrupt our operations, or opponents who collude with officials on secret ‘stings’ meant to entrap drivers.”

But questions about its legality are now being raised here and in Europe. Said Peter Henning, a law professor at Wayne State University, “With any type of systematic thwarting of the law, you’re flirting with disaster. We all take our foot off the gas when we see the police car at the inter- section up ahead, and there’s nothing wrong with that. But this goes far beyond avoiding a speed trap.” Meanwhile, an official in the Netherlands has asked the EU’s European Commission whether it plans to investigate.80

At this writing, Uber observers are wondering what lies ahead, including for the rest of Silicon Valley regarding sexist culture and sexual harrassment. 

• What ideas from this chapter could improve decision making at Uber? 

• What’s been happening lately? Has there been any evidence of improved decision making?

Management in Action UBER IN CRISIS

And if someone steps in and manages the

crisis well, a hero is born.

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affective conflict, p. 88

bounded rationality, p. 92

brainstorming, p. 90

certainty, p. 75

coalition model, p. 92

cognitive conflict, p. 88

conflict, p. 76

contingency plans, p. 79

custom-made solutions, p. 78

devil’s advocate, p. 88

dialectic, p. 88

discounting the future, p. 83

framing effects, p. 83

garbage can model, p. 92

goal displacement, p. 86

groupthink, p. 86

illusion of control, p. 83

incremental model, p. 92

maximizing, p. 80

nonprogrammed decisions, p. 74

optimizing, p. 80

programmed decisions, p. 74

ready-made solutions, p. 78

risk, p. 75

satisficing, p. 80

uncertainty, p. 75

vigilance, p. 82

KEY TERMS

In Chapter 3, you learned that most managers make less than perfectly rational decisions because they lack the necessary information, time, or structure. The ideal decision-making process includes six steps (see Exhibit 3.3 recreated below). The best decision hinges on the manager’s ability to be vigi- lant at all stages of the decision- making process. Various barriers can diminish the effectiveness of the decision- making process. While there are advantages and disad- vantages of making decisions in groups, a good leader can manage the challenges by using the right leadership style, allowing constructive conflict, encouraging creativity, and brainstorming.

Decision making in organizations is complex and individ- uals are often bounded by multiple constraints. Decisions can be made incrementally, through coalitions, or in a cha- otic garbage can manner. Decision making during organi- zational crises is particularly challenging; managers should anticipate and plan for it.

Describe the kinds of decisions you will face as a manager.

• Most important managerial decisions lack struc- ture and are characterized by uncertainty, risk, and conflict.

• Despite these challenges, managers are expected to make rational decisions in a timely manner.

Summarize the steps in making “rational” decisions.

• The ideal decision-making process involves six phases. The first, identifying and diagnosing the problem (or opportunity), requires recognizing a

LO 1

LO 2

discrepancy between the current state and a desired state and then delving below surface symptoms to identifying underlying causes of the problem.

• The second phase, generating alternative solutions, involves applying ready-made or designing custom- made solutions.

• The third, evaluating alternatives, means predicting the consequences of different alternatives, some- times through building scenarios of the future.

• Fourth, a solution is chosen; the solution might maxi- mize, satisfice, or optimize.

• Fifth, people implement the decision; this phase requires more careful planning than it often receives.

• Finally, managers should evaluate how well the deci- sion is working. This means gathering objective, valid information about the impact the decision is having. If the evidence suggests the problem is not getting solved, either a better decision or a better implemen- tation plan must be developed.

Recognize the pitfalls you should avoid when making decisions.

• Situational and human limitations lead most decision makers to satisfice rather than maximize or optimize.

• Psychological biases, time pressures, and the social realities of organizational life may prevent rational execution of the six phases.

• Vigilance and an understanding of how to manage decision-making groups and organizational con- straints will improve the process and result in better decisions.

LO 3

RETAINING WHAT YOU LEARNED

EXHIBIT 3.3 (revisited)  The Phases of Decision Making

Identify and diagnose the problem

S te

p 1 Generate

alternative solutionsS

te p

2 Evaluate alternatives

S te

p 3 Make the

choice

S te

p 4 Implement

the decisionS

te p

5 Evaluate the decisionS

te p

6

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96 Part One  Foundations of Management

Evaluate the pros and cons of using a group to make decisions.

• Advantages of using groups include more informa- tion, perspectives, and approaches brought to bear on problem solving; intellectual stimulation; greater understanding of the final decision; and higher com- mitment to the decision once it is made.

• Potential dangers or disadvantages of using groups include individual domination of discussions, sat- isficing, groupthink, goal displacement, and social loafing.

Identify procedures to use in leading a decision-making group.

• Effective leaders in decision-making teams avoid dominating the discussion; encourage people’s input; avoid groupthink and satisficing; and stay focused on the group’s goals.

• They encourage constructive conflict via devil’s advocacy and the dialectic, posing opposite sides of an issue or solutions to a problem.

Explain how to encourage creative decisions.

• When creative ideas are needed, leaders should set a good example by being creative themselves. They should recognize the almost infinite little opportuni- ties for creativity and have confidence in their own creative abilities.

LO 4

LO 5

LO 6

• They can inspire creativity in others by providing cre- ative freedom, rewarding creativity, and not punish- ing creative failures.

• Leaders should encourage interaction with custom- ers, stimulate discussion, and protect people from managers who might squelch the creative process.

• Brainstorming is one of the most popular techniques for generating creative ideas.

Discuss the processes by which decisions are made in organizations.

• Decision making in organizations can be a highly complex process. Individuals and groups are con- strained by a variety of factors and constituencies. In practice, decision makers are boundedly rational rather than purely rational.

• Some decisions are made on an incremental basis. Coalitions form to represent different preferences. The process is often chaotic, as depicted in the gar- bage can model.

• Politics can also enter the process, decisions are negotiated, and crises come and go.

Describe how to make decisions in a crisis.

• Crisis conditions make sound, effective decision making more difficult. However, it is possible for cri- ses to be managed well.

• A strategy for crisis management can be developed beforehand, and the mechanisms readied, so that if crises do arise, decision makers are prepared.

LO 7

LO 8

DISCUSSION QUESTIONS 1. Discuss Uber’s success and crises in terms of risk,

uncertainty, and how its managers are handling the company’s challenges. What is the current news on this company?

2. Identify some risky decisions you have made. Why did you take the risks? How did they work out? Looking back, what did you learn?

3. Identify a decision you made that had important unex- pected consequences. Were the consequences good, bad, or both? Should you, and could you, have done anything differently in making the decision?

4. What effects does time pressure have on your decision making? In what ways do you handle it well and not so well?

5. Recall a recent decision that you had difficulty making. Describe it in terms of the characteristics of managerial decisions.

6. What do you think are some advantages and disad- vantages to using computer technologies in decision making?

7. Do you think that when managers make decisions they follow the decision-making steps as presented in this chapter? Which steps are apt to be overlooked or given inadequate attention? What can people do to make sure they do a more thorough job?

8. Discuss the potential advantages and disadvantages of using a group to make decisions. Give examples from your experience.

9. Suppose you are the CEO of a major corporation and one of your company’s oil tanks has ruptured, spilling thousands of gallons of oil into a river that empties into the ocean. What do you need to do to handle the crisis?

10. Identify some problems you want to solve. Brainstorm with others a variety of creative solutions.

EXPERIENTIAL EXERCISES 3.1 DECISION MAKING IN ACTION

OBJECTIVE Learn how to improve your ability to make good decisions.

INSTRUCTIONS Refer again to Exhibit 3.3. Think back to a recent expensive purchase you made. It could have been a bike,

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mobile device, suit for interviews, and so forth. In order to evaluate the quality of your decision, please think

OBJECTIVE To understand the dynamics of group decision making through role-playing a meeting between a president and her employees.

INSTRUCTIONS

1. Identify 5 students to play the roles of the employees. Ask these 5 individuals to read their roles below.

2. Identify 1 student to play the role of the president of the social enterprise (Taylor Johnson). Ask this individual to read his/her role below.

3. Set up a table with 6 chairs at the front of the classroom.

4. Ask the remaining students in the audience to observe how the 6 individuals behave and then answer the dis- cussion questions below.

5. When everyone is ready, Taylor Johnson joins the others at the table in her office, and the scene commences.

6. The meeting continues until there is a successful close unless an argument develops and no progress is made after 10–15 minutes.

DISCUSSION QUESTIONS

1. How did each member frame the problem? What did each member discuss?

2. How effectively did the group generate and evaluate alternatives?

3. What was its final decision?

4. Evaluate the effectiveness of the group’s decision making.

5. How could the group’s effectiveness be enhanced?

Decision Making Worksheet 1. What problem did you hope to solve by making this purchase?

____________________________________________________________________________________________

2. What alternative (or competing) products did you consider? ____________________________________________________________________________________________

3. How did you evaluate the different alternative (or competing) products? Did you identify each product’s strengths and weaknesses? ____________________________________________________________________________________________

4. When you made the final choice, was it a maximizing, satisficing, or optimizing outcome? ____________________________________________________________________________________________

5. After purchasing the product, how frequently did you test it out? ____________________________________________________________________________________________

6. Was your decision to make the purchase a positive or negative one? Did it satisfy your original need(s)?

____________________________________________________________________________________________

3.2 GROUP PROBLEM SOLVING AT A SOCIAL ENTERPRISE

about your purchase when answering each of the questions below.

OVERVIEW The role-play exercise is based on a meeting between a manager of a social enterprise and her 5 employees. Each character’s role is designed to re-create a realistic business meeting. Each character brings to the meeting a unique per- spective on a major problem confronting the social enter- prise as well as some personal views of the other characters developed over several years of knowing them in business and social contexts.

CAST OF CHARACTERS Taylor Johnson, the president, founded the enterprise 10 years ago as a way to connect outstanding teachers who have recently earned their teaching degrees with students in schools located in economically disadvantaged areas. The new teachers agree to serve in the disadvantaged schools for a 3-year period in exchange for a reasonably good salary and forgiveness of up to $30,000 of their stu- dent loans. Taylor is well known for her hard-driving, self- less style of leadership. A charismatic leader, she is highly skilled at bringing diverse stakeholders together. However, Taylor admits that she lacks knowledge related to online classroom and teaching technologies. In the old days, this wouldn’t be an issue. However, Taylor’s competitors are beginning to overtake the social enterprise by offering new teachers training, mobile devices, and online learning tools (e.g., online homework, interactive videos, eBooks, and so forth) to help them create high-performance classrooms. She doesn’t know whether the enterprise should continue doing what it does best (placing new teachers into tradi- tional face-to-face teaching environments) or begin pre- paring its recruits to teach online and hybrid (combining face-to-face with online modules) classes.

Amit Patel, head of information technology, has worked for the enterprise for 6 months. A recent college graduate,

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98 Part One  Foundations of Management

Concluding Case SOARING EAGLE SK ATE COMPANY

Amit reports directly to Taylor. She is on a mission to mod- ernize the way the enterprise does its work. She feels strongly that the enterprise should be shifting more of its IT operations to the cloud. Also, Amit feels that a great deal of insight could be mined from 10 years of data cur- rently stored in antiquated servers at the enterprise. Amit believes she could make these changes without spending a lot of funds. Unfortunately, Amit’s zeal for rapid change has been a cause of concern for Felipe and Taylor who prefer a more methodical approach to change.

Felipe Rodriguez, director of fund-raising, reports directly to Johnson. He has held this position for 8 years and is a very close friend of Taylor’s. Donations and grants for the most recent year are down by 10 percent. Prior to joining the enterprise, he worked as a fund-raiser for a major university in the region. The university offered a wide variety of online and hybrid courses. Felipe would often refer to these innovations when seeking donations from alumni. He was widely viewed as successful at his work.

Mike Clarke, manager in charge of recruiting new teachers, works for Felipe. After working for the enterprise as an entry-level recruiter for two years, Mike was recently promoted to this position. Though a persuasive recruiter of new teachers, he has noticed a recent decline in the

number of recruits willing to teach in traditional face-to- face learning environments. He is progressive in his think- ing and believes that the enterprise needs to change how it does business in order to keep up with the competitors. Mike and Amit feel they are agents of change and want to modernize the enterprise.

TODAY’S MEETING Taylor has called the meeting with these three managers to decide whether the social enterprise should begin pre- paring its new recruits to teach not only traditional face- to-face classes, but also hybrid and online classes. This decision has to be made within 15 minutes because the enterprise’s largest client just called and asked to meet with Taylor immediately. Taylor is concerned that the school may be on the verge of discontinuing the con- tract with the enterprise. If that’s the case, Taylor wants the managers to help her decide on a counteroffer to win back the client school. Losing this client school is not an option given that it makes up 40 percent of the enter- prise’s revenue.

SOURCE: Adapted from  Gordon, Judith R., A Diagnostic Approach to Organizational Behavior (Upper Saddle River, NJ: Pearson Education, Inc., 1983).

As a child, Stan Eagle just knew he loved riding his skate- board and doing tricks. By the time he was a teenager, he was so proficient at the sport that he began entering pro- fessional contests and taking home prize money. By his twenties, Eagle was so successful and popular that he could make skateboarding his career. A skateboard maker spon- sored him in competitions and demonstrations around the world.

The sponsorship and prize money paid enough to support him for several years. But then interest in the sport waned, and Eagle knew he would have to take his business in new directions. He believed skateboarding would return to popularity, so he decided to launch into designing, building, and selling skateboards under his own brand. To finance Soaring Eagle Skate Company, he pooled his own personal savings with money from a friend, Pete Williams, and came up with $75,000. Sure enough, new young skaters began snapping up the skate- boards, attracted in part by the products’ association with a star.

As the company prospered, Eagle considered ideas for expansion. Another friend had designed a line of clothing he thought would appeal to Eagle’s skateboarding fans, and Eagle’s name on the product would lend it credibility. At the friend’s urging, Eagle branched out into clothing for skateboarders. However, he discovered that the busi- ness of shorts and shirts is far different from the business

of sports equipment. The price markups were tiny, and the sales channels were entirely different. Three years into the expansion, Soaring Eagle had invested millions of dollars in the line but was still losing money. Eagle decided to sell off that part of the business to a clothing company and cut his losses.

Soon after that experiment, cofounder Williams pro- posed another idea: They should begin selling other types of sports equipment—inline roller skates and ice skates. Selling equipment for more kinds of sports would produce more growth than the company could obtain by focusing on just one sport. Eagle was doubtful. He was consid- ered one of the most knowledgeable people in the world about skateboarding. He knew nothing about inline skat- ing and ice skating. Eagle argued that the company would be better off focusing on the sport in which it offered the most expertise. Surely there were ways to seek growth within that sport—or at least to avoid the losses that came from investing in industries in which the company lacked experience.

Williams continued to press Eagle to try his idea. He pointed out that unless the company took some risks and expanded into new areas, there was little hope that Williams and Eagle could continue to earn much of a return on the money they had invested. Eagle was troubled. The attempt at clothing delivered, he thought, a message that they needed to be careful about expansion. But he

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Managerial Decision Making  Chapter 3 99

seemed unable to persuade Williams to accept his point of view. He could go along with Williams and take the chance of losing money again, or he could use money he had earned from his business to buy Williams’s ownership share in the company and then continue running Soaring Eagle on his own.

DISCUSSION QUESTIONS

1. How do the characteristics of management decisions— uncertainty, risk, conflict, and lack of structure—affect the decision facing Stan Eagle?

2. What steps can Eagle take to increase the likelihood of making the best decision in this situation?

PART ONE SUPPORTING CASE

Zappos Eliminates All Managers and Titles Recently, Zappos’ CEO Tony Hsieh surprised many observ- ers in the business world by announcing to his 1,500 or so employees that the e-retailer famous for its shoes was doing away with job titles, managers, and other artifacts associated with traditional top-down management and replacing it with a system where employees are expected to act like mini entrepreneurs. This new approach or holacracy encourages employees to self-manage and self-organize, thus eliminating the need for bosses. One of the manage- ment system’s overarching goals is to “create a dynamic workforce where everyone has a voice and bureaucracy doesn’t stifle innovation.”

How does a holacracy function? Based on the work of Brian Robertson, who developed the idea while running his start-up, Ternary Software, a holacracy organizes employ- ees into circles of responsibility—similar to functional areas like marketing and customer service, and employee special interest areas like career development and so forth. Though democratic and self-governing, the circles do not operate in a vacuum as they are arranged in a hierarchy (circles report to higher-level circles) and follow detailed procedures for running meetings and making decisions. Employees are free to choose which circles to which they want to belong and on what projects they would like to work. The circles are responsible for achieving a specific set of responsibili- ties. At meetings, employees are encouraged to address and resolve in a proactive manner “tensions” or problems related to internal (e.g., unfair workloads) or external (e.g., a way to enhance the customer experience) issues. Rather than reporting to a manager with the power to hire or fire, as is the case in hierarchically organized companies, a “lead link” helps employees accomplish the circle’s responsibili- ties and communicates between circles.

Zappos is not the first company in history to experi- ment with employee self-management. For example, Gore & Associates (maker of Gore-Tex) has no formal chain of command and provides its associates with freedom to self- select work projects and choose associates with relevant expertise to assist in the development of those projects. Semco Partners, a Brazilian industrial machinery manufac- turer, engages its 3,000-plus employees through partici- pative management, where employees set their own work hours and pay levels, hire and review their supervisors, and

decide which new businesses in which to enter. Johnsonville Sausage Company eliminated its hierarchy and introduced “self-managed, self-organizing teams throughout the com- pany.” Ralph Styer, the CEO who championed this radical change, believed that “helping human beings fulfill their potential is of course a moral responsibility, but it’s also good business practice.” He believed in the connection between employee happiness and organizational perfor- mance: “Learning, striving people are happy people and good workers.”

Are the employees at Zappos happy about their expanded responsibilities and freedom to self-govern? How are the managers accepting this change? It’s mixed. In a recent e-mail to all staff at the company, Hsieh said that everyone had a choice to make: either embrace the new holacratic system or accept a three-month severance pack- age and resign. Two hundred and ten (or 14 percent) of the staff resigned. Of those who left the company, 20 (or 7 per- cent) were managers. Does that mean that the 86 percent of staff who decided to stay did so because they believe in the new holacratic approach? Time will tell. One may specu- late that the individuals who chose to remain at Zappos did so because they are either “believers” or lack the interest or motivation to switch jobs at the moment.

Some of the employees who are staying have shared concerns about the new management approach like using the complicated new lingo, adjusting to the rapidly chang- ing work roles and expectations, and the “ever-expanding number of circles and the endless meetings” that take employees away from achieving their work goals. On the upside, holacracy promotes employees’ ownership and encourages even the lowest-paid employees to add items to meeting agendas that are subsequently discussed and acted upon.

What will become of the 267 ex-managers at Zappos? Though no one knows for sure, the company has created a new circle titled “Reinventing Yourself” to help these indi- viduals find “new roles that might be a good match for their passions, skills, and experience.” John Bunch, the employee who is helping Zappos transition to a holacracy, suggests, “most managers will be able to grow into new areas of technical work to replace the time they were doing people management.”

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100 Part One  Foundations of Management

There may be an irony in the way that Zappos shifted from a hierarchical management structure to one that is based on democratic, self-organizing circles. The mandate for this change came from Tony Hsieh, the CEO. Those employees and managers who did not agree with the “top- down” change were asked to leave the company. This irony suggests that even for visionary business leaders like Hsieh, radical change may not be easy to accomplish in a consensus-driven manner.

As Zappos and its employees continue to adapt to the new holacratic system of management, Bunch has admitted the company will need to refine salary processes as well as the decision process for assigning projects throughout the company. He is patient and is taking the long view: “We believe that, over time, the ability for people to be empow- ered and entrepreneurial will make people happy.”

DISCUSSION QUESTION

1. To what degree do you think that Zappos’ new hola- cratic approach to organizing will enhance its competi- tive advantage in innovation, quality, service, speed, and cost competitiveness? Explain.

SOURCES: Adapted from Noguchi, Y., “Zappos: A Workplace Where No One and Everyone Is the Boss,” NPR, July 21, 2015, http://www.npr.org; Gelles, D., “At Zappos, Pushing Shoes and a Vision,” The New York Times, July 17, 2015, http://www.nytimes.com; Feloni, R., “7% of Zappos’ Managers Quit After Recent CEO Ultimatum to Embrace Self-Management or Leave,” Business Insider, June 9, 2015, http://www.buisnessinsider.com; Silverman, R., “At Zappos, Banishing Bosses Brings Confusion,” The Wall Street Journal, May 20, 2015, http://www.wsj.com; Petriglieri, G., “Making Sense of Zappos’ War on Manager,” Harvard Business Review, May 19, 2015, http://www.hbr. org; Denning, S., “Zappos Says Goodbye to Bosses,” Forbes, January 15, 2015, http://www.forbes.com; Fisher, L., “Ricardo Semler Won’t Take Control,” Strategy + Business, November 29, 2005, http://www.strategy-business.com.

Employee Raiding Litson Cotton Yarn Manufacturing Company, located in Murray, New Jersey, decided as a result of increasing labor costs to relocate its plant in Fairlee, a southern commu- nity of 4,200. Plant construction was started, and a human resources office was opened in the state employment office, located in Fairlee.

Because of ineffective HR practices in the other three textile mills located within a 50-mile radius of Fairlee, Litson was receiving applications from some of the most highly skilled and trained textile operators in the state. After receiv- ing applications from approximately 500 people, employ- ment was offered to 260 male and female applicants. These employees would be placed immediately on the payroll with instructions to await final installation of machinery, which was expected within the following six weeks.

The managers of the three other textile companies, faced with resignations from their most efficient and best- trained employees, approached the Litson managers with the complaint that their labor force was being “raided.” They registered a strong protest to cease such practices and demanded an immediate cancellation of the employment of the 260 people hired by Litson.

Litson managers discussed the ethical and moral consid- erations involved in offering employment to the 260 peo- ple. Litson clearly faced a tight labor market in Fairlee, and management thought that if the 260 employees were dis- charged, the company would face cancellation of its plans and large construction losses. Litson management also felt obligated to the 260 employees who had resigned from their previous employment in favor of Litson.

The dilemma was compounded when the manager of one community plant reminded Litson that his plant was part of a nationwide chain supplied with cotton yarn from Litson. He implied that Litson’s attempts to continue opera- tions in Fairlee could result in cancellation of orders and the possible loss of approximately 18 percent market share. It was also suggested to Litson managers that actions taken

by the nationwide textile chain could result in cancellation of orders from other textile companies. Litson’s president held an urgent meeting of his top subordinates to (1) decide what to do about the situation in Fairlee, (2) formulate a writ- ten policy statement indicating Litson’s position regarding employee raiding, and (3) develop a plan for implementing the policy.

How would you prepare for the meeting, and what would you say at the meeting?

SOURCE: Champion, J. and James, J., Critical Incidents in Management: Decision and Policy Issues, 6th ed. New York: McGraw-Hill/Irwin, 1989. Copyright © 1989 The McGraw-Hill Companies.

CASE INCIDENTS

Effective Management Dr. Sam Perkins, a graduate of the Harvard University College of Medicine, had a private practice in internal medi- cine for 12 years. Fourteen months ago, he was persuaded by the Massachusetts governor to give up private practice to be director of the State Division of Human Services.

After one year as director, Perkins recognized he had made little progress in reducing the considerable ineffi- ciency in the division. Employee morale and effectiveness seemed even lower than when he had assumed the posi- tion. He realized his past training and experiences were of a clinical nature with little exposure to effective management techniques. Perkins decided to research literature on the subject of management available to him at a local university.

Perkins soon realized that management scholars are divided on the question of what constitutes effective man- agement. Some believe people are born with certain identi- fiable personality traits that make them effective managers. Others believe a manager can learn to be effective by treat- ing subordinates with a personal and considerate approach and by giving particular attention to their need for favorable working conditions. Still others emphasize the importance of developing a management style characterized by an authoritarian, democratic, or laissez-faire approach. Perkins

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Managerial Decision Making  Chapter 3 101

was further confused when he learned that a growing num- ber of scholars advocate that effective management is con- tingent on the situation.

Because a state university was located nearby, Perkins contacted the dean of its college of business administra- tion. The dean referred him to the director of the college’s management center, Professor Joel McCann. Discussions between Perkins and McCann resulted in a tentative agree- ment that the management center would organize a series of management training sessions for the State Division of Human Services. Before agreeing on the price tag for the management conference, Perkins asked McCann to prepare a proposal reflecting his thoughts on the following questions:

1. How will the question of what constitutes effective management be answered during the conference?

2. What will be the specific subject content of the conference?

3. Who will the instructors be? 4. What will be the conference’s duration? 5. How can the conference’s effectiveness be

evaluated? 6. What policies should the State Division of Human

Services adopt regarding who the conference participants should be and how they should be selected? How can these policies be implemented best?

SOURCE:  Champion, J. and James, J., Critical Incidents in Management: Decision and Policy Issues, 6th ed. New York: McGraw-Hill/Irwin, 1989. Copyright © 1989 The McGraw-Hill Companies.

Design elements: Lightbulb icon that indicates innovation: ©McGraw-Hill Education; Money icon that indicates cost: ©McGraw-Hill Education; Recycle icon that indicate sustainability: ©McGraw-Hill Education; Human head with headset that indicate service: ©McGraw-Hill Education; Letter Q icon that indicates quality: ©McGraw-Hill Education; Sand dial that indicates speed: ©McGraw-Hill Education

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An Overview of Planning Fundamentals The Basic Planning Process

Levels of Planning Strategic Planning Tactical and Operational Planning Aligning Tactical, Operational, and Strategic Planning

Strategic Planning Step 1: Establishing Mission, Vision, and Goals Step 2: Analyzing External Opportunities and Threats Step 3: Analyzing Internal Strengths and Weaknesses Step 4: SWOT Analysis and Strategy Formulation Step 5: Strategy Implementation Step 6: Strategic Control

PART TWO PLANNING: DELIVERING STRATEGIC VALUE

After studying Chapter 4, you will be able to:

Summarize the basic steps in any planning process.

Describe how to integrate strategic planning with tactical and operational planning.

Identify elements of the external environment and internal resources of the firm to analyze before formulating a strategy.

Define core capabilities and explain how they provide the foundation for business strategy.

Summarize the types of choices available for corporate strategy.

Discuss how companies can achieve competitive advantage through business strategy.

Describe the keys to effective strategy implementation.

LO 1

LO 2

LO 3

LO 4

LO 5

LO 6

LO 7

CHAPTER 4

Planning and Strategic Management

Manage your destiny, or someone else will.

—JACK WELCH, FORMER CEO, GENERAL ELECTRIC

CHAPTER OUTLINELEARNING OBJECTIVES

©Robert Churchill/Getty Images RF

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The record-breaking opening weekend for Disney’s live- action/digital Beauty and the Beast put the movie, star- ring Emma Watson, on track for becoming the company’s latest box-office success, to the tune of an anticipated $1 billion in ticket sales worldwide. Though this “tale as old as time” has no sequels to count on, Disney planned to repeat the formula of remaking its beloved animated classics in the coming years, with digitally enhanced live- action versions of hits including Dumbo, The Lion King, Aladdin, Mulan, and Pinocchio all in progress.

The company has honed to perfection its ability to appeal to “children from 6 to 60,” as founder Walt Disney described his intended audience. Another of Walt Disney’s successful strategies, according to Sean Bailey, president of Walt Disney Studios motion picture production, was to take “beautiful, timeless stories he knew had lasting relevance, and he then sort of applied the sensibilities of his times.” The company has contin- ued this strategy, even if it has occasionally meant cre- ating a minor dust-up in overseas markets. Because the company refused to delete a few seconds of Beauty and the Beast in which a character is revealed to be gay, Russia limited viewers to those 16 and over, and the Malaysian government would not allow the film to be shown at all. The effect of these lost viewers was expected to be minimal for the $56 billion company, one of the largest in the entertainment industry. Walt Disney is not merely huge in terms of sales volume; it has four business divisions, engaged in nearly every kind of commercial entertainment.

It all began with Walt Disney Studios, which today produces movies, music, and stage shows under the banners of Disney, Pixar, Marvel Studios, Lucasfilm,

Touchstone Pictures, and Hollywood Records. The Media Networks group covers publishing, radio, and broadcast and cable television, including Disney/ABC Television and ESPN. The Parks and Resorts group encompasses 11 theme parks and 44 resorts around the world as well as a cruise line. Disney’s Consumer Products and Interactive Media division offers enter- tainment on digital platforms, including console games and the Internet, and extends the business value of characters and story lines by operating Disney Stores and licensing its creations for use on toys, clothing, art objects, and a wide variety of other consumer goods.

The man in charge of keeping the magic alive through activities carried out by more than 195,000 employees is Disney’s chief executive officer, Robert Iger. Iger and his executive team must define an over- all direction and goal for the company and keep an eye on how well each business group is contributing

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Management in Action HOW WALT DISNEY COMPANY SCRIPTS ITS OWN SUCCESS

As you read this chapter, think about the challenge of drawing new revenue from

remakes of old properties. What environmental factors would you be tracking to

help determine whether this strategy will be financially successful?

©Bertrand Guay/AFP/Getty Images

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Another coup for Iger was the purchase of ESPN, the most valuable cable channel in terms of revenues. Iger meets weekly with the heads of the business units. Although he keeps an eye on the company’s overall direc- tion, he gives each unit’s head wide latitude. As the Walt Disney Studios division embarks on a years-long effort to revitalize some of its classic animated features, Iger and the company’s management team will be watching closely to see whether this strategy is as effective abroad as it may be at home, or whether new environmental analyses suggest other avenues for the film company to explore.1

to achievement of that goal. Iger does this by spotting opportunities for growth in the industry—hence the expansion into cable television and, more recently, into interactive entertainment and the revitalization of past movie hits. He also looks for characters and brands Disney can make more valuable because of its access to more channels. For example, Disney could afford to pay generously for Pixar and Marvel because those companies’ characters generate sales in products as diverse as theme parks, video games, and sweatshirts.

An Overview of Planning Fundamentals

To imagine Disney—or any organization—navigating into the future without a plan is almost impossible. Planning describes what managers decide to do and how they intend to do it. It provides the framework, focus, and direction for meaningful action. This chapter examines the most important concepts and processes involved in planning and strategic management. By learning these concepts and reviewing the steps outlined, you will be on your way to understanding current approaches to strategic management in today’s organizations.

Although management pioneers such as Alfred Sloan of General Motors instituted formal planning processes, planning became a widespread management function only during the past few decades. Initially, larger organizations adopted formal planning, but now even small firms operated by aggressive, opportunistic entrepreneurs engage in formal planning.2

As discussed in Chapter 1, planning is the conscious, systematic process of deciding what goals and activities a person, group, work unit, or organization will pursue in the future. Planning is not an informal or haphazard response to a crisis; it is a purposeful effort that is directed and controlled by managers and often draws on the knowledge and experi- ence of employees throughout the organization. Planning provides individuals and work units with a clear map to follow in their future activities; at the same time, this map should be flexible enough to allow for individual circumstances and changing conditions.

The Basic Planning Process Because planning is a decision process—you’re deciding what to do and how to go about doing it—the important steps followed during formal planning are similar to the basic decision-making steps we discussed in Chapter 3. Exhibit 4.1 summarizes the similarities between decision making and planning—including the fact that both move not just in one direction but in a cycle. The outcomes of decisions and plans are evaluated, and if neces- sary, they are revised.

We now describe the basic planning process in more detail. Later in this chapter, we will discuss how managerial decisions and plans fit into the larger purposes of the organization— its strategy, mission, vision, and goals.

Step 1: Situational Analysis Planning begins with a situational analysis. Within their time and resource constraints, planners should gather, interpret, and summarize all informa- tion relevant to the planning issue in question. A thorough situational analysis studies past events, examines current conditions, and attempts to forecast future trends. It focuses on the internal forces at work in the organization or work unit and, consistent with the open-systems approach (see Chapter 2), examines influences from the external environment. The outcomes of this step are the identification and diagnosis of planning assumptions, issues, and problems.

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situational analysis

A process planners use to gather, interpret, and summarize all information relevant to the planning issue under consideration.

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EXHIBIT 4.1 Decision-Making Stages (Chapter 3) and Formal Planning Steps (Chapter 4)

General decision-making stages

Specific formal planning steps

Identifying and diagnosing the problem

Generating alternative solutions

Evaluating alternatives

Making the choice

Implementing

Evaluation

Situational analysis

Alternative goals and plans

Goal and plan evaluation

Goal and plan selection

Implementation

Monitor and control

A thorough situational analysis will help you make important planning decisions. For example, if you are a manager in a magazine company considering the launch of a sports publication for the teen market, you should analyze the number of teens who subscribe to magazines, the appeal of the teen market to advertisers, your firm’s ability to serve this market effectively, current economic conditions, the level of teen interest in sports, and any sports magazines already serving this market and their current sales. Such a detailed analy- sis will help you decide whether to proceed with the next step in your magazine launch.

Step 2: Alternative Goals and Plans Based on the situational analysis, the plan- ning process should generate alternative goals that could be pursued and the alternative plans that could be used to achieve those goals. This step should stress creativity and encourage managers and employees to think broadly about their work.

Once a range of alternatives has been developed, the merits of these different plans and goals will be evaluated. Continuing with our magazine publishing example, the alternatives you might want to consider include whether the magazine should be targeted at young men, young women, or both, and whether it should be sold mainly online, through subscriptions, or on newsstands.

Goals are the targets or ends the manager wants to reach. Plans are the actions or means the manager intends to use to achieve goals. At a minimum, plans should outline alterna- tive actions for attaining each goal, the resources required to reach the goal through those means, and the obstacles that may develop.

After General Motors declared bankruptcy and borrowed billions from the U.S. govern- ment in 2009, management made plans for a return to profitability. The plans included reducing costs by producing fewer trucks, eliminating several brands, introducing smaller vehicles, keeping fewer vehicles in inventory, and closing hundreds of dealerships. GM also

goal

A target or end that management desires to reach.

plans

The actions or means managers intend to use to achieve organizational goals.

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introduced cars it hoped would be more popular, including the Cruze compact and the Sonic subcompact. Despite difficulties such as meeting demand with a reduced workforce and the lower profitability of smaller vehicles, the company moved back into the black a year after the bankruptcy, and in two years it reported its strongest financial performance in over a decade.3

Contingency plans are “what if” plans. They include actions to be taken if initial plans do not work well or if events demand a sudden change.

Recent disasters have reminded many businesses how important contingency planning can be. Walmart in the United States has several crisis plans in place to keep stores open and stocked with food, water, pharmaceutical supplies, and so forth in the aftermath of natural disasters.4

Most major corporations have contingency plans in place to respond to major disasters— to make sure vital data are backed up and can be recovered, for instance, and that employ- ees know what to do when a crisis occurs. But contingency plans are important for more common situations as well. For example, many businesses are affected by snowstorms, increases in gasoline prices, computer breakdowns, competitors’ moves, changes in con- sumer tastes.

Step 3: Goal and Plan Evaluation Next, managers will evaluate the advantages, disadvantages, and potential effects of each goal and plan. They must prioritize their goals and eliminate some of them. Also, managers will consider carefully the implications of alter- native plans for meeting high-priority goals.

In particular, they will pay a great deal of attention to the cost of any initiative and the investment return that is likely to result. In our magazine publishing example, your evalu- ation might determine that newsstand sales alone wouldn’t be profitable enough to justify the launch. Perhaps you could improve profits with an online edition supplemented by pod- casts and promoted via social media. To decide, you would estimate the costs and expected returns of such alternatives, trying to follow the decision steps advised in Chapter 3.

Step 4: Goal and Plan Selection Once managers have assessed goals and plans, they try to select the best. The evaluation process helps to identify trade-offs and decide what to do. For example, if your plan is to launch a number of new online publications, and you’re try- ing to choose among them, you might weigh the different up-front investment each requires, the size of each market, which one fits best with your existing product line or company image, and so on. Experienced judgment always plays an important role in this process. However, as you will discover later in the chapter, relying on this alone may not be the best way to proceed.

Typically, the planning process leads to a written set of goals and plans that are appropriate and feasible for a par- ticular set of circumstances. In some organizations, the alternative genera- tion, evaluation, and selection steps generate planning scenarios, as dis- cussed in Chapter 2. A different contin- gency plan is attached to each scenario. The manager pursues the goals and implements the plans associated with the most likely scenario. However, the manager will also be prepared to switch to another set of plans if the situation changes and another scenario becomes relevant. This approach helps the firm anticipate and manage prob- lems and allows greater flexibility and responsiveness.

scenario

A narrative that describes a particular set of future conditions.

Bottom Line Contingency plans that keep service levels high during a major storm can seal a utility company’s reputation for caring about customers. Managers must decide how crucial service is to their strategy—and how willing customers will be to forgive them for service lapses under pressure. During a major storm, what utility services—potable water, wastewater, or electricity—do you expect to receive with minimal interruption? Would you pay more to make these services more reliable?

Panera Bread officially opened the fifth “Panera Cares Community Cafe” in Boston.

© ZUMA Press, Inc./Alamy Stock Photo

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Step 5: Implementation Once managers have selected the goals and plans, they must implement the plans designed to achieve the goals. Even the best plans are useless if they are not implemented properly. Managers and employees must understand the plan, have the resources to implement it, and be motivated to do so. As we mentioned earlier, employees usually are better informed, more committed, and more highly motivated when a goal or plan is one they helped develop.

Successful implementation requires a plan to be linked to other systems in the organization, particu- larly the budget and reward systems. If the manager does not have a budget with financial resources to execute the plan, the plan is probably doomed. Similarly, goal achievement must be linked to the organization’s reward system. Many orga- nizations use incentive programs to encourage employees to achieve goals and to implement plans properly. Commissions, salaries, promotions, bonuses, and other rewards are based on successful performance.

Even the best strategy won’t be effective

without a strong focus on implementation.

Social Enterprise Novo Nordisk Monitors Progress with Its Triple Bottom Line

While some companies simply talk about operating in a more socially and environmentally conscious manner, others like Novo Nordisk put this philosophy into action. Headquartered in Denmark, Novo Nordisk is a leading global provider of diabetes care solutions. The firm fol- lows a Triple Bottom Line (TBL: economic, societal, and environmental) strategy, meaning decisions are based on the belief that “a healthy economy, environment, and soci- ety are fundamental to long-term business success.” Novo Nordisk’s goal is to operate its business so that diabetes solu- tions benefit both the business and patients, while meeting societal expectations in the process. To ensure that the TBL philosophy would stick, Novo Nordisk took the uncommon step of incorporating it into its company bylaws.5

In addition to standard financial performance mea- sures, Novo Nordisk monitors multiple short- and long- term goals within the social and environmental areas. The 2014 Integrated Annual Report Emphasizing Long-Term

Thinking highlights the company’s social and environ- mental performance:6

Novo Nordisk is breaking with traditional profit-only business models by setting and monitoring meaningful social and environmental goals. The TBL model seems to be working. With the diabetes drug market expected to reach $58 billion by 2018, the company is positioned to perform well financially while making a significant, mul- tilevel impact.7

Questions

• According to Novo Nordisk, only four companies have incorporated Triple Bottom Line goals into their bylaws. Why do you think so few companies take this step?

• Assume you want your employer to consider adopt- ing a Triple Bottom Line philosophy. How would you pitch the idea? With whom would you speak?

Social impact

Environmental impact

• Continued to reduce CO2 emissions from energy consumption for production (45 percent reduction since 2004). • Decreased energy consumption by 1 percent over previous year.

• Diabetes care products reached 24.4 million people with the disease. • Over 3,000 new jobs were added in the company.

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Levels of Planning

Lyft, the ride-sharing company, recently entered into a long-term strategic alliance with General Motors to build an “integrated network of on-demand autonomous vehicles in the U.S.”8 As part of the deal, GM bought a $500 million stake in Lyft, currently the second- largest ride-sharing service in the United States. The initial autonomous fleet will likely be comprised of the Chevrolet Bolt electric vehicle.9

The ultimate success of this alliance will hinge on the plan’s successful implementa- tion. According to GM executive Mike Ableson, success will require “the ability to engineer autonomous systems, to build self-driving vehicles in volume and to deploy them in a ride sharing fleet.”10

Step 6: Monitor and Control The sixth step in the formal planning process— monitoring and controlling—is essential. Without it, you will never know whether your plan is succeeding. Remember, planning works in a cycle; it is an ongoing, repetitive process. Managers must continually monitor the actual performance of their work units against the units’ goals and plans. They also need to develop control systems to measure that perfor- mance and allow them to take corrective action when needed.

The nearby “Social Enterprise” box discusses how Novo Nordisk monitors progress toward achieving important organizational goals. We will discuss the important issue of control systems later in this chapter and in Chapter 16.

Bottom Line Linking plans to a firm’s financials is a key element of success. How might a plan to improve employees’ job satisfaction be tied to a company’s financial measures?

In Chapter 1, you learned about the three major types of managers: top-level (strategic managers), middle-level (tactical managers), and frontline (operational managers). Because planning is an important management function, managers at all three levels use it. However, the scope and activities of the planning process often differ at different levels.

Strategic Planning Strategic planning involves making decisions about the organization’s long-term goals and strategies. Strategic plans have a strong external orientation and cover major portions of the organization. Senior executives are responsible for the development and execution of the strategic plan, although they usually do not implement the entire plan personally.

Strategic goals are major targets or results that relate to the long-term survival, value, and growth of the organization. Strategic managers—top-level managers—usually establish goals that reflect both effectiveness (providing appropriate outputs) and efficiency (a high ratio of outputs to inputs). Typical strategic goals include achieving growth, increasing market share, improving profitability, boosting return on investment, fostering both quantity and quality of outputs, increasing productivity, improving customer service, and contributing to society.

Organizations usually have a number of mutually reinforcing strategic goals. For exam- ple, a computer manufacturer may have as its strategic goals the launch of a specified num- ber of new products in a particular time frame, of higher quality, with a targeted increase in market share. Each of these goals supports and contributes to the others.

A strategy is a pattern of actions and resource allocations designed to achieve the goals of the organization. As Exhibit 4.2 illustrates, an effective strategy provides a basis for answering five broad questions about how the organization will meet its objectives.11 Former Procter & Gamble CEO A. G. Lafley and consultant Roger Martin emphasize that the answers to the “where” and “how” questions should be aimed at winning (question 3), which requires offering a better “value proposition” than the competition. Merely matching the competition, they say, is neither strategic nor a path to success.

For example, P&G gave new life to its Oil of Olay skin care brand by addressing the concerns of middle-aged women and by improving the active ingredients in its product. In addition, P&G used its strength in selling to mass-market retailers to persuade them to set up attractive displays for Oil of Olay. With the value proposition of an affordable, attractive,

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A set of procedures for making decisions about the organization’s long-term goals and strategies; see also planning.

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

strategy

A pattern of actions and resource allocations designed to achieve the organization’s goals.

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widely available product serving a previously ignored market segment, P&G could meet its strategic goal of leadership in the skin care market.12

In setting a strategy, managers try to match the organization’s skills and resources to the opportunities in the external environment. Every organization has certain strengths and weaknesses; strategies should capitalize and help build on strengths that satisfy consumers and other key factors in the organization’s external environment. Organizations also can implement strategies that change or influence the external environment, as discussed in Chapter 2.

Tactical and Operational Planning Once the organization’s strategic goals and plans are identified, they serve as the foundation for planning done by middle-level and frontline managers. As you can see in Exhibit 4.3, goals and plans become more specific and involve shorter periods of time as they move from the strategic level to the tactical level and then to the operational level. A strategic plan will typically have a time horizon of from three to seven years—but sometimes even decades, as with the successful plan to land a probe on Titan, Saturn’s moon. Tactical plans may have a time horizon of a year or two, and operational plans may cover a period of months.

Tactical planning translates broad strategic goals and plans into specific goals and plans that are relevant to a particular unit in the organization—often a functional area like market- ing or human resources. Tactical plans focus on the major actions a unit must take to fulfill its part of the strategic plan. For example, if the strategy calls for the rollout of a new prod- uct line, the tactical plan for the manufacturing unit might involve the design, testing, and installation of the equipment needed to produce the new line.

Operational planning identifies the specific procedures and processes required at lower levels of the organization. Frontline managers usually focus on routine tasks such as pro- duction runs, delivery schedules, and the human resources requirements described in later chapters.

The planning model we have been describing is a hierarchical one, with top-level strate- gies flowing down through the levels of the organization into more specific goals and plans and ever-shorter time frames. But the planning sequence is not as rigid as it sounds so far. As we will see later, managers at all levels may be involved in developing and contributing to the strategic plan.

Furthermore, lower-level managers may be making decisions that shape strategy, whether or not top executives realize it. The fast-casual food chain, Chipotle Mexican Grill, has experienced significant growth since its founding in Denver in 1993.13 In 2016, however,

tactical planning

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

operational planning

The process of identifying the specific procedures and processes required at lower levels of the organization.

1. Where will we be active?

2. How will we get there (e.g., by increasing sales or acquiring another company)?

3. How will we win in the market (e.g., by keeping prices low or offering the best service)?

4. How fast will we move and in what sequence will we make changes?

5. How will we obtain financial returns (low costs or premium prices)?

EXHIBIT 4.2 Effective Strategies Answer Five Questions

Managerial Level Level of Detail Time Horizon

Strategic Top Low Long (3–7 years)

Tactical Middle Medium Medium (1–2 years)

Operational Frontline High Short (<1 year)

EXHIBIT 4.3 Hierarchy of Goals and Plans

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its strategy of “Food With Integrity” was negatively affected by food-related health out- breaks that sickened hundreds of customers.14 At the store level, inconsistent employee management and food preparation practices contributed to its problems.15 Steve Ells, CEO of Chipotle, then focused on restoring customer and investor confidence in the restau- rant chain by correcting several of these operational-level issues: “The [food-safety] events exposed some weaknesses that our momentum in earlier years may have masked.”16

The lesson for top managers is to make sure they are communicating strategy to all levels of the organization and paying attention to what is happening at all levels in the organization.

Aligning Tactical, Operational, and Strategic Planning To be fully effective, the organization’s strategic, tactical, and operational goals and plans must be aligned—that is, ideally they will be consistent, mutually supportive, and focused on achieving the common purpose and direction. Whole Foods Market, for example, links its tactical and opera- tional planning directly to its strategic planning. The firm describes itself on its website as a mission-driven company that aims to set the standards for excellence for food retailers. The firm measures its success in fulfilling its vision by “customer satisfaction, team member excellence and happiness, return on capital investment, improvement in the state of the environment, and local and larger community support.”

Whole Foods’ strategic goal is “to sell the highest-quality products that also offer high value for our customers.” Its operational goals focus on ingre- dients, freshness, taste, nutritional value, safety, and appearance that meet or exceed its customers’ expectations, including guaranteeing product sat- isfaction. Tactical goals include store environments that are “inviting, fun, unique, informal, comfortable, attractive, nurturing, and educational” and are safe and inviting for employees.

One method for aligning the organization’s strategic and operational goals is a strategy map. A strategy map is a tool for communicating strategic goals and helping employees to understand the parts they will play in help- ing to achieve them. The map illustrates the four key drivers (or “balanced

scorecard”) of a firm’s long-term success: the skills of its people and their ability to grow and learn; the effectiveness of its internal processes; its ability to deliver value to customers; and ultimately its ability to grow its financial assets. The map shows how specific plans and goals in each area link to the others, and can generate real improvements in an organiza- tion’s performance.

Exhibit 4.4 shows a strategy map and how the various goals of the organization relate to each other to create long-term value. As an example, let’s assume that a company’s primary financial goal is “to increase revenues by enhancing the value we offer to existing customers by making our prices the lowest available.” (Target and Walmart might be good examples.) The company will have corresponding goals and plans to support that strategy. Its learning and growth goals might include bringing in the most efficient production technologies or work processes and training the staff to use them. These in turn will lead to the internal goals of improved production speed and lower cost, which in turn lead to the customer goal of competitive pricing, making the original financial goal feasible.

As a contrasting example, a financial strategy of revenue growth through new products might lead to people and technology goals that speed up product design, internal processes that lead to innovation, and a customer goal of perceived product leadership. Whatever the strategy, the strategy map can be used to develop the appropriate measures and standards in each operational area and to show how they all are linked.17

As you read the nearby “Management in Action: Progress Report,” consider how well tactical, operational, and strategic planning are aligned at Walt Disney Company, particu- larly with regard to its Disney Interactive unit.

Bottom Line Ideally, strategic plans integrate all the bottom-line practices of the firm. What might happen if a company’s innovation practices were not aligned with its strategy?

Q

Whole Foods has operational goals that focus on high quality, freshness, taste, nutritional value, safety, and appearance.

©Rubberball/Mike Kemp/Getty Images RF

Bottom Line The strategy map shows the relationship between a firm’s practices and its long-term success. Where do a company’s quality practices show up in the strategy map (Exhibit 4.4)?

Q

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EXHIBIT 4.4 The Strategy Map: Creating Value by Aligning Goals

Financial goals

Revenue growth

• New markets • New products • Increasing value to existing customers • New customers

Customer goals

Customer intimacy

• Exceptional service • E�ective solutions

Product leadership

• Product functionality • Product features • Product performance

Operational excellence

• Competitive pricing • Product quality • Speedy delivery

Internal goals

Innovation

• New products/services • New market segments

Learning and growth goals

Improved competence/ skills of workforce

E�ective information/ technology systems

Supportive values and practices

Increased customer value

• Deepened relationship with existing customers

Good corporate citizenship

• E�ective relationships with employees, suppliers, regulators, others

Operational improvements

• Lower cost • Higher quality • Greater speed

Long-term value

Productivity growth

• Reducing expenses • Increasing e�ciency

SOURCES: Adapted from Kaplan, R. and Norton, “Plotting Success with Strategy Maps,” Optimize, February 2004, online; and Kaplan, R. and Norton, “Having Trouble with Your Strategy? Then Map It,” Harvard Business Review, September–October 2000.

Strategic Planning

Strategic decision making is one of the most exciting topics in management today. Many organizations are changing the ways they develop and execute their strategic plans.

Traditionally, strategic planning emphasized a top-down approach. Senior executives and specialized planning units developed goals and plans for the entire organization. Tactical and operational managers received those goals and plans, and their own planning activities were limited to specific procedures and budgets for their units.

Over the years, managers and consulting firms created new analytical techniques and planning approaches, many of which have become essential for analyzing complex business challenges and competitive issues. In many instances, however, senior executives spent too much time with their planning specialists to the exclusion of managers in the rest of the orga- nization. A gap often developed between strategic managers and tactical and operational

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Bottom Line New ideas from managers throughout the organization can contribute to a plan’s effectiveness. What experiences might give frontline managers ideas that top-level executives haven’t considered?

managers, and people throughout the organization became alienated and uncommitted to the organization’s success.19

Today, however, senior executives increasingly are involving managers throughout the organization in the strategy formation process.20 The problems just described and the rapidly changing environment of the past few decades years forced executives to look to all levels of the organization for ideas and innovations to make their firms more competi- tive. Although the CEO and other top managers continue to set the strategic direction, or “vision,” for the organization, tactical and operational managers can provide valuable input to the organization’s strategic plan. In some cases, these managers also have substantial autonomy to formulate or change their own plans. This authority increases flexibility and responsiveness, critical requirements for success today.

Because of these trends, firms often use the term strategic management to describe the process. Strategic management involves managers from all parts of the organization in the formulation and implementation of strategic goals and strategies. It integrates strategic planning and management into a single process. Strategic planning becomes an ongoing activity in which all managers are encouraged to think strategically and focus on long-term, externally oriented issues as well as short-term tactical and operational issues.

As shown in Exhibit 4.5, the strategic management process has six major components:

1. Establishing mission, vision, and goals. 2. Analyzing external opportunities and threats. 3. Analyzing internal strengths and weaknesses.

strategic management

A process that involves managers from all parts of the organization in the formulation and implementation of strategic goals and strategies.

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Management in Action PLANNING A TURNAROUND FOR DISNEY INTERACTIVE

Walt Disney Company’s corporate strategy is to lead in providing entertainment and information. The com- pany’s top ranking in the industry and recent profits of $13.5  billion suggest it is succeeding. Despite years of operating at a loss and recent layoffs, Disney Interactive Media is the fastest-growing business segment in the company’s portfolio.

Disney Interactive, founded in 2008, has as its ambi- tious goal to “entertain kids, families, and Disney enthu- siasts everywhere with world-class products that push the boundaries of technology and imagination.” Its tacti- cal plans include development of games for every digital media platform, including mobile and social media as well as the major gaming consoles.

Measured by those standards, performance has been less than stellar. The slow pace at which it crafts movies is unsuitable for game creation. The six years required to go from concept to release of Epic Mickey, created only for the Nintendo Wii, meant the release came in 2010, after that console’s popularity had peaked. At one point, Disney ran six development studios creating games for consoles, which became a problem when players switched to online games and began using mobile devices.

A basic element of Disney’s digital strategy has been its entertainment website, Disney.com, successor to the Go.com web portal, which closed in 2001. However, the company has struggled to make it relevant. One challenge is that the brand aims to serve the diverse interests of toddlers and parents as well as game play- ers of all ages in between. Mostly, the site has focused on cross-promoting its entertainment and licensed merchandise.

James A. Pitaro, president of Disney Interactive Media, is pivoting the unit in two significant ways. First, it is focus- ing more on mobile gaming that can be played on tab- lets and smartphones. In Japan, the mobile game Tsumu Tsumu is a big hit with over 8 million downloads. And sec- ond, Disney Interactive Media seeks brand sponsors for its popular Disney Online website.18 Pitaro believes that brand sponsors will generate more revenue than the web- site advertising model currently being used.

• At which steps of the planning process would you say Disney Interactive most needs improvement? Why?

• How can Pitaro ensure that strategic, tactical, and oper- ational management are well aligned?

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EXHIBIT 4.5 The Strategic Management Process

Strategy implementation

Analyzing internal

strengths and weaknesses

Analyzing external

opportunities and threats

Establishing mission,

vision, and goals

Strategic control

SWOT analysis and strategy formulation

alyzing ternal

ortunities threats

alyzing ternal gths and knesses

4. SWOT (strengths, weaknesses, opportunities, and threats) analysis and strategy formulation.

5. Strategy implementation. 6. Strategic control.

Because this process is a planning and decision process, it is similar to the planning framework discussed earlier. Although organizations may use different terms or emphasize different parts of the process, the components and concepts described in this section are found—explicitly or implicitly—in every organization. Even a small entrepreneurial firm can benefit from the kind of planning framework we describe here.

Step 1: Establishing Mission, Vision, and Goals The first step in strategic planning is establishing a mission, a vision, and goals for the orga- nization. The mission is a clear and concise expression of the basic purpose of the organiza- tion. It describes what the organization does, for whom it does it, its basic good or service, and its values. Here are some mission statements of firms that you will recognize:21

CVS: “We will be the easiest pharmacy retailer for customers to use.” Naked Juice: “Making the whole planet feel better. One bottle at a time.” Make-A-Wish: “We grant the wishes of children with life-threatening medical conditions

to enrich the human experience with hope, strength and joy.”

Smaller organizations, of course, may have missions that aren’t as broad as these. For example, the local bar close to most campuses has this implicit mission: “to sell large quanti- ties of inexpensive beer to college students in a noisily enjoyable environment.”

While the mission describes the organization’s ongoing purpose, the strategic vision points to the future—it provides a perspective on where the organization is headed and what it can become. Ideally, the vision statement clarifies the long-term direction of the company and its strategic intent.

The most effective vision statements inspire orga- nization members. They offer a worthwhile target for the entire organization to work together to achieve. Often these statements are not strictly financial because financial targets alone may not motivate all organization members. For example, NASA’s Armstrong Flight Research Center focuses on the future of flight and exploration. Similarly, Habitat for Humanity envisions “a world where everyone has a decent place to live.”

mission

An organization’s basic purpose and scope of operations.

strategic vision

The long-term direction and strategic intent of a company.

The strategic vision points to the future—

where the organization is headed and what it

can become.

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The chief executive officer of the organization, with the input and approval of the board of directors, establishes the mission, vision, and major strategic goals. These should be communi- cated or at least accessible to everyone who has contact with the organization. Large firms pro- vide public formal statements of their missions, visions, goals, and even values. For example, in support of its vision that “creating a community of good neighbors” is best done “together” with all sectors of the community, the City of Redmond established goals such as these:

• Enhance citizen engagement in city issues. • Sustain the natural systems and beauty of the community. • Sustain a safe community with a coherent, comprehensive, cohesive approach to

safety. • Maintain economic vitality.

Different city departments contribute to various aspects of this vision as they carry out their operational plans in collaboration with local businesses and residents.

Lofty words in a vision and mission statement mean little without strong support from leadership. Elon Musk, CEO of SpaceX, is committed to its mission of revolutionizing space technology to enable individuals to inhabit other planets. Musk, despite significant setbacks (for example, a rocket exploded on the launchpad) and a widely publicized missed deadline, continues to support this goal. Musk wants to help humans become a “spacefaring civilization.” By the mid-2020s, Musk believes that humans will be traveling to Mars with the goal of establishing a colony on the Red planet.22

Where leadership is strong, statements of visions and goals clarify the organization’s purpose to key constituencies outside the organization. They also help employees focus their talent, energy, and commitment in pursuit of organizational goals. When you con- sider employment with a firm, reviewing its statements of mission, vision, and goals is a good first step in determining whether the firm’s purposes and values will be compatible with your own.

Step 2: Analyzing External Opportunities and Threats The mission and vision drive the second component of the strategic management process: analyzing external environment. Effective strategic management depends on an accurate and thorough evaluation of the competitive environment and macroenvironment (Chapter 2).

The important activities in an environmental analysis include the ones shown in Exhibit 4.6. The analysis begins with an examination of the industry. Next, organizational stakeholders are examined. Stakeholders are groups and individuals who affect and are affected by the achievement of the organization’s mission, goals, and strategies. These include buyers, suppliers, competitors, government and regulatory agencies, unions and employee groups, the financial community, owners and shareholders, and trade associa-

tions. The environmental analysis assesses these stakehold- ers and the ways they influence the organization.23

The environmental analysis also should examine other forces in the environment, such as economic conditions and technological factors. One critical task in environmental analysis is forecasting future trends. As noted in Chapter 2, forecasting techniques range from simple judgment to com- plex mathematical models that examine systematic rela- tionships among many variables. Even simple quantitative techniques outperform the intuitive assessments of experts. Judgment is susceptible to bias, and managers have a lim- ited ability to process information. Managers should use subjective judgments as inputs to quantitative models or when they confront new situations.

The difference between an opportunity and a threat depends in part on how a company positions itself

LO 3

stakeholders

Groups and individuals who affect and are affected by the achievement of the organization’s mission, goals, and strategies.

Some view renewable resources as a threat; others as an opportunity.

©Kim Steele/Getty Images RF

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Industry and Market Analysis

• Industry profile: major product lines and significant market segments in the industry.

• Industry growth: growth rates for the entire industry, growth rates for key market segments, projected changes in patterns of growth, and the determinants of growth.

• Industry forces: threat of new industry entrants, threat of substitutes, economic power of buyers, economic power of suppliers, and internal industry rivalry (recall Chapter 2).

Competitor Analysis

• Competitor profile: major competitors and their market shares.

• Competitor analysis: goals, strategies, strengths, and weaknesses of each major competitor.

• Competitor advantages: the degree to which industry competitors have differentiated their products or services or achieved cost leadership.

Political and Regulatory Analysis

• Legislation and regulatory activities and their effects on the industry.

• Political activity: the level of political activity that organizations and associations within the industry undertake (see Chapter 5).

Social Analysis

• Social issues: current and potential social issues and their effects on the industry.

• Social interest groups: consumer, environmental, and similar activist groups that attempt to influence the industry (see Chapters 5 and 6).

Human Resources Analysis

• Labor issues: key labor needs, shortages, opportunities, and problems confronting the industry (see Chapters 10 and 11).

Macroeconomic Analysis

• Macroeconomic conditions: economic factors that affect supply, demand, growth, competition, and profitability within the industry.

Technological Analysis

• Technological factors: scientific or technical methods that affect the industry, particularly recent and potential innovations (see Chapter 17).

EXHIBIT 4.6 Environmental Analysis

strategically. For example, some states have required electric utilities to get a certain share of their power from renewable sources such as wind and solar energy rather than from fossil fuels, including coal, oil, and natural gas. This requirement poses a threat to utilities because the costs of fossil fuel energy are less, and customers demand low prices.

However, some companies see strategic opportunities in renewable power. Ocean Renewable Power Company (ORPC) has been developing technology that uses “ocean and river currents to produce clean, predictable electricity to power our homes and businesses while protecting the environment.” At the Bay of Fundy on the border between Maine and Canada, ORPC operates the first commercial tidal power system in the United States. The system converts ocean energy to electricity that is then delivered to the public electricity grid. ORPC’s goal is to increase output to the point where the system will power approxi- mately 2,000 homes and businesses in Maine with clean tidal energy. ORPC has similar renewable energy generation projects under way in Alaska and Nova Scotia.24

Similarly, overflowing landfills are an expensive challenge for many municipalities, but a growing number are seeing an opportunity in the form of energy generation. As gar- bage decomposes, it produces methane gas, which is used as a fuel to power plants and

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manufacturing facilities. The United States Environmental Protection Agency (EPA) formed an outreach program that partners with stakeholders—communities, landfill owners, and utilities—which by 2016 had over 650 methane-to-energy conversion projects.25

Thinking creatively helps managers see opportunities in the face of serious threats. For Farif Ali Abood, who opened a shop to make commercial signs in his hometown of Najaf, Iraq, the difficulties included sporadic electrical service, lack of funds to borrow, and even occasional sniper fire in the area. Despite these challenges, Abood kept the business run- ning by using a generator when the power goes out. As conditions in the city stabilized, busi- ness grew enough for Abood to hire several full-time employees and earn a modest profit.26 Those who, like Abood, best serve customer needs in difficult times will earn customer loyalty and longer-term business relationships.

Step 3: Analyzing Internal Strengths and Weaknesses As managers conduct an external analysis, they also assess the strengths and weaknesses of major functional areas inside their organization. Exhibit 4.7 lists some of the major compo- nents of this internal resource analysis. For example, is your firm strong enough financially to handle the lengthy and costly investment new projects often require? Can your existing staff carry out its part of the plan, or do you need to provide new training or hire new people? Internal analysis gives strategic decision makers an inventory of the organization’s existing functions, skills, and resources as well as its overall performance level. Many of your other business courses will prepare you to conduct a detailed internal analysis.

Resources and Core Capabilities Strategic planning has been strongly influenced in recent years by a focus on internal resources. Resources are inputs to production (recall systems theory) that can be accumulated over time to enhance the performance of a firm.

Resources can take many forms, but they tend to fall into two broad categories: (1) tan- gible assets such as real estate, production facilities, raw materials, and so on; and (2) intan- gible assets such as company reputation, culture, technical knowledge, and patents as well as accumulated learning and experience. The Walt Disney Company, for example, has based its strategic plan on combinations of tangible assets (e.g., hotels and theme parks) and intangi- ble assets (brand recognition, talented craftspeople, culture focused on customer service).27

Internal analysis provides a clearer understanding of how a company can compete through its resources. Resources provide competitive advantage only under certain cir- cumstances. First, the resource provides advantage if it is instrumental in creating cus- tomer value—increasing the benefits customers derive from a good or service relative to the costs they incur.28 For example, Amazon’s powerful search technology, its ability to

LO 4

resources

Inputs to a system that can enhance performance.

The Digital World Corporations must plan their strategies and analyze exter- nal opportunities and threats. Yet technology and online communication have changed the picture and compli- cated this process. Few in their respective industries real- ized what Netflix would do to Blockbuster, what Amazon would do to bookstores, what Uber would do to taxi ser- vices, or what Airbnb would do to the hotel industry.

Online companies can move fast because they often have the ability to scale exponentially compared to brick- and- mortar businesses. Analysts and strategy makers today bear this in mind as they survey the scene. Despite the most thorough industry and market analysis, a busi- ness may be surprised to find new online competitors that didn’t exist a year ago.

Many companies are closely watching developments in 3D printing. In the automotive field, for example, it will become possible to diagnose an engine problem, send the digital diagnosis to the technician, send specs for the car’s make and model, and print the needed part by the time the car has been towed.

Companies must plan for a dynamic digital future in which their inventory, supply-chain, vendors, timing, and infrastructure issues will evolve quickly. For those able to see the strategic value of new business models, there will be many new opportunities.

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Financial Analysis

Examines financial strengths and weaknesses through financial statements such as a balance sheet and an income statement, and compares trends to historical and industry figures (see Chapter 18).

Marketing Audit

Examines strengths and weaknesses of major marketing activities and identifies markets, key market segments, and the competitive position (market share) within key markets.

Operations Analysis

Examines the strengths and weaknesses of the manufacturing, production, or service delivery activities of the organization (see Chapters 9, 16, and 17).

Other Internal Resource Analyses

Examines, as necessary and appropriate, the strengths and weaknesses of other organizational activities, such as research and development (product and process), management information systems, engineering, and purchasing.

Human Resources Assessment

Examines strengths and weaknesses of all levels of management and employees and focuses on key human resources activities, including recruitment, selection, placement, training, labor (union) relationships, compensation, promotion, appraisal, quality of work life, and human resources planning (see Chapters 10 and 11).

EXHIBIT 4.7 Internal Resource Analysis

track customer preferences, its ability to offer personalized recommendations each time its site is accessed, and its quick product delivery system are valuable resources that enhance Amazon’s competitiveness.

Second, resources are a source of advantage if they are rare and not equally available to all com- petitors. Even for extremely valuable resources, if all competitors have equal access, the resource cannot provide competitive advantage. For companies such as W.L. Gore, Intel, Johnson & Johnson, 3M, Dow Chemical, and others, patented formulas are both rare and valuable.

Third, resources provide competitive advantage if they are difficult to imitate. Online retailer Zappos.com seeks competitive advantage via service that makes customers say “Wow!” The company gives new customer service employees seven weeks of training and empowers them to do whatever it takes to delight a customer, from spending hours patiently on the phone, issu- ing refunds, or sending packages of free cookies. Zappos frees reps from using scripted replies, promotes positive relationships with colleagues through mentoring programs and fun activities, and provides on-site coaching to help employees achieve their career and personal goals.29 This highly motivating combination of training, socializing, and job design is harder to imitate than just a free return policy.30

As shown in Exhibit 4.8, when resources are valuable, rare, inimitable, and organized, they comprise a company’s core capabilities. A core capability (also referred to as “compe- tence”) is something a company does especially well relative to its competitors. BMW has a core competence in high- performance engine design and manufacturing; Chik-fil-A provides a consistently pleasant dining experience for its cus- tomers; and Activision Blizzard has a core competence in cre- ating games for video gaming consoles. As in these examples, a core competence typically refers to a set of skills or expertise in some activity rather than physical or financial assets.

Benchmarking To assess and improve performance, some companies use benchmarking, the process of assessing

core capability

A unique skill and/or knowledge an organization possesses that gives it an edge over competitors.

Bottom Line Amazon provides value via speed, low cost, and

excellent customer service. What are some resources Amazon needs to deliver

these benefits?

Q

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how well one company’s basic functions and skills compare with those of another company or set of companies. As introduced in Chapter 2, the goal of benchmarking is to understand the “best practices” of other firms thoroughly and to undertake actions to achieve lower costs and better performance.

According to consulting firm Accenture, benchmarking consists of four stages:31

1. Decide what needs to be measured and which metrics will be used. 2. Collect and validate the data; compile initial findings. 3. Assess initial findings to see if additional data need to be collected. 4. Analyze results and make final recommendations to key stakeholders.

Benchmarking programs have helped many companies, such as Ford, Corning, Hewlett- Packard, Xerox, and Anheuser-Busch, make great strides in eliminating inefficiencies and improving competitiveness.

Benchmarking may be of limited help when it only helps a company perform as well as its competitors; strategic management ultimately is about surpassing those companies. Companies can gain additional advantage via internal benchmarking: comparing different internal units against one another to disseminate the company’s best practices throughout the organization.

AXA Canada, an insurance company, used internal benchmarking to compare results among its regions. However, in a country as vast as Canada, the differences among regions were so great that performance couldn’t really be compared. More energy went to arguing about the numbers than looking for ways to close performance gaps. The most success came from gather- ing performance data from several insurance companies, analyzing it, and reporting on areas of strength and weakness. Using this benchmarking information, AXA Canada found areas where it could operate more efficiently by applying other companies’ practices. The company uses the benchmarking data primarily for cutting costs and identifying potential new markets.32

Step 4: SWOT Analysis and Strategy Formulation Once managers have analyzed the external environment and internal organizational resources, they have the information they need to assess the organization’s strengths, weak- nesses, opportunities, and threats. Such an assessment is called a SWOT analysis.

Strengths and weaknesses refer to internal resources. For example, an organization’s strengths might include skilled management, positive cash flow, and well-known and highly regarded brands. Weaknesses might be lack of spare production capacity and the absence of reliable suppliers.

SWOT analysis

A comparison of strengths, weaknesses, opportunities, and threats that helps executives formulate strategy.

Resources are rare

Core capability

Resources are

organized

Resources are

inimitable

Resources are

valuable

EXHIBIT 4.8 Resources and Core Capability

Bottom Line Benchmarking can identify best practices both outside and inside your company. In some famous benchmarking examples, businesses learned from pit crews for race car teams. What kinds of bottom-line practices could that industry demonstrate?

Q

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Opportunities and threats arise in the macroenvironment and competitive environment. Examples of opportunities are a new technology that could make the supply chain more efficient, and an underserved market niche. Threats could include the possibility that com- petitors will enter the underserved niche if it is shown to be profitable.

SWOT analysis helps managers summarize the relevant, important facts from their exter- nal and internal analyses. Based on this summary, they can identify the primary and second- ary strategic issues their organization faces. The managers then formulate a strategy that will use the SWOT analysis to pursue opportunities by capitalizing on the organization’s strengths, neutralizing its weaknesses, and countering potential threats.

For example, David Handmaker enjoyed several years of unfettered growth since open- ing his printing company, Next Day Flyers, in Los Angeles. However, over time he noticed that his competitors were more adept at finding and serving online customers. Handmaker needed a plan to restore healthy business growth by migrating parts of his marketing and printing services online before it was too late. But Next Day Flyers originally aimed at local customers, which raised questions about whether the company could serve the needs of geographically dispersed customers.

Handmaker and his team needed to analyze what the firm did well and how it needed to improve relative to the competitive printing marketplace. Exhibit 4.9 summarizes this example in a format commonly used for a basic SWOT analysis. The company developed a strategy calling for it to hire talent with the skills, knowledge, and experience to help Next Day Flyers establish a professional presence on the web, including simple online ordering; free online design services; free printing templates; blog with design and marketing tips; and customer support by phone, e-mail, and live chat.33

As a company is formulating strategy, its competitors are, too. Therefore the strategy manage- ment process must keep evolving. The more uncertainty that exists in the external environment,

EXHIBIT 4.9 Sample SWOT Analysis: Next Day Flyers

Next Day Flyers

Strengths • Large, established customer base. • Operations in CA and NJ. • 10-plus years of experience in printing industry.

Opportunities • Talent with technical and marketing knowledge. • West and East Coast markets. • Scalable operations.

Threats • Competitors already servicing online customer segments. • Pressure for online presence and fast deliveries.

Weaknesses • Lack of online marketing and customer service knowledge. • Limited financial resources for major investment in technology upgrades.

SOURCES: Based on information from Myers, R., “That Sounds Like a Plan,” Inc., no. 36 (2014), pp. 90–92; and Next Day Flyers company website, “About Next Day Flyers,” http://www.nextdayflyers.com.

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Multiple Generations at Work Perceived Strengths and Weaknesses of Each Generation

Ernst & Young, the accounting and consulting firm, recently asked managers and employees across multiple generations and industries to describe the strengths and

Strengths • Loyal

• Mentoring others • Hardworking

Weaknesses • Slower to adapt to

change and collaborate with others

Strengths • Revenue generators • Adaptable • Problem-solvers

Weaknesses • Displaying executive presence and being cost e�ective

Strengths • Tech savvy • Skilled at leveraging social media • Enthusiastic

Weaknesses • Team player and hardworking

Gen Xers MillennialsBaby Boomers

weaknesses commonly associated with different genera- tional cohorts. The following exhibit includes some of the findings:

The results show respondents’ perceptions of the work- related strengths and weaknesses of different generations. Of course, caution is advised when generalizing to all members of any group, including generational cohorts.

However, if you do a self-SWOT analysis, you may want to compare your self-assessment to the stereotypes this study revealed. This may prove useful for overcom- ing or leveraging stereotypes. Millennials can think

about how to counter the perceived weaknesses of not being hardworking team players. Gen Xers who want to advance into executive positions may want to observe how current executives dress, communicate, plan, work in teams, and make decisions. A Boomer can overcome the stereotype of being slow to adapt to change by embracing and becoming adept with new technologies at work.34

the more the strategy needs to focus on strengthening internal capabilities through practices such as seeking new company expertise, opportunistic knowledge sharing, and continuous process improvement.35 To keep it competitive, Next Day Flyers identified online customer engagement as the major strategy it needed to commit to and continue to develop.

By the way, you might find a self-SWOT analysis helpful when seeking a job. What are you particularly good at? What weaknesses might you need to overcome to improve your employment chances? What firms offer the best opportunity to apply your skills to full advantage? Who are your competitors? How is your generation perceived in the workplace (see the nearby “Multiple Generations at Work” box)? As with companies, this kind of analysis can lead to a plan of action that improves your own effectiveness.

Corporate Strategy A corporate strategy identifies the set of businesses, markets, or industries in which the organization competes and the distribution of resources among those businesses. Exhibit 4.10 shows basic alternatives for a corporate strategy that range from very specialized to highly diverse.

A concentration strategy (the purple center of the figure) focuses on a single business competing in a single industry. In the food retailing industry, Kroger, Safeway, and A&P all pursue concentration strategies. A company pursues concentration strategies when (perceived) industry growth potential is high or when the company has a narrow range of competencies. An example is Arm & HammerTM, which pursues a concentration strategy by making baking soda for home personal care application; the strategy has enabled the Church & Dwight Company to operate successfully for more than 165 years.

LO 5

corporate strategy

The set of businesses, markets, or industries in which an organization competes and the distribution of resources among those entities.

concentration

A strategy employed for an organization that operates a single business and competes in a single industry.

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A vertical integration strategy (horizontal arrows in the figure) involves expanding the company’s domain to include supplier and distributors. At one time, Henry Ford had fully integrated his company from the ore mines needed to make steel all the way to the show- rooms where his cars were sold. Vertical integration generally is used to reduce costs associ- ated with suppliers or distributors and to reduce the uncertainties created by unpredictable business relationships.

A strategy of concentric diversification (expanded center of the figure) moves into new but related businesses. William Marriott expanded his original restaurant business outside Washington, DC, by moving into airline catering, hotels, and fast food. Each of these busi- nesses within the hospitality industry is related in terms of the services it provides, the skills necessary for success, and the customers it attracts. Often companies such as Marriott pur- sue a strategy of concentric diversification to take advantage of their strengths in one busi- ness to gain advantage in another. Because the businesses are related, the products, markets, technologies, or capabilities used in one business can be transferred to another.

Success in a concentric diversification strategy requires adequate management and other resources for operating more than one business. Guitar maker C. F. Martin once tried expanding through purchases of other instrument companies, but management was stretched too thin to run them well. The company divested the acquisitions and returned to its concentration strategy.36

In contrast to concentric diversification, conglomerate diversification (multiple arrows pointing outside the primary industry) is a corporate strategy of expansion into unrelated businesses. For example, General Electric Corporation diversified from its original base in electrical and home appliance products into health, finance, insurance, truck and air trans- portation, and media with its ownership of NBC (now owned with Comcast). Typically, companies pursue a conglomerate diversification strategy to minimize risks due to market fluctuations in one industry.

The diversified businesses of an organization are sometimes called its business portfolio. One of the most popular techniques for analyzing a corporation’s strategy for managing its portfolio is the BCG matrix, developed by the Boston Consulting Group. Exhibit 4.11 shows the BCG matrix. Each business in the corporation is plotted on the matrix based on the growth rate of its market and the relative strength of its competitive position in that market (market share). To convey additional information visually, each business can be represented by a circle whose size indicates its contribution to corporate revenues.

In the BCG matrix, high-growth, weak-competitive-position businesses are called question marks. They require substantial investment to improve their position; otherwise divestiture is rec- ommended. High-growth, strong-competitive-position businesses are the stars. These businesses require heavy investment, but their strong position allows them to generate the needed revenues.

vertical integration

The acquisition or development of new businesses that produce parts or components of the organization’s product.

conglomerate diversification

A strategy used to add new businesses that produce unrelated products or are involved in unrelated markets and activities.

EXHIBIT 4.10 Summary of Corporate Strategies

Supply chain

Concentration Distribution channels

Concentric diversification

Primary industry

Unrelated industry Conglomerate diversification

Vertical integration

Vertical integration

concentric diversification

A strategy used to add new businesses that produce related products or are involved in related markets and activities.

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Low-growth, strong-competitive-position businesses are called cash cows. These busi- nesses generate revenues in excess of their investment needs and therefore fund other busi- nesses. Finally, low-growth, weak-competitive-position businesses are the dogs. Once any remaining revenues from these businesses are realized, the businesses are divested.

The BCG matrix alone is not a substitute for management judgment, creativity, insight, or leadership. But it is a well-known tool that, along with others, can help top corporate executives and the individual business managers understand their business portfolios and strategic options.37 This approach helps companies like General Electric that need to weigh the relative merits of many business units and product lines.

When GE struggled in some of its widely diversified businesses, the company refocused on its strength as a manufacturer, targeting three industries: energy, health care, and trans- portation. Not only do these industries offer significant growth potential, but GE already dominates the markets for electric turbines and jet engines. Therefore, besides selling off NBC Universal and GE Capital, GE acquired wind farms and blade manufacturers, and 3D printing companies to manufacture aircraft components.38

Trends in Corporate Strategy Corporate America periodically is swept by waves of mergers and acquisitions (M&As). The targets chosen for mergers and acquisitions depend on the corporate strategy of either concentraing or diversifying the business portfolio.

Many recent deals were aimed at helping companies expand their market share and product offerings within related industries. For example, two telecommunication behemoths, AT&T and Time Warner, merged recently to create a firm with considerable influence in the entertain- ment space, including cable-TV, broadband Internet, satellite TV, and cellular-data networks.39

The value of implementing a more diversified corporate strategy depends on circum- stances. Many argue that unrelated diversification hurts a company more often than it helps. Many diversified companies have sold their peripheral businesses so they could concentrate on a more focused portfolio. In contrast, the diversification efforts of an organization com- peting in a slow-growth, mature, or threatened industry often are applauded.

Business Strategy Once corporate strategies are determined, managers must determine how they will compete in each business area. Business strategy defines the major actions by which an organization builds and strengthens its competitive position. A business can gain com- petitive advantage using one of two generic business strategies: low cost and differentiation.40

Businesses using a low-cost strategy attempt to be efficient and to offer standard, no-frills products. Walmart Stores uses the power of its giant size to negotiate favorable prices from

LO 6

EXHIBIT 4.11 Mapping GE’s Business Units and Product Lines to the BCG Matrix

Market growth

High Energy Health care Transportation

Wind farms

Turbines Jet engines

NBC Universal GE CapitalLow

Strong Weak

Relative competitive position

Stars Question marks

Cash cows Dogs

Bottom Line Companies that integrate vertically often do so to reduce their costs. Why might buying from a division of your company be less costly than buying on the open market?

business strategy

The major actions by which a business competes in a particular industry or market.

low-cost strategy

A strategy an organization uses to build competitive advantage by being efficient and offering a standard, no-frills product.

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suppliers, enabling it to sell at prices below those of most competing retailers. Its size allows it to provide goods and services more efficiently (at lower cost), which leads to higher sales. market share, and profits. Recently, when gasoline prices soared, the company promoted its stores as a place where consumers can save on transportation costs by purchasing every- thing they need at low prices in one trip.41

Companies that succeed with a low-cost strategy often are large and take advantage of economies of scale in production or distribution. An organization using this strategy gener- ally must be the cost leader in its industry or market segment. However, even a cost leader must offer a product that is acceptable to customers compared with competitors’ products.

Alternatively, an organization may pursue a differentiation strategy. With a differentiation strategy, a company attempts to be unique in its industry or market segment along some dimen- sions (other than cost) that customers value. This unique or differentiated position within the industry often is based on high product quality, excellent marketing and distribution, or superior service. Nordstrom’s well-known commitment to outstanding, personalized customer service in the retail apparel industry is an excellent example of a differentiation strategy.

Whatever strategy managers adopt, the most effective strategy is one that competitors are unwilling or unable to imitate. If the organization’s strategic plan is one that can easily be adopted by industry competitors, it will yield only short-term advantage. For example, a strategy to gain market share by being the first to offer an innovative product may or may not succeed, depending in part on competitive responses. In some industries, technologies advance so fast that the first company to provide a new product is quickly challenged by later entrants offering superior products.42

Functional Strategy The final step in strategy formulation is to establish the major functional strategies. Functional strategies are implemented by each functional area of the organization to support the business strategy. The typical functional areas include production, human resources, marketing and sales, research and development, finance, and distribution.

For example, Bloomin’ Brands, the parent company of restaurant chains Outback Steakhouse, Bonefish Grill, Carrabba’s Italian Grill, and Fleming’s Prime Steakhouse, set a business strategy with targets for aggressive growth and greater efficiency built on the chains’ reputation for offering good food at affordable prices. To achieve this, functional strategies included improving employee retention through enhanced training and develop- ment, adding innovative items to menus, and launching a multi-brand loyalty program.43

Functional strategies typically are developed by functional managers with input and approval from the executives responsible for business strat- egy. Senior strategic decision makers review the functional strategies to ensure that each major department is operat- ing consistently with the business strategies. For example, even if they saved money, automated production tech- niques would not be appropriate for a piano company like Steinway, whose products are strategically positioned (and priced) as high-quality and handcrafted.

At companies that compete based on product innova- tion, strategies for the research and development functions are especially critical. Based on the previous recession, GE committed itself to an R&D strategy of maintaining high budgets even when sales growth slowed.44 The company invests over $10 billion each year in R&D expenditures.45

Step 5: Strategy Implementation As with any plan, simply formulating a good strategy is not enough. Strategic managers also must ensure that the new strategies are implemented effectively and efficiently. The best execu- tives and strategy consultants realize that clever planning techniques and a good strategy do not guarantee success.

differentiation strategy

A strategy an organization uses to build competitive advantage by being unique in its industry or market segment along one or more dimensions.

functional strategies

Strategies implemented by each functional area of the organization to support the organization’s business strategy.

LO 7

Employees at Bonefish Grill strive to meet the company’s business strategy to provide good food at reasonable cost.

©The Washington Post/Getty Images

Bottom Line A high-quality strategy

is often more difficult for competitors to imitate.

What would be hard about imitating Nordstrom’s

strategy for top-quality service?

Q

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Many organizations are extending more participative strategic management process to implementation. Managers at all levels are involved with formulating strategy and identify- ing and executing ways to implement it. Senior executives still may oversee the implementa- tion process, but they are placing responsibility and authority in the hands of others.

In general, strategy implementation involves these steps:

Step 1: Define strategic tasks. Articulate in simple language what a particular unit must do to create or sustain a competitive advantage. Define strategic tasks to help employees understand how they contribute.

Step 2: Assess organization capabilities. Evaluate the organization’s ability to implement the strategic tasks. A task force might interview employees and managers to identify issues that help or hinder implementation. Then the results are summarized for top management.

Step 3: Develop an implementation agenda. Management decides how it will change its own activities and procedures; what skills and individuals are needed in key roles; and what structures, measures, information, and rewards can best support the needed actions.

Step 4: Implement. The top management team, the employee task force, and others develop the implementation plan. The top management team monitors progress. The task force continues its work by providing feedback about how others in the organi- zation are responding to the changes.

This process, though straightforward, does not always go smoothly. Exhibit 4.12 shows six barriers to strategy implementation and provides some key principles for overcoming these silent killers. By paying closer attention to the processes by which strategies are implemented, execu- tives, managers, and employees can make sure that strategic plans are actually carried out.46

Step 6: Strategic Control The final component of the strategic management process is strategic control. A strategic control system helps managers evaluate the organization’s progress with its strategy and, when

SOURCE: Beer, M. and Eisenstat, R. A., “The Silent Killers of Strategy Implementation and Learning Barriers,” MIT Sloan Management Review 4, no. 4 (Summer 2000), pp. 29–40.

Change starts with the leader

The Silent Killers Beating the Silent Killers

Top-down or laissez-faire senior management style

The CEO creates a partnership with the top team and lower levels to develop a compelling business direction, create an enabling organizational context, and delegate authority to clearly accountable individuals and teams.

Unclear strategy and conflicting priorities

The top team, as a group, develops a statement of strategy and priorities that members are willing to stand behind.

An ineffective senior management team

Involve the top team in all steps in the change process so that its effectiveness is challenged and developed.

Poor vertical communication Establish an honest, fact-based dialog with lower levels about the new strategy and the barriers to implementing it.

Poor coordination across functions, businesses, or borders

Define a set of businesswide initiatives and new organizational roles and responsibilities that require “the right people to work together on the right things in the right way to implement the strategy.”

Inadequate down-the- line leadership skills and development

Lower-level managers develop skills through newly created opportunities to lead change and drive key business initiatives. They are supported with just-in-time coaching, training, and targeted recruitment. Those who still are not able to make the grade must be replaced.

EXHIBIT 4.12  Attacking the Six Barriers to Strategy Implementation

strategic control system

A system designed to support managers in evaluating the organization’s progress regarding its strategy and, when discrepancies exist, taking corrective action.

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discrepancies exist, identify needed corrective actions. The system must encourage efficient oper- ations that are consistent with the plan while allowing flexibility to adapt to changing conditions.

Most strategic control systems include a budget to monitor and control major financial expen- ditures. As a first-time manager, you are likely to work with your work unit’s budget—a key aspect of your organization’s strategic plan. Your executive team may give you budget assumptions and targets for your area, reflecting your part in the overall plan, and you may be asked to revise your budget once all the budgets in your organization have been consolidated and reviewed.

The dual responsibilities of a control system—efficiency and flexibility—often seem contra- dictory with respect to budgets. The budget usually establishes spending limits, but changing conditions or the need for innovation may require different financial commitments during the period. To solve this dilemma, some companies use two budgets: strategic and operational. For example, managers at Texas Instruments control two budgets under the OST ( objectives– strategies–tactics) system. The strategic budget creates and maintains long-term effective- ness, and the operational budget is tightly monitored to achieve short-term efficiencies.

The broader topic of control, including budgets in particular, is discussed in more detail in Chapter 16. In “Management in Action: Onward,” consider the significance of controls to Disney’s decisions about its portfolio of businesses.

Reportedly, Walt Disney Company’s mission statement once was “Make people happy.” The corporate website now offers a longer statement: “to be one of the world’s leading producers and providers of entertainment and information, using its portfolio of brands to differentiate its content, ser- vices and consumer products.” The statement adds, “The company’s primary financial goals are to maximize earnings and cash flow, and to allocate capital toward growth initia- tives that will drive long-term shareholder value.”

In pursuit of this two-part objective, Disney has made decisions about its large portfolio of businesses. As it repositions itself for a global marketplace and a social, mobile Internet, it continues making strategic decisions about where to invest and what to divest.

Disney’s largest sources of revenues are cable net- works and theme parks, with cable providing by far the greatest profits. ESPN alone delivers 45 percent of operat- ing income. Recently, Disney entered into a media rights contract with the NFL and a deal to air NBA games on ESPN and ABC. The company has rolled out apps based on WatchESPN to let cable subscribers watch program- ming on mobile devices. In the theme park arena, profit- ability during a sluggish economy lets Disney build when construction costs are low, so it has renovated Disney California Adventure, expanded Hong Kong Disneyland, and added a cruise ship to its fleet. In June 2016, Disney opened a theme park in Shanghai, China.

Disney Interactive is by far the smallest business unit in terms of revenues, and has not been profitable. Still, it

matters because children are spending ever more time online, and winning the hearts of children has been the basis for the company’s growth. Disney Interactive will con- tinue to engage fans through mobile games like Frozen Free Fall and Disney Tsum Tsum, as well as connect with parents via Disney.com.

Disney’s movie studios, though a relatively small unit, are a core business. To increase the brand’s appeal with teenage boys, this unit purchased Lucasfilm, producer of Star Wars. Disney also signed a deal giving Netflix the right to stream movies soon after release on DVD, when cable channels air movies. Dealing directly with Netflix signals that movie streaming is an important trend for Disney. And Disney created Keychest, which gives buyers of its DVDs and Blu-ray discs automatic access to streamed versions.

China is a huge growth market, so Iger is heavily invest- ing in a new theme park, Shanghai Disney. The venture is risky; Disney’s resort in Hong Kong is just breaking even after a 2005 opening. But it offers access to a billion con- sumers, and the effort is supported by use of the Disney Channel to build consumer relationships in China and 166 other countries.47

• How clear is Walt Disney Company’s mission? How well does its strategy support the mission?

• In the BCG matrix (see again Exhibit 4.11), where would you place Disney’s main businesses? How well is Disney matching its strategic moves to the businesses’ positions in the matrix?

Management in Action WALT DISNEY COMPANY’S STRATEGY UNDER ROBERT IGER

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Bottom Line Firms that follow low-cost

strategies exert downward pressure on competitors’

prices. How can managers

compete against a low-cost strategy so that their firm

can continue to charge higher prices for its goods or

services?

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In Chapter 4, you learned that managerial planning is a conscious, systematic process of deciding which goals and activities the organization will pursue in the future. Directed and controlled by managers, this purposeful effort should draw on the experience and knowledge of employees throughout the organization. As shown in Exhibit 4.1, the Chapter 3 decision-making model links closely to the formal planning process. Strategic planning should be integrated

with tactical and operational planning. Before formulating a strategy, managers should analyze the external environment and internal resources, including core capabilities. A firm can concentrate narrowly or broaden its strategy via related or unrelated diversification. Companies can achieve com- petitive advantage by being unique and differentiated, or by focusing on cost via efficiency and lower prices. Effective implementation is critical to the success of any strategy.

RETAINING WHAT YOU LEARNED

EXHIBIT 4.1 (revisited) Decision-Making Stages (Chapter 3) and Formal Planning Steps (Chapter 4)

General decision-making stages

Specific formal planning steps

Identifying and diagnosing the problem

Generating alternative solutions

Evaluating alternatives

Making the choice

Implementing

Evaluation

Situational analysis

Alternative goals and plans

Goal and plan evaluation

Goal and plan selection

Implementation

Monitor and control

KEY TERMS business strategy, p. 122

concentration, p. 120

concentric diversification, p. 121

conglomerate diversification, p. 121

core capability, p. 117

corporate strategy, p. 120

differentiation strategy, p. 123

functional strategies, p. 123

goal, p. 105

low-cost strategy, p. 122

mission, p. 113

operational planning, p. 109

plans, p. 105

resources, p. 116

scenario, p. 106

situational analysis, p. 104

stakeholders, p. 114

strategic control system, p. 124

strategic goals, p. 108

strategic management, p. 112

strategic planning, p. 108

strategic vision, p. 113

strategy, p. 108

SWOT analysis, p. 118

tactical planning, p. 109

vertical integration, p. 121

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Planning and Strategic Management  Chapter 4 127

Summarize the basic steps in any planning process.

• The planning process begins with a situation analy- sis of the external and internal forces affecting the organization. This examination helps identify and diagnose issues and problems and can bring to the surface alternative goals and plans for the firm.

• The advantages and disadvantages of these goals and plans should be evaluated and compared against one another.

• Implementing goals and plans involves communicat- ing the plan to employees, allocating resources, and making certain that other systems such as rewards and budgets support the plan.

• Control systems to monitor how implementation is faring: progress toward the goals.

Describe how to integrate strategic planning with tactical and operational planning.

• Strategic planning is different from operational plan- ning in that it involves making long-term decisions about the entire organization.

• Tactical planning translates broad goals and strate- gies into specific actions to be taken within the orga- nization’s subunits.

• Operational planning identifies the specific short- term procedures and processes required at lower levels of the organization.

Identify elements of the external environment and internal resources of the firm to analyze before formulating a strategy.

• Strategic planning is designed to leverage the strengths of a firm while minimizing the effects of its weaknesses.

• It is difficult to know a firm’s potential advantages with- out a proper internal analysis. Close examine might indicate, for instance, a particularly talented marketing department or a uniquely efficient production system.

• However, managers cannot determine whether inter- nal characteristics are sources of competitive advan- tage until they learn from external analyses how well competitors compare.

LO 1

LO 2

LO 3

Define core capabilities and explain how they provide the foundation for business strategy.

• A core competence is something a company does especially well relative to its competitors.

• When this competence is significantly important to market success, it can be a competitive advantage.

• It can provide a sustainable advantage if it is valu- able, rare, difficult to imitate, and well organized.

Summarize the types of choices available for corporate strategy.

• Corporate strategy identifies the breadth of a firm’s competitive domain.

• Corporate strategy can be kept narrow, as in a con- centration strategy, or can move to suppliers and buyers via vertical integration.

• Corporate strategy also can broaden a firm’s domain via concentric (related) diversification or conglomer- ate (unrelated) diversification.

Discuss how companies can achieve competitive advantage through business strategy.

• Companies gain competitive advantage in two pri- mary ways. They can attempt to be unique in some way by pursuing a differentiation strategy, or they can focus on efficiency and price by pursuing a low- cost strategy.

Describe the keys to effective strategy implementation.

• Many good plans fail due to poor implementation. • Strategy must be actively supported, for example,

by structure, technology, human resources, rewards, information systems, culture, and leadership.

• Ultimately, the success of a plan depends on how well employees at low levels are able and willing to implement it.

• Participative management is one important approach to gaining employees’ input and commitment to strat- egy implementation.

LO 4

LO 5

LO 6

LO 7

DISCUSSION QUESTIONS 1. This chapter opened with a quote from former CEO of

GE Jack Welch: “Manage your destiny, or someone else will.” What does “managing your destiny” mean for stra- tegic management? What does it mean when Welch adds, “or someone else will”?

2. List the six steps in the formal planning process. Suppose you manage a local business and you want to launch a new website. What activities you would carry out during each step to create the site?

3. Your friend is frustrated because he’s having trouble selecting a career. He says, “I can’t plan because the

future is too complicated. Anything can happen, and there are too many choices.” What would you say to him to change his mind?

4. How do strategic, operational, and tactical planning differ? How might the three levels complement one another in an organization?

5. How might an organization such as Urban Outfitters use a strategy map? With your classmates and using Exhibit 4.4 as a guide, develop a possible strategy map for the company.

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6. What accounts for the shift from strategic planning to strategic management? In which industries or compa- nies is this essential? Why?

7. Review Exhibit 4.6, which lists the components of an environmental analysis. Why is this so vitally important to a company’s strategic planning process?

8. What are the core capabilities of Harley-Davidson Motor Company motorcycles? How do these capabilities help

Harley-Davidson compete against foreign competitors such as Yamaha and Suzuki?

9. How could SWOT analysis help newspaper companies remain competitive in the new media environment?

10. What are the key challenges in strategy implementa- tion? What are some barriers to success, and what can you do about them?

EXPERIENTIAL EXERCISES 4.1 BUSINESS STRATEGIES NEED ADJUSTING

OBJECTIVE To study why and how a company adjusts its business strat- egy to adapt to changing external environments.

INSTRUCTIONS Using an Internet browser or a college’s library research por- tal, identify a recent article from such business news outlets as The Wall Street Journal, Bloomberg Business, Forbes, or Fast Company that describes a company that is changing its short- and long-term business strategies. Please read the article and provide answers to the following questions:

1. How would you describe the company’s former busi- ness strategy?

2. Why is the company changing its strategy? What exter- nal forces are encouraging it to change?

3. How would you describe the new business strategy?

4. What strategic goals or major targets does the com- pany hope to achieve?

5. How does the company intend to translate its new stra- tegic goals into tactical or operational plans? Which lev- els of management will carry out these plans?

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Planning and Strategic Management  Chapter 4 129

6. To what extent do you think the new strategy will be successful in addressing or adapting to the external forces? Explain.

SOURCE: Adapted from McGrath, R. R., Jr., Exercises in Management Fundamentals, 1st, p. 15. Upper Saddle River, NJ: Pearson Education, 1985.

Wish You Wood is a toy boutique located in the main shop- ping strip of a resort town near Piney Lake. People who own cabins near the lake or come to visit the local state park enjoy browsing through the town’s stores, where they pick up pottery, landscape paintings, and Wish You Wood’s beautifully crafted wooden toys. For these shoppers, Wish You Wood is more than a store; it is a destination they asso- ciate with family and fun.

The store’s owners, Jim and Pam Klein, personally select the toys from craftspeople and toymakers around the world. They enjoy their regular customers but believe sell- ing mostly to vacationers has limited the company’s growth. They decided that the lowest-cost way to expand would be to sell toys online. However, after several years, they had to admit that traffic to the store’s website was unimpressive. Thanks to e-mail and Facebook reminders, they were lur- ing some of their loyal in-store shoppers to the site to make off-season purchases, but few other people looking for toys ever found Wish You Wood online.

Jim and Pam concluded that the next-best way to sell online would be to partner with Amazon.com. Amazon’s Marketplace service lets other retailers sell products on Amazon. The Kleins signed an agreement to list the store’s most popular items with Amazon. For example, if a shopper is searching for wooden dollhouses, Wish You Wood’s doll- houses will be included in the search results. A customer who chooses to buy from Wish You Wood places the order right on Amazon’s website. Under Amazon’s participation agreement, the listings must be honest and may not link to Wish You Wood’s own website or invite phone calls from customers. In exchange for giving the products exposure on the site, Amazon charges a monthly fee plus a commission on each sale.

Initially, Jim and Pam were thrilled about their deci- sion to partner with Amazon. They tracked each month’s sales and compared them with in-store sales. In the first five months, sales jumped 45 percent, mainly because of sales on Amazon. Then, suddenly, sales of popular toy train sets, which were particularly profitable, stopped altogether. Puzzled, Jim visited Amazon to make sure the train sets were still listed. To his surprise, he found that the train set was there, at the usual price of $149, listed right after the same set available directly from Amazon, at $129. He and Pam concluded that shoppers were now buying the product directly from Amazon. It appeared that their store had helped Amazon identify a product consum- ers value.

The Kleins worried that they needed a new strategy. If they matched Amazon’s price, they would lose most of the profit on their most popular items. Wish You Wood was too small of a business to negotiate better prices from its suppliers. If the store didn’t match Amazon’s price, it would continue to lose sales at the Amazon site. Jim and Pam won- dered whether they should pull out of Amazon altogether or find a way to continue working with the partner that had become a competitor. They also considered rethinking which toys to offer on Amazon.

DISCUSSION QUESTIONS

1. Prepare a SWOT analysis for Wish You Wood, based on the information given.

2. Using the SWOT analysis, what general corporate strategy would you recommend for Wish You Wood? Should the store continue or change its current approach?

Concluding Case WISH YOU WOOD TOY STORE

Design elements: Lightbulb icon that indicates innovation: ©McGraw-Hill Education; Money icon that indicates cost: ©McGraw-Hill Education; Recycle icon that indicate sustainability: ©McGraw-Hill Education; Human head with headset that indicate service: ©McGraw- Hill Education; Letter Q icon that indicates quality: ©McGraw-Hill Education; Sand dial that indicates speed: ©McGraw-Hill Education

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Ethics Ethical Systems Business Ethics The Ethics Environment Ethical Decision Making Courage

Corporate Social Responsibility Contrasting Views Reconciliation

The Natural Environment and Sustainability A Risk Society Ecocentric Management Environmental Agendas for the Future

After studying Chapter 5, you will be able to:

Describe how different ethical perspectives guide decision making.

Explain how companies influence their ethics environment.

Outline a process for making ethical decisions.

Summarize the important issues surrounding corporate social responsibility.

Discuss reasons for businesses’ growing interest in the natural environment.

Identify actions managers can take to manage with the environment in mind.

LO 1

LO 2

LO 3

LO 4

LO 5

LO 6

CHAPTER 5

Ethics, Corporate Responsibility, and Sustainability

It is truly enough said that a corporation has no conscience; but a corporation of conscientious men

is a corporation with a conscience.

—HENRY DAVID THOREAU

CHAPTER OUTLINELEARNING OBJECTIVES

©Ingram Publishing RF

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For IBM’s Sam Palmisano and Ginni Rometty, business success can grow out of

values that emphasize focusing on the needs of others. As you read this chapter,

think about how well IBM’s values-driven approach positions the company to be

both ethical and successful.

The standard for principled leadership is set high for IBM’s chief executive, Ginni Rometty. She took charge of IBM upon the retirement of the widely admired Sam Palmisano, who saw an opportunity for the company to distinguish itself by applying its data-processing exper- tise to delivering customized business solutions.

Palmisano, rather than jumping straight into cor- porate restructuring or marketing campaigns, started with values. He set up a three-day “values jam,” dur- ing which employees throughout the global company were asked to contribute thoughts about what IBM’s values should be. Out of that process came a com- mitment to helping clients and building relationships based on trust and personal responsibility.

In a further expression of Palmisano’s values-based vision, IBM began to use the tagline “Smarter Planet.” Employees help companies, cities, and communi- ties around the world make better decisions aimed at improving business results, living conditions, and even the health of planet Earth. This goal was based on the realization that computers have extraordinary power to gather and analyze data, but applying the data also requires creative thinking, productive processes, and open communication. IBM would offer not just com- puter hardware but also decision-making and analytic expertise to bring all these requirements together.

Palmisano’s vision set IBM on course for years of strong growth as businesses, city governments, and nongovernmental organizations saw how the company could help them meet their goals. When he prepared to retire, Palmisano threw his support behind Rometty, who had started as a systems engineer at IBM in the

1980s and worked her way up to senior vice president and group executive for sales, marketing, and strategy. In a recent speech, Rometty signaled that she sees the Smarter Planet strategy as positioning IBM for a future in which data will drive more decisions, cloud computing will transform how industries operate, and mobile and social media will facilitate personalized user engagement.

Rometty’s strategy expertise and technical back- ground prepared her to guide IBM through an unprec- edented shift away from legacy hardware and services to new business initiatives such as business analytics, cloud computing, and mobile apps. But this change has not been an easy one. IBM’s sales revenue declined even as profit margins increased. Change takes time. Rometty believes there is money to be made in caring about the needs of cities, the business community, and the planet.1

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Management in Action HOW CAN GINNI ROMETTY ENSURE THAT IBM

DOES WELL WHILE DOING GOOD?

©AP Images

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How would you measure the success of a company such as IBM? By this quarter’s profits and its value in the stock market? By the degree of trust people place in its managers and consultants? By the good it does in improving quality of life by helping people make better decisions? Although a company might enjoy high profits in one quarter without these vir- tues, many argue that in the long run, all these measures of success are interdependent and essential.

This chapter addresses the values and manner of doing business adopted by managers as they carry out their corporate and business strategies. In particular, we will explore ways of applying ethics, the system of rules that governs the ordering of values. We do so based on the premise that managers, their organizations, and their communities thrive over the long term when they apply ethical standards that direct them to act with integrity.

We also consider the idea that organizations have a responsibility to meet social obliga- tions beyond earning profits within legal and ethical constraints. As you study this chapter, consider what kind of manager you want to be. What reputation do you hope to have? How would you like others to describe you as a manager?

It’s a Big Issue Scandals periodically engulf company executives, independent auditors, politicians and regulators, and shareholders and employees.2 In some, executives at public companies make misleading statements to inflate stock prices, undermining the public’s trust in the integrity of the financial markets. Often the scandals are perpetrated by a number of people coop- erating with one another, and many of the guilty parties had been otherwise upstanding individuals. Lobbyists have been accused—and some convicted—of buying influence with lavish gifts to politicians. Executives have admitted to bribing representatives of foreign governments in order to secure large contracts.

What recent news disturbs you about managers’ behavior? Tainted products in the food supply . . . actions that harm the environment . . . Internet hacks and scams . . . employees pressured to meet sales or production targets by any means? The list goes on, and the pub-

lic becomes cynical. In a 2017 survey by the public relations firm Edelman, only about one-third (down 12 percent over the previous year) of the respondents trusted business leaders to be good stewards of their organizations.3

When corporations behave badly, it’s often not the top executives but the rank-and- file employees who suffer most. For example, Wells Fargo’s leaders created a sales incentive system that strongly encouraged cross-selling (example: the bank’s employees were expected to convince a customer with only a savings account to open a check- ing account). Cross-selling is a common practice, but this program was particularly aggressive. The pressure to reach sales quotas was so high that many employees com- mitted fraud by opening over two million phony customer accounts—unbeknownst to the customers.4

The scandal came to light after some customers complained of being forced to pay fees on accounts they didn’t know existed. Wells Fargo paid over $185 million in gov- ernment fines, and of course its reputation as a trusted bank was damaged.5 Other recent corporate scandals include the Samsung Galaxy Note 7 battery debacle and the sexual harassment charges against Roger Ailes, the former chairman and CEO of Fox News.6

Simply talking about famous cases as examples of lax company ethics doesn’t get at the heart of the problem. Clearly, these cases have culprits, and their ethical lapses are obvious. But this makes it too easy to simply say “Of course I would never do things like that."

The fact is that temptations exist in every type of work and every organization. Many of the decisions you will face will pose ethical dilemmas, and the right thing to do is not always evident or easy.

ethics

The system of rules that governs the ordering of values; see also corporate social responsibility.

Temptations exist in every organization

and at every level.

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It’s a Personal Issue “Answer true or false: ‘I am an ethical manager.’ If you answered ‘true,’ here’s an uncomfort- able fact: You’re probably not.”7 These sentences are the first in a Harvard Business Review article called “How (Un)Ethical Are You?” The point is that most of us think we are good decision makers, ethical, and unbiased. But the fact is, most people have unconscious biases that favor themselves and their own group. For example, managers often hire people who are like them, think they are immune to conflicts of interest, take more credit than they deserve, and blame others when they deserve some blame themselves.

Knowing that you have biases may help you try to overcome them, but usually that’s not enough. Consider the act of telling a lie.8 Many people lie—some more than others, and in part depending on the situation, usually presuming that they will benefit somehow. At a basic level, we all can make ethical arguments against lying and in favor of honesty. Yet it is useful to think thoroughly about the real consequences of lying.9 Exhibit 5.1 summarizes the possible outcomes of telling the truth or lying in different situations. People often lie or commit other ethical transgressions somewhat mindlessly, without realizing the full array of negative personal consequences.

Ethics issues are not easy, and not just for newsworthy corporate CEOs. For example, people at work use computers with Internet access. If the employer pays for the computer and the time you spend sitting in front of it, is it ethical for you to use the computer to do tasks unrelated to your work?

What if you stream video of games for your own and your co-workers’ enjoyment, or take a two-hour lunch to locate the best deal on a flat-panel TV? Besides lost productivity, employ- ers are most concerned about computer users introducing viruses, leaking confidential infor- mation, and creating a hostile work environment by downloading inappropriate web content.

SOURCE: Adapted from Gover, S. L., “The Truth, the Whole Truth, and Nothing but the Truth: The Causes and Management of Workplace Lying,” The Academy of Management Executive: The Thinking Manager’s Source. Mississippi State, MS: Academy of Management, 2005.

Reason for the Lie Results of Lying Results of Telling the Truth

Negotiation • Short-term gain and economically positive.

• Harms long-term relationship.

• Must rationalize to oneself.

• Supports high-quality, long-term relationship.

• Develops reputation of integrity.

• Models behavior to others.

Conflicting expectations

• Easier to lie than to address the underlying conflict.

• Does not solve underlying problem.

• Liar must rationalize the lie to preserve positive self-concept.

• Emotionally more difficult than lying.

• May correct underlying problem.

• Develops one’s reputation as an honest person.

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

• Maintains relationship with the party for whom confidence is kept.

• May project deceitfulness to the deceived party.

• Violates a trust to the confiding party.

• Makes one appear deceitful to all parties in the long run.

Reporting your own performance (within an organization)

• Might advance oneself or one’s cause.

• Develops dishonest reputation over time.

• Creates a reputation of honesty and integrity.

• Performance report may not always be positive.

EXHIBIT 5.1 Possible Outcomes of Lying and Telling the Truth

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Multiple Generations at Work Millennials Are Bullish on Business

According to Deloitte’s Millennial Survey 2017, Millennials believe that businesses are behaving ethi- cally and that their leaders are committed to improving society.10 But plenty of room remains for companies to improve continuously on both dimensions.

Organizations can build trust among their Millennial and other employee groups. Leaders and managers can demonstrate ethical behaviors including honesty; strive for high-quality relationships built on respect, trust, and decency; and develop and communicate a clear code of

ethics. And, how to consider ethics when making deci- sions is an excellent topic for training and professional development.11

The desire to be ethical in business and make a positive impact on society is growing. In March 2017, Ethisphere hosted the 9th annual “Global Ethics Summit” for leaders from over 200 organizations and companies from around the world. These top executives shared best practices in fostering ethical cultures, increasing value to stockhold- ers, and ensuring sustainable corporate governance.12

70%

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Businesses’ leaders want to improve society

2015

2017

SOURCE: Adapted from “The Deloitte Millennial Survey 2017,” www2.deloitte.com.

Sometimes employees write blogs or post comments online about their company and its products. Obviously, companies do not want their employees to say bad things about them, but some companies are concerned about employees who are overly enthusiastic. When employees plug their companies and products on comments or review pages, the practice is spamming at best and deceptive if the employees don’t disclose their relationship with their company.

It also is deceptive when companies create fictional blogs as a marketing tactic without disclosing their sponsorship, and when they pay bloggers to write positive comments about them—a practice known as “astroturfing” because the “grassroots” interest it builds is fake. Examples include Bell Canada paying a $1.25 million penalty to the Canadian government for encouraging employees to post positive reviews and ratings regarding its mobile app,13 and false positive reviews on Amazon paid for via sites including “Buy Amazon Reviews" and “Paid Book Reviews.”14 To protect the integrity of its 5-star product rating system, Amazon sued these and other sites that sell fraudulent online reviews.15

Are these examples too small to worry about? No, minor ethical lapses may lead to major problems. This chapter will help you think through decisions with ethical ramifications.

Try to imagine the challenge of leading employees who don’t trust you. The nearby “Multiple Generations at Work” box discusses trust in the workplace.

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The aim of ethics is to identify both the rules that should govern people’s behavior and the “goods” that are worth seeking. Ethical decisions are guided by the underlying values of the individual. Values are principles of conduct such as caring, being honest, keeping promises, pursuing excellence, showing loyalty, being fair, acting with integrity, respecting others, and being a responsible citizen.16

Most people would agree that all of these values are admirable guidelines for behavior. However, ethics becomes a more complicated issue when a situation dictates that you must chooses one value over others. An ethical issue is a situation, problem, or opportunity in which an individual must choose among several actions that must be evaluated as morally right or wrong.17

Ethical issues arise in every facet of life; we concern ourselves here with business ethics in particular. Business ethics comprise the moral principles and standards that guide behav- ior in the world of business.18

Ethical Systems Moral philosophy refers to the principles, rules, and values people use in deciding what is right or wrong. This is a simple definition in the abstract but often terribly complex and dif- ficult when facing real choices. How do you decide what is right and wrong? Do you know what criteria you apply and how you apply them?

Ethics scholars point to several major ethical systems as potential guides (see Exbibit 5.2).19 The first, universalism, states that all people should uphold certain values, such as honesty, that society needs to function. Universal values are principles

ethical issue

Situation, problem, or opportunity in which an individual must choose among several actions that must be evaluated as morally right or wrong.

LO 1

Ethics

Ethics becomes a more complicated issue

when a situation dictates that you must

choose one value over others.

EXHIBIT 5.2 Examples of Decisions Made under Different Ethical Systems

A nonprofit organization treats all of its employees who work in di�erent countries with

fairness and dignity.

An entrepreneur builds a successful company for personal growth and financial gain; and ultimately,

employs thousands of employees.

Employees of a mid-sized company, after losing two major customers, accept a 10 percent

reduction in salary so no one has to be laid o�.

A college student refuses to share answers with a fellow student during an exam because her

friends would engage in such behavior.

A manager believes that it is critical to stand up for what is right and not be unduly influenced by her

manager or other organizational pressure.

Universalism

Egoism

Utilitarianism

Relativism

Virtue ethics

business ethics

The moral principles and standards that guide behavior in the world of business. See also ethics.

moral philosophy

Principles, rules, and values people use in deciding what is right or wrong.

universalism

The ethical system stating that all people should uphold certain values that society needs to function.

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so fundamental to human existence that they are important in all societies— for example, rules against murder, deceit, torture, and oppression.

Some efforts have been made to establish global, universal ethical principles for business. The Caux Roundtable, a group of international executives based in Caux, Switzerland, worked with business leaders from Japan, Europe, and the United States to create the Caux Principles. Two basic ethical ideals underpin the Caux Principles: kyosei and human dignity. Kyosei means living and work- ing together for the common good, allowing cooperation and mutual prosperity to coexist with healthy and fair competition. Human dignity concerns the value of each person as an end, not a means to the fulfillment of others’ purposes.

Universal principles can be powerful and useful, but what people say, hope, or think they would do is often different from what they really do, faced with conflicting demands in real situations. Different individuals in different circumstances apply different moral philosophies. Consider each of the following moral philosophies and the actions to which they might lead.20

Egoism and Utilitarianism According to egoism, acceptable behav- ior is that which maximizes benefits for the individual. “Doing the right thing,” the focus of moral philosophy, is defined by egoism as “do the act that promotes the greatest good for oneself.” If everyone follows this sys- tem, according to its proponents, the well-being of society as a whole should increase. This notion is similar to Adam Smith’s concept of the invisible hand in business. Smith argued that if every organization follows its own economic self-interest, the total wealth of society will be maximized.

Unlike egoism, utilitarianism directly seeks the greatest good for the greatest number of peo- ple. Consider how utilitarianism might justify laying off about half of the 1,200 workers from the Nabisco plant (maker of Oreos, Chips Ahoy, and Ritz Crackers) in Chicago. According to Irene Rosenfeld, CEO of Mondelez International (which owns Nabisco), production is moving to more modern facilities in Mexico. The move will increase efficiency and productivity, two essential ingredients that will help Nabisco compete successfully in 165 countries around the world.21 Maintaining global competitiveness will help ensure that thousands of other Nabisco employees who were not laid off will continue to have jobs and careers with the company.

Relativism Relativism defines ethical behavior based on the opinions and behaviors of relevant other people. In the Nabisco Oreo layoff example, leaders of other U.S. manu- facturers (especially bakers) who are operating aging, less efficient facilities are likely to understand and even support the layoffs. However, city officials in Chicago and the plant’s laid off employees will not agree.

Relativism acknowledges the existence of different ethical viewpoints. For example, norms, or standards of expected and acceptable behavior, vary from one culture to another. A study of Russian versus U.S. managers found that all followed norms of informed consent about chemical hazards in work situations and paying wages on time. But in Russia more than in the United States, business people were likely to consider the interests of a broader set of stakeholders (in this study, keeping factories open for the sake of local employment), to keep double books to hide information from tax inspectors and criminal organizations, and to make personal payments to government officials in charge of awarding contracts.22 Relativism defines ethical behavior according to how others behave.

Virtue Ethics The moral philosophies just described apply different types of rules and reasoning. Virtue ethics is a perspective that goes beyond the conventional rules of society by suggesting that what is moral must come also from what a mature person with good “moral

Caux Principles

Ethical principles established by international executives based in Caux, Switzerland, in collaboration with business leaders from Japan, Europe, and the United States.

egoism

An ethical system defining acceptable behavior as that which maximizes consequences for the individual.

Employees sometimes feel that “borrowing” a few office supplies from their company helps compensate for any perceived inequities in pay or other benefits.

©allesalltag/Alamy Stock Photo

utilitarianism

An ethical system stating that the greatest good for the greatest number should be the overriding concern of decision makers.

relativism

Philosophy that bases ethical behavior on the opinions and behaviors of relevant other people.

virtue ethics

Perspective that what is moral comes from what a mature person with “good” moral character would deem right.

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character” would deem right. Society’s rules provide a moral minimum, and then moral individ- uals can transcend rules by applying their personal virtues such as faith, honesty, and integrity.

Individuals differ in this regard. Kohlberg’s model of cognitive moral development classi- fies people into categories based on their level of moral judgment.23 People in the preconven- tional stage make decisions based on rewards and punishments and immediate self-interest. People in the conventional stage conform to the expectations of ethical behavior held by groups or institutions such as society, family, or peers. People in the principled stage see beyond authority, laws, and norms and follow their self-chosen ethical principles.24

Some people forever reside in the preconventional stage, some move into the conven- tional stage, and some develop further yet into the principled stage. Over time, and through education and experience, people may change their values and ethical behavior.25

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

Business Ethics Insider trading, sweatshops and modern slavery,26 bribery and kickbacks, and other scan- dals create negative perceptions of business and business leaders. People use illegal and unethical means to beat their rivals,27 increase profits, or improve their personal positions. Neither young managers nor consumers believe top executives are doing a good job of establishing high ethical standards.28 Some even joke that business ethics is a contradiction in terms.

A recent survey found that about half of the employees in large companies have observed misconduct in the work- place.29 Many people feel ethically conflicted, stressed, and exhausted as companies sometimes encourage them to behave in ways that differ from their own sense of right and wrong.30 Many managers must deal frequently with ethical dilemmas, and the issues are becoming increasingly complex. For exam- ple, many people seek spiritual renewal in the workplace, in part reflecting a broader religious awakening in the United States, whereas others argue that this trend violates religious freedom and the separation of church and boardroom.31

Exhibit 5.3 shows some other important examples of ethical dilemmas in business. Think about how you would address each of these issues as a manager. What ethical principles are you applying?

The Ethics Environment Responding to a series of corporate scandals—particularly the high-profile cases of Enron and WorldCom—Congress passed the Sarbanes-Oxley Act in 2002 to improve and maintain investor confidence. The law requires companies to have more independent board directors (not just company insiders), to adhere strictly to accounting rules, and to have senior man- agers personally sign off on financial results. Violations can result in heavy fines and crimi- nal prosecution. One of the biggest impacts of the law was the requirement for companies and their auditors to provide reports to financial statement users about the effectiveness of internal controls over the financial reporting process.

Companies that make the effort to meet or exceed these requirements can reduce their risks, by lowering the likelihood of misdeeds and the consequences if an employee does break the law.32 But some executives said Sarbanes-Oxley distracted from their real work and made them more risk-averse. Some complained about the time and money needed to comply with the internal control reporting—millions of dollars at big businesses. But some discovered that the effort helped them avoid mistakes and improve efficiency.

Sarbanes-Oxley created legal requirements intended to improve ethical behavior. After his inauguration, President Donald Trump wanted to ease legal constraints on business including Wall Street. What has happened since then, and what is happening now?

Kohlberg’s model of cognitive moral development

Classification of people based on their level of moral judgment.

LO 2

Sarbanes-Oxley Act

An act passed into law by Congress to establish strict accounting and reporting rules in order to make senior managers more accountable and to improve and maintain investor confidence.

Should pharmaceutical companies be allowed to advertise directly to the consumer if the medicine can be obtained only with a prescription from a doctor? When patients request a particular product, doctors are more likely to prescribe it—even if the patients haven’t reported the corresponding symptoms.

©McGraw-Hill Education/John Flournoy

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CEO pay What is a fair level of pay for a top executive? Twenty times, or hundreds of times, what the average company worker earns? Whatever other companies want to pay their top executives?

Climate What is a company’s responsibility for its impact on the climate? For example, if operations in one country contribute to rising global temperatures that lead to greater floods in another country, how should the company respond?

Globalization When a company operates in countries with lower costs, what are its obligations, if any, to the workers in those countries? What standards should it meet for pay rates?

Health care With health care costs outpacing inflation, employers struggle to cover the cost of health insurance for workers. Are they ethically obligated to provide this benefit?

Obesity As an obesity epidemic threatens health and adds to health care costs, what role, if any, should employers play in encouraging healthy employee lifestyles?

Online privacy What obligations do employers have in protecting the privacy of employee information and information about customers?

Social media What ethical obligations do employees have in commenting about their employer on social media? What ethical obligations do employers have concerning their employees’ privacy on social media?

Wages When adjusted for inflation, the median wage in the United States has fallen over the past decades. What should employers do to promote a sense that their compensation is fair?

EXHIBIT 5.3 Current Ethical Issues in Business

Maintaining a positive ethical climate is always challenging, but it is especially complex for organizations with international activities. Different cultures and countries may have different standards of behavior, and managers have to decide when relativism is more appro- priate than adherence to firm standards. Exchange of courtesies is one thing, but a danger is posed for the unwary business person in areas of the world where bribery and graft are commonplace, which is why Congress passed the Foreign Corrupt Practices Act.

(Un)ethical actions are influenced not only by laws and by individual virtue, but also by the company’s work environment. Unethical corporate behavior may be the responsibility of an unethical individual, but it often also reveals a company culture that is ethically lax.33

The ethical climate of an organization refers to the processes by which decisions are evalu- ated and made on the basis of right and wrong.34 For employees, the right ethical climate can be a source of ethical personal actions plus pride, satisfaction, and commitment to the employer, while the wrong climate will cause unethical behavior or dissatisfaction and quitting.35

General Electric’s top executives have demonstrated a commitment to promoting high levels of integrity without sacrificing the company’s well-known commitment to business results. The measures taken by GE to maintain a positive ethical climate include establish- ing global standards for behavior to prevent ethical problems. The company’s Statement of Integrity reinforces the ethical climate:

For more than 125 years, GE has demonstrated an unwavering commitment to performance with integrity. At the same time we have expanded into new businesses and new regions and built a great record of sustained growth, we have built a worldwide reputation for lawful and ethical conduct.36

As GE managers monitor the external environment, they are expected to consider legal and ethical developments, along with other concerns, so that the company can be prepared for new issues as they arise. Managers at all levels are rewarded for their performance in meeting both integrity and business standards, and when violations occur, even managers

ethical climate

In an organization, the processes by which decisions are evaluated and made on the basis of right and wrong.

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who were otherwise successful are disciplined. This sends a powerful message that ethical behavior truly is valued at GE.37

Danger Signs Maintaining consistent ethical behavior by all employees is an ongo- ing challenge. What are some danger signs that an organization may be allowing or even encouraging unethical behavior? Exhibit 5.4 lists many factors that could create a climate conducive to unethical behavior.38

Regardless of your employer’s ethical climate, you are responsible for the decisions you make. It’s been said that your reputation is your most precious asset. Here’s a suggestion: when making decisions, explicitly consider their impact on your personal reputation.

You can have strong personal character, but if you “manage” ethics only by benign neglect, you won’t develop a reputation as an ethical leader. Here’s another suggestion, if you want to take ethics to the next level: Set a goal for yourself to be seen by others as both a moral person and as a moral manager—someone who influences others to behave ethically. When you are both personally moral and a moral manager, you will truly be an ethical leader.39

Corporate Ethical Standards To create a culture that encourages ethical behavior, managers must be more than ethical people. They also should lead others to behave ethi- cally.40 At General Electric, longtime (now former) chief executive Jeffrey Immelt demon- strated his concern for ethical leadership by beginning and ending each annual meeting with a statement of the company’s integrity principles, emphasizing that “GE’s business success is built on our reputation with all stakeholders for lawful and ethical behavior.”41

OshKosh provides questions for employees to ask themselves when facing ethical deci- sions: “Are my actions legal?” “Am I being fair, honest and ethical?” “Will I sleep soundly tonight?” and “What would I tell my child to do?” The implication: if you wouldn’t want a decision highlighted in the media, then don’t do it.42 This “light of day” or “sunshine” ethi- cal framework can be a powerful influence.

Such fear of exposure compels people more strongly in some cultures than in others. In some Asian countries, anxiety about losing face often makes executives resign immediately if they are caught in ethical transgressions or if their companies are embarrassed by revelations in the media. By contrast, in the United States, exposed executives might respond with indignation, intransi- gence, pleading the Fifth Amendment, stonewalling, and mounting an everyone-else-does-it self- defense, or by not admitting wrongdoing and giving no sign that resignation ever crossed their minds. Partly because of legal tradition, the attitude often is never explain, never apologize, don’t admit the mistake, and do not resign, even if the entire world knows exactly what happened.43

Ethics Codes The Sarbanes-Oxley Act required public companies periodically to dis- close whether they have adopted a code of ethics for senior financial officers—and if not, why not. Often such statements are just for show, but when implemented well, they can change a company’s ethical climate for the better and truly encourage ethical behavior. Executives say they pay most attention to their company’s code of ethics when they feel that

ethical leader

One who is both a moral person and a moral manager influencing others to behave ethically.

1. Excessive emphasis on short-term revenues over longer-term considerations.

2. Failure to establish a written code of ethics.

3. A desire for simple, quick-fix solutions to ethical problems.

4. An unwillingness to take an ethical stand that imposes financial costs.

5. Consideration of ethics solely as a legal issue or a public relations tool.

6. Lack of clear procedures for handling ethical problems.

7. Responding to the demands of shareholders at the expense of other constituencies.

EXHIBIT 5.4 Seven Danger Signs of Unethical Behavior at Your Organization

Fear of exposure compels people more

strongly in some cultures than in others.

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The Digital World While corporate ethics programs work hard to ensure that employees are behaving ethically, some companies use technology to enforce compliance and limit their lia- bility if a violation occurs. Most companies have a policy that computers, cell phones, and Internet access provided by the company come with the company’s legal right to access any content.

Goldman Sachs’ compliance department monitors all e-mails and social media with an algorithm that looks for key words, which, when flagged, receive additional scrutiny to determine if there is an issue. Employees sign a document stating that they are aware e-mails are reviewed.

Examples of words and phrases monitored are “worst investment,” “I trusted you,” and many types of profan- ity. While the original list of words and phrases was pro- duced in 2008, in 2016 news agencies started publishing words and phrases used by the algorithm that had been obtained from an anonymous inside source.

Digital monitoring tools can affect employee online behavior by their power to catch transgressors, and also by the ease with which stakeholders can post proof online of behavior they think the public should know about. These provide a level of transparency not previously pos- sible, while creating additional ethics challenges. What are your reactions to this?

stakeholders (customers, investors, lenders, and suppliers) try to influence them to do so, to promote a positive image.44

Most ethics codes address subjects such as employee conduct, community and environ- ment, shareholders, customers, suppliers and contractors, political activity, and technology. The nonprofit Ethics Resource Center conducts research and assists companies interested in establishing a corporate code of ethics.45

Ethics codes must be carefully written and tailored to individual companies’ philoso- phies. Exhibit 5.5 reprints the Commitments section of The Hershey Company’s code of ethics.

To make an ethics code effective, do the following: (1) involve those who have to live with it in writing the statement; (2) focus on real-life situations that employees can relate to; (3) keep it short and simple, so it is easy to understand and remember; (4) write about values and shared beliefs that are important and that people can really believe in; and (5) set the tone at the top, having executives talk about and live up to the statement.46

When reality differs from the statement—as when a motto says people are our most pre- cious asset or a product is the finest in the world, but in fact people are treated poorly or product quality is weak—the statement becomes a joke to employees rather than a guiding light.

Ethics Programs Corporate ethics programs commonly include formal ethics codes that articulate the company’s expectations: ethics committees that develop policies, evalu- ate actions, and investigate violations; ethics communication systems that give employees a means of reporting problems or getting guidance; ethics officers or ombudspersons who investigate allegations and provide education; ethics training programs; and disciplinary processes for addressing unethical behavior.47

Ethics programs can range from compliance-based to integrity-based.48 Compliance- based ethics programs are designed by corporate counsel to prevent, detect, and punish legal violations. Program elements include establishing and communicating legal standards and procedures, assigning high-level managers to oversee compliance, auditing and monitoring compliance, reporting criminal misconduct, punishing wrongdoers, and taking steps to pre- vent offenses in the future.

Such programs can reduce illegal behavior and help a company stay out of court. But as a former chair of the Securities and Exchange Commission said, “It is not an adequate ethical standard to aspire to get through the day without being indicted.”

Integrity-based ethics programs go beyond the mere avoidance of illegality; they are con- cerned with the law but also with instilling in people a personal responsibility for ethical

compliance-based ethics programs

Company mechanisms typically designed by corporate counsel to prevent, detect, and punish legal violations.

integrity-based ethics programs

Company mechanisms designed to instill in people a personal responsibility for ethical behavior.

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We have each made a commitment to operate ethically and to lead with integrity. This commitment is embedded in the Hershey values. Our Code of Ethical Business Conduct (“Code”) shows us how to uphold this commitment as we interact with the various groups that have a stake in our Company’s success.

OUR COMMITMENT TO FELLOW EMPLOYEES

We treat one another fairly and with respect, valuing the talents, experiences and strengths of our diverse workforce.

OUR COMMITMENT TO CONSUMERS

We maintain the trust consumers place in our brands, providing the best products on the market and adhering to honest marketing practices.

OUR COMMITMENT TO THE MARKETPLACE

We deal fairly with our business partners, competitors and suppliers, acting ethically and upholding the law in everything we do.

OUR COMMITMENT TO STOCKHOLDERS

We act honestly and transparently at all times, maintaining the trust our stockholders have placed in us.

OUR COMMITMENT TO THE GLOBAL COMMUNITY

We comply with all global trade laws, protecting our natural resources and supporting the communities where we live, work and do business.

EXHIBIT 5.5 The Hershey Company’s Code of Ethical Business Conduct: Commitments

The Hershey Company, “Code of Ethical Business Conduct.” Accessed March 20, 2015. http://www. thehersheycompany.com. All rights reserved. Used with permission.

behavior. With such a program, companies and people govern themselves through a set of guiding principles that they embrace.

For example, the Americans with Disabilities Act (amended in 2008) required compa- nies to change the physical work environment so it will allow people with disabilities to function on the job. Mere compliance would involve making the changes necessary to avoid legal problems. Integrity-based programs would go further by training people to understand and perhaps change attitudes toward people with disabilities, and sending clear signals that people with disabilities also have valued abilities. This effort goes far beyond taking action to stay out of trouble with the law.49

Ethical Decision Making We’ve said it’s not easy to make ethical choices. Such decisions are complex.50 For starters, you may face pressures that are difficult to resist. Furthermore, it’s not always clear that a problem has ethical dimensions; they don’t hold up signs that say “Hey, I’m an ethical issue, so think about me in moral terms!”51

Making ethical decisions takes moral awareness (realizing the issue has ethical implica- tions), moral judgment (knowing what actions are morally defensible), and moral character (the strength and persistence to act in accordance with your ethics despite the challenges).52

The philosopher John Rawls created a thought experiment based on the “veil of igno- rance.”53 Imagine that you are making a decision about a policy that will benefit or disad- vantage some groups more than others. For example, a policy might provide extra vacation time for all employees but eliminate flextime, which allows parents of young children to balance their work and family responsibilities. Or you’re a university president considering raising tuition or cutting financial support for study abroad.

Now pretend that you belong to one of the affected groups, but you don’t know which one—for instance, those who can afford to study abroad or those who can’t, or a young parent or a young single person. You won’t find out until after the decision is made.

LO 3

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How would you decide? Would you be willing to risk being in the disadvantaged group? Would your decision be different if you were in a group other than your own? Rawls main- tained that only a person ignorant of his own identity can make a truly ethical decision. A decision maker can apply the veil of ignorance to help minimize personal bias.

Thinking before deciding, and having an ethics-oriented conversation with others, can help you and others make more ethical decisions.54 You can use the process illustrated in Exhibit 5.6. Understand the various moral standards (universalism, relativism, etc.), as described ear- lier in the chapter. Go through the problem-solving model from Chapter 3 and recognize the impacts of your alternatives: Which people do they benefit and harm, which are able to exercise their rights, and whose rights are denied? You now know the full scope of the moral problem.

Excuses for unethical behavior often are bogus.55 “I was told to do it” implies a per- son has no personal thoughts and blindly obeys. “Everybody’s doing it” often really means that some- one is doing it, but it’s rarely everybody; regardless, following convention doesn’t mean correctness.

“Might equals right” is just a rationalization. “It’s not my problem” is sometimes a wise per- spective, if it’s a battle you can’t win, but sometimes it’s a cop-out. “I didn’t mean for that to happen, it just felt right at the time” can be prevented with more forethought and analysis.

You must also consider legal requirements to ensure full compliance, and the economic outcomes of your options, including costs and potential profits.56 Some are obvious: fines and penalties. Others, such as corrective actions and lower morale, are less obvious. Ultimately, the effects on customers, employees, and others can be huge. Being fully aware of the potential costs can help prevent people from straying into unethical terrain.

Courage As stated earlier, behaving ethically requires not just moral awareness and moral judgment but also moral character. It sometimes requires courage to take actions consistent with your ethics when others don’t want you to.

Think about how hard it can be to do the right thing.57 On the job, how hard would it be to walk away from lots of money just to stick to your ethics? To tell colleagues or your boss that you believe they’ve crossed an ethical line? To disobey a boss’s order? To go over your boss’s head to someone in senior management with your suspicions about accounting practices? To go outside the company to alert authorities if someone is being hurt and man- agement refuses to correct the problem?

Courage plays a role in the moral awareness involved in identifying an act as unethical, the moral judgment to consider the repercussions fully, and the moral character to take the ethical action. Consider, for example, how difficult it is to deliver unpleasant news, even if you believe that honesty is important and is the way you would want to be treated.

Honesty was a hurdle for some Hilton Worldwide managers as they made staffing deci- sions for their call centers. Hilton, which operates call centers in five countries and contracts with call centers in the Philippines, reportedly sent employees from its Hemet, California,

Recognize all moral impacts: Benefits/Harms to others Rights exercised/denied.

Understand all moral standards.

Define complete

moral problem.

Evaluate the ethical duties.

Propose convincing

moral solution.

Determine the economic

outcomes.

Consider the legal

requirements.

Excuses are often bogus.

Bottom Line “Costs” aren’t exactly synonymous with “ethics.” But by considering all costs to all parties, you can make high-quality ethical decisions that you can more effectively sell to others. What are some costs of treating employees or customers unethically?

SOURCE: Hosmer, L. T., The Ethics of Management, 4th ed. New York: McGraw-Hill/Irwin, 2003, p. 32. Fig. 5.1A.

EXHIBIT 5.6  A Process for Ethical Decision Making

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center to a new call center in Manila to train those employees in customer service. Only afterward were the California employees told that the company would be closing the Hemet facility and laying off the workers there unless they agreed to relocate to jobs in Texas or Florida. Perhaps the managers feared that telling employees the news earlier would have led to pushback, a poor job of training (intentional or otherwise) in the Philippines, or a refusal to go. Honesty takes courage when it is difficult, and the risks of complete honesty are real.58

Even more courage is necessary when you decide that the only ethical course of action is whistleblowing—telling others, inside or outside the organization, of wrongdoing. The road for whistleblowers is rocky. When whistleblowers go public, others often see them as acting against the company’s interests. Many, perhaps most, whistleblowers suffer consequences such as being ostracized, treated rudely, or given undesirable assignments.

Some organizations offer channels for employees to report ethics problems so they can deal with them internally. Ideally, the reporting method should keep the whistleblower’s identity secret, management should investigate and respond quickly, and there should be no retaliation against whistleblowers who use proper channels.

The road for whistleblowers is rocky.

One advantage IBM has in meeting its standards for trust is that it is part of a relatively trusted industry. In the Edelman Trust Barometer, an annual survey of public attitudes toward various institutions, people from around the world rated the technology industry as the industry they most often trust to do what is right—mainly because they see tech companies as able to benefit society. Ginni Rometty, CEO of IBM, periodically highlights the importance of pro- tecting people’s privacy and security.

IBM is tackling this challenge. It has a set of policies aimed at building trust, including a policy for business conduct and ethics and one for protecting data privacy. The ethics policy states, “It is IBM’s policy to conduct itself ethically and lawfully in all matters and to maintain IBM’s high standards of business integrity.” It puts employees on notice that there are consequences for unethical conduct.

IBM’s policies explicitly call for fairness, equity, a com- mitment to quality, and compliance with laws, including employment and anti-corruption laws. Its data privacy laws call for employees to collect only relevant personal infor- mation, keep it as accurate as possible, and take measures to keep it secure, among other requirements.

Compliance with ethical standards is most likely when managers and employees at all levels are committed to the standards. Thus, it should help IBM that its strategy and culture changes under Sam Palmisano started with an all- employee values jam. An outcome of that process was a statement of three values:

1. Dedication to every client’s success 2. Innovation that matters, for our company and the

world 3. Trust and personal responsibility in all relationships

These statements appear on the company’s web- site, where any employee or concerned citizen can be reminded of what IBM is striving to achieve.

Even with formal statements and consequences for behavior, maintaining ethical conduct is a challenge, espe- cially for a global company because employees encounter differences in standards and practices in other countries. Thus, IBM was charged by the Securities and Exchange Commission with bribing government officials in South Korea and China over more than 10 years. As part of its settlement, IBM must file monthly reports with the SEC to demonstrate its efforts to avoid future violations of the Foreign Corrupt Practices Act.

Meanwhile Canadian media reported in 2015 that three IBM employees were arrested there on corruption charges. IBM also says it is cooperating with the SEC as regulators look at IBM’s accounting practices in the UK and Ireland, as well as at home in the United States. Living up to its own code of ethics will require continued vigilance at IBM.59

• Besides the measures described, how else can IBM promote ethical conduct by its employees?

• In a company operating where bribing government officials is expected, how can employees find the moral courage to forgo bribery at the risk of losing a big sale?

Management in Action THE STATE OF ETHICS AT IBM

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For ethical managers, the goal is to lead employees to maintain high ethical standards, which creates an environment in which whistleblowing is unnecessary. After reading “Management in Action: Progress Report,” consider how IBM promotes ethical conduct and how this might reinforce employees’ moral courage.

Corporate Social Responsibility

Stewardship means contributing to the long-term welfare of others.60 Does business ever operate this way? Consider the following examples:

• Unilever structures its production and management processes to reduce negative impact on environments and communities.

• Starbucks has over 1,000 Leadership in Energy and Environmental Design (LEED) certified stores in 20 countries.

• Burt’s Bees helped develop the Natural Standard for personal products, which cre- ated guidelines for what can be deemed natural.

• Pedigree dog food built its brand by focusing on the need to adopt homeless dogs. • Whole Foods created Whole Planet Foundation to fight poverty through microlend-

ing to microentrepreneurs in rural communities around the world. • Ford Motor Company fights HIV/AIDS in South Africa. • Kickboard empowers teachers to use data to improve student performance in high-

poverty areas in the United States. • Bank Boston fosters economic development in communities of moderate income

and in the inner city.61

Should business be responsible for social concerns beyond its own economic well-being? Do social concerns affect a corporation’s financial performance? In the 1960s and 1970s, the political and social environment became more important to U.S. corporations as society turned its attention to issues such as equal opportunity, pollution control, energy and natu- ral resource conservation, and consumer and worker protection.62 Public debate addressed these issues and the ways business should respond to them. This controversy focused on the concept of corporate social responsibility.

Corporate social responsibility (CSR) is the obligation toward society assumed by busi- ness.63 Corporate social responsibility reflects the social imperatives and the social con- sequences of business practices; it consists broadly of policies and practices that reflect business responsibility for some wider societal good.64 This can range from local or small- scale problems to issues of politics, diplomacy, international relations, and peace through commerce.65 Interesting questions to contemplate include why past corporate irrespon- sibilities are easily forgotten, and whether and how current managers of an organization should be held responsible for the irresponsible actions of the managers who came before them.66

CSR actions and policies take into account stakeholders’ expectations and often con- sider the triple bottom line of economic, social, and environmental performance.67 The pre- cise policies and practices underlying CSR lie at the discretion of the corporation. Some companies refer to their CSR practices in terms of sustainability, on the grounds that these efforts maintain positive long-term relationships with communities, employees, customers, governments, and the natural environment.68

Social responsibilities can be categorized69 as shown in Exhibit 5.7. The economic responsibilities of business are to produce goods and services that society wants at a price that perpetuates the business and satisfies its obligations to investors. For Smithfield Foods, the largest pork producer in the United States, this means selling bacon, ham, and other products to customers at prices that maximize Smithfield’s profits and keep the company growing over the long term. Economic responsibility may also extend to offering certain products to needy consumers at a reduced price.

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stewardship

Contributing to the long- term welfare of others.

corporate social responsibility (CSR)

Obligation toward society assumed by business. See also ethics.

triple bottom line

Economic, social, and environmental performance.

economic responsibilities

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

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EXHIBIT 5.7 Pyramid of Global Corporate Social Responsibility and PerformancePhilanthropic

responsibility

Ethical responsibility

Legal responsibility

Economic responsibility

Be a good global corporate citizen.

Be ethical.

Obey the law.

Be profitable.

Do what is desired by global stakeholders.

Do what is expected by global stakeholders.

Do what is required by global stakeholders.

Do what is required by global capitalism.

SOURCE: Carroll, A., “Management Ethically with Global Stakeholders: A Present and Future Challenge,” Academy of Management Executive: The Thinking Manager’s Source. Mississippi State, MS: Academy of Management, 2004.

Legal responsibilities are to obey local, state, federal, and relevant international laws. Laws affecting Smithfield cover a wide range of requirements, from filing tax returns to meeting worker safety standards. Ethical responsibilities include meeting other societal expectations, not written as law. Smithfield took on this level of responsibility when it responded to requests by major customers, including McDonald’s, Walmart, and Safeway, that it discontinue the practice of using gestation crates to house its sows. The customers were reacting to pressure from animal rights advocates who consider it cruel for sows to live in the two-foot by seven- foot crates during their entire gestation period, which means they cannot walk, turn around, or stretch their legs for months at a time.70 Smithfield was not legally required to make the change (except in two states), and the arrangement was costly, but the company’s decision helped its public image—that is, until it backed out of the plan, citing economic woes.

Finally, philanthropic responsibilities are additional behaviors and activities that society finds desirable and that the values of the business support. Examples include supporting com- munity projects and making charitable contributions. Philanthropic activities can be more than mere altruism; managed properly, strategic philanthropy can become not an oxymoron but a way to build goodwill in a variety of stakeholders and even add to shareholder wealth.71

Many believe that a 21st-century education must help students think about responsibilities beyond self-interest and profitability. Such an education teaches students to leave a legacy that extends beyond the bottom line—a transcendent education.72 A transcendent education has five higher goals that balance self-interest with responsibility to others: empathy (feeling your decisions as potential victims might feel them, to gain wisdom); generativity (learning how to give as well as take, to others in the present as well as to future generations); mutuality (viewing success not merely as per- sonal gain, but a common victory); civil aspiration (thinking not just in terms of don’ts [lie, cheat, steal, kill], but also in terms of positive contributions); and intolerance of inhumanity (speaking out against unethical actions).

legal responsibilities

To obey local, state, federal, and relevant international laws.

ethical responsibilities

Meeting other social expectations, not written as law.

philanthropic responsibilities

Additional behaviors and activities that society finds desirable and that the values of the business support.

transcendent education

An education with five higher goals that balance self-interest with responsibility to others.

A transcendent education teaches students

to leave a legacy that extends beyond the

bottom line.

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Contrasting Views Two basic and contrasting views describe principles that guide managerial responsibility. The first holds that managers act as agents for shareholders and, as such, are obligated to maxi- mize the present value of the firm. This tenet of capitalism is widely associated with the early writings of Adam Smith in The Wealth of Nations and later with Milton Friedman, the Nobel Prize–winning economist of the University of Chicago. With his now-famous dictum, “The social responsibility of business is to increase profits,” Friedman contended that organizations may help improve the quality of life as long as such actions are directed at increasing profits.

Some considered Friedman to be “the enemy of business ethics,” but his position was ethical: he believed that it was unethical for unelected business leaders to decide what was best for society and unethical for them to spend shareholders’ money on projects uncon- nected to key business interests.73 Furthermore, the context of Friedman’s famous state- ment includes the qualifier that business should increase its profits while conforming to society’s laws and ethical customs.

The second perspective, different from the profit maximization perspective, is that managers should be motivated by principled moral reasoning. Adam Smith wrote about a world different from the one we are in now, driven in the 18th century by the self-interest of small owner- operated farms and craft shops trying to generate a living income for themselves and their fami- lies. This self-interest was quite different from that of top executives of modern corporations.74

It is noteworthy that Adam Smith also wrote A Theory of Moral Sentiments, in which he argued that “sympathy,” defined as a proper regard for others, is the basis of a civilized society.75 Smith argued further that “the wise and virtuous man is at all times willing that this own private interest should be sacrificed to public interest” if circumstances require it.76

Advocates of corporate social responsibility argue that organizations have a wider range of responsibilities that extend beyond the production of goods and services at a profit. As members of society, organizations should actively and responsibly participate in the com- munity and in the larger environment.

From this perspective, many people criticized insurance companies after Hurricane Sandy devastated homes and businesses along the New Jersey and New York coasts. From a social responsibility perspective, it was wrong for companies to watch out for their bot- tom line and avoid paying claims whereever they could make a case that the damage wasn’t covered; the insurers should have been more concerned about their devastated customers.

Reconciliation Profit maximization and corporate social responsibility used to be regarded as antagonistic, leading to opposing policies. But the two views can converge.77 The Coca-Cola Company set a goal to improve its water efficiency in manufacturing operations by 25 percent over a ten-year period (ending in 2020).78 The company is improving water efficiency in the production process and treating its wastewater.79 From a practical perspective, Coca-Cola’s strategic planners have identified water shortages as a strategic risk; from a values perspec- tive, water is, in the words of executive Neville Isdell, “at the very core of our ethos,” so

“responsible use of that resource is very important to us.”80

Earlier attention to corporate social responsibility focused on alleged wrongdoing and how to control it. More recently, attention has also centered on the possible com- petitive advantage of socially responsible actions.

The relationship between corporate social performance and corporate financial performance is complex;81 socially responsible organizations are not necessarily more or less successful in financial terms.82 But on net, the accumu- lated evidence indicates that social responsibility is associ- ated with better financial performance.83 Companies can avoid unnecessary and costly regulation if they are socially responsible. Such actions also can pay dividends to the

The U.S. Department of Agriculture and Coca-Cola North America are in partnership to restore and protect damaged watersheds on national forests.

©Nature and Science/Alamy Stock Photo

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conscience, to the personal reputation, and to the public image of the company as well as in the market response.84 Plus, society’s problems can offer business opportunities, and profits can be made from systematic and vigorous efforts to solve these problems.

Firms can perform cost–benefit analyses to identify actions that will maximize profits while satisfying the demand for corporate social responsibility from multiple stakehold- ers.85 In other words, managers can treat corporate social responsibility as they would treat all investment decisions. This has been the case as firms attempt to reconcile their business practices with their effect on the natural environment.

The Natural Environment and Sustainability

Most large corporations developed in an era of abundant raw materials, cheap energy, and unconstrained waste disposal.86 But many of the technologies developed during this era have contributed to the destruction of ecosystems. Industrial-age systems follow a linear flow of extract, produce, sell, use, and discard—what some call a take–make–waste approach.87

At the same time, perhaps no time in history has offered greater possibilities for a change in business thinking than the 21st century. Some maintain that ecological sustainability is now the key driver of inno- vation.88 And, whereas some are pessimistic about the planet’s future, many are both resolute about creat- ing a healthier planet, and more optimistic now than in recent years. One such optimist is Sanjit Bunker Roy, creator of India’s Barefoot College (featured in the nearby “Social Enterprise” box).

Business used to look at environmental issues as a no-win situation; you either help the environment and hurt your business or help your business at a cost to the environment. But now a paradigm shift is taking place in corporate environmental management: the deliber- ate incorporation of environmental values into competitive strategies and into the design and manufacturing of products.89 In addition to philosophical reasons, companies go green to satisfy consumer demand, to react to a competitor’s actions, to meet requests from cus- tomers or suppliers, to comply with legal requirements, and to create competitive advantage.

GE used to view environmental rules as a burden and a cost; now it sees environmentally friendly technologies as one of the global economy’s most significant business opportuni- ties. Through its Ecomagination program, GE has invested over $17 billion in clean tech R&D that helps solve environmental problems. Its solutions include wind turbines, materi- als for solar energy cells, and energy-efficient home appliances. These have delivered $232 billion in revenue, a green image for the GE brand, and a leadership position in many rap- idly growing markets including high-efficiency jet engines and locomotives.90

A Risk Society We live in a risk society. That is, the creation and distribution of wealth generate by- products that can cause injury, loss, or danger to people and the environment. The fundamental sources of risk in modern society are the excessive production of hazards and ecologically unsustainable consumption of natural resources.91 Risk has proliferated through population explosion, industrial pollution, and environmental degradation.92

Industrial pollution risks include air pollution, smog, global warming, ozone depletion, acid rain, toxic waste sites, nuclear hazards, obsolete weapons arsenals, industrial accidents, and hazardous products. Tens of thousands of uncontrolled toxic waste sites have been documented in the United States alone. The situation is far worse in some other parts of the world. The pattern, for toxic waste and many other risks, is one of accumulating risks and inadequate remedies.

The institutions that create environmental and technological risk (corporations and gov- ernment agencies) are responsible for controlling and managing the risks.93 Patagonia admits

LO 5

Business used to look at environmental issues

as a no-win situation, but now a paradigm shift

is taking place.

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Social Enterprise A College Built by and for the Poor

An extraordinary effort began over 40 years ago. India’s Barefoot College is an educational organization work- ing in 1,300 villages across nearly 80 of the world’s least developed countries in Asia, Africa, the Pacific islands, and South America. Its mission is to improve rural lives and communities through learning-by-doing training programs in health care, women’s empowerment, solar energy, water, and land development that are designed and built by and for the poor.

Barefoot College is based on the guiding principles of service and sustainability espoused by Mahatma Gandhi, along with a commitment to equality, shared decision mak- ing, and self-reliance. Its projects have brought artificial light to more than half a million people and provide clean water and solar energy for cooking and heating to thou- sands of communities. Its Enriche program is dedicated to using simple methods to empower rural women of all ages, even if illiterate, with the scientific and engineering skills they need to undertake environmental stewardship, man- age solar energy, and protect women’s reproductive health.

Each woman in the program is trained to teach others in turn. Those trained in the six-month solar energy program in Tilonia, India, come from around the world. They receive fellowship grants from the Indian govern- ment while enrolled, and leave with a stipend for starting their own business.

Sanjit Bunker Roy, educated in Delhi, was from a wealthy background, but in his 20s he decided to try living on $1 a day. Based on that experience, as a young social worker in 1972 he was inspired to create Barefoot College, which he calls “the only College where the teacher is the learner and the learner the teacher.” He has been honored by Time magazine for his “grass roots social entrepreneurship” and was Business Standard’s 2016 Social Entrepreneur of the Year. Says Roy, “People find

something in themselves that they never thought they had. And then go back to the communities they are from and show what they learned — that’s how leaders are born.”

Among Roy’s ambitious plans for Barefoot College’s near future include efforts to triple the number of people it trains, reaching 6 million by 2018, by opening more of its simple training centers around the world and making greater use of digital teaching materials and methods. These plans will be supported by an infusion of $11 mil- lion, which he hopes to raise from corporate partners.

Questions

• In what ways do you think Barefoot College’s mission and goals demonstrate a utilitarian philosophy of ethics?

• Which of Barefoot College’s guiding principles have you observed where you have worked or volunteered? Choose a principle you might not have observed and explain how you would go about incorporating it into your current or a recent workplace.94

©Ashley Cooper pics/Alamy Stock Photo

openly that its business activities (its factories use water and release carbon into the air) con- tribute to climate change. The company uses this factual acknowledgment to do whatever is within its control to “reduce, neutralize, or even reverse the root causes of climate change.”95

Some of the world’s worst environmental problems are in China because of its rapid industrialization and its huge population and size. The smog in Beijing is so unhealthy on certain days that the government closes factories, schools, and bans half the vehicles until the pollution level drops.96 China’s environmental problems affect more than large cities. Hundreds of millions of China’s rural population drink unclean water. At least the problem is recognized; the central government is pressuring local authorities to clean up or shut down dirty factories.97 Still, most cleanup efforts focus on big cities while rural areas worsen.

Developing countries are often seen as sustainability laggards, focused solely on raising people out of poverty. Regulatory agencies can be weak and hesitant to impose restrictions, but visionary individuals the world over can pioneer successful sustainability efforts.98

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Ecocentric Management Ecocentric management has as its goal the creation of sustainable economic development and improvement of quality of life worldwide for all organizational stakeholders.99 Sustainable growth is economic growth and development that meet the organization’s present needs without harming the ability of future generations to meet their needs.100 Sustainability is fully compatible with the natural ecosystems that generate and preserve life.101

Businesses are both a cause of and a solution to environmental degradation, and clearly have a major role to play in sustainability debates and strategies.102

Increasingly, firms are paying attention to their total environmental impact throughout the life cycle of their products.103 Life-cycle analysis (LCA) is a process of analyzing all inputs and outputs, through the entire cradle-to-grave life of a product, to determine the total environmen- tal impact of the production and use of a product. LCA quantifies the total use of resources and the releases into the air, water, and land. Reporting worldwide carbon footprints is a big step in environmental reporting in that industry. Previously mentioned apparel maker Patagonia uses LCA to analyze the carbon footprint at each stage of its supply chain from farm to factory.104

LCA considers the extraction of raw materials, product packaging, transportation, and dis- posal. Consider packaging alone. Goods make the journey from manufacturer to wholesaler to retailer to customer; then they are recycled back to the manufacturer. They may be pack- aged and repackaged several times, from bulk transport, to large crates, to cardboard boxes, to individual consumer sizes. Repackaging not only creates waste but also costs time. The design of initial packaging in sizes and formats adaptable to the final customer can minimize the need for repackaging, cut waste, and realize financial benefits.

Rather than the linear take–make–waste production model described earlier, a fully sustainable model applies a circular borrow–use–return approach.105 Whereas the former model engages in harmful extraction, generates huge quantities of waste and pollution, and depletes natural resources (a process in which resources move from cradle to grave), the cradle-to- cradle approach is ecologically benign and restorative. In its ideal form, this sustainable approach extracts energy and raw materials without harm, phases out the use of nonrenewable resources, designs processes and products that recirculate so they don’t cause environmental or socioeconomic harm, keeps toxic substances in closed-loop industrial cycles, and recircu- lates biological materials back into nature without harm.106

Profitability need not suffer and may be positively affected by ecocentric philosophies and practices. Some, but not all, research has shown a positive relationship between corporate environmental performance and profit- ability.107 Of course, whether the relationship is positive, negative, or neutral depends on the strategies chosen and the effectiveness of implementation.

Companies can integrate green practices with strategy in a variety of ways. Certainly they develop and market green products; Toyota’s bold move to develop the Prius paid off handsomely with market dominance.108 Companies also can emphasize green attributes in their marketing but need

ecocentric management

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

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Timberland has paid particular attention to life-cycle analysis, as implied by what is printed on its recycled material shoe boxes.

©McGraw-Hill Education/Jill Braaten

sustainable growth

Economic growth and development that meets present needs without harming the needs of future generations.

life-cycle analysis (LCA)

A process of analyzing all inputs and outputs, through the entire “cradle-to- grave” life of a product, to determine total environmental impact.

carbon footprint

The output of carbon dioxide and other greenhouse gases.

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to avoid misleading claims (greenwashing) and public backlash. For instance, previously mentioned Arm & Hammer positioned its baking soda brand as “the number one environ- mentally sensible alternative for cleaning and deodorizing” and says it’s been “committed to the environment since 1846.” On the other hand, the company ignored a major problem: it used animal testing. The blogosphere began touting equally green but cruelty-free Bob’s Red Mill baking soda.109

Companies also can acquire other companies with sustainability (and image) in mind. L’Oréal bought The Body Shop, Colgate-Palmolive bought Tom’s of Maine, Unilever bought Ben & Jerry’s, and Group Danone bought Stonyfield’s.110 When Clorox bought Burt’s Bees, which had decades of leadership and experience with sustainability, it did so for growth and to convince environmental stakeholders that the company’s strategic change was genuine, but also to acquire knowledge about the green product space.111

If you are interested in learning more, you can check out the Global Reporting Initiative (GRI) list of sustainability performance indicators. This useful resource, at www. globalreporting.org, aims to help companies improve their sustainability practices, includ- ing transparent reporting.

Environmental Agendas for the Future In the past, most companies were oblivious to their negative environmental impact. More recently, many began striving for low impact. Now some strive for positive impact, eager to sell solutions to the world’s problems.

Consider climate change and the world’s shortage of clean water. By 2025, approximately 3.5 billion people may be living in areas of the world with scarce water resources.112 When Dow Chemical’s Freeport, Texas, site had trouble getting enough water to run its processes during droughts, it installed technology to monitor the water system 24/7 and reduced water consumption by a billion gallons a year.113 Marriott is pursuing a goal to reduce energy and water consumption by 20 percent per occupied hotel room.114 Nestlé saves up to 1,375 cubic meters of water per year since improving how it collects and transports milk from farmers.

You don’t have to be a manufacturer or a utility to jump on the green bandwagon. Web search giant Google is working hard to reduce its carbon footprint and purchasing offsets— funding projects that reduce greenhouse gas emissions elsewhere.115

Collaborative efforts will be essential—for example, the energy industry and environ- mentalists working with rather than against one another.116 Networks of companies with a common ecological vision can combine their efforts into high-leverage, highly impactful action.117 In cities such as San Antonio, Texas, and Columbus, Ohio, federal partner agen- cies work closely with city governments, utilities, and multiple manufacturers to reduce pol- lutants and energy consumption and to increase energy savings.

In Kalundborg, Denmark, such a collaborative alliance exists among an electric power generating plant, an oil refiner, a biotech production plant, a plasterboard factory, cement producers, heating utilities, a sulfuric acid producer, and local agriculture and horticulture. Chemicals, energy (for both heating and cooling), water, and organic materials flow among companies. Resources are conserved, waste materials generate revenues, and water, air, and ground pollution all are reduced.

In 2010, the World Bank launched a project to help developing countries arrive at valu- ations of their natural capital. Then-president Robert Zoellik said, “The natural wealth of nations should be a capital asset, valued in combination with its financial capital, manu- factured capital, and human capital.”118 Now, nonprofit organizations and accounting firms offer methodologies that value ecosystems. The for-profit Global Environment Fund currently has invested about $1 billion in firms focused on environmental and natural resources.119

Stated Dow CEO Andrew Liveris, “Companies that value and integrate biodiversity and ecosystem services into their strategic plans are best positioned for the future.”120 In addi- tion to the benefits to the world of sustainable practices, many now believe that preparing for and adapting to climate change is a major and fast-growing challenge,121 and that solving environmental problems is one of the biggest opportunities in the history of commerce.122

Bottom Line Packaging isn’t the most glamorous of business topics, but it holds great potential for reducing costs and increasing speed while helping the environment. You can always find opportunities to improve results in unexpected places where others haven’t tried. Think of a product you recently purchased that seemed to have excess packaging. How could its packaging have been more environmentally friendly?

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Because openness builds the kind of trust IBM wants as the basis for its relationships, the company publishes its values and policies online along with an annual Corporate Responsibility Report. IBM’s understanding of its role in corporate citizenship includes practices related to the natural environment and the communities it serves. IBM defines its social role this way:

1. We identify and act upon new opportunities to apply our technology and expertise to societal problems.

2. We scale our existing programs and initiatives to achieve maximum benefit.

3. We empower our employees and others to serve their communities.

4. We integrate corporate citizenship and social responsibility into every aspect of our company.

These statements apply IBM’s resources as a large global technology company (over 431,000 employees in almost 170 countries) to the communities where it operates.

Especially in its concern for the natural environment, IBM unites a commitment to be responsible with the busi- ness opportunities available to a company specializing in data analysis, cloud computing solutions, and planning. In fact, IBM has had policies for protecting the environment and conserving resources since 1967. IBM’s product recy- cling programs are designed to resell, refurbish, or recycle at least 97 percent of its end-of-life products. The company also requires its suppliers to demonstrate that they are tak- ing responsibility for their impact on the environment.

Moreover, environmental protection is now part of IBM’s Smarter Planet strategy. IBM’s consultants and sys- tems help cities, businesses, and building owners man- age the data required to operate as efficiently as possible. For example, IBM is helping San Francisco figure out how to keep all of its waste out of landfills by directing it to recycling and other uses. IBM’s Smarter Building initia- tive installs sensors and building automation software to gather data on building systems and uses, and uses the data to conserve energy and water.

IBM’s corporate citizenship also involves supporting selected nonprofit causes, including economic develop- ment, education, and health. Its biggest philanthropy is its Smarter Cities challenge, which awards grants to cities to help them improve in a specified area of performance. IBM sends a six-member team of its own experts to each city to help leaders analyze problems and develop solutions. By the end of 2013, IBM had sent teams to 100 cities around the world to address such challenges as improving urban planning, managing traffic, encouraging entrepreneur- ship, improving energy efficiency, and much more. The company also recently announced plans to add 25,000 U.S. jobs over the next few years, including 2,000 military veterans.123

• How is IBM’s commitment to corporate social responsibility good for IBM as a business? Explain.

• Improving energy efficiency saves IBM millions of dollars, but recycling its used electronics requires hiring hundreds of people. Is the recycling program justifiable? Why or why not?

Management in Action IBM TAKES RESPONSIBILITY

business ethics, p. 135

carbon footprint, p. 149

Caux Principles, p. 136

compliance-based ethics programs, p. 140

corporate social responsibility (CSR), p. 144

ecocentric management, p. 149

economic responsibilities, p. 144

egoism, p. 136

ethical climate, p. 138

ethical issue, p. 135

ethical leader, p. 139

ethical responsibilities, p. 145

ethics, p. 132

integrity-based ethics programs, p. 140

Kohlberg’s model of cognitive moral development, p. 137

legal responsibilities, p. 145

life-cycle analysis (LCA), p. 149

moral philosophy, p. 135

philanthropic responsibilities, p. 145

relativism, p. 136

Sarbanes-Oxley Act, p. 137

stewardship, p. 144

sustainable growth, p. 149

transcendent education, p. 145

triple bottom line, p. 144

universalism, p. 135

utilitarianism, p. 136

virtue ethics, p. 136

KEY TERMS

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In Chapter 5, you learned that ethics is an important and personal issue that affects employee and organizational behavior. Ethical decisions are influenced by personal values and which ethical system people use to frame a given problem. Companies attempt to influence their ethics environment by establishing ethical programs or codes. Codes prescribe guidelines for behavior. Making ethical decisions requires moral awareness, moral judgment, and moral character. A model of ethical decision making is repeated below. Corporate social

responsibility suggests that corporations have not only economic but also legal, ethical, and philanthropic responsibilities. While most companies used to view the natural environment as a source of raw materials and profit, now more companies are adopting a greener agenda for business reasons as well as personal commitment to sustainable development. Ecocentric managers attempt to minimize negative environment impact, create sustainable economic development, and improve the quality of life worldwide.

RETAINING WHAT YOU LEARNED

EXHIBIT 5.6 (revisited) A Process for Ethical Decision Making

Recognize all moral impacts: Benefits/Harms to others Rights exercised/denied.

Understand all moral standards.

Define complete

moral problem.

Evaluate the ethical duties.

Propose convincing

moral solution.

Determine the economic

outcomes.

Consider the legal

requirements.

SOURCE: Hosmer, L. T., The Ethics of Management, 4th ed. New York: McGraw-Hill/Irwin, 2003, p. 32. Fig. 5.1A.

Describe how different ethical perspectives guide decision making.

• The purpose of ethics is to identify the rules that gov- ern human behavior and the “goods” that are worth seeking.

• Ethical decisions are guided by the individual’s val- ues or principles of conduct such as honesty, fair- ness, integrity, respect for others, and responsible citizenship.

• Different ethical systems include universalism, ego- ism and utilitarianism, relativism, and virtue ethics.

• These philosophical systems, as practiced by differ- ent individuals according to their level of cognitive moral development and other factors, underpin the ethical stances of individuals and organizations.

Explain how companies influence their ethics environment.

• Different organizations apply different ethical per- spectives and standards.

• Ethics codes sometimes are helpful, although they must be implemented properly.

• Ethics programs can range from compliance-based to integrity-based.

• Ethics codes address employee conduct, community and environment, shareholders, customers, suppliers and contractors, political activity, and technology.

LO 1

LO 2

Outline a process for making ethical decisions.

• Making ethical decisions requires moral awareness, moral judgment, and moral character.

• When faced with ethical dilemmas, the veil of igno- rance is a useful metaphor and provides a useful tactic for ethical decision making.

• You can know various moral standards (universalism, relativism, and so on), use the problem-solving model described in Chapter 3, identify the positive and neg- ative effects of your alternatives on different parties, consider legal requirements and the costs of unethi- cal actions, and then evaluate your ethical duties.

Summarize the important issues surrounding corporate social responsibility.

• Corporate social responsibility is the extension of the corporate role beyond economic pursuits. It includes not only economic but also legal, ethical, and philan- thropic responsibilities.

• Advocates believe managers should consider soci- etal and human needs in their business decisions because corporations are members of society and carry a wide range of responsibilities.

• Critics of corporate responsibility believe managers’ first responsibility is to increase profits for the share- holders who own the corporation.

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Ethics, Corporate Responsibility, and Sustainability  Chapter 5 153

• The two perspectives are potentially reconcilable, especially if managers choose to address areas of social responsibility that contribute to the organiza- tion’s strategy.

Discuss reasons for businesses’ growing interest in the natural environment.

• In the past, most companies viewed the natural envi- ronment as a resource to be used for raw materials and profit. But consumer, regulatory, competitive, and other pressures arose. Executives often viewed these pres- sures as burdens, constraints, and costs to be borne.

• Now more companies view the interface between business and the natural environment as a potential win–win opportunity.

• Some are adopting a greener agenda for philosophi- cal reasons and personal commitment to sustainable development.

• Many also are recognizing the potential financial benefits of managing with the environment in mind

LO 5

and are integrating environmental issues into corpo- rate and business strategy.

• Some see entering businesses that help rather than harm the natural environment as one of the great commercial opportunities in history.

Identify actions managers can take to manage with the environment in mind.

• Organizations have contributed risk to society and bear some responsibility for reducing it.

• They also are capable of helping to solve environ- mental problems.

• Ecocentric management attempts to minimize nega- tive environment impact, create sustainable eco- nomic development, and improve the quality of life worldwide.

• Relevant actions are described in the chapter, includ- ing strategic initiatives, life-cycle analysis, and inter- organizational alliances.

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DISCUSSION QUESTIONS 1. Consider the various ethical systems described early in

the chapter. Identify concrete examples from your own past decisions or the decisions of others you have seen or read about.

2. Choose one or more topics from Exhibit 5.3 and discuss their current status and the ethical issues surrounding them.

3. Identify and discuss illegal, unethical, and socially responsible business actions in the current news.

4. Does your school have a code of ethics? If so, what does it say? Is it effective? Why or why not?

5. You have a job you like at which you work 40 to 45 hours per week. How much off-the-job volunteer work would you do? What kinds of volunteer work? How will you react if your boss makes it clear he or she wants you to cut back on the outside activities and devote more hours to your job?

6. What are the arguments for and against the concept of corporate social responsibility? Where do you stand and why? Give your opinions about some of the in-text examples.

7. What do you think of the concept of a transcendent education as described in the chapter? What can be done to implement such a vision for education?

8. What is the current status of the Sarbanes-Oxley Act? What do executives think of it now? What impact has it had?

9. A company in England slaughtered 70,000 baby ostrich chicks each year for their meat. It told a teen

magazine that it would stop if it received enough complaints. Analyze this policy, practice, and pub- lic statement using the concepts discussed in the chapter.

10. A Nike ad in the U.S. magazine Seventeen showed a picture of a girl, aged perhaps 8 or 9. The ad read,

If you let me play . . .

I will like myself more.

I will have more self-confidence.

I will suffer less depression.

I will be 60 percent less likely to get breast cancer.

I will be more likely to leave a man who beats me.

I will be less likely to get pregnant before I want to.

I will learn what it means to be strong.

If you let me play sports.

Assess this ad in terms of chapter concepts surrounding ethics and social responsibility. What questions would you ask in doing this analysis?

11. Should companies be held accountable for actions of decades past, then legal but since made illegal, as their harmful effects became known? Why or why not?

12. Discuss courage as a requirement for ethical behav- ior. What personal examples can you offer, either as an actor or as an observer? What examples are in the news?

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EXPERIENTIAL EXERCISES 5.1 MEASURING YOUR ETHICAL WORK BEHAVIOR

OBJECTIVES

1. To explore a range of ethically perplexing situations.

2. To understand your own ethical attitudes.

INSTRUCTIONS Make decisions in the situations described in the Ethical Behavior Worksheet. You will not have all the background information on each situation; instead, you should make whatever assumptions you feel you would make if you were actually confronted with the decision choices described. Select the decision choice that most closely represents the decision you feel you would make personally. You should choose decision options even though you can envi- sion other creative solutions that were not included in the exercise.

Ethical Behavior Worksheet SITUATION 1 You are taking a very difficult chemistry course, which you must pass to maintain your scholarship and to avoid dam- aging your application for graduate school. Chemistry is not your strong suit, and, because of a just-below-failing average in the course, you will have to receive a grade of 90 or better on the final exam, which is two days away. A janitor, who is aware of your plight, informs you that he found the master for the chemistry final in a trash barrel and has saved it. He will make it available to you for a price, which is high but which you could afford. What would you do?

(a) I would tell the janitor thanks, but no thanks.

(b) I would report the janitor to the proper officials.

(c) I would buy the exam and keep it to myself.

(d) I would not buy the exam myself, but I would let some of my friends, who are also flunking the course, know that it is available.

SITUATION 2 You have been working on some financial projections man- ually for two days now. It seems that each time you think you have them completed, your boss shows up with a new assumption or another what-if question. If you only had a copy of a spreadsheet software program for your personal computer, you could plug in the new assumptions and revise the estimates with ease. Then a colleague offers to let you make a copy of some software that is copyrighted. What would you do?

(a) I would accept my friend’s generous offer and make a copy of the software.

(b) I would decline to copy it and plug away manu- ally on the numbers.

(c) I would decide to go buy a copy of the software myself, for $300, and hope I would be reim- bursed by the company in a month or two.

(d) I would request another extension on an already overdue project date.

SITUATION 3 Your small manufacturing company is in serious financial dif- ficulty. A large order of your products is ready to be deliv- ered to a key customer when you discover that the product is simply not right. It will not meet all performance specifica- tions, will cause problems for your customer, and will require rework in the field; however, this, you know, will not become evident until after the customer has received and paid for the order. If you do not ship the order and receive the pay- ment as expected, your business may be forced into bank- ruptcy. And if you delay the shipment or inform the customer of these problems, you may lose the order and go bankrupt. What would you do?

(a) I would not ship the order and place my firm in voluntary bankruptcy.

(b) I would inform the customer and declare volun- tary bankruptcy.

(c) I would ship the order and inform the customer after I received payment.

(d) I would ship the order and not inform the customer.

SITUATION 4 You are the cofounder and president of a new venture, man- ufacturing products for the recreational market. Five months after launching the business, one of your suppliers informs you it can no longer supply you with a critical raw material because you are not a large-quantity user. Without the raw material, the business cannot continue. What would you do?

(a) I would grossly overstate my requirements to another supplier to make the supplier think I am a much larger potential customer to secure the raw material from that supplier, even though this would mean the supplier will no longer be able to supply another, noncompeting small manufacturer who may thus be forced out of business.

(b) I would steal raw material from another firm (noncompeting) where I am aware of a sizable stockpile.

(c) I would pay off the supplier because I have reason to believe that the supplier could be persuaded to meet my needs with a sizable under-the-table payoff that my company could afford.

(d) I would declare voluntary bankruptcy.

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Ethics, Corporate Responsibility, and Sustainability  Chapter 5 155

SITUATION 5 You are on a marketing trip for your new venture for the pur- pose of calling on the purchasing agent of a major prospective client. Your company is manufacturing an electronic system that you hope the purchasing agent will buy. During your con- versation, you notice on the cluttered desk of the purchasing agent several copies of a cost proposal for a system from one of your direct competitors. This purchasing agent has previ- ously reported mislaying several of your own company’s pro- posals and has asked for additional copies. The purchasing agent leaves the room momentarily to get you a cup of cof- fee, leaving you alone with your competitor’s proposals less than an arm’s length away. What would you do?

(a) I would do nothing but await the man’s return.

(b) I would sneak a quick peek at the proposal, look- ing for bottom-line numbers.

(c) I would put the copy of the proposal in my briefcase.

(d) I would wait until the man returns and ask his permission to see the copy.

Timmons, Jeffry A., New Venture Creation, 3rd ed. 1994, pp. 160–161. Copyright 1994 McGraw-Hill Education Global Holdings LLC. All rights reserved. Used with permission.

5.2 ETHICAL STANCE

Are the following actions ethical or unethical in your opin- ion? Why? Consider the actions individually and discuss them in small groups. • Calling in sick when you really are not • Taking office supplies home for personal use • Cheating on a test • Turning in someone for cheating on a test or paper • Overcharging on your company expense report • Trying to flirt your way out of a speeding ticket • Splicing cable from your neighbor • Surfing the net on company time • Cheating on income tax

• Lying (exaggerating) about yourself to influence some- one of the opposite sex

• Looking at pornographic sites on the web through the company network

• Lying about your education on a job application • Lying about experience in a job interview • Making a copy of a rental DVD before returning it to the

store

SOURCE: de Janasz, Suzanne C., Dowd, Karen O. and Schneider, Beth Z., Interpersonal Skills in Organizations, New York: McGraw-Hill, 2002, p. 211.

Heather Franklin is a marketing manager for Ma Earth Skin Care. Four years ago, when she was hired to help with the paperwork for promotional campaigns, she was thrilled to become a part of this company because she loved Ma Earth’s lotions, soaps, and cosmetics. Besides smelling heavenly and offering exquisite colors for eye shadow and lipstick, the products spoke to Heather’s values: Ma Earth promised to use all natural ingredients, sustainably grown or mined, and to operate with minimal adverse impact on the planet. So for Heather, going to work was almost like carrying out a mission, promoting both beauty and concern for the planet’s well-being. No doubt, her commitment and enthusiasm helped pave the way when the position of mar- keting manager opened up.

Currently, Heather and her team are preparing a pro- motional campaign for a new product line, Oré Essentials, which includes lipsticks, foundation, and eye shadows tinted with a plant extract called orellana. The exciting fea- ture of Oré Essentials is that orellana is harvested deep in the Amazon rain forest, and because of its sustainable prac- tices, Ma Earth will obtain this special ingredient in a socially responsible manner. The company set up a contract with a

tribe living in a remote village. The people of the tribe are supposed to grow and harvest the orellana, which is natu- rally part of the area’s ecosystem, and Ma Earth has prom- ised to pay a fair price to the whole tribe so the people can use the money to maintain their village and their way of life. Consumers will get a beautiful product and the pleasure of knowing that they are helping preserve an endangered ecology—and an endangered way of life for the rain forest people.

But when Heather sat down for a meeting with the pho- tography crew that traveled to the village, some concerns began to surface. She was looking at stunning photos of tribe members arrayed in grass skirts as they stood behind a pile of fruit from the orellana tree. As she was selecting her favorite shots, one of the photographers commented that the translator had made some surprising remarks on the return trip from the village. Apparently the pile of orel- lana fruit had been gathered just for the photo shoot. The tribe doesn’t really bother with growing and harvesting orel- lana; the people of this area aren’t primarily farmers, and there aren’t actually many orellana trees within a day’s walk of the village. The first year they had tried selling orellana

Concluding Case MA EARTH SKIN CARE TRIES TO STAY NATURAL

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to Ma Earth, they grew only enough to earn a few hundred dollars, not really worth the effort. Heather felt confused by these statements and planned to take a closer look at spending on her product later that day.

Hours later, when the other employees had gone home, Heather finally had a chance to spend some time research- ing her product on the company’s employee website. She found purchasing transactions for “orellana/annatto,” and after a little research learned that under either name, the product is just an inexpensive dye. Under the latter name, it is used as a common food coloring. It turns out that Ma Earth made most of its purchases from a mainstream sup- plier, which is cheaper than persuading remote villagers to provide orellana.

That evening Heather went home feeling betrayed and upset. The next day she asked her boss, the divisional vice president, why the company pretended to care about a remote village if it was just a front for a brand. Heather’s boss, Megan McDonough, said, “But we do care! We send them tens of thousands of dollars every year. Sure, they don’t actually grow that stuff for us, but they could, and we’ll buy it if they do. Anyway, our aid has provided a school and a health clinic, not to mention food and clothing. We’ve helped the tribe members stay healthy and preserve their language and culture.”

Heather considered what Megan said. “So,” she asked, “does this mean we’re using their culture to build an image for our brand, and in exchange, they get money from us to keep that culture alive?” She thought about the traditional designs the marketing department had copied from the tribe as decorations for the Oré Essentials packaging.

Megan nodded encouragingly. “That’s exactly what I’m saying. It’s a win–win situation.” Heather felt relieved but not quite sure that her original idealism would withstand her deeper knowledge of how Ma Earth defined its mission.

DISCUSSION QUESTIONS

1. What ethical issues is Heather facing in this situation? What possible marketing claims about the company’s relationship with the Amazonian tribe would cross a line into unethical territory? What claims could it make ethically?

2. How could Ma Earth create an ethical climate that would help managers such as Heather ensure that they are behaving ethically?

3. How effectively do you think Ma Earth is practicing cor- porate social responsibility in this situation? Explain the reasoning behind your evaluation.

Design elements: Lightbulb icon that indicates innovation: ©McGraw-Hill Education; Money icon that indicates cost: ©McGraw-Hill Education; Recycle icon that indicate sustainability: ©McGraw-Hill Education; Human head with headset that indicate service: ©McGraw- Hill Education; Letter Q icon that indicates quality: ©McGraw-Hill Education; Sand dial that indicates speed: ©McGraw-Hill Education

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Managing in Today’s (Global) Economy International Challenges and Opportunities Outsourcing and Jobs

The Geography of Business Western Europe Asia: China and India The Americas Africa and the Middle East

Global Strategy Pressures for Global Integration Pressures for Local Responsiveness Choosing a Global Strategy

Entry Mode Exporting Licensing Franchising Joint Ventures Wholly Owned Subsidiaries

Working Overseas Skills of the Global Manager Understanding Cultural Issues Ethical Issues in International Management

After studying Chapter 6, you will be able to:

Discuss what integration of the global economy means for companies and their managers.

Describe how the world economy is becoming more integrated than ever before.

Define the strategies organizations use to compete in the global marketplace.

Compare the various entry modes organizations use to enter overseas markets.

Explain how companies can staff overseas operations.

Summarize the skills and knowledge managers need to manage globally.

Identify ways in which cultural differences between countries influence management.

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CHAPTER 6

International Management

It was once said that the sun never set on the British Empire. Today, the sun does set on the

British Empire, but not on the scores of global empires, including those of IBM, Unilever,

Volkswagen, and Hitachi.

—LESTER BROWN

CHAPTER OUTLINELEARNING OBJECTIVES

©PhotoAlto/Alamy Stock Photo RF

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How well can Alibaba translate its dedication to elevating the thrill of online

shopping to consumers in the United States? As you read this chapter, consider

what qualities of the international business environment present threats and

opportunities for this company.

Online shoppers around the world recently spent an astounding $17.7 billion in a record-shattering 24-hour buying spree. That’s almost three times as much money as was spent in the United States on Black Friday and Cyber Monday put together.

While some of the more than 40,000 participat- ing brands that day included familiar U.S. retailers like Macy’s, Target, Starbucks, Costco, and Gap, the web- site where this frenzy occurred is one that many U.S. shoppers have yet to hear of—China’s e-commerce giant Alibaba, managed by Alibaba Holding Group Ltd.

The occasion was the annual anti–Valentine’s Day holiday known as Singles’ Day, which unattached Chinese consumers have been celebrating every November 11, mostly quietly, for about 20 years. But since 2009, when Alibaba decided to join the hand- ful of companies then offering shopping discounts on Singles’ Day, it has grown into the biggest one- day shopping blitz in the world. Discounts of up to 50 percent are offered on everything from clothing and cosmetics to wine, cars, and chandeliers. Celebrities like Scarlet Johannsen and David Beckham host live events leading up to the midnight opening, and online events run for the entire 24 hours, with virtual-reality gimmicks and special deals for those shopping via their phones (who accounted for 80 percent of sales).

Alibaba has been growing by leaps and bounds, helped by a new generation of young and sophisti- cated tech-savvy shoppers in China with middle-class tastes and money to spend. They are an attractive market for brands from around the world, including the United States, and for smaller vendors as well, who can sell their wares on Alibaba’s third-party market in much the same way they do on Amazon.com.

To fund the growth it seeks at home and abroad, Alibaba raised $25 billion (another record-breaking number) from its IPO, listing itself in the United States. It employs about 45,000 people (far fewer than its near- est rival, Amazon, which holds more than 40 percent of

the U.S. e-commerce market), and posted revenues of over $5 billion in 2016, despite a marked slowing of the Chinese economy. The value of transactions on its site rose to $248 billion, greater than for eBay and Amazon combined.

In addition to its e-commerce site, which has 80 percent market share in China and hundreds of millions of users, Alibaba is in the digital media, enter- tainment, and cloud computing businesses as well. It has purchased a share of Groupon Inc., of Walmart’s e- commerce arm Jet.com, and of Lyft.

Alibaba’s founder Jack Ma has promised to expand his company’s toehold in the United States. He stresses that his company will remain true to its stated principles, which put customers first, employees sec- ond, and shareholders third. “Our philosophy is that we want to be an ecosystem,” he says. “Our philosophy is to empower others to sell, empower others to ser- vice, making sure the other people are more power- ful than us. With our technology, our innovation, our partners—10 million small business sellers—they can compete with Microsoft and IBM. Our philosophy is, using Internet technology we can make every com- pany become Amazon.”1

M A

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R ’S

B R

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P R

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S S

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Management in Action HOW ALIBABA IS BECOMING A GLOBAL BRAND

©VCG/Visual China Group/Getty Images

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The direction of Alibaba’s growth resembles that of many successful businesses in recent decades. The company started out by satisfying customers in a local market. As sales increased, the company began serving a larger region. Eventually, it began selling goods to and running operations in other countries. Now it boasts sales and develops managers around the globe.

Today’s corporate giants—and many ambitious, creative small businesses—need employ- ees and sales in other countries to meet their objectives. U.S. multinational corporations now employ almost one-third of their workers outside the United States, and the overseas share is growing. Sales of some product categories are growing faster outside the United States. Popular with older riders in the U.S., Harley-Davidson is marketing its motorcycles to first-time, younger riders in international markets. From 2015 to 2016, the company expe- rienced 39 percent growth overseas.2

Or consider Walt Disney Company. After years of negotiations, the iconic U.S. company opened a $5.5 billion theme park and resort in Shanghai. The deal was complex because the Chinese government insisted on Chinese ownership, but for Disney it was worth it to bring its brand of entertainment to China’s vast population and rapidly developing economy.3

Because of such trends, today’s managers need to be able to plan how their company will enter markets around the world. That planning begins with understanding the impor- tance of the global economy and the opportunities and threats of the fast-changing global environment.

Managing in Today’s (Global) Economy

The global economy matters because our economy is global—because your customers, com- petitors, employees, and suppliers could be located anywhere in the world. For managers, this makes the business environment more complex and exciting than ever: a global econ- omy with threats and opportunities around the world, accompanied by a need to know their customers’ specific needs and values, which may vary considerably from place to place.

We will describe how managers can select strategies for this world. But first, let’s see how the ever-greater interconnection, or integration, of the world economy is shaping business today.

International Challenges and Opportunities Increasing prosperity and lower trade barriers helped many nations integrate into a now- global economy. This integration has had many important consequences. First, even as the world’s economic output grew, the volume of exports grew even (and much) faster. Second, foreign direct investment (FDI) plays an ever-increasing role in the global economy as com- panies of all sizes invest overseas. Third, imports penetrate more deeply into the world’s largest economies. The growth of imports is a natural by-product of the growth of world trade and the trend toward manufacturing component parts, or even entire products, over- seas before shipping them back home for final sale.

Finally, the growth of world trade, FDI, and imports means that companies around the globe are finding their home markets under attack from foreign competitors. This is true in the United States, where Chinese companies are purchasing once iconic firms like Starwood Hotels, Smithfield Foods, and GE’s appliance business.4

What does all this mean for today’s managers? Opportunities are greater because many formerly protected national markets are open for business. The potential for export and for making direct investments overseas is greater today than ever before. The environment is more complex due to the challenges of working in radically different cultures and coordi- nating globally dispersed operations. And the environment is more competitive because of cost-efficient overseas competitors.

Companies both large and small view the world, not just their own country, as their marketplace. As Exhibit 6.1 shows, the United States has no monopoly on international

LO 1

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business. Of the top 25 corporations in the world, 18 (72 percent) are based in countries outside the United States. Companies have dispersed their manufactur- ing, marketing, and research facilities to locations around the globe where cost and skill conditions are most favorable. This trend is so pervasive in industries such as automobiles, aerospace, and electronics that it is increasingly irrelevant to talk about “American products” or “Chinese products” or “German products.”

For example, the headquarters of an automaker no longer says much about where a particular car is made. The American-Made Index ranks vehicles based on where they were assembled, whether they have a high percentage of domestic parts, and how popular they are among U.S. consumers. Surprisingly, the “most American” models in 2016 were Toyota Camry, Honda Accord, and Toyota Sienna.5 A U.S. headquarters doesn’t limit a U.S. car company either. General Motors sold 10 million cars in 2016 in China (while sales in the U.S. were lackluster). This all-time record helped GM earn record profits.6

This is not just for the largest corporations. Many small companies limit their interna- tional involvement to exporting, or sourcing from or setting up production facilities over- seas. Others acquire existing small businesses to gain talent and access to new markets. Based in Denver, AppIt Ventures develops custom software apps for client companies. It wasn’t long before the company expanded internationally by purchasing a software develop- ment company in India. Two years later, AppIt acquired an app development firm in Great Britain. Both acquisitions gave AppIt access to skilled talent and additional markets.7

There are other, perhaps less obvious, benefits to collaborating with other countries on trade. Because trade allows each country to obtain more efficiently what it cannot as easily produce on its own, it lowers prices overall and makes more goods more widely available. This in turn raises living standards—and may broaden the market for a manager’s own prod- ucts, both locally and abroad. Trade makes new technologies and methods more widely

Companies both large and small view the

world as their marketplace.

United States

1. Walmart 6. ExxonMobil 9. Apple

Netherlands

5. Royal Dutch ShellBritain

10. BP Germany

7. Volkswagen

China 4. Sinopec Group

2. State Grid

Japan

8.Toyota Motor

3. China National Petroleum

SOURCE: “Global 500,” Fortune, March 18, 2017, http://fortune.com/global500/.

EXHIBIT 6.1  Top 10 Global Firms

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available, again raising the standard of living. Finally, collaborating with others on trade creates links between people and cultures that, particularly over the long run, can lead to cooperation in other areas.

Outsourcing and Jobs In recent years, the issues of offshoring and outsourcing became important sources of con- troversy. Outsourcing occurs when an organization contracts with an outside provider to produce one or more of its goods or services. Offshoring is a specific type of outsourcing whereby companies move jobs to providers in another country, typically where wages are lower.

Most concerns about offshoring refer to outsourcing because people think that high- paying jobs are being lost to low-cost countries overseas. The concern is prompted by widespread reports of major corporations relocating assembly lines, computer program- ming, customer service centers, and other parts of their operations to the Philippines, India, Mexico, China, and elsewhere.

The decline in manufacturing employment in the United States is evident, and many blame offshoring. However, considerable evidence suggests that the cause of this job decline is not offshoring but innovation. One important trend is how automation technologies (e.g., machine learning and robotics) are replacing human beings in some jobs.8 These inno- vations mean that companies need fewer workers to produce the same quantity of goods or services. The important question, then, is how to prepare the workforce for the types of jobs most needed in the United States of the future—jobs requiring personal interaction with employees and other stakeholders, the use of judgment in physical work (for example, gen- eral contractors), and tailored approaches to particular situations (identifying clients’ needs rather than following a routine).9

Job transfers from offshoring are a small fraction of the 135 million jobs in the United States. Most jobs require workers to be close to their markets; people still shop at their local supermarkets and appliance dealers, visit their doctors, and attend community schools. Importantly, as offshoring increases efficiency, it frees funds for expansion and additional employment. Offshoring is also offset somewhat when foreign companies hire workers in the United States—for example, InBev (owner of Anheuser-Busch), Honda, InfoSys, and Siemens are all large employers.

But people (employees, families) are deeply affected when their jobs are lost. Some organi- zations decide that they have a social responsibility to retrain their displaced workers to help prepare them for jobs that are less likely to move overseas. Others are less helpful. In this and so many other ways, managers have some latitude, multiple options, and a variety of ways to make decisions that have both positive and negative business and human consequences.

One less positive effect of offshoring is wage stagnation in industries where offshoring is common, because workers in those areas compete with their lower-wage counterparts

abroad. On the other hand, wages, energy costs, and other expenses in some other countries have started to rise, reduc- ing the benefits of offshoring.10 Some firms find lower costs outside India and China in Bangladesh, Vietnam, and Indonesia. In recent years, the Philippines has become a popular location for outsourcing. Over the past decade, the outsourcing sector has generated about 100,000 jobs per year and $23 billion for this developing nation.11

Automation reduces labor costs, making it less neces- sary to move jobs overseas. Also, managers who offshore to save on wages are often surprised by increasing wage rates and the added costs of travel, training, supply chain disruption, quality control, language barriers, and the resistance of some customers who prefer to deal with local personnel.

outsourcing

Contracting with an outside provider to produce one or more of an organization’s goods or services.

offshoring

Moving work to other countries.

Many American companies are outsourcing and offshoring to save money. This photo is from a call center in Hyderabad, India.

©Bloomberg/Getty Images

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These drawbacks, along with political pressure, have led some companies to engage in inshoring, or moving work back to the United States. For example, a large domestic insurer may stop using a call center in Bangalore in favor of one based in the United States. Deloitte Consulting found that one-fourth of companies that outsourced to international locations soon after inshored the operations due to quality and cost concerns.12

Using the same example, if the domestic insurer were to create an internal (or in-house) call center staffed with its own employees and managers, that would be an example of insourcing.13

In deciding whether to offshore, managers should not start out with the assumption that it will be cheaper for them to do so. Instead, here are some factors to take into account:

What competitive advantage do the products offer? If, say, rapid delivery, reliability, and customer contact are paramount, then offshoring is a less attractive option. But if the product is widely available and standardized, like a calculator, and the only competitive advantage is price, the lowest possible production cost is essential and offshoring is beneficial.

Is the business in its early stages? If so, offshoring may well be inappropriate because managers need to stay close to the business and its customers to solve problems and make sure everything is going according to plan. When the business is more mature, managers can afford to consider moving some operations overseas.

Can production savings be achieved locally? Automation can often achieve significant labor cost savings and eliminate the advantage of moving production abroad. Where automation is not feasible, as with computer call centers, then offshoring becomes more attractive.

Can the entire supply chain be improved? As we discussed in Chapter 2, enormous productivity savings are possible when managers develop an efficient supply chain, from suppliers to manufacturing to customers. These improvements permit both lower cost and faster customer service. If the supply chain is already highly efficient or routine, and more savings are needed, then offshoring can achieve efficiencies.14

inshoring

Moving work from other countries back to the headquarters country. Work may be done by a domestic provider or in-house.

insourcing

Producing in-house one or more of an organization’s goods or services.

The Geography of Business

As we saw in Chapter 2, an organization’s external environment includes its economic, technological, legal/regulatory, demographic, social, and natural environments. When today’s managers think about the economic potential of a market, the laws that pro- tect their property, and the resources they need for making products, they should be thinking about where the best opportunities lie anywhere in the world. Exhibit 6.2 pro- vides examples of current issues we will consider in each area of this international environment.

The global economy is more integrated than ever before. For example, the World Trade Organization (WTO), formed in 1995, now has 164 member coun- tries involved in most of the world’s trade. The WTO provides a forum for nations to negotiate trade agree- ments and procedures for administering the agreements and resolving disputes. Issues that are currently under negotiation include objections to environmental regulations and subsidies to farmers in developed countries, on the grounds that they conflict with free trade. To follow how these and other issues are playing out, you can explore the “Trade Topics” section of the WTO website, http://www.wto.org.

The global economy is dominated by countries in three regions: North America, western Europe, and Asia. Meanwhile, developing regions and specific countries represent impor- tant areas for economic growth.

LO 2

The global economy is becoming more

integrated than ever before.

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Economic environment Foreign investment; growth of developing nations; rising wages in developing nations

Technological environment Internet and wireless technology

Legal/regulatory environment Free trade agreements; anticorruption laws

Demographics Aging population in developed nations; growing population worldwide, especially in the developing world

Social issues Cultural differences; bribery concerns

Natural environment Intensifying demand for resources, including oil, water, and food; growing desire for sustainable products and operations; increasingly endangered species; climate change

EXHIBIT 6.2 Key Aspects of the Global Environment

Bottom Line Globalization requires improvements in all bottom- line practices. Why might constant innovation be important for a U.S. company in a global market?

Q

Western Europe Following the widespread devastation of World War II, a handful of European countries initiated a bold experiment to bring unification (and avoid future wars) and economic prog- ress. After the Maastricht Treaty, which formally established the European Union (EU), the euro was adopted as a common currency among 19 member countries.15 The EU allows most goods, services, capital, and human resources to flow freely across its national bor- ders. These efforts helped the EU emerge as an economic superpower. Its 28 members boast a population of more than 508 million and a GDP (gross domestic product) exceed- ing that of the United States.16

The road to European unification has not always been a smooth one. In 2016, British vot- ers surprised many observers during a national referendum by opting to leave the European Union (dubbed “Brexit” or British Exit).17 What will this departure mean for the future strength of the European Union? It is too early to tell, but there is speculation that it could pave the way for voters in other member nations—like Sweden, Denmark, and Greece—to consider a similar decision.18

This divisive sentiment derives partly from recent events including the recent Greek financial crisis and the challenges of heavy migration.19 Member countries also are reluctant to relinquish control of key aspects of their economies, like the ability to devalue national currencies during an economic downturn (this move boosts exports because they become less expensive). As a result, not all members have adopted the euro.20

Despite these difficulties, unification has created a globally more competitive Europe, one that U.S. managers must take into account. Thus in 2017, Priceline purchased UK-based Momondo, a search engine that identifies flights, hotels, and car rentals.21 Dunkin’ Donuts, which has already opened stores in Iceland, Poland, and Denmark, is planning to open more than 1,000 stores in Europe over the next several years.22

The EU also presents a regulatory challenge to certain companies from the United States, including large tech firms like Google, Apple, Amazon, and Facebook. Recent complaints levied by EU authorities include “perceived failure to pay local taxes and their collection of reams of personal information.”23

In late 2017, Europe’s top courts will hear an appeal by Apple regarding whether it received $14 billion in preferential tax treatment in Ireland. If Apple loses the appeal (unknown at this writing), it will be required to pay the tax bill in full.24 As you read this, what related developments have occurred?

Despite these political, economic, and regulatory challenges, Europe will continue to be a hugely important force in global business. At the time of writing, some political develop- ments (for example, the French presidential election) suggest a possible resurgence of opti- mism about the EU project, Undoubtedly, though, change and uncertainties will continue.

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Asia: China and India Japan and its economic success dominated world attention toward the end of the 20th century, particularly so in the United States. Recently the Japanese economy has slowed, but Japanese companies such as Toyota and Sony are a major source of imported goods. As competitors, they are an important influence on how U.S. managers seek quality and efficiency in their operations. Japanese auto makers have a significant presence in the U.S.

Today, China claims the headlines. China has the world’s largest population and a fast- growing middle class. The country has industrialized rapidly, and surged ahead of Germany to become the world’s largest exporter. It also is the number two importer after the United States.25 The country is the world’s largest consumer of basic raw materials, such as steel and cement, as well as the world’s largest cell phone market. China is the largest exporter of goods into the United States, a cause of political concern in the U.S. because of the U.S. trade imbalance with China.

As a consuming nation, China’s appeal to managers lies in its huge population of 1.37 billion people and its rapid economic growth. Chinese companies have moved into more complex manufacturing operations such as auto parts, optical devices, and advanced electronics.

Rising incomes in China create a paradox for business expansion: Newly middle-class consumers in China are purchasing more products, both foreign and domestic; at the same time low-cost manufacturers must now look away from China somewhat to set up opera- tions in lower-wage countries.26 Other companies are staying in China to serve the huge market there. General Motors, for example, is setting up research and design facilities in China so it can introduce innovations aimed at satisfying the demands of Chinese consum- ers, starting with battery power.27

More and more, China’s growing consumption makes it a highly attractive market. But China continues to have an even greater global impact as an exporting nation. The enormous size of its labor force, combined with low labor costs, has given it a competitive advantage in manufactur- ing. This has led many U.S. and European managers to relocate operations to China, and to import an increasing number and variety of Chinese products, instead of con- tinuing to do business with local manufacturers.

Slow economic growth may threaten China’s domi- nance. In 2016, the Chinese economy expanded at a rate of 6.7 percent, the slowest in 26 years.28 Also, countries that have experienced job loss face growing pressure to restrict Chinese imports, particularly in the EU with its strong labor unions. But for the foreseeable future, China’s pres- ence in the world economy, as an importer and exporter, is one that you as a manager need to fully appreciate.

India too has become an important player in the global marketplace. The nation is still developing, and its poverty is severe, but its 1.27 billion people (the world’s second-largest population), many of them entering the working and professional classes, make India an essential market. For many U.S. companies, India provides online support for computer software, software development, call centers, and other services. In fact, so many compa- nies have set up shop there that the demand for Indian workers with strong technical and English language skills is exceeding the supply. Companies such as Wipro, Infosys, and Tata Group are responding with expanded training programs.29

Other rapidly growing countries in the Asia-Pacific region that have strong trade relation- ships with the United States include South Korea, Taiwan, and Singapore. These countries are important trading partners not merely because of their wage rates, but because many of their companies have competitive advantages in areas such as engineering and technological know-how. South Korea’s Samsung has the largest share of the world’s market for flat-screen

This Chevy Volt electric car is charging in the parking lot in Shanghai at General Motors headquarters.

©Peter Parks/Getty Images

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televisions and second-largest share (after Apple) in smartphones.30 Taiwan’s Hon Hai is the leader in contract manufacturing of electronics. You may not have heard of Hon Hai (also known as Foxconn), because it specializes in making components for brand-name products of other companies, including Apple iPhones and Sony PlayStation and Nintendo Wii video game consoles.31

These Asian countries and others have joined with the United States, Australia, and Russia to form the 21-member Asia-Pacific Economic Cooperation (APEC) trade group. Combined, APEC members’ economies account for more than half of world output (GDP) and 54 percent of world trade.32 The APEC countries have established policies that reduce trade barriers and encourage international commerce. APEC members address these objec- tives through dialogue and nonbinding commitments rather than treaties.

Another international organization, the Association of Southeast Asian Nations (ASEAN), brings together 10 developing nations including Indonesia, Malaysia, and Thailand. Economic growth in Vietnam and the Philippines is predicted to remain high at about 6 percent per annum.33 Along with economic development, ASEAN aims to promote cultural development and political security.

The Americas North and South America constitute a mix of industrialized countries, such as Canada and the United States, and growing economies such as Argentina, Brazil, Chile, and Mexico. The winter fruit you eat may come from Chile, the coffee you drink from Jamaica, and the shirt you wear from Honduras.

The North American Free Trade Agreement (NAFTA) combined the economies of the United States, Canada, and Mexico into the world’s largest trading bloc with nearly 444 million U.S., Canadian, and Mexican consumers and total trade reaching $1.1 trillion.34 Although the United States has a long-standing agreement with Canada, after NAFTA Mexico quickly became the United States’ third-largest trading partner. U.S. industries that have benefited include capital goods suppliers, manufacturers of consumer durables, grain producers and distributors, construction equipment manufacturers, the auto industry, and the financial industry, which gained privileged access into a previously protected market.

Besides importing and exporting, companies in the NAFTA countries have invested in facilities across national borders. Mexico-based CEMEX, the world’s third-largest cement company, is actually the largest cement supplier in the United States. Twenty-two percent of CEMEX’s employees and 27 percent of its sales are in the United States, and it con- ducts management meetings in English because the majority of its employees do not speak Spanish.35

After a protracted recession and several political scandals, Brazil’s economy may begin growing again.36 Brazil is the largest economy in South America, and hopes to leverage the $6.2 billion boost it received from tourists attending the 2016 Olympic and Paralympic Games there.37 Other bright spots in Brazil include increases in private consumption and exports of products like soy beans, iron ore, and raw cane sugar to China, the United States, and Argentina.38

As in Asia, South American companies rely on innovation and technology, rather than simply cost advantages, to compete in the global marketplace. “Start-Up Chile,” a start-up accelerator for immigrants funded by the Chilean government, helps high-potential entre- preneurs launch their start-up companies. Since its inception in 2010, 4,000 entrepreneurs from 79 countries have participated.39

Other agreements have been proposed to promote U.S. trade with Central and South America. The Central America–Dominican Republic–United States Free Trade Agreement (CAFTA-DR) includes Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua. CAFTA-DR creates the second-largest free trade zone with the United States (NAFTA being the largest). As part of the agreement, Central American nations promised to protect workers’ rights in their countries. Complaints that some coun- tries did not deliver on this promise have led the U.S. government to request consultations

North American Free Trade Agreement (NAFTA)

An economic pact that combined the economies of the United States, Canada, and Mexico into one of the world’s largest trading blocs.

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with Guatemala on “apparent violations of its obligations.”41 Additional trade agreements have been negotiated on a country-by-country basis with Chile, Peru, Colombia, and Panama.

The countries of South America have formed their own trading bloc, called Mercosur, to promote trade within the continent.

Africa and the Middle East The economy of the Middle East is best known for its export of oil. Although oil exploration and drilling take place in many parts of the world, the oil-rich countries of the Middle East supply by far the most oil to the world’s buyers, most of it going to buyers in Asia. The main Middle Eastern supplier of U.S. oil imports is Saudi Arabia,42 with other major suppliers being Canada, Mexico, and Venezuela.

The United States’ dependence on foreign oil has decreased since the shale oil boom in Texas, New Mexico, North Dakota, and Alaska.43 Nevertheless, U.S. businesses remain concerned about the Middle East because activities there can shape the price of oil, which is important not only for transportation but also for the manufacture of many products including fertilizer and plastic.

Social Enterprise Student Social Entrepreneurs Compete for $1 Million

The Hult Prize Foundation is a student business competi- tion and start-up accelerator that awards $1 million to tal- ented social entrepreneurs from universities around the world. The annual competition identifies and provides seed funding to promising “start-up social enterprises that tackle grave issues faced by billions of people.” Each year, about 1,500 students from 150 countries around the world participate in the Hult Prize and spend over 2.5 million hours on solving the world’s most press- ing issues. Since its founding in 2009, students from 600 schools have competed for the Hult Prize. Former president Bill Clinton of the Clinton Global Initiative presents the prize money to the student winners.

Here are some recent start-ups that were awarded the Hult Prize:

Magic Bus from Indiana’s Earnham College came up with a way for bus riders in Nairobi to pre-book their tick- ets using a text messaging system and a popular mobile pay app, making transportation easier and more reliable.

NanoHealth from the Indian School of Business won for its work in providing affordable, holistic medical ser- vices for impoverished “slum-dwellers” who suffer from chronic diseases.

Sweet Bites from the University of Pennsylvania aims to improve the health and quality of life of millions of impoverished people globally who can’t afford dental care. Sweet Bites is 100% xylitol chewing gum that stops the progression of tooth decay.

Bee Healthy from HEC Paris uses bees to revolutionize disease detection for underprivileged people around the

world. The bees’ olfactory system is used to detect signs of diseases such as diabetes, cancer, and tuberculosis on a person’s breath.

Are student social entrepreneurs who compete for the Hult Prize making a difference? Yes. According to Muhammad Yunus, Nobel Peace Prize winner for his pioneering work in microlending: “If you can create a real business, the begin- ning of a prototype, you can change the world.”40

Questions

• Of the four recent award-winning start-ups mentioned, which do you find most likely to succeed? Why?

• The Hult Prize has been awarded to new social enter- prises from all over the world. Why do you think the competition has a global focus?

©Stephanie Keith/Getty Images News/Getty Images

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Africa has long been seen by managers only as a continent cursed by dire poverty. The continent is still plagued by an epidemic of AIDS, political instability, and ongoing wars. But areas of progress and growth in the middle class in some countries have provided opportunities for businesses willing to learn the needs of the population and make the effort to navigate a challenging environment. For example, the mobile phone industry has leap- frogged the landline phase of communications in Africa.

The nearby “Social Enterprise” box discusses how student social entrepreneurs are tack- ling some of the world’s toughest challenges. As part of its Smarter Planet initiative (described in the “Management in Action” for Chapter 5), IBM learns about Africa’s huge potential by sending in teams to help local governments solve problems. As it came to know the region, IBM began selling services, setting up partnerships with local companies, and opening research facilities in Kenya, Senegal, South Africa, and other countries.44

Global Strategy

A crucial task for an international manager is to determine the best strategy for compet- ing in a global marketplace. To determine the most appropriate global strategy—from among global, international, transnational, multinational--managers can plot a company’s position on an integration–responsiveness grid (Exhibit 6.3). The vertical axis measures pressures for global integration, and the horizontal axis measures pressures for local responsiveness.

Pressures for Global Integration Several reasons can cause managers to want or need a common global strategy (high pres- sures for global integration, on the vertical axis of Exhibit 6.3) rather than one tailored to individual markets (low such pressures): universal customer needs, necessity to reduce costs, or the presence of competitors with a global strategy.

Universal needs exist when consumer tastes and product preferences in different coun- tries are similar. Products that serve universal needs require little adaptation across national markets; thus global strategic integration is facilitated. This is the case in many markets: electronic products such as semiconductor chips, certain basic foodstuffs (such as colas), and appliances (can openers and others).

LO 3

EXHIBIT 6.3 Organizational Models

High

Low

GLOBAL

Views the world as a single market. Operations are controlled centrally from the corporate o�ce.

High

Pressures for local responsiveness

Low

P re

ss ur

es fo

r gl

ob al

in te

gr at

io n

INTERNATIONAL

Uses existing capabilities to expand into foreign markets.

TRANSNATIONAL

Specialized facilities permit local responsiveness. Complex coordination mechanisms provide global integration.

MULTINATIONAL

Several subsidiaries operating as stand-alone business units in multiple countries.

SOURCES: Bartlett, C. A. and Ghoshal, S., Managing across Borders: The Transnational Solution. Boston, MA: Harvard Business School Press, 1991; and Harzing, A. W., “An Empirical Analysis and Extension of the Bartlett and Ghoshal Typology of Multinational Companies,” Journal of International Business Studies 31, no. 1 (2000), pp. 101–20.

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Competitive pressures to reduce costs may cause managers to integrate manufacturing globally. Costs are particularly important when price is the main competitive weapon and competition is intense (as with smartphones). It is important also if key com- petitors are based in countries where labor and other operating costs are low. In these cases, products are more likely to be standardized and perhaps produced in few locations to cap- ture economies of scale.

When competitors engage in global strategic coordination, this too creates pressures to integrate globally. A competitor that centrally coordinates the purchase of raw materials worldwide may achieve significant price reductions compared with firms that allow sub- sidiaries to handle purchases locally. Global competition can create pressures to centralize in corporate headquarters certain decisions being made by different national subsidiaries. Once one multinational company adopts global strategic coordination, its competitors may be forced to do the same.

Pressures for Local Responsiveness The second dimension of the grid, on the horizontal axis of Exhibit 6.3, is the need for responsiveness to local tastes and conditions. In some circumstances, managers must make sure their companies can adapt to different needs or demands in different locations. Strong pressures for local responsiveness emerge when consumer tastes and preferences differ sig- nificantly among countries. In such cases, products and/or marketing messages have to be customized. For instance, U.S. consumers’ demand for pickup trucks is strong in the South and West, whereas in Europe pickup trucks are viewed as utility vehicles and are purchased primarily by companies rather than by individuals. Automakers must tailor their marketing messages to these differences in consumer demand.

Pressures for local responsiveness also emerge when there are differences in traditional practices among countries. For example, in Great Britain people drive on the left side of the road, creating a demand for right-hand-drive cars, whereas in neighboring France and elsewhere, people drive on the right side of the road. Obviously, automobiles must be cus- tomized to accommodate this difference in traditional practices.

For restaurant and fast-food chains, what people like to eat locally creates pressures for local responsiveness. Yum! announced recently that it opened its first Taco Bell restaurant in China.45 To make the menu more appealing to customers in Shanghai, the company offers a Shrimp and Avocado Burrito made from high-quality ingredients and new sauces.46 McDonald’s faced a bigger challenge when entering India, where most of the population doesn’t eat beef. Teaming up with local entrepreneur Amit Jatia, the fast-food giant agreed to not offer any beef or pork items. This decision prompted creative new ideas like the Chicken Maharajah Mac and McVeggie sandwich.47

Finally, economic and political demands of host-country governments require local responsiveness. Most important, threats of protectionism, economic nationalism, and local content rules (rules requiring that a certain percentage of a product be manufactured locally) dictate that international companies manufacture locally. Countries may impose tar- iffs (taxes on imports) or quotas (restrictions on the num- ber of imports allowed into a country) to protect domestic industries from foreign competition perceived to be unfair or not in the nation’s interests.

The United States recently imposed high tariffs on steel imported from China.48 The U.S. government justified the tariffs as a response to complaints that the Chinese compa- nies were selling steel at extremely low prices, presumably because the slowdown in building in China led to a surplus

Universal needs encourage managers to

develop a global strategy.

Bottom Line The need to lower costs is a

key strategy driver. What is one way in which

a global strategy can help reduce costs?

©Agence France Presse/Douglas E. Curran/Hulton Archive/Getty Images

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of steel.49 Others interpret this and other protectionist actions as being motivated primarily by political objectives.50 Whatever the reasons for them, tariffs and quotas influence manag- ers’ decisions about whether it is economically advantageous, or even possible, to operate locally or rely on exporting.

Choosing a Global Strategy As Exhibit 6.3 shows, managers can use four approaches to international competition: the international model, the multinational model, the global model, and the transnational model. Organizations using each model compete globally, but they differ in the strategy they use and in the structures and systems that drive their operations.

The International Model In the international model, managers use their firm’s core capabilities to expand into foreign markets. As the grid indicates, it is most appropriate when there are few pressures for economies of scale or local responsiveness. Komatsu is an example of a company operating with the international model. Its industry doesn’t compete on cost, and its earth moving equipment doesn’t need to be tailored to local tastes.

The international model uses subsidiaries in each country in which the company does business, under the control exercised by the parent company. Although subsidiaries may have some latitude to adapt products to local conditions, core functions such as research and development are centralized in the parent company. Consequently, subsidiaries’ depen- dence on the parent company for new products, processes, and ideas requires a great deal of coordination and control by the parent company.

The advantage of this model is that it facilitates the transfer of skills and know-how from the parent company to subsidiaries around the globe. IBM and Xerox, among many oth- ers, profited from the transfer of their core skills in technology and research and develop- ment (R&D) overseas. The overseas successes of Kellogg, Coca-Cola, Heinz, and Procter & Gamble are based more on marketing know-how than on technological expertise. Toyota and Honda successfully penetrated U.S. markets from their base in Japan with their core competencies in manufacturing relative to local competitors. General management skills provided advantages that explain the growth of international hotel chains such as Hilton International, Intercontinental, and Sheraton.

One disadvantage of the international model is that it does not provide much latitude for responding to local conditions. Another is that it does not provide opportunity to achieve a low-cost position via scale economies.

The Multinational Model Where global efficiency is not required but adapting to local conditions offers advantages, the multinational model is appropriate. The multinational model, sometimes referred to as multidomestic, uses subsidiaries in each country in which the company does business and allows those offices to respond to local conditions. Each local subsidiary is a self-contained unit with all operating functions in the host market. Thus each has its own manufacturing, marketing, research, and human resources functions. Because of this autonomy, each multinational subsidiary can customize its products and strategies according to the tastes and preferences of local consumers, competitive condi- tions, and political, legal, and social structures.

A good example of a multinational firm is Heineken, a Netherlands-based brewing com- pany. Heineken has three major global brands—Heineken, Amstel, and Affligem—but it also offers regional and local brands. The company attempts to adapt its products to local atti- tudes and tastes while maintaining its high quality. The company produces more than 250 brands around the world, from its international brands to local and specialty brews. The localized portfolio includes Red Stripe in Jamaica, Tiger in Asia, and Tecate in Mexico. Countries have considerable autonomy in the beers that they brew locally.51

Major disadvantages of the multinational form include higher manufacturing costs and duplication of effort. Although a multinational can transfer core skills among its interna- tional operations, it cannot realize scale economies from centralizing manufacturing facili- ties and offering a standardized product to the global marketplace. Moreover, because a

international model

An organizational model that is composed of a company’s overseas subsidiaries and characterized by greater control by the parent company over local product and marketing strategies than is the case in the multinational model.

multinational model

An organizational model that consists of the subsidiaries in each country in which a company does business, and provides a great deal of discretion to those subsidiaries to respond to local conditions.

Bottom Line The multinational model helps speed up local response. What kind of product might experience rapid changes in local demand?

Bottom Line The international model helps spread quality and service standards globally. Give examples of products for which quality standards apply globally.

Q

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multinational approach tends to decentralize strategy decisions (discussed further in Chapters 8 and 9), launching coordinated global attacks against competitors is difficult. This can be a significant disadvantage when competitors have this ability.

The Global Model The global model is designed to market a standardized product in the global marketplace and to manufacture that product in a limited number of locations having favorable mixes of costs and skills. The global model is adopted by companies that view the world as one market and assume no tangible differences among countries in con- sumer tastes and preferences.

As part of its effort to improve efficiency while broadening its appeal, Ford launched a line of compact cars under the Ford Focus brand as the company’s first truly global prod- uct. The Focus models included hybrid, plug-in hybrid, and electric cars, and promotional plans were built around a unified advertising campaign highlighting technology features.52 Soon after the strategy was launched, the Focus was the best-selling car (by units) in the world for two consecutive years.53

Companies adopting the global model construct global-scale manufacturing facilities in a few selected locations. They realize scale economies by spreading the fixed costs of invest- ments in new product development, plants and equipment, and the like over worldwide sales. By using centralized manufacturing facilities and global marketing strategies, Sony was able to push down its unit costs to the point where it became the low-cost player in the global television market. This enabled Sony to take market share away from Philips, RCA, and Zenith, all of which used traditional manufacturing operations based in each major national market (a multinational approach). Because operations are centralized, subsidiar- ies usually are limited to marketing and service functions.

On the downside, the global model requires a great deal of coordination, with significant management and paperwork costs. Moreover, because a company pursuing a purely global approach tries to standardize its goods and services, it may be less responsive to consumer tastes and demands in different countries. Attempts to lower costs through global product standardization may result in a product that fails to satisfy anyone.

For example, although Procter & Gamble has been quite successful using a global approach, the company experienced problems when it tried to market Cheer laundry deter- gent in Japan. The product did not suds up as promoted in Japan because the Japanese use a great deal of fabric softener, which suppresses suds. Moreover, the claim that Cheer worked in all water temperatures was irrelevant in Japan, where most washing is done in cold water.

The Transnational Model Achieving competitive advantage often requires managers to pursue local responsiveness, transfer of know-how, and cost economies simultaneously.54 The transnational model is designed to help them do just that. It is an approach that enables managers to “think globally but act locally.”

In companies that adopt the transnational model, functions are centralized where it makes sense to do so, but a great deal of decision making also takes place at the local level. In addition, the experiences of local subsidiaries are shared worldwide to improve the firm’s overall knowledge and capabilities. For example, research, training, and the overall develop- ment of the corporate strategy and global brand image tend to be centralized at home. Other functions may be centralized as well, but not necessarily in the home country.

To achieve cost economies, companies base global-scale production plants for labor- intensive products in low-wage countries such as Indonesia, Mexico, or Hungary, and locate production plants that require a skilled workforce in high-skill countries such as Germany and Japan. Companies can find locations with an optimal balance of needed skills and rela- tively low costs. Thus, although wages are rising in India, the technical skills of its workforce make that country an attractive place to locate some knowledge-based operations such as loan approvals, legal research, and biotech R&D. These skilled occupations are growing faster in India than jobs in call centers, the work that once brought India to prominence as an offshoring location.55

global model

An organizational model consisting of a company’s overseas subsidiaries and characterized by centralized decision making and tight control by the parent company over most aspects of worldwide operations; typically adopted by organizations that base their global competitive strategy on cost considerations.

transnational model

An organizational model characterized by centralizing certain functions in locations that best achieve cost economies; basing other functions in the company’s national subsidiaries to facilitate greater local responsiveness; and fostering communication among subsidiaries to permit transfer of technological expertise and skills.

Bottom Line The global model of

standardization lowers costs. Could this model apply to a website design company? If

so, how? If not, why not?

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Alibaba, China’s e-commerce giant, shattered sales records during its annual 24-hour discount event and media extravaganza known as Singles’ Day. Some U.S. brands participated in the event, such as Starbucks, Target, and Gap. But Alibaba’s websites—Taobao and Tmall Global—are not very well known in the United States.

The attraction of China’s huge and increasingly profit- able market is substantial. Some estimates suggest the new Chinese middle class alone is as big a market as the entire U.S. population. These shoppers are sophisticated and tech-savvy, and despite the risk of counterfeits (a problem Alibaba routinely contends with), they covet—and are willing to pay for—the international brands that make up a fast-growing proportion of the site’s Western vendors. There may be no better way for U.S. vendors to reach them, and the $150 billion market they represent, than through e-commerce.

Company founder Jack Ma wants to change that. He plans a major expansion in the United States, which he hopes will not only bring more U.S. shoppers to the site but also attract more American vendors, large and small. Some large companies, including Macy’s and Target, made their first appearance in China via Tmall Global. If Jack Ma

succeeds in expanding his company’s presence in the United States, thousands and possibly millions of other vendors, including the kinds of small operations that thrive in Amazon’s third-party marketplace, could follow them.

During his visit with then president-elect Donald Trump, Jack Ma indicated he wants to capitalize on the opportu- nity to serve U.S. small vendors, and customers too. He announced plans to expand his company’s New York City headquarters by leasing several floors in a downtown office building, where he himself will have an office. In fact, Ma’s plans for Alibaba in the United States are so aggres- sive that he has hinted he would like to celebrate the 10th anniversary of Singles’ Day, in November 2019, in either New York or Paris. Within the next 15 years, he anticipates the extravagant media and consumer event will be as pop- ular in the United States as it already is in China.56

• In what ways do you think Alibaba’s Jack Ma is respond- ing to the need for global integration? How does his strategy exemplify local responsiveness?

• Which global strategy (international, multinational, global, or transnational) do you think is most appropri- ate for Alibaba? Why?

Management in Action ALIBABA’S GLOBAL STRATEGY

P R

O G

R E

S S

R E

P O

R T

M A

N A

G E

R ’S

B R

IE F

O N

W A

R D

Marketing, service, and final assembly functions tend to be based in the national subsid- iaries for greater local responsiveness. Thus major components are manufactured in central- ized production plants to realize scale economies and then shipped to local plants, where the final product is assembled and customized to fit local needs.

Panasonic’s experience in China has made it more of a transnational company.57 Panasonic, a Japanese company, initially saw China primarily as a low-cost site for manu- facturing its home appliances. In the early years, Panasonic conducted extensive consumer research in Japan but none in China; it served the Chinese market by removing features to make low-cost versions of its appliances. But as China’s economy developed, consum- ers began buying new products from Chinese producers—who were also capturing market share from Panasonic elsewhere. Panasonic’s management realized it needed to view China as more than a source of cheap labor. It set up a unit called Panasonic Corporation of China to provide research and development and marketing support, as well as back-office services, to the manufacturing facilities in China. It also set up the China Lifestyle Research Center to learn more about the tastes and lifestyles of Chinese consumers.

The Japanese managers shared their knowledge of technology and production efficiency. Their Chinese colleagues helped Panasonic identify and meet the needs of this huge con- sumer market. Engineers from different facilities worked together to understand how they could meet the identified needs better. As the efforts helped Panasonic develop better new products, the company began to spread this collaborative approach to other markets—for example, by opening research centers in Germany and India.

Panasonic also set up a global marketing organization to share knowledge about its best practices. Such efforts are critical for Panasonic, whose performance had suffered

Bottom Line The transnational model tries to deliver on all bottom-line practices. Does that mean the transnational model is always best? Why or why not?

Q

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from efforts to remain profitable in the highly competitive market for electronics such as televisions.

Perhaps the most important distinguishing characteristic of the transnational organiza- tion is the fostering of communications among subsidiaries and the ability to integrate the efforts of subsidiaries (when doing so makes sense). Communicating effectively across sub- sidiaries requires the head office to play an active role, creating formal mechanisms such as transnational committees staffed by people from the various subsidiaries. Equally important is to transfer managers among subsidiaries on a regular basis. This creates a global network of personal contacts in different subsidiaries with whom they can share information as the need arises.

Now that you have seen examples of the need to balance global integration and local responsiveness, consider how those pressures apply to Alibaba’s situation as described in “Management in Action: Progress Report.”

Entry Mode

When considering global expansion, international managers must decide on the best means of entering an overseas market. The five basic ways to expand overseas are exporting, licens- ing, franchising, entering into a joint venture with a host-country company, and setting up a wholly owned subsidiary in the host country.58 Exhibit 6.4 compares the entry modes.

Exporting Most manufacturing companies begin global expansion as exporters and later switch to one of the other modes for serving an overseas market. The advantages of exporting are that it (1) provides scale economies by avoiding the costs of manufacturing in other countries and (2) is consistent with a pure global strategy. By manufacturing the product in a centralized location and then exporting it to other national markets, the company can realize substan- tial scale economies from its global sales volume.

However, exporting has a number of drawbacks. First, other countries might offer lower- cost locations for manufacturing the product. An alternative is to manufacture in a location where the mix of costs and skills is most favorable and then export from that location.

LO 4

Exporting Licensing Franchising Joint Venture Wholly Owned Subsidiary

Advantages

Scale economies

Lower development costs

Lower development costs

Local knowledge

Maintains control over technology

Consistent with pure global strategy

Lower political risk

Lower political risk

Shared costs and risk

May be the only option

Maintains control over operations

Disadvantages

No low-cost sites

High transportation costs

Tariff barriers

Loss of control over technology

Loss of control over quality

Loss of control over technology

Conflict between partners

High cost

High risk

EXHIBIT 6.4 Comparison of Entry Modes

Bottom Line Exporting offers scale

economies. Can services be exported?

Why or why not?

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A second drawback of exporting is that high transportation costs can make it uneconom- ical, particularly for bulk products. Chemical companies get around this by manufacturing their products on a regional basis, serving several countries in a region from one facility.

A third drawback is that host countries can impose (or threaten to impose) tariff bar- riers. Trade arrangements described earlier, including the World Trade Organization, NAFTA, and APEC, work to minimize this risk. However, tariffs continue to affect trade between particular countries in various industries. Examples include U.S.-imposed tariffs on sugar imported from Mexico and, as mentioned earlier, steel imported from China. The U.S. government recently ruled that LG and Samsung sold washing machines at prices that are lower than they cost to produce, a practice known as dumping. The government imposed tariffs of between 32 and 52 percent on the two companies.59

Licensing International licensing is an arrangement by which a licensee in another country buys the rights to manufacture a company’s product in its own country for a negotiated fee (typically royalty payments on the number of units sold). The licensee then puts up most of the capital necessary to get the overseas operation going. The advantage of licensing is that the com- pany need not bear the costs and risks of opening up an overseas market.

However, a problem arises when a company licenses its technological expertise to overseas companies. Technological know-how is the basis of the competitive advantage of many multinational companies. But RCA Corporation lost con- trol over its color TV technology by licensing it to a number of Japanese companies. The Japanese companies quickly assimilated RCA’s technology and then used it to enter the U.S. market, eventually gaining a bigger share of the U.S. market than RCA held.

Sometimes, licensing is a reasonable alternative when it is not feasible for a firm to operate on its own. Due to a “challenging regulatory, legal and competitive environ- ment,” Netflix recently decided to pursue a licensing strat- egy in China. In lieu of operating on its own, the company will license content to existing online service providers.60

Franchising In many respects, franchising is similar to licensing. However, whereas licensing is a strategy pursued primarily by manufacturing companies, franchising is used primarily by service companies. Anytime Fitness, Bricks 4 Kidz, Subway, and many others have expanded over- seas by franchising.61 7-Eleven has expanded through franchising to the point where it has 61,000 stores in 18 countries.62

In franchising, the company sells limited rights to use its brand name in return for a lump-sum payment and a share of the franchisee’s profits. Unlike most licensing agree- ments, the franchisee has to agree to abide by strict rules regarding how it does business. Thus, McDonald’s expects the franchisee to run its restaurants in a manner identical to that used under the McDonald’s name elsewhere in the world.

The advantages of franchising as an entry mode are similar to those of licensing. The franchisees put up capital and assume most of the risk. However, local laws can limit this advantage.

The most significant disadvantage of franchising concerns quality control. The compa- ny’s brand name guarantees consistency in the company’s product. Thus a business traveler booking into a Hilton International hotel in Hong Kong can reasonably expect the same quality of room, food, and service that he or she would receive in New York. But if over- seas franchisees are less concerned about quality than they should be, the impact can go beyond lost sales in the local market to a decline in the company’s reputation worldwide. If

In nine years, Cold Stone Creamery expanded its franchises into 24 countries outside the United States, including Brazil, shown here.

©RosaIreneBetancourt 10/Alamy Stock Photo

Bottom Line Franchising is one way to maintain standards globally. Why does quality control pose a risk in franchising?

Q

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a business traveler has an unpleasant experience at the Hilton in Hong Kong, she or he may decide never to go to another Hilton hotel—and urge colleagues to do likewise.

Joint Ventures Establishing a joint venture (a formal business agreement discussed in more detail in Chapter 17) with a company in another country has long been a popular means of entering a new market. Joint ventures benefit a company through (1) the local partner’s knowledge of the host country’s competitive conditions, culture, language, political systems, and busi- ness systems; and (2) the sharing of development costs and/or risks with the local partner.

In many countries, political considerations make joint ventures the only feasible entry mode. Before China opened its borders to trade, many U.S. companies, including Eastman Kodak, AT&T, Ford, and GM, did business in the country via joint ventures.

In 2014, Duke University and Wuhan University opened a joint venture in China, Duke Kunshan University (DKU). DKU offers programs in global health, medical physics, and management studies. Approved by the Chinese Ministry of Education, DKU joins other high-profile partnerships that have been created between Western and Chinese institutions of higher education. Many of the new ventures focus on “advanced business studies, espe- cially targeting the Chinese MBA market, and most are taught partly or entirely in English.”

Fueling this trend in cross-border ventures is China’s goal to become a major education hub and the fact that several state-owned enterprises (SOEs) in China want to modernize the way they do business. One way to accomplish both of these goals is by attracting stu- dents and scholars from premier learning institutions.63

As attractive as they sound, joint ventures have their problems. First, as in the case of licensing, a company runs the risk of losing control over its technology to its venture part- ner. Japan’s Kawasaki Heavy Industries and Germany’s Siemens entered into joint ventures with Chinese partners to build China’s high-speed rail network, but now those Chinese companies are using some of the technology they learned from the venture to compete with Kawasaki and Siemens for contracts elsewhere.64

Second, companies may find themselves at odds with one another. For example, one joint venture partner may want to move production to a country where demand is growing, but the other would prefer to keep its factories at home running at full capacity. Conflict over who controls what within a joint venture is a primary reason many fail.65

In fact, many of the early joint ventures American and European companies entered into with companies in China lost money or failed precisely because of conflicts over con- trol. To offset these disadvantages, experienced managers strive to iron out technology, control, and other potential conflicts up front, when they first negotiate the joint venture agreement.

Wholly Owned Subsidiaries Establishing a wholly owned subsidiary—that is, an independent company owned by the parent corporation—is the most costly method of serving an overseas market. Companies that use this approach must bear the full costs and risks (as opposed to joint ventures, in which the costs and risks are shared, or licensing, in which the licensee bears most of the costs and risks).

Nevertheless, setting up a wholly owned subsidiary offers two clear advantages. First, when a company’s competitive advantage is based on technology, a wholly owned subsid- iary reduces the risk of losing control over the technology. Wholly owned subsidiaries are thus the preferred mode of entry in the semiconductor, electronics, and pharmaceutical industries.

However, this advantage is limited by the extent to which the government of the country where the sub- sidiary is located will protect intellectual property such as patents and trademarks. Obviously this is a vital consideration.

Setting up a wholly owned subsidiary offers

two clear advantages.

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Second, a wholly owned subsidiary gives a company tight control over operations in other countries, which is necessary if the company chooses to pursue a global strategy. Establishing a global manufacturing system requires world headquarters to have a high degree of control over the operations of national affiliates. Unlike licensees or joint ven- ture partners, wholly owned subsidiaries usually accept centrally determined decisions about how to produce, how much to produce, and how to price output for transfer among operations.

Working Overseas

When establishing operations overseas, headquarters executives can choose to send expatriates (individuals from the parent country), use host-country nationals (natives of the host country), and deploy third-country nationals (natives of a country other than the home country or the host country). Most corporations use all three types of employees, as each has distinctive advantages and disadvantages.

Sending expatriates can cost three to four times as much as employing host-country nationals. Moreover, in many countries—particularly developing countries in which firms are trying to get an economic foothold—the personal security of expatriates is a big issue. Firms therefore may send their expatriates on shorter assignments, or avoid the problem by not sending people to some countries and instead use telecommuting, teleconferencing, and other electronic means to communicate between international divisions.

Working internationally can be highly stressful, even for experienced globetrotters. Exhibit 6.5 shows some of the primary stressors for expatriates at different stages of their assignments. It also shows how managers can cope with the stress, plus some things compa- nies can do to help with the adjustments.

LO 5

expatriates

Parent-company nationals who are sent to work at a foreign subsidiary.

host-country nationals

Natives of the country where an overseas subsidiary is located.

SOURCE: Adapted from Sanchez, J., Spector, P. and Cooper, C., Academy of Management Executive, May 2000, pp. 96–106.

Stage Primary Stressors Executive Coping Response Employer Coping Response

Assignment acceptance

Unrealistic evaluation of stressors to come. Hurried time frame.

Think of assignment as a growth opportunity rather than an instrument to vertical promotion.

Do not make hard-to-keep promises. Clarify expectations.

Pre- and postarrival

Ignorance of cultural differences.

Do not make unwarranted assumptions of cultural competence and cultural rules.

Provide pre-, during-, and postassignment training. Encourage support-seeking behavior.

Novice Cultural blunders or inadequacy of coping responses. Ambiguity owing to inability to decipher meaning of situations.

Observe and study functional value of coping responses among locals. Do not simply replicate responses that worked at home.

Provide follow-up training. Seek advice from locals and expatriate network.

Mastery Frustration with inability to perform boundary-spanning role. Bothered by living with a cultural paradox.

Internalize and enjoy identification with both cultures and walking between two cultures.

Reinforce rather than punish dual identification by defining common goals.

Repatriation Disappointment with unfulfilled expectations. Sense of isolation. Loss of autonomy.

Realistically reevaluate assignment as a personal and professional growth opportunity.

Arrange prerepatriation briefings and interviews. Schedule postrepatriation support meetings.

EXHIBIT 6.5  Expatriate Stressors and Coping Responses

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Expatriate assignments are valuable for professional and personal development, and hav- ing a pool of experienced expatriates is useful. On the other hand, local employees are more available, tend to be familiar with the culture and language, and usually cost less. In addition, local governments often provide incentives to companies that create good jobs for their citizens, or they may place restrictions on the use of expatriates.

Such advantages, coupled with the often-inadequate educational systems of developing nations, create stiff competition for local management talent. The result is that China, India, and Latin America do not have enough qualified talent to fill the demand for local execu- tives. In China, recruiting firm Russell Reynolds finds that local managers offer technical skills but often lack conceptual skills and a strategic perspec- tive. Motorola Mobility meets the challenge in main- land China with a mix of executives—about one-third from mainland China, one-third from other Asian countries, and one-third from the West.66

Skills of the Global Manager Estimates are that nearly 15 percent of all employee transfers are to an international loca- tion. However, the failure rate among expatriates (defined as those who come home early) is considerably higher for American expatriates compared to those international assignees from Europe and Asia.67 The cost of each of these failed assignments ranges from tens of thousands to hundreds of thousands of dollars.68

The causes of failure overseas go beyond technical capability and include personal and social issues. In a recent survey of human resource managers around the globe, two-thirds said the main reason for the failures is family issues, especially dissatisfaction of the employee’s spouse or partner.69 The problem may be compounded for dual-career couples, in which one spouse may have to give up his or her job to join the expatriate manager in the new location. For both the expatriate and the spouse, adjustment requires flexibility, emotional stability, empathy for the culture, communication skills, resourcefulness, initiative, and diplomatic skills.70

Companies such as Levi Strauss, Bechtel, Monsanto, Whirlpool, and Dow Chemical have worked to identify the skills that predict expatriate success (Exhibit 6.6). Importantly, in addi- tion to such things as cultural sensitivity, technical expertise, and business knowledge, an indi- vidual’s success abroad may depend greatly on his or her ability to learn from experience.71

Companies such as BPAmoco, Global Hyatt, and others with large international staffs have extensive training programs to prepare employees for international assignments. Exhibit 6.7 suggests ways to improve their likelihood of success. Other companies, such as Coca-Cola, Motorola, Chevron, and Mattel, extend this training to include employees who may be located in the United States but who also deal in international markets. These pro- grams focus on areas such as language, culture, and career development.

Going on overseas assignments affects careers. A manager selected for a post overseas usually is being groomed to become a more effective manager in an era of globalization. In addition, she often will have more responsibility, challenge, and operating leeway than at home. Yet expatriates often worry about being out of the loop on decisions and key develop- ments back home. Good companies and managers address this issue with effective commu- nication between subsidiaries and headquarters and visitations to and from the home office.

Understanding Cultural Issues In many ways, cultural issues represent the most elusive aspect of international business. In the era of the global village, it is easy to forget how deep and enduring cultural differences can be. The fact that people everywhere drink Coke, wear blue jeans, and drive Toyotas doesn’t mean we are all becoming alike. Each country is unique for reasons rooted in his- tory, culture, language, geography, social conditions, race, and religion. These differences complicate any international activity and represent the fundamental issues that inform and guide how a company should conduct business across borders.

LO 6

LO 7

Bottom Line Expatriate hiring increases

costs; training raises quality. How might training an

expatriate manager differ from training a local

manager?

Q

Estimates are that nearly 15 percent of all

employee transfers are to an international

location.

third-country nationals

Natives of a country other than the home country or the host country of an overseas subsidiary.

failure rate

The number of expatriate managers of an overseas operation who come home early.

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End-State Dimensions Survey Items

1. Sensitivity to cultural differences.

When working with people from other cultures, works hard to understand their perspective.

2. Business knowledge. Has a solid understanding of the company’s products and services.

3. Courage to take a stand. Is willing to take a stand on issues.

4. Brings out the best in people.

Has a special talent for dealing with people.

5. Acts with integrity. Can be depended on to tell the truth regardless of circumstances.

6. Is insightful. Is good at identifying the most important part of a complex problem.

7. Is committed to success. Clearly demonstrates commitment to seeing the organization succeed.

8. Takes risks. Takes personal as well as business risks.

Learning-Oriented Dimensions Survey Items

1. Uses feedback. Has changed as a result of feedback.

2. Is culturally adventurous.

Enjoys the challenge of working in countries other than his or her own.

3. Seeks opportunities to learn.

Takes advantage of opportunities to do new things.

4. Is open to criticism. Does not appear brittle—as if criticism might cause him or her to break.

5. Seeks feedback. Pursues feedback even when others are reluctant to give it.

6. Is flexible. Doesn’t get so invested in things that he or she cannot change when something doesn’t work.

EXHIBIT 6.6 Identifying International Executives

SOURCE: Spreitzer, G. M., McCall, M. W. and Mahoney, J. D., “Early Identification of International Executive Potential,” Journal of Applied Psychology 82, no. 1 (1997), pp. 6–29. ©1997 by American Psychological Association.

• Structure assignments clearly: Develop clear reporting relationships and job responsibilities.

• Create clear job objectives.

• Develop performance measurements based on objectives.

• Use effective, validated selection and screening criteria (both personal and technical attributes).

• Prepare expatriates and families for assignments (briefings, training, support).

• Create a vehicle for ongoing communication with expatriates.

• Anticipate repatriation to facilitate reentry when they come back home.

• Consider developing a mentor program that will help monitor and intervene in case of trouble.

EXHIBIT 6.7 How to Prevent Failed Global Assignments

Ironically, although most of us would guess that the trick to working abroad is learning about a foreign culture, our problems often stem from being oblivious to our own cultural conditioning. Most of us pay no attention to how our own culture influences our everyday behavior. Because of this, we adapt poorly to situations that are unique or foreign to us.

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Without realizing it, some managers may act out of ethnocentrism—a tendency to judge foreign people or groups by the standards of one’s own culture or group and to see one’s own standards as superior. This tendency may be unconscious: “in England, they drive on the wrong side of the road” rather than merely on the left. Or people may not recognize the values underlying a local culture—for example, assuming that the culture is backward because it does not air American or European television programming, when actu- ally it is trying to maintain its traditional values and norms.

Such assumptions are one reason people traveling abroad frequently experience culture shock—the disorienta- tion and stress associated with being in a foreign environ- ment. Managers are better able to navigate this transition if they are sensitive to their surroundings, including social norms and customs, and adjust their behavior to the new circumstances.72 Employers can help by conveying cultural norms and suggesting behaviors that contribute to success in the host country.

A wealth of cross-cultural research has been conducted on the differences and similari- ties among various countries. Perhaps best known is the work of Geert Hofstede, who iden- tified four types of differences between country cultures within multinational corporations:

Power distance: the extent to which a society accepts the fact that power in organizations is distributed unequally.

Individualism/collectivism: the extent to which people act on their own or as a part of a group. Uncertainty avoidance: the extent to which people in a society feel threatened by uncer-

tain and ambiguous situations. Masculinity/femininity: the extent to which a society values quantity of life (e.g., accom-

plishment, money) over quality of life (e.g., compassion, beauty).

Exhibit 6.8 depicts graphically how 40 nations differ on the dimensions of individualism/ collectivism and power distance. Of course, it is easy to stereotype, exaggerate, and overgen- eralize differences among countries. Americans often prefer to act as part of a group, just as many Taiwanese enjoy acting individualistically. Globalization by now may have blurred some of Hofstede’s distinctions. Still, to suggest that no cultural differences exist is equally simplistic. Clearly, cultures such as the United States which emphasize individualism differ significantly from collectivist cultures such as those of Pakistan, Taiwan, and Colombia.

Cross-cultural management extends beyond U.S. employees going abroad. It includes effective management of inpatriates—foreign nationals who are brought in to work at the par- ent company. These employees bring extensive knowledge about how to operate effectively in their home countries. They also will be better prepared to communicate their organiza- tion’s products and values when they return. But they often have the same types of problems as American expatriates and may be even more neglected because parent-company manag- ers see the home country as normal—requiring no period of adjustment. Yet the language, customs, expense, and lack of local community support in the United States are at least as daunting to inpatriates as the experience of American nationals abroad.

Thus, culture shock works both ways. Effective managers are sensitive to these issues and consider them when dealing with foreign-national employees. In contrast to American-born employees, co-workers or customers from other countries might tend to communicate less directly, place more emphasis on hierarchy and authority, or make decisions more slowly. In general, managers of international groups can manage misunderstandings by acknowledg- ing cultural differences frankly and participatively establishing behavioral norms to correct and prevent problems that upset group members, or by removing group members who dem- onstrate they cannot work effectively with others.73

Good managers help their employees adjust. Basic issues include the following:

Meetings: Americans tend to have specific views about the purpose of meetings and how much time should be spent. International workers may have different preconceptions

ethnocentrism

The tendency to judge others by the standards of one’s own group or culture, which are seen as superior.

culture shock

The disorientation and stress associated with being in a foreign environment.

inpatriate

A foreign national brought in to work at the parent company.

In this era, when people from all over the globe are collaborating on business issues, it is vital to continue learning about and respecting different cultures.

©Digital Vision/Getty Images RF

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Multiple Generations at Work Do Millennials Need International Work Experience?

According to the results of a survey of working Millennials from six countries, opinions indicate “yes” but also depend on nationalities. PricewaterhouseCoopers asked early career employees the following question: “Thinking of working outside your home country, do you agree/disagree that you need international experience to further your career?” The percentages of respondents who agreed that they needed international experience are illustrated below.

Large majorities of Millennial respondents from the emerging economies of Brazil, China, and India viewed international experience as important for their careers. In

contrast, just over half of respondents from the United States and Germany, both developed economies, thought international experience would benefit their careers.

Given the dramatic increase in globalization and inter- national competition in recent decades, employees of all ages and economies should be looking for opportunities to acquire international business skills. By working with peo- ple from different cultures, employees can learn how cul- tural programming influences their behaviors and attitudes. That is the first step in being able to function effectively in international business situations.74

90

80

70

60

P er

ce nt

50

40

30

20

10

0 USA Germany Brazil China India

about the nature and length of meetings, and managers should make sure foreign nationals are comfortable with the American approach.

Work(aholic) schedules: Workers from other countries can work long hours, but in coun- tries with strong labor organizations they often get many more weeks of vacation than American workers. Europeans in particular may balk at working on weekends. Matters such as these are most helpfully raised and addressed at the beginning of the work assignment.

E-mail: Not everyone loves e-mail and texting; whether a cultural or an individual prefer- ence, many refer to communicate face to face. Particularly when potential language difficulties exist, managers should avoid relying on e-mail for important matters at least at the outset.

Fast-trackers: Although U.S. companies may put a young MBA graduate on the fast track to upper management, most other cultures still see no substitute for the wis- dom gained through experience. This is something U.S. managers working abroad should bear in mind.

Feedback: Everyone likes praise, but excessive positive feedback is more prevalent in the United States than in other cultures—a useful fact for (1) American expats receiving

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EXHIBIT 6.8 Positions of 40 Countries on the Power Distance and Individualism Scales(4) Small power distance/

collectivist

Collectivism

Individualism

Large power

distance

Small power

distance

(3) Small power distance/

individualist

CAN

USA

*

*

(2) Large power distance/individualist

(1) Large power distance/ collectivist

* SPA

* *

* * *

* * * * *

* *

* *

* *

* *PAK COL TAI PER

CHL SIN

HOK YUG MEX

PHI

POR

GRE TUR

BRA IRA

JAP

VEN

THA

IND

ARG

SAF

FRA

BELITA

* *

* **

* *

* *

* * *

*

AUT ISR

FIN

NOR GER SWI

SWEIRE DEN

* NZL *

* *

*

NET * GBR

AUL

The 40 Countries (showing abbreviations used above)

ARG Argentina AUL Australia AUT Austria BEL Belgium BRA Brazil CAN Canada CHL Chile COL Colombia DEN Denmark FIN Finland

FRA France GBR Great Britain GER Germany (West) GRE Greece HOK Hong Kong IND India IRA Iran IRE Ireland ISR Israel ITA Italy

JAP Japan MEX Mexico NET Netherlands NOR Norway NZL New Zealand PAK Pakistan PER Peru PHI Philippines POR Portugal SAF South Africa

SIN Singapore SPA Spain SWE Sweden SWI Switzerland TAI Taiwan THA Thailand TUR Turkey USA United States VEN Venezuela YUG Yugoslavia

SOURCE: Hofstede, G., “Motivation, Leadership, and Organization: Do American Theories Apply Abroad?” Organizational Dynamics 9, no. 1 (Summer 1980), pp. 42–63.

performance reviews overseas, and (2) U.S. managers when they give reviews to for- eign nationals.75

Ethical Issues in International Management If managers are to function effectively overseas, they must understand how culture affects both how they are perceived and how others behave. One of the most sensitive issues in this regard is how culture plays out in terms of ethics.76 Assessments of right and wrong get blurred as we move from one culture to another, as actions that are normal and custom- ary in one setting may be unethical—even illegal—in another. Bribes are a classic example, as they can be an accepted part of commercial transactions in many Asian, African, Latin

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The Digital World International management in the digital age means con- necting with people, across the globe at all times of day and night, who have all sorts of different cultural norms and expectations. In the limited context of electronic communication it can be difficult to spot and track subtle cues. For example, straightforward details can seem bare or abrupt via e-mail or text.

The degree of formality in e-mail varies from culture to culture. In many cultures it is expected (and polite) to begin with a personal question about someone’s family, but in other cultures, this would be considered prying or rude.

Timing phone calls so they are convenient for all time zones can be a challenge. There are seasonal differences, too. Trying to finalize a deal when the majority of people in some countries go on holiday could indicate a lack of respect for someone’s culture.

By the way, don’t assume that some countries are tech- nologically less developed than yours. This can result in a social gaffe, and a missed opportunity. In 2016, Senegal, Ghana, Kenya, Tunisia, and Indonesia all had larger per- centages of their population using social networking sites on smartphones than the United States.

Alibaba is China’s premier e-commerce site, drawing in hundreds of millions of consumers from China’s rising middle class with sophisticated tastes and the money to spend on gratifying them. Willing to pay for high-quality brands, these consumers are growing more savvy about rejecting the counterfeit goods that have long plagued Alibaba’s retail platforms, especially Taobao. Black-market sites where counterfeits are rampant are actually experi- encing a decline as China’s newly wealthy young consum- ers flex their spending muscle for the first time and choose to shop where they can place their trust.

Problems with counterfeits at Alibaba caused U.S. trade officials to place Taobao on its watchlist of “notorious mar- kets” in 2012. Alibaba responded with efforts to combat fakes—hiring a staff of 2,000 and enlisting 5,000 volunteers to help identify counterfeit goods, setting aside 150  mil- lion yuan (almost $22 million) to buy and test suspected fakes, and designing algorithms that help spot fakes by monitoring data such as price. The company invested in a $2.4  million lobbying effort in Washington to seek removal from the list, and a reprieve was finally granted.

In December 2016, however, just a few weeks before company founder Jack Ma met with then president-elect

Donald Trump to announce plans for expanding Alibaba in the United States, the United States Trade Representative returned Taobao to its blacklist.

This was an embarrassing setback for the multi-billion- dollar company. The announcement carries no official consequences and is not expected to dent the company’s Chinese operations. It could cast a pall over its U.S. expan- sion plans, however, particularly if the U.S. agency’s warn- ing about Alibaba’s other retail site, Tmall, does not lead to improvements there also.

Alibaba has responded with a new strategy, taking to Chinese courts to sue two vendors selling fake Swarovski watches on its site. It’s the first such suit the company has filed. “We want to mete out to counterfeiters the punish- ment they deserve in order to protect brand owners,” said the company’s chief platform governance officer. “We will bring the full force of the law to bear on these counter- feiters so as to deter others from engaging in this crime wherever they are.”78

• What is Alibaba’s ethical responsibility for controlling the sale of counterfeit goods on its websites?

• What cultural issues can you identify in this example?

Management in Action CONTROLLING ALIBABA’S PROBLEM WITH COUNTERFEITS

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American, and Middle Eastern cultures. Even companies from cultures that view bribery as a form of corruption sometimes feel they must offer bribes when they think that this is part of the culture they are dealing with.77

Consequently, companies with global operations should be at least as active as domestic corporations in identifying, establishing, and enforcing standards for ethical behavior. In Chapter 5, we identified a number of steps organizations can take to clarify and encourage

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International Management  Chapter 6 183

ethical behavior. The primary difference in the international context is that this must be done with not just domestic employees but also overseas colleagues and partners, who may have their own expectations.

Research has identified five core values that most people embrace regardless of their nationality or religion: compassion, fairness, honesty, responsibility, and respect for others. These values lie at the heart of human experience and human rights, and seem to transcend more superficial differences between countries and regions. Knowing these shared values can help to build more effective partnerships, across as well as within cultures. Perhaps as long as people understand that they share some core values, they can collaborate effectively despite their differences.79

To a large extent, the challenge of managing across borders comes down to the practi- cal philosophies and everyday systems developed for working with people. International managers need to develop a portfolio of behaviors and methods adapted to different cultural situations. These adjustments, however, should not compromise the values, integrity, and strengths of their home country cultures.

When managers understand and work effectively across cultures, they can capitalize on the opportunities that our global economy offers. The implications of globalization are evi- dent with Alibaba’s emergence as a world player. People around the world are becoming more educated, launching businesses, and enjoying a higher standard of living. The opportu- nities to responsibly serve their needs are enormous, and even small, local business manag- ers can learn about people’s needs and meet them globally. Probably many more will start participating in Alibaba’s e-markets.

culture shock, p. 179

ethnocentrism, p. 179

expatriates, p. 176

failure rate, p. 177

global model, p. 171

host-country nationals, p. 176

inpatriate, p. 179

inshoring, p. 163

insourcing, p. 163

international model, p. 170

multinational model, p. 170

North American Free Trade Agreement (NAFTA), p. 166

offshoring, p. 162

outsourcing, p. 162

third-country nationals, p. 177

transnational model, p. 171

KEY TERMS

In Chapter 6, you learned how globalization is changing the competitive landscape and influencing the behavior of managers and companies. The lowering of trade barriers is fueling the movement toward increased globalization. Companies use different strategies to compete, including international, multinational, global, and transnational. Each strategy emphasizes a different mix of global integration and local responsiveness. The five methods of entering an overseas market are exporting, licensing, franchising, entering into a joint venture, and setting up a wholly owned subsidiary. When staffing an overseas operation, companies can deploy expatriates from the headquarters’ country, host-country nationals, and third-country nationals. To decrease the risk of failure, expatriates should possess not only technical capability but also personal and social skills. By recognizing cultural differences, people can find it easier to work together collaboratively and benefit from the exchange.

Discuss what integration of the global economy means for companies and their managers.

• In recent years, rapid growth has occurred in world trade, foreign direct investment, and imports.

• One consequence is that companies around the globe are now finding their home markets under attack from international competitors.

• The global competitive environment is becom- ing a much tougher place in which to do business. However, companies now have access to markets that previously were denied to them.

Describe how the world economy is becoming more integrated than ever before.

• The gradual lowering of barriers to free trade is mak- ing the world economy more integrated.

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RETAINING WHAT YOU LEARNED

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• This means that the modern manager operates in an environment that offers more opportunities but is also more complex and competitive than that faced by the manager of a generation ago.

Define the strategies organizations use to compete in the global marketplace.

• The international corporation builds on its existing core capabilities in R&D, marketing, manufacturing, and so on to penetrate overseas markets.

• A multinational is a more complex form that usually has fully autonomous units operating in multiple coun- tries. Subsidiaries have latitude to address local issues such as consumer preferences, political pressures, and economic trends in their own regions of the world.

• The global organization pulls control of over- seas operations back into the headquarters and approaches the world market as a unified whole to maximize efficiency on a global scale.

• A transnational attempts to achieve both local responsiveness and global integration by coordinat- ing specialized facilities positioned around the world.

Compare the various entry modes organizations use to enter overseas markets.

• Companies can enter overseas markets by exporting, licensing, franchising, entering into a joint venture, and setting up a wholly owned subsidiary.

• Each mode has advantages and disadvantages.

Explain how companies can staff overseas operations.

• Most executives use a combination of expatriates, host-country nationals, and third-country nationals.

• Expatriates can establish new country operations quickly, transfer the company’s culture, and bring in specific technical skills.

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• Host-country nationals have the advantages of being familiar with local customs and culture, cost- ing less, and being viewed more favorably by local governments.

• Third-country nationals often are used as a compro- mise in politically touchy situations or when home- country expatriates are not available.

Summarize the skills and knowledge managers need to manage globally.

• The causes of failure overseas extend beyond technical capability and include personal and social issues.

• Important knowledge permeates the chapter, but in particular see Exhibit 6.6.

Identify ways in which cultural differences between countries influence management.

• Culture influences our actions and perceptions as well as the actions and perceptions of others. Unfortunately, we often are unaware of how culture influences us, and this can cause problems.

• Managers must be able to change their behavior to match the needs and customs of people they work with. Hofstede’s classic research identified four dimensions of cultural differences; some say those differences are disappearing but this should not be assumed. It is important not to stereotype or over- generalize, but potential differences deserve atten- tion and mutual accommodation.

• By recognizing cultural differences and discussing behavioral norms for dealing with them, people can find it easier to work together collaboratively and benefit from the exchange.

• Legal and ethical issues create particularly important challenge.

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DISCUSSION QUESTIONS 1. Why is the world economy becoming more integrated?

What are the implications of this integration for interna- tional managers?

2. Imagine you are the CEO of a major company; choose your favorite products or industry. What approach to global competition would you choose for your firm: international, multinational, global, or transnational? Why?

3. Why have franchises been so popular as a method of international expansion in the fast-food industry? Contrast this with high-tech manufacturing, where joint ventures and partnerships have been more popular. What accounts for the differences across industries?

4. What are the pros and cons of using expatriates, host- country nationals, and third-country nationals to run

overseas operations? If you were expanding your busi- ness, what approach would you prefer to use?

5. If you had entered into a joint venture with a foreign company but knew that women were not treated fairly in that culture, would you consider sending a female expatriate to handle the start-up? Why or why not?

6. Consider Hofstsede’s four cultural dimensions. He identified them in a huge global corporation several decades ago. Do you think cultural differences since then have decreased due to globalization? What evi- dence do you draw from?

7. What are the biggest cultural obstacles that we must overcome if we are to work effectively in Mexico? Are there different obstacles in France? Japan? China?

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International Management  Chapter 6 185

EXPERIENTIAL EXERCISES 6.1 GLOBAL INTEGRATION — LOCAL RESPONSIVENESS WORKSHEET

OBJECTIVE To understand how companies compete in the global marketplace.

INSTRUCTIONS An effective way to learn how companies respond to the competing pressures to be globally integrated and locally responsive is to study them in action. Referring back to Exhibit 6.3, search online for examples of companies that are currently using a global, transnational, international, or multinational organizational model. Please provide answers to the following questions:

PART I: GLOBAL MODEL Name of company using a global organizational model:

URL of website/article describing the company’s global strategy:

Explain why the company uses a global strategy to compete:

PART II: TRANSNATIONAL MODEL Name of company using a transnational organizational model:

URL of website/article describing the company’s trans­ national strategy:

Explain why the company uses a transnational strategy to compete:

PART III: INTERNATIONAL MODEL Name of company using an international organizational model:

URL of website/article describing the company’s interna­ tional strategy:

Explain why the company uses an international strategy to compete:

PART IV: MULTINATIONAL MODEL Name of company using a multinational organizational model:

URL of website/article describing the company’s multi­ national strategy:

Explain why the company uses a multinational strategy to compete:

SOURCE: Adapted from McGrath, R. R., Jr., Exercises in Management Fundamentals, 1st, p. 177. Upper Saddle River, NJ: Pearson Education, 1985.

6.2 CROSS- CULTURAL ANTHROPOLOGIST

Assume you are a cross-cultural anthropologist. In this role, please visit multiple public places that are frequented by one or more ethnic or cultural groups. Observe four to five behaviors that strike you as unique or different compared to what you consider to be “normal.” After you make your observations, walk to a quiet location and record what you

observed in a notebook or mobile device. Think about why these behaviors caught your attention in the first place and then analyze them from the perspective of Hofstede’s cul- tural dimensions (individualism/collectivism, power distance, uncertainty avoidance, and masculinity/femininity).

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LEARNING OBJECTIVES

1. To help students interpret nonverbal communication in a more culturally neutral manner.

2. To encourage students to understand their own reac- tions to different cultural behaviors.

3. To reinforce the importance of observation skills in cross-cultural encounters.

STEPS

1. Visit multiple public places where you can observe the behaviors of one or more ethnic or cultural groups. Examples include major airports, ethnic associations, foreign consulates, religious entities, cultural centers, museums, and cultural or affinity groups at universities.

2. Bring a notebook or mobile device and: a. On the left side of the page, make a column titled:

“Observation/description.”

i. In this section, describe what you saw. Any behavior that strikes you as different, frustrat- ing, funny, or confusing is appropriate. Stick to the facts when describing these behaviors. Write down 5–10 observed behaviors.

b. On the right side of the page, make a column titled: “How This Observation Relates to Hofstede’s Dimensions.”

i. In this section, interpret the behaviors by using Hofstede’s dimensions (individualism/collectivism, uncertainty avoidance, power distance, and mas- culinity/femininity). How can these dimensions help explain what you observed? Explain.

3. Type and hand in your anthropologist’s analysis. This should include:

a. Your name, date, and the name of each public place you visited.

b. Include 5–10 observed behaviors (left side of note- book) that you made while visiting the place(s) and describe how these observations relate to Hofstede’s cultural dimensions (right side of notebook).

SOURCE: Adapted from Kohls, L. R. and Knight, J. M., Cross­Cultural Journal in Developing Intercultural Awareness: A Cross­Cultural Training Handbook. Yarmouth, ME: Intercultural Press, 1994, p. 67.

Nina Jones and Matt Smith have been raising capital for their start-up, Net-Work Docs. The company will help business clients create and manage their documents electronically. Net-Work Docs will help companies create easily search- able electronic versions of their safety manuals, human resource manuals, training guides, operating instructions, and more. For clients who wish, the company will help in embedding video, audio, and pop-up content along with the basic text and will develop apps for companies that want to make the content available through mobile devices. They also will provide consulting services such as helping clients shop for cloud storage of their documents.

As Nina and Matt developed their business plan, they found themselves expanding their idea of the geographic mar- ket they could serve. Initially, they intended to start by work- ing with businesses in their city. But they realized they will be selling a product that can be made anywhere and shipped anywhere. Software and electronic documents can be trans- ported over the Internet at essentially no cost, and a website gives a company an immediate global presence. With that in mind, Nina and Matt have concluded that they are unneces- sarily limiting themselves by targeting geographic markets.

Thus, the plan is now to launch Net-Work Docs as a global company, serving clients in any country. After all, reason Nina and Matt, companies everywhere have policies and procedures they need to document. They will describe their

services on their website, make initial contacts via e-mail, and set up a PayPal service to handle online payments. They can travel to meet major clients, but routine jobs may not require face-to-face meetings, and cost-conscious clients should appreciate the savings of conducting business online.

One hitch with this plan is that some potential investors have expressed doubts about operating globally before the company has built experience and a reputation serving clients locally. One investor asked Matt and Nina whether they really were prepared to understand the needs of business clients located hundreds or thousands of miles away—and whether they could assess a faraway client’s likelihood to pay for ser- vices. He asked, “Can you really serve overseas clients without any overseas employees?” The company’s founders believe they can because they will start with an English-only website, so they will initially have only English-speaking clients.

DISCUSSION QUESTIONS

1. What are some possible advantages of Net-Work Docs serving a global market?

2. How are the founders balancing pressures for global integration and local responsiveness? Is their global strategy likely to succeed? Why or why not?

3. What skills of a global manager could help Net-Work Docs succeed?

Design elements: Lightbulb icon that indicates innovation: ©McGraw­Hill Education; Money icon that indicates cost: ©McGraw­Hill Education; Recycle icon that indicate sustainability: ©McGraw­Hill Education; Human head with headset that indicate service: ©McGraw­ Hill Education; Letter Q icon that indicates quality: ©McGraw­Hill Education; Sand dial that indicates speed: ©McGraw­Hill Education

Concluding Case A GLOBAL LAUNCH FOR NET-WORK DOCS

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Entrepreneurship Why Become an Entrepreneur? What Does It Take to Succeed? What Business Should You Start? What Does It Take, Personally? Success and Failure Common Management Challenges Increasing Your Chances of Success

Corporate Entrepreneurship Building Support for Your Idea Building Intrapreneurship Management Challenges Entrepreneurial Orientation

After studying Chapter 7, you will be able to:

Describe why people become entrepreneurs and what it takes, personally.

Summarize how to assess opportunities to start new businesses.

Identify common causes of success and failure.

Discuss common management challenges.

Explain how to increase your chances of success, including good business planning.

Describe how managers of large companies can foster entrepreneurship.

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CHAPTER 7

Entrepreneurship

A (wo)man is known by the company (s)he organizes.

—AMBROSE BIERCE

CHAPTER OUTLINELEARNING OBJECTIVES

©kasto/123RF

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Howard Schultz founded a company on the realization that he could market a

familiar product in a coffeehouse environment that was new to U.S. consumers. As

you read about the qualities of successful entrepreneurs and the challenges they

must overcome, think about which qualities and challenges you see in Schultz and

his dream for Starbucks.

Shortly after joining Starbucks, a four-store Seattle retailer and wholesaler of fresh-roasted coffee beans, a young employee named Howard Schultz traveled to Italy. He was then the company’s director of retail opera- tions and marketing. Deeply impressed by the laid-back culture and popularity of the neighborhood espresso bars and coffeehouses he visited in Italy, Schultz noted how much people enjoyed gathering there, in “a place between work and home,” to socialize and enjoy long, leisurely conversations. He returned home to Seattle determined to persuade the owners of Starbucks to let him try the coffeehouse concept in the United States.

The experiment was so successful that within a few short years Schultz had left Starbucks to found his own coffeehouse chain, called Il Giornale, and then pur- chased Starbucks himself, with capital from local inves- tors. Almost immediately he began opening Starbucks stores outside Seattle, beginning with several in Chicago and Vancouver. By 1992, when the company held its IPO, there were 160 stores, and now the com- pany operates thousands of stores around the world. The feeling of community that so awed Schultz in Italy’s neighborhood coffeehouses was the element he was committed to cultivating in all Starbucks stores—along with the finest coffee.

Schultz, who stepped down as Starbucks' CEO in 2017 but remains board chair and active in the com- pany’s new ventures, grew up in Brooklyn, New York. He was one of three children in a family living on a mar- ginal income with, as he says, “nothing to fall back on.” A football scholarship took him to Northern Michigan University, where he became the first in his family to

earn a college degree. Later he went on to executive- level jobs at Xerox and the U.S. division of a Swedish housewares company before moving to Seattle to join Starbucks.

What drove him to take the inspiration found in his visit to Italy and turn it into a multi-billion-dollar com- pany? Schultz calls Starbucks a “team sport,” credits the value of luck, and claims, “I’ve gotten more credit than I deserve” for the company’s many years of suc- cess. But he does describe his entrepreneurial ambi- tions this way: “I willed it to happen,” he says. “I took my life in my hands, learned from anyone I could, grabbed what opportunity I could, and molded my success step by step.” That spirit still informs his think- ing. In his new role within the company, the popular Schultz will be returning to his entrepreneurial roots and focusing on growing the company’s new ultra- premium retail stores.1

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Management in Action STARBUCKS’ ENTREPRENEURIAL BEGINNINGS

©Chip Somodevilla/Getty Images News/Getty Images

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As Howard Schultz and countless others have demonstrated, great opportunity is available to skilled entrepreneurs who are willing to work hard to achieve their dreams. Entrepreneurship occurs when an enterprising individual pursues a lucrative opportunity.2 To be an entrepre- neur is to initiate and build an organization rather than being only a passive part of one.3 The entrepreneurial process involves discovering, evaluating, and capitalizing on opportuni- ties to create new and future goods and services.4

Creating value is a central objective of entrepreneurship, just as it is in strategic manage- ment. Wealth may be an entrepreneur’s ultimate goal, but it won’t come without providing value for other individuals, organizations, and/or society.5

How does entrepreneurship differ from managing a small business?6 A small business is often defined as having fewer than 500 employees, being independently owned and operated, not dominant in its field, and not characterized by many innovative practices.7 Small-business owners tend not to manage particularly aggressively, and they expect normal, moderate sales, profits, and growth. In contrast, an entrepreneurial venture has growth and high profitability as primary objectives. Entrepreneurs manage aggressively and develop innovative strategies, practices, and products. They and their financial back- ers usually seek rapid growth, immediate and high profits, and sometimes a quick sellout with large capital gains.

The Excitement of Entrepreneurship Consider these words from Jeffry Timmons, a leading entrepreneurship scholar and author: “[The] new generation of entrepreneurs has altered permanently the economic and social structure of this nation and the world. . . . It will determine more than any other single impetus how the nation and the world will live, work, learn, and lead in this century and beyond.”8 Timmons had written previously, “We are in the midst of a silent revolution—a triumph of the creative and entrepreneurial spirit of humankind throughout the world. I believe its impact on the 21st century will equal or exceed that of the Industrial Revolution on the 19th and 20th.”9

Overhype? Well, partly, because the rate of new business formation is slowing down.10 Given that 99 percent of companies in the United States are small businesses, a slowdown could reduce employment rates.11 But let’s hope the slowdown is temporary, because entre- preneurship has transformed economies all over the world and the global economy in gen- eral.12 The Small Business Administration reports that there are 28 million small businesses in the United States accounting for over half of all jobs.13

The self-employed often report the highest levels of pride, satisfaction, and income. Importantly, entrepreneurship is not about the privileged descendants of the Rocke- fellers and the Vanderbilts—it provides opportunity and upward mobility for anyone who performs well.14

Myths about Entrepreneurship Simply put, entrepreneurs generate new ideas and turn them into business ventures.15 But entrepreneurship is not simple, and is frequently misunderstood; we need more research and theory,16 although we do have a lot of useful knowledge. Review Exhibit 7.1 to start thinking about the myths and realities of this impor- tant career option.

Another myth, not in the exhibit, is that being an entrepreneur is great because you can get rich quick and enjoy a lot of leisure time while your employees run the company. But the reality is much more difficult. During the start-up period, you are likely to have a lot of bad days. It’s exhausting. Even if you don’t have employees, you should expect commu- nications breakdowns and other people problems with agents, vendors, distributors, fam- ily, subcontractors, lenders, and whomever. Legendary software entrepreneur Dan Bricklin advised that the most important thing to remember is this: “You are not your business. On those darkest days when things aren’t going so well—and trust me, you will have them—try to remember that your company’s failures don’t make you an awful person. Likewise, your company’s successes don’t make you a genius or superhuman.”17

As you read this chapter, you will learn about two primary sources of new venture cre- ation: independent entrepreneurship and intrapreneurship. Entrepreneurs are individuals

entrepreneurship

The pursuit of lucrative opportunities by enterprising individuals.

small business

A business having fewer than 100 employees, independently owned and operated, not dominant in its field, and not characterized by many innovative practices.

entrepreneurial venture

A new business having growth and high profitability as primary objectives.

Bottom Line Entrepreneurship is inherently about innovation—creating a new venture where one didn’t exist before. How is entrepreneurship different from inventing a new product?

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who establish a new organization without the benefit of corporate support. Intrapreneurs are new venture creators working inside big companies; they are corporate entrepreneurs, using their company’s resources to build a profitable line of business based on a fresh new idea.18 Thus, entrepreneurship is an activity that can and should contribute greatly to mature organizations. Entrepreneurship is vitally important across the entire life cycle of an organization.19

intrapreneurs

New venture creators working inside big companies.

entrepreneur

Individual who establishes a new organization without the benefit of corporate sponsorship.

EXHIBIT 7.1 Some Myths about Entrepreneurs

Myth 1—Entrepreneurs are born, not made.

Reality—Adaptive entrepreneurs accumulate the relevant skills, know-how, experiences, and contacts over a period of years. The creative capacity to envision and then pursue an opportunity is earned. . . .

Myth 2—Anyone can start a business.

Reality—Entrepreneurs who recognize the difference between an idea and an opportunity, and who think big enough, start businesses that have a better chance of succeeding. The easiest part is starting. What is hardest is surviving, sustaining, and building a venture so its founders can realize a harvest. Perhaps only 1 in 10 to 20 new businesses that survive five years or more results in a capital gain for the founders.

Myth 3—Entrepreneurs are gamblers.

Reality—Successful entrepreneurs take very careful, calculated risks. They try to influence the odds, often by getting others to share risk with them and by avoiding or minimizing risks if they have the choice. Often they slice up the risk into smaller, digestible pieces; only then do they commit the time or resources to determine whether [each] piece will work.

Myth 4—Entrepreneurs want the whole show to themselves.

Reality—Owning and running the whole show effectively puts a ceiling on growth. It is extremely difficult to grow a higher-potential venture by working single-handedly. Higher-potential entrepreneurs build a team, an organization, and a company.

Myth 5—Entrepreneurs are their own bosses and completely independent.

Reality—Entrepreneurs have to serve many constituencies, including partners, investors, customers, suppliers, creditors, employees, families, and their communities. Entrepreneurs, however, can make free choices about whether, when, and what they respond to.

Myth 6—Entrepreneurs work longer and harder than managers in big companies.

Reality—Some do, some do not. Some actually report that they work less.

Myth 7—Entrepreneurs experience a great deal of stress and pay a high price.

Reality—Being an entrepreneur is stressful. But there is no evidence that it is more so than other highly demanding professional roles, and entrepreneurs find their jobs very satisfying. They have a high sense of accomplishment, are healthier, and are much less likely to retire than those who work for others.

Myth 8—If an entrepreneur is talented, success will happen in a year or two.

Reality—An old maxim among venture capitalists says a lot: The lemons ripen in two and a half years, but the pearls take seven or eight. Rarely is a new business established solidly in less than three or four years.

Myth 9—Entrepreneurs are lone wolves and cannot work with others.

Reality—The most successful entrepreneurs are leaders who build great teams and effective relationships working with peers, directors, investors, key customers, key suppliers, and the like.

Spinelli, S., Jr., and Adams, R. J., New Venture Creation: Entrepreneurship for the 21st Century, 9th ed., 2012, pp. 46–47. Copyright ©2012 McGraw-Hill Global Education Holdings LLC. All rights reserved. Used with permission.

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Exhibit 7.2 lists some extraordinary entrepreneurs. The companies they founded are famously successful—and all of the founders started in their 20s. Two young entrepre- neurs who started a highly successful business are Tony Hsieh and Nick Swinmurn. About 20 years ago, Swinmurn had the then-new idea to sell shoes online, but he needed money to get started. Hsieh, who at age 24 had already just sold his first start-up, agreed to take a chance on the new venture. It was a smart decision. Ten years later, Amazon purchased Zappos for $1.2 billion.20

Swinmurn has moved on, but Hsieh remains at the helm of the company as the CEO of Zappos.com. The real, more complete story of entrepreneurship is not about the famous people in Exhibit 7.2—it’s mostly about people you’ve probably never heard of. Often it’s about young people, and definitely it’s about people of all demographic groups.21

They have built companies, thrived personally, created jobs, and made positive contribu- tions to their communities through their businesses. Or they’re just starting out.

Why Become an Entrepreneur? Jessica Mah was an entrepreneur before she even finished school. At the age of 13, she went into business using eBay to sell computer parts and templates for websites. While in college at the University of California–Berkeley, she and another student, Andy Su, founded InternshipIN, which provided information about internship opportunities.

When she graduated, Mah was ready to launch another venture. With support from Y Combinator, which provides funds and advice to selected start-ups, Mah again partnered with Su, this time founding inDinero, a company that helps small-business owners manage their money and taxes. Basically, inDinero keeps track of transactions, analyzes where their money is going, and provides financial reports. The idea for inDinero came from Mah’s own experience: for some people excited about starting a new business, working with customers and products is more exciting and easier to learn than handling money.22

Why do Jessica Mah and other entrepreneurs do what they do? Entrepreneurs start their own firms because of the challenge, the profit potential, and the enormous satisfaction they hope lie ahead. People starting their own businesses are seeking a better quality of life than they might have at big companies. They seek independence and a feeling of being part of

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Bottom Line Today’s concern for sustainability presents a tremendous variety of opportunities to entrepreneurs who care about the environment. What are some environmentally friendly start-ups you’ve heard about? What do you think of their profit potential?

Entrepreneurial Company Founder(s)

Snapchat Evan Spiegel

Facebook Mark Zuckerberg

Suja Juice Annie Lawless

Google Sergey Brin and Larry Page

Instagram Kevin Systrom

Microsoft Bill Gates and Paul Allen

Pinterest Ben Silbermann and Evan Sharp

PartPic Jewel Burks

Spotify Daniel Ek

Zero Waste Solutions Shavila Singh

Apple Steve Jobs and Steve Wozniak

EXHIBIT 7.2 Successful Entrepreneurs Who Started in Their 20s

SOURCES: Heath, A. and Stone, M., “The Fabulous Life of Snap CEO Evan Spiegel,” Business Insider, March 3, 2017, www.businessinsider.com; Howard, C. and Inverso, E., “Forbes 30 Under 30,” Forbes, www.forbes.com, accessed March 25, 2017; Borison, R., “10 Entrepreneurs Who Can’t Be Overshadowed by Men–Even in Silicon Valley,” Inc. (online), December 18, 2014, http://www.inc.com; Blake, Brock, “Why 20-Somethings Are the Most Successful Entrepreneurs,” Forbes, November 30, 2012, http://www.forbes.com.

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the action. They feel tremendous satisfaction in building something from nothing, seeing it succeed, and watching the market embrace their ideas and products.

People also start their own companies when they see their progress or ideas blocked at big corporations. When people are laid off, they often try to start businesses of their own. And when employed people believe they will not receive a promotion or are frustrated by bureau- cracy or other features of corporate life, they may quit and become entrepreneurs. Well worth considering is the hybrid path: starting a business while retaining your “day job.”23

For example, Barbara Nascimento was laid off after working for 14 years for a multinational company in sales and marketing, Using this time to reevaluate her career priorities of wanting to be around people and free of an office setting, she founded a tour company, The Traveller Tours. A native of Cascais, a picturesque Portuguese fish- ing village, Nascimento’s strategy is to help tourists travel like locals. The Traveller differentiates itself by blending “informality, local authenticity and a certain gently-funky attitude.”24 While showing customers around Cascais in a Subaru, Nascimento shares stories and information about the village with the flare of a long-time resident, something the Lisbon-based tour guides cannot match. When compar- ing her entrepreneurial venture to her previous corporate career, Nascimento accepts more financial risk now, but finds running The Traveller to be more fun and rewarding.25

When people find conventional paths to economic success closed to them, they may migrate to another location and turn to entrepreneurship.26 Migration is to move within or across meaningful social or political boundaries, both intra- and internationally.27 In the late 19th century, mining entrepreneurs moved to the western United States. The Cuban community in Miami has produced many successful entrepreneurs, as has the Vietnamese community throughout the United States. Sometimes the immigrant’s experience gives him or her useful knowledge about foreign suppliers or markets that present an attractive busi- ness opportunity.

Elon Musk immigrated to the United States from Pretoria, South Africa, to study at the University of Pennsylvania. After graduation, Musk cofounded an online payments company, X.com (renamed PayPal), then he cofounded Tesla Motors, and then SpaceX which shuttles supplies to the International Space Station. What’s next for this serial entrepreneur? Famously he has Mars in his sights; he also plans to build a “hyperloop” between Los Angeles and San Francisco in which people travel through tubes at speeds greater than 700 miles per hour.28

What Does It Take to Succeed? What can we learn from the people who start their own companies and succeed? What enables entrepreneurs to succeed? In general terms, Exhibit 7.3 shows that successful

©The Traveller Tours

EXHIBIT 7.3 Who Is the Entrepreneur?

High

Creativity and

innovation

Low High General management skills, business know-how, and networks

Inventor Entrepreneur

Promoter Manager, administrator

Timmons, J. A. and Spinelli, S., Jr., New Venture Creation: Entrepreneurship for the 21st Century, 7th ed., 2007, pp. 67–68. Copyright ©2007 McGraw-Hill Global Education Holdings LLC. All rights reserved. Used with permission.

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Limor Fried, Adafruit Industries, combined her academic knowledge and personal interests to prove her capabilities as an entrepreneur.

©Brian Ach/Getty Images

entrepreneurs are innovators who also have good knowledge and skills in management, busi- ness, and networking.29 In contrast, inventors may be Highly creative but may lack the skills to turn their ideas into a successful business. Manager-administrators may be great at ensur- ing efficient operations but aren’t necessarily innovators. Promoters have a different set of marketing and selling skills—useful for entrepreneurs, but those skills can be hired, whereas innovativeness and business management skills remain the essential combination for suc- cessful entrepreneurship.

What Business Should You Start? You need a good idea, and you need to find or create the right opportunity. The following discussion offers some general considerations for choosing a type of business.

The Idea Many entrepreneurs and observers say that in contemplating your business, you must start with a great idea. A great product, a viable market, and good timing are essential ingredients.

Many great organizations have been built on a different kind of idea: the founder’s desire to build a great organization rather than to offer a particular product.30 Examples abound. Bill Hewlett and David Packard decided to start a company and then figured out what to make. J. Willard Marriott knew he wanted to be in business for himself but didn’t have a product in mind until he opened an A&W root beer stand. Masaru Ibuka had no specific product idea when he founded Sony in 1945. Sony’s first product attempt, a rice cooker, didn’t work, and its first product (a tape recorder) didn’t sell. The company stayed alive by making and selling crude heating pads.

Many now-great companies had early failures. But the founders persisted; they believed in themselves and in their dreams of building great organizations. Be prepared to kill or revise an idea, but never give up on your company—this has been a prescription for success for many great entrepreneurs and business leaders. Think about Sony, Disney, Hewlett-Packard, Procter & Gamble, IBM, and Walmart: their founders’ greatest achievements—their greatest ideas—are their organizations.31

The Opportunity Entrepreneurs find ways to spot, create, and capture opportunities.32 Entrepreneurial com- panies can explore domains that big companies miss or avoid, and introduce goods or services that capture the market because they are simpler, cheaper, more accessible, or more convenient. Limor Fried spotted her opportunity when she got involved with a hobby that flew under the radar of most traditional businesses: building clever do-it- yourself electronic gadgets. When Fried was in school, she relaxed by ordering parts to build homemade MP3 play- ers, programmable jewelry, and other fun gadgets. As she posted her creations on her personal website, she began attracting requests from people wanting her to sell them kits so they could make the same items themselves. Fried took some personal funds and started Adafruit Industries,

now a 50-employee business racking up $10 million in sales annually.33

To spot opportunities, think carefully about events and trends as they unfold. Consider, for example, the following possibilities:34

Technological discoveries. Start-ups in biotechnology, microcomputers, artificial intel- ligence, robotics, and nanotechnology followed technological advances. Johnson & Johnson will collaborate with Google to develop advanced robots to aid in surgeries.35

Demographic changes. Health care organizations of all kinds have sprung up to serve an aging population, from exercise studios to assisted-living facilities. One business that

LO 2

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targets the aging American population is fitness center company Welcyon, which provides senior-friendly low-impact cardio machines, background music at lower vol- umes, and fitness classes that can be taken while seated.36 The service assists those who are pressed for time or have difficulty getting around.37

Lifestyle and taste changes. Start-ups have capitalized on new clothing and music trends, desire for new fast foods, and ever-growing interest in sports. In recent years, more consumers want to help take care of the environment, and more businesses are con- cerned about showing consumers that they care, too.

Economic dislocations, such as booms or failures. Rising oil prices spurred a variety of developments related to alternative energy or energy efficiency.

Calamities such as wars and natural disasters. The terrorist attacks of September 2001 spurred concern about security, and entrepreneurs still pursue ideas to help govern- ment agencies prevent future attacks. Destructive hurricanes, floods, and tornadoes raised awareness of the importance of emergency preparedness.

Government initiatives and rule changes. Deregulation spawned new airlines and truck- ing companies. Whenever the government changes regulations, tightens energy effi- ciency requirements, and so forth, opportunities arise for entrepreneurs to think of new ideas for products and processes

Franchises One important type of opportu- nity is the franchise. You may know intuitively what franchising is, or you can at least name some prominent franchises: Supercuts, Jimmy John’s, Jazzercise—add your favorites here. Franchising is an entrepreneurial alliance between two organi- zations, the franchisor and the franchisee.38 The franchisor is the innovator who has created at least one successful store and seeks partners to operate the same concept in other local markets. For the franchisee, the opportunity is wealth creation via a proven (but not failureproof!) business con- cept, with the added advantage of the franchisor’s expertise. For the franchisor, the opportunity is wealth creation through growth. The partnership is manifest in a trademark or brand, and together the partners’ mission is to maintain and build the brand. For example, the Panera Bread chain of bakery-cafés has expanded rapidly in recent years. In 2014, you could find over 1,900 Panera stores across 45 states.39

People often assume that buying a franchise is less risky than starting a business from scratch, but the evidence is mixed.

If you are contemplating a franchise, consider its market presence (local, regional, or national), market share and profit margins, national programs for marketing and purchas- ing, the nature of the business, including required training and degree of field support, terms of the license agreement (e.g., 20 years with automatic renewal versus less than 10 years or no renewal), capital required, and franchise fees and royalties.40

Although some people think success with a franchise is a no-brainer, would-be franchi- sees have a lot to consider. Luckily, plenty of useful sources exist for learning more, includ- ing the International Franchise Association (http://www.franchise.org), the Small Business Administration (http://www.sba.gov), Franchise Chat (http://www.franchise-chat.com), and Entrepreneur magazine’s online Franchises page (http://www.entrepreneur.com), which includes rankings as well as articles profiling franchisors and franchisees. In addition, the Federal Trade Commission investigates complaints of deceptive claims by franchisors and publishes information about those cases. Take your time in investigating business opportuni- ties, consulting with an accountant or lawyer who has experience.

©RosaIreneBetancourt 4/Alamy Stock Photo

franchising

An entrepreneurial alliance between a franchisor (an innovator who has created at least one successful store and wants to grow) and a franchisee (a partner who manages a new store of the same type in a new location).

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The Next Frontiers The next frontiers for entrepreneurship—where do they lie? Throughout history, aspiring entrepreneurs have asked this question. The powerful poten- tial of big data to improve decision making is opening up tremendous opportunities for businesses that can help their clients collect, store, manage, and analyze data. Sectors and product categories that have recently enjoyed huge growth are health care, education, and, of course, mobile apps.41

One fascinating opportunity for entrepreneurs is outer space. Historically, the space mar- ket was driven by the government and was dominated by big defense contractors such as Boeing and Lockheed Martin. But now, with demand for satellite launches and potential profits skyrocketing, smaller entrepreneurs are entering the field. SpaceX has been trans- porting cargo to the International Space Station for NASA and is developing the capability to transport astronaut crews. NASA also has granted a cargo-shuttling contract to Orbital Sciences Corporation.

More futuristic still is the concept of entrepreneur Robert Bigelow. His company, Bigelow Aerospace, has created a residence module for living in space. The module is made out of a synthetic fiber rather than a metal structure, so it can be compressed for more efficient transportation and then expanded upon its arrival. Bigelow received a $17.8 million con- tract from NASA to send a module into space for a two-year mission.42

Changes have been coming fast in the health care sector in the United States. Where there is change, smart entrepre- neurs spot opportunities. Health care providers have been digitizing their data for patient care, medication management, and treatment outcomes—a trend that yields opportunities for hardware and software businesses that understand the needs of these clients. In addition, rising costs for health care and health insurance create opportunities for entrepreneurs with ideas for restraining those costs. For example, apps that pro- mote fitness or help patients manage chronic conditions can appeal to consumers, insurance companies, and employers. GE’s healthymagination program recently partnered with an entrepreneurship support group called Startup Health to fund promising start-ups in the health care field.

The Internet The Internet is a business frontier that continues to expand. With Internet commerce, as with any start-up, entrepreneurs need sound business models and practices. During the heady days of the Internet rush, many entrepreneurs and investors thought rev- enues and profits were unimportant and all that mattered was to attract visitors to their websites (to capture eyeballs). But you need to watch costs carefully, and you want to break even and achieve profitability as soon as possible.43

At least five successful business models have proven successful in the e-commerce mar- ket: transaction fee, advertising support, intermediary, affiliate, and subscription models.44 In the transaction fee model, companies charge a fee for goods or services. Amazon.com and online travel agents are prime examples. In the advertising support model, advertisers pay the site operator to gain access to the demographic group that visits the operator’s site.

eBay is a prime example of the intermediary model, bringing buyers and sellers together and charging a commission for each sale. With the affiliate model, sites pay commissions to other sites to drive business to their own sites. Zazzle.com, Spreadshirt.com, and CafePress. com are variations on this model. They sell custom-decorated gift items such as mugs and T-shirts. Designers are the affiliates; they choose basic, undecorated products (such as a plain shirt) and add their own designs, creating the customized products offered to consum- ers.45 Finally, websites using the subscription model charge a monthly or annual fee for site visits or access to site content. Newspapers and magazines are good examples.

What about businesses whose primary focus is not e-commerce? Start-ups and estab- lished small companies can create attractive websites that add to their professionalism, give them access to more customers, and bring them closer to suppliers, investors, and service

transaction fee model

Charging fees for goods and services.

advertising support model

Charging fees to advertise on a site.

intermediary model

Charging fees to bring buyers and sellers together.

affiliate model

Charging fees to direct site visitors to other companies’ sites.

subscription model

Charging fees for site visits.

The International Space Station is a habitable artificial satellite. Currently the largest artificial body in orbit, it can sometimes be seen with with the naked eye from earth.

SOURCE: NASA

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providers. Companies can move much more quickly than in the past and save money on activities including customer service/support, technical support, data retrieval, public rela- tions, investor relations, selling, requests for product literature, and purchasing. Setting up shop online costs less than ever.

Social Entrepreneurship Social entrepreneurship has been around for decades, but is surging in popularity and impact and as a focus for research.47 Social entrepreneurship has been defined in many ways, but most fundamentally it refers to leveraging resources to address social problems.48

It does so by using market-based methods.49 Organizations that do this are social enterprises.50 Social entrepreneurship creates social value by stimulating social change or meeting social needs.51

One of the best-known examples of social entrepreneurship is the Nobel Prize– winning work of Dr. Muhammad Yunus, formerly of Grameen Bank, which began helping women in South Asia obtain microloans.52 Another is Fabio Rosa’s Agroelectric System of Appropriate Technology (STA), which established low-cost electrification and irrigation in rural Brazil.53 Additional examples include Basic Needs, which provides treatment for people with mental

social entrepreneurship

Leveraging resources to address social problems.

social enterprise

Organization that applies business models and leverages resources in ways that address social problems.

Social Enterprise Empowering Latina Entrepreneurs

When she was 5 years old, Nely Galan and her fam- ily left their native Cuba and began a new life in the United States. As a young person, Galan admired Sherry Lansing, the first female president of Paramount Pictures movie studio. After leaving the entertainment business, Lansing started an “encore career” by pursuing a variety of philanthropic activities.

Galan is following in Lansing’s footsteps. Galan became the first Latina president of the Miami-based TV network Telemundo. The “Tropical Tycoon” went on to found her own business, Galan Entertainment, which launched TV channels in Latin America and produced original program- ming from sitcoms to telenovelas (soap operas).

Being an entertainment mogul was not enough. Galan founded Adelante (http://theadelantemovement.com), a movement “designed to empower Latinas in the U.S. eco- nomically through inspiration, training, and resources on entrepreneurship.” Galan feels that helping Latinas become more financially successful will have a positive impact on their communities and families. The potential ripple effect is significant when considering that the Latina population in the United States is expected to grow to about 13 percent of the United States’ population by 2050. In 2013, Latina- owned businesses earned about $66 billion in revenue.

Galan is not working alone. She has joined forces with Coca-Cola’s worldwide effort to empower 5 million women entrepreneurs by 2020. Citing a personal goal to train 30,000 Latinas in the United States to became entrepreneurs, Galan sums up her passion this way: “I am a woman that believes in ownership and entrepreneurship as the way for most women to have financial freedom and become actualized.”46

Questions

• What motivates Galan to help Latinas become successful entrepreneurs?

• Why do you think Coca-Cola, a global consumer products company, is collaborating with Galan to empower women entrepreneurs?

©Imeh Akpanudosen/Getty Images

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illness across 12 developing countries;54 Sproxil, which developed a mobile app that enables consumers in Kenya, Ghana, Nigeria, and India to verify the pharmaceutical product they are purchasing is authentic;55 and Clínicas del Azúcar (Sugar Clinics,) which provides affordable care to low- and middle-income patients who suffer from diabetes.56

Social entrepreneurship is not charity, and it is different from corporate social respon- sibility (CSR),57 which you read about in Chapter 5. CSR is not necessarily practiced with profit as a guiding principle, and corporations often relegate it to a side activity. As described in the nearby “Social Enterprise” box, social entrepreneurship fully incorporates social as well as economic value into mainstream thinking and decision making. It provides dual, shared value: creating economic value plus social or societal benefit simultaneously.58 See Exhibit 7.4 for more examples.

Combining social and commercial goals isn’t new; consider hospitals, universities, and arts organizations.59 And not all social problems can be solved by entrepreneurial solutions. But pursuing the dual goal of both economic and social value may be developing as a new norm, with positive social outcomes as key to long-term success.

States Pierre Omidyar, founder of eBay: “you really can make the world better in any sector—in nonprofits, in business, or in government. It’s not a question of one sector’s

Company Name Description

40K Plus Education Sets learning “pods” in rural villages that offer tablet-based after-school tutoring to students of government and low-cost private schools.

Barrier Break Employs deaf people to provide online services for those who are hearing impaired, utilizing an innovative “Sign-and-Talk” business over video-enabled web connections.

Buy42.com Promotes sustainable living and resells goods collected from individuals and businesses online with a proportion of the revenue being used to fund charity projects.

Edom Nutritional Solutions

Manufactures organically fortified staple flours cost-effectively and sells them at affordable prices to the malnourished in East Africa.

Healthy-TX Sells a mobile platform that automates patient education around post, chronic, and preventive care. The physician- designed technology platform and programs greatly improve the quality of care for patients.

Jack and Jake’s Has developed a local/organic wholesale company, sourcing food from within a 100-mile radius of New Orleans to provide healthy food for hospitals and schools.

Kweli Provides a mobile marketplace for fishermen to access centralized data on market-competitive prices. The goal is to help create a fair marketplace for fishermen.

Not Mass Produced Is an online marketplace for local, independent businesses in the UK; their flagship site sources local food for UK restaurants, wholesale purchasers, and retail consumers.

PEURegen Sells a sponge-like scaffold, which is placed inside a deep skin defect to help with wound healing. The product helps patients retain their quality of life through improved healing outcomes after a wound or surgery.

Solidarium Partners with Walmart and JCPenney to sell ethically produced, fair trade consumer products, selling over 100,000 units and paying its producers 50% more than competitors.

EXHIBIT 7.4 Examples of Social Enterprises

SOURCE: Courtesy of Village Capital.

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struggling against another, or of ‘giving back’ versus ‘taking away.’ That’s old thinking. A true philanthropist will use every tool he can to make an impact. Today business is a key part of the equation, and the sectors are learning to work together.”60

Opportunities exist to make substantial positive impact on virtually every societal need and to make a profit doing so. Profit is likely to make societal value creation more sustain- able over the long run.

What Does It Take, Personally? Many people assume that there is an entrepreneurial personality. No single personality type predicts entrepreneurial success, but you are more likely to succeed as an entrepreneur if you apply certain perspectives and behaviors:61

1. Commitment and determination: Successful entrepreneurs are decisive, tenacious, disciplined, willing to sacrifice, and able to immerse themselves in their enterprises. Entrepreneurial passion62 can play an important role in all of these things.

2. Leadership: They are self-starters, team builders, superior learners, and teachers. Communicating a vision for the future of the company—an essential component of leadership that you’ll learn more about in Chapter 12—clearly has an impact on venture growth.63

3. Opportunity obsession: They have an intimate knowledge of customers’ needs, are market driven, and are obsessed with value creation and enhancement.

4. Tolerance of risk, ambiguity, and uncertainty: They are calculated risk takers and risk managers, tolerant of stress, and able to resolve problems.

5. Creativity, self-reliance, and ability to adapt: They are open-minded, restless with the status quo, able to learn quickly, highly adaptable, creative, skilled at conceptualizing, and attentive to details.

6. Motivation to excel: They have a strong results orientation, set high but realistic goals, have a strong drive to achieve, know their own weaknesses and strengths, and focus on what can be done rather than on the reasons things can’t be done.

Making Good Choices Success is a function not only of personal approaches but also of making good choices about the business you start. Exhibit 7.5 presents a model for conceptualizing entrepreneurial ventures and making the best possible choices. It depicts ventures along two dimensions: innovation and risk. The new venture may involve high or

EXHIBIT 7.5 Entrepreneurial Strategy Matrix

High innovation Low risk

Innovation (creating a unique

and di�erent product/service)

Low

High

Low High Risk

(probability of major loss)

Low innovation Low risk

High innovation High risk

Low innovation High risk

SOURCE: Sonfield and Lussier, “Entrepreneurial Strategy Matrix: A Model of New and Ongoing Ventures,” Business Horizons, May–June 1997.

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low levels of innovation or the creation of something new and different. It can also be char- acterized by low or high risk. Risk refers primarily to the probability of major financial loss. But it also is more than that; it includes psychological risk as perceived by the entrepreneur, including risks to reputation and ego.64

The upper-left quadrant, high innovation/low risk, depicts ventures of truly novel ideas with little risk. As examples, the inventors of LEGO building blocks and Velcro fasteners could build their products by hand at little expense. A pioneering product idea from Google might fit here if there are no current competitors and because, for a company of that size, the financial risks of new product investments can seem relatively small.

In the upper-right quadrant, high innovation/high risk, novel product ideas are accom- panied by high risk because the financial investments are high and the competition is great. A new drug or a new automobile would likely fall into this category.

Most small-business ventures are in the low innovation/high risk cell (lower right). They are fairly conventional entries in well-established fields. New restaurants, retail shops, and commercial outfits involve high investment for the small-business entrepreneur and face direct competition from similar businesses. Finally, the low innovation/low risk category includes ventures that require minimal investment and/or face minimal competition for strong market demand. Examples are some service businesses having low start-up costs and those involving entry into small towns if there is no competitor and demand is adequate.

How is this matrix useful? It helps entrepreneurs think about their ventures and decide whether they suit their particular objectives. It also helps identify effective and ineffective strategies. You might find one cell more appealing than others. The lower-left cell is likely to have relatively low payoffs but to provide more security. The higher risk/return trade-offs are in other cells, especially the upper right. So you might place your new venture idea in the appropriate cell and determine whether that cell is the one in which you would prefer to operate. If it is, the venture is one that perhaps should be pursued, pending fuller analysis. If it is not, you can reject the idea or take steps to move it toward a different cell.

The matrix also can help entrepreneurs remember a useful point: successful companies do not always require a cutting-edge technology or an exciting new product. Even com- panies offering the most mundane products—the type that might reside in the lower-left cell—can gain competitive advantage by doing basic things differently from and better than competitors.

Success and Failure Success or failure lies ahead for entrepreneurs starting their own companies as well as for those starting new businesses within bigger corporations. Entrepreneurs succeed or fail in private, public, and not-for-profit sectors; in nations at all stages of development; and in all nations, regardless of their politics.65

Start-ups have at least two major liabilities: newness and smallness.66 New companies are relatively unknown and need to learn how to be better than established competitors at something that customers value. Regarding smallness, the odds of surviving improve if the venture reaches a critical mass of at least 10 or 20 people, has revenues of $2 million or $3 million, and is pursuing opportunities with growth potential.67

To understand further the factors that influence success and failure, we’ll consider the economic environment, various management-related hazards, and initial public stock offer- ings (IPOs).

The Role of the Economic Environment Entrepreneurial activity stems from the economic environment as well as the behavior of individuals. Money is a critical resource for all new businesses. Increases in the money supply and the supply of bank loans, real

economic growth, and improved stock market perfor- mance lead to both improved prospects and increased sources of capital. In turn, the prospects and the cap- ital increase the rate of business formation. Under

LO 3

Economic cycles can quickly change favorable

conditions into downturns.

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favorable conditions, many aspiring entrepreneurs find early success. But economic cycles can quickly change favorable conditions into downturns. To succeed, entrepreneurs must have the foresight and talent to survive when the environment becomes more hostile.

Although good economic times may make it easier to start a company and to survive, bad times can offer an opportunity to expand. Ken Hendricks of ABC Supply found a business opportunity in a grim economic situation: a serious downturn in the manufactur- ing economy of the Midwest contributed to the shutdown of his town’s largest employer, the Beloit Corporation. Hendricks purchased the company’s buildings and lured a diverse group of new employers to town despite the economic challenges. In fact, Hendricks turned around struggling suppliers that ABC acquired.69 Another silver lining in difficult economic times is that it’s easier to recruit talent.

Business Incubators and Accelerators The need to provide a nurturing environment for fledgling enterprises led to the creation of business incubators. Business incubators, often located in industrial parks or abandoned factories, are protected environments for new, small businesses. Incubators offer benefits such as low rents and shared costs for up to a 5-year period.70 Shared staff costs, such as for receptionists and secretaries, avoid the expense of a full-time employee but still provide convenient access to services. The staff manager is usually an experienced businessperson or consultant who advises the new business owners. Incubators often are associated with universities, which provide technical and business services for the new companies.

Whereas a business incubator hatches new businesses in a gradual way in a noncom- petitive environment, a business accelerator is a 3- to 6-month intensive process designed

business incubators

Protected environments for new, small businesses.

Part of being an entrepreneur is experiencing occasional failures. Despite its worldwide success, which has created hundreds of thousands of jobs and made founder and for- mer CEO Howard Schultz a billionaire, Starbucks has not always succeeded in its attempts to be innovative.

Some of Schultz’s bold moves have, of course, been famously successful, including in the areas of social responsibility and sustainability. His company was the first to offer full employment benefits to part-timers and health care coverage to employees’ domestic partners, was a pioneer in the use of ethically sourced coffee, and was the first in the industry to use post-consumer recycled fiber in its beverage cups. Highly individualized orders for exotic specialty coffee drinks once unknown to U.S. consum- ers are now iconic staples in the company’s thousands of stores. Prepackaged sandwiches, desserts, and teas and fruit juices are popular items for those who want more than coffee, and some of Starbucks' beverage products are sold in other retail stores and markets for preparation at home. Digital payment and mobile ordering are other inno- vations for which Starbucks can take credit.

But some product ideas have missed the mark. A prod- uct called drinking chocolate, essentially a liquid dessert

popular in Europe, was an almost immediate failure. A part- nership between Starbucks and PepsiCo yielded a bottled blend of coffee and soda that failed, though it did make way for bottled Frappuccino, a successful extension of the company’s iconic blended cold coffee drink. Another dessert, called Sorbetto, failed in its West Coast test mar- ket and so didn’t go any further. Efforts to build a new Starbucks brand with a line of low-calorie fruit smoothies, billed as a healthy option, failed as well. Smoothies are still offered, but the brand-building effort was abandoned. More recently, the Fizzio line of carbonated drinks, with three flavors rolled out in 16 states, has fizzled.68

• How would you categorize Starbucks' decisions to test new products in terms of high or low innovation and risk? Why?

• How is Starbucks' decision making about new products different from that of a start-up company, and how is it similar?

• How would you like to work for a big company (Starbucks, or choose your favorite) and hold the title “entrepreneur in residence”? What would your job entail?

Management in Action STARBUCKS RISKS SUCCESS AND FAILURE

business accelerator

Organization that provides support and advice to help young businesses grow.

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to help budding entrepreneurs build and launch rapidly successful ventures. There are at least 2,000 accelerator programs in the world, including Y Combinator, TechStars, and Startupbootcamp.71 Accelerators pay participants to attend structured learning sessions, and receive in return an equity stake (e.g., 6 or 7 percent). Industry experts, venture capital- ists, and fellow cohort members serve as sounding boards and mentors.72

Common Management Challenges As an entrepreneur, you are likely to face several common challenges that you should under- stand before you face them and then manage effectively when the time comes. Here we discuss several such challenges.

You Might Not Enjoy It Some managers and employees can specialize in what they love, whether it’s selling or account- ing. But entrepreneurs usually have to do it all, at least in the beginning. If you love product design, you also have to sell what you create. If you love marketing, get ready to manage the money too. This last challenge was almost a stumbling block for Elizabeth Busch, Anne Frey- Mott, and Beckie Jankiewicz when they launched The Event Studio to run business conferences for their clients. All three women had experience with some aspect of running conferences, but when they started their company, they didn’t fully think through all the accounting decisions for measuring their income and cash flow. With some practical advice, they learned some basic accounting lessons that helped them avoid tax troubles later on.73 If they hadn’t been willing to learn new skills, entrepreneurship might not have been the right career path for them.

Survival Is Difficult Companies without much of a track record tend to have more trouble lining up lenders, investors, and customers. When economic conditions cool or competition heats up, a small start-up serving a niche market may have limited options for survival. Failure can be devastating.

Founders of a start-up must make key decisions in so many areas of business that mis- takes are potentially a devastating risk. Several months after starting Zipcar, a car-sharing service, founder Robin Chase evaluated the early financial data and discovered that the company had made a mistake in setting prices. The daily rental fees had been set too low to make the company profitable. Chase concluded that the only way she could keep Zipcar in business was to own up to her error, disclose it to her customers, and explain that the rate would be rising by 25 percent. Only two customers complained, and Zipcar grew into a multimillion-dollar business.74

Growth Creates New Challenges In the beginning, entrepreneurs keep their business afloat with dogged determination to win customers and keep them happy. They work long hours at low pay, deliver great service, get good word-of-mouth advertising, and their business grows. When keeping up with all the work becomes physically impossible, entrepreneurs feel they need to bring in help.

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The Digital World One of the main challenges for entrepreneurs is finding funding. Because of the Internet, funding opportunities have grown exponentially. Kickstarter, GoFundMe, and Indiegogo are three examples of sites that raise billions for entrepreneurs via short pitches on their websites.

The same idea applies for social entrepreneurs. Sites like Kiva, DonorsChoose.org, and GiveForward provide

funding all over the world for microloans and socially beneficial projects.

Check out these sites to see how entrepreneurs are getting access to funds. While online sites won’t replace traditional funding sources like banks and venture capital groups, they do increase opportunities for entrepreneurs to creatively access funds.

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Julie Ladd, founder of CopyShark.net, says she got ready to contract for help after she spent six months doing everything alone: “I was working 70-plus hours a week and wasn’t able to get the turnaround time that my clients needed.”75 The challenge, of course, is that you not only have to come up with the money to keep paying people for the long haul, but also have to figure out who will bring enough skills, motivation, and commitment to the company.

Growth seems to be a consuming goal for most entrepreneurs. But some company found- ers reach the size where they’re happy and don’t want to grow any further. Reaching a golden mean is possible.76 Other founders pursue slow growth. Jason Fried, cofounder of Basecamp (formerly known as 37signals), refuses to grow so fast that the workload and stress would push employees to the point of quitting: “I like the people who work here too much. I don’t want them to burn out.” With a relatively small staff of 43 people, Basecamp is successful with nearly 2.6 million individual and 100,000 company subscribers.77

It’s Hard to Delegate As the business grows, entrepreneurs often hesitate to delegate to other people work that they are used to doing themselves. Leadership deteriorates into micromanagement, in which managers monitor too strictly, to the minutest detail. During the early Internet craze, many company founders with great technical knowledge but little experience became instant experts in every phase of business, including branding and advertising.78 Turns out, they didn’t know as much as they thought, and their companies crashed.

Fortunately, many entrepreneurs observe the consequences of their behavior and figure out how to manage more effectively. Kit Hickey and her business partners had a good prob- lem on their hands. Within a month of launching Ministry of Supply, they sold 6,000 shirts and acquired 4,000 customers. The leadership team had to scale production from 300 to 6,000 shirts per month. Their solution was to divide responsibilities and then empower each other to make customers as happy as possible. For example, one partner was in charge of product development and technology, another was the head of customer advocacy, and so forth. These decisions, combined with agile problem solving and transparent communica- tion, helped Ministry of Supply grow rapidly to meet surging customer demand.79

Misuse of Funds Many unsuccessful entrepreneurs blame their failure on inadequate financial resources. Yet failure due to a lack of financial resources doesn’t necessarily indicate a real lack of money; it could mean a failure to use the available money properly. A lot of start-up capital may be wasted—on expensive locations, great furniture, and fancy stationery.

Entrepreneurs who fail to use their resources wisely usually make one of two mistakes: They apply financial resources to the wrong uses, or they maintain inadequate control over their resources.

This can be a problem when a lucky entrepreneur gets a big infusion of cash from a ven- ture capital firm or an initial offering of stock. For start-ups, where the money on the line comes from the entrepreneur’s own assets, he or she has more incentive to be careful. Tripp Micou, founder of Practical Computer Applications, says, “If all the money you spend is based on what you’re bringing in [through sales], you very quickly focus on the right things to spend it on.”80 Micou, an experienced entrepreneur, believes that this financial limitation is actually a management advantage.

Poor Controls Entrepreneurs, in part because they are very busy, often fail to use formal control systems. One common entrepreneurial malady is an aversion to record keeping. Expenses mount, but records do not keep pace. Pricing decisions are based on intuition without adequate reference to costs. As a result, the company does not earn profit margins adequate to support growth.

Blinded by the light of growing sales, many entrepreneurs fail to maintain vigilance over other aspects of the business. Sometimes, then, an economic slowdown provides a needed alarm, warning business owners to pay attention to controls. When Servatii Pastry Shop and Deli’s sales deteriorated even as the prices of ingredients were rising, owner Gary Gottenbusch

Bottom Line Entrepreneurs can increase

their companies’ size, but they still have to keep a

high-value business model and provide great customer

service. What might be a sign that a

small company is growing too fast?

Q

Bottom Line You probably will pay close

attention to costs at the beginning, but success

sometimes brings neglect. Don’t fall into that trap. An entrepreneur who

loves selling delegates bookkeeping to an

accountant. What potential risks and rewards does this

pose to the business?

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set goals and monitored progress. One problem Gottenbusch tackled was the price of baking commodities, such as shortening and flour. He partnered with other local bakeries to form a purchasing association that buys in bulk and passes along the savings. Keeping costs down helped Servatii stay profitable when customers were trimming their budgets for baked goods.81

Even in high-growth companies, great numbers can mask brewing problems. In the absence of controls, the business veers out of control. So, don’t get overconfident; keep asking critical questions. Is our success based on just one big customer? Is our product just a fad that can fade away? Can other companies easily enter our domain and hurt our busi- ness? Are we losing a technology lead? Do we really understand the numbers, know where they come from, and have any hidden causes for concern?

Mortality and Succession One long-term measure of an entrepreneur’s success is the eventual fate of the venture after the founder’s retirement or death. Founding entrepreneurs often fail to plan for succession. When death occurs, estate tax problems or the lack of a skilled replacement for the founder can lead to business failure. In the United States and around the world, only one-third of family-owned businesses survive after the second generation takes over.82

Family members who are mediocre performers are resented by others. Outsiders can be more objective and contribute expertise the family might not have. Issues of management succession are often the most difficult of all, causing serious conflict and possible breakup of the firm.

Management guru Peter Drucker offered the following advice to help family-managed busi- nesses survive and prosper.83 Family members working in the business must be at least as capable and hard-working as other employees; at least one key position should be filled by a nonfamily member; and someone outside the family and the business should help plan succession.

Going Public Many entrepreneurs avoid going public, feeling they’ll lose control of their business. But often companies reach a point at which the owners want to go public. Initial public stock offerings (IPOs) offer a way to raise capital through federally registered and underwritten sales of shares in the company.84 You need lawyers and accountants who know current regulations.

The reasons for going public include raising more capital, reducing debt or improving the balance sheet and enhancing net worth, pursuing otherwise unaffordable opportunities, and improving credibility with customers and other stakeholders—you’re in the big leagues now. Disadvantages include the expense, time, and effort involved; the tendency to become more interested in the stock price and capital gains than in running the company properly; and the creation of a long-term relationship with an investment banking firm that won’t neces- sarily always be a good one.85

Executing IPOs and other approaches to acquiring capital are complex, legalistic, and beyond the scope of this chapter. Sources for more information include the National Venture Capital Association (www.nvca.org), the Small Business Administration’s Community page (http://www.sba.gov/community), and the SBA’s Small Business Learning Center (http:// www.sba.gov/tools/sba-learning-center).

Increasing Your Chances of Success Entrepreneurs need to think through their business idea carefully to help ensure its success. We discuss here the importance of good planning and different types of resources.

Planning So you think you have identified a business opportunity. And you have the personal drive to make it a success. Now what? Where should you begin?

The Business Plan Your excitement and intuition may convince you that you are on to something. But they might not convince anyone else. You need more thorough planning and analysis. This effort will help convince other people to get on board and help you avoid costly mistakes.

initial public offering (IPO)

Sale to the public, for the first time, of federally registered and underwritten shares of stock in the company.

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The first formal planning step is to do an opportunity analysis. An opportunity analysis includes a description of the good or service, an assessment of the opportunity, an assess- ment of the entrepreneur (you), a specification of activities and resources needed to trans- late your idea into a viable business, and your source(s) of capital.86 Exhibit 7.6 shows the questions you should answer in an opportunity analysis.

The opportunity analysis, or opportunity assessment plan, focuses on the opportunity, not the entire venture. It provides the basis for making a decision on whether to act. Then the business plan describes all the elements involved in starting the new venture.87 The busi- ness plan describes the venture and its market, strategies, and future directions. It often has functional plans for marketing, finance, manufacturing, and human resources.

Exhibit 7.7 shows an outline for a typical business plan. The business plan (1) helps determine the viability of your enterprise, (2) guides you as you plan and organize, and (3) helps you obtain financing. It is read by potential investors, suppliers, customers, and others. Get help in writing a sound plan!

Key Planning Elements The business needs enough cash to cover start-up expenses and keep the company running during slow periods. The initial budget should cover one-time costs, such as the fee to form a corporation, and ongoing expenses such as supplies and rent for the first few months. The company’s founders may start the business with their own money, or they may seek financ- ing in the form of debt (taking out a loan from family, friends, or a bank) or equity (taking money in exchange for an ownership share in the company). Typically, start-ups get most of their money from the owners, their families, and loans and credit lines from banks. Other kinds of investors, such as venture capital firms, generate a lot of publicity for splashy deals but provide a very small share of start-up funds.88

Raising money to start a business can be one of the entrepreneur’s greatest challenges. Peer-to-peer loans are an alternative to using a bank. Using online platforms like Lending Club or Prosper, individual investors loan up to $35,000 to small businesses. For example, Hannah Attwood wanted to raise money to open a cloth diaper supply and cleaning service. After four banks rejected her, Attwood secured from investors a three-year loan to help launch her new business. Combining the loan with her own savings, Attwood was able to purchase industrial washers and dryers.89

Just as the Internet has transformed every other aspect of business, it is poised to remake the challenge of raising start-up money. This trend started with the use of social media tools to link would-be entrepreneurs with people who want to make great ideas happen. At crowdfunding websites, such as AngelList, FundersClub, Indiegogo, and Kickstarter, the entrepreneurs post their ideas and anyone can donate to the cause.

opportunity analysis

A description of the good or service, an assessment of the opportunity, an assessment of the entrepreneur, specification of activities and resources needed to translate your idea into a viable business, and your source(s) of capital.

business plan

A formal planning step that focuses on the entire venture and describes all the elements involved in starting it.

What market need does my idea fill?

What personal observations have I experienced or recorded with regard to that market need?

What social condition underlies this market need?

What market research data can be marshaled to describe this market need?

What patents might be available to fulfill this need?

What competition exists in this market? How would I describe the behavior of this competition?

What does the international market look like?

What does the international competition look like?

Where is the money to be made in this activity?

EXHIBIT 7.6 Opportunity Analysis

Hisrich, R. and Peters, M., Entrepreneurship: Starting, Developing, and Managing a New Enterprise, p. 41. Copyright ©1998 McGraw-Hill Global Education Holdings LLC. All rights reserved. Used with permission.

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I. EXECUTIVE SUMMARY

Description of the Business Concept and the Business

Opportunity and Strategy

Target Market and Projections

Competitive Advantages

Costs

Sustainability

The Team

The Offering

II. THE INDUSTRY AND THE COMPANY AND ITS PRODUCT(S) OR SERVICE(S)

The Industry

The Company and the Concept

The Product(s) or Service(s)

Entry and Growth Strategy

III. MARKET RESEARCH AND ANALYSIS

Customers

Market Size and Trends

Competition and Competitive Edges

Estimated Market Share and Sales

Ongoing Market Evaluation

IV. THE ECONOMICS OF THE BUSINESS

Gross and Operating Margins

Profit Potential and Durability

Fixed, Variable, and Semivariable Costs

Months to Breakeven

Months to Reach Positive Cash Flow

V. MARKETING PLAN

Overall Marketing Strategy

Pricing

Sales Tactics

Service and Warranty Policies

Advertising and Promotion

Distribution

VI. DESIGN AND DEVELOPMENT PLANS

Development Status and Tasks

Difficulties and Risks

Product Improvement and New Products

Costs

Proprietary Issues

VII. MANUFACTURING AND OPERATIONS PLAN

Operating Cycle

Geographical Location

Facilities and Improvements

Strategy and Plans

Regulatory and Legal Issues

VIII. MANAGEMENT TEAM

Organization

Key Management Personnel

Management Compensation and Ownership

Other Investors

Employment and Other Agreements and Stock Option and Bonus Plans

Board of Directors

Other Shareholders, Rights, and Restrictions

Supporting Professional Advisers and Services

IX. OVERALL SCHEDULE

X. CRITICAL RISKS, PROBLEMS, AND ASSUMPTIONS

XI. THE FINANCIAL PLAN

Actual Income Statements and Balance Sheets

Pro Forma Income Statements

Pro Forma Balance Sheets

Pro Forma Cash Flow Analysis

Breakeven Chart and Calculation

Cost Control

Highlights

XII. PROPOSED COMPANY OFFERING

Desired Financing

Offering

Capitalization

Use of Funds

Investor’s Return

XIII. APPENDIXES

EXHIBIT 7.7  Outline of a Business Plan

Timmons, J. A. and Spinelli, S., Jr., New Venture Creation: Entrepreneurship for the 21st Century, 7th ed., 2007, p. 229. Copyright ©2007 McGraw-Hill Global Education Holdings LLC. All rights reserved. Used with permission.

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Until recently, crowdfunding was mostly limited to small contributions from people who gave in exchange for a company-provided experience, discount, or product sample; the funders don’t receive equity in the business. The main reason is that the Securities and Exchange Commission, which regulates investing, needs to ensure that investors on these sites have the same protections available to traditional investors. In 2012, however, Congress passed the Jumpstart Our Business Startups Act (JOBS Act), which makes it eas- ier for start-ups to receive funding from online investors (crowdfunding) and to go public. Early results are promising. Two years after the act was passed, the number of IPOs reached a 14-year high.90

Most business plans devote so much attention to financial projections that they neglect other important information—information that matters greatly to astute investors. In fact, financial projections tend to be overly optimistic. Investors know this and discount the fig- ures. In addition to the numbers, the best plans convey—and make certain that the entre- preneurs have carefully thought through—five key factors: the people, the opportunity, the competition, the context, and risk and reward.91

The people should be energetic and have skills and expertise directly relevant to the ven- ture. For many astute investors, the people are the most important variable, more impor- tant even than the idea. Arthur Rock, a legendary venture capitalist who helped start Intel, Teledyne, and Apple, stated, “I invest in people, not ideas. If you can find good people, if they’re wrong about the product, they’ll make a switch.”92

The opportunity should provide a competitive advantage that can be defended. Customers are the focus here: Who is the customer? How does the customer make deci- sions? How will the product be priced? How will the venture reach all customer segments? How much does it cost to acquire and support a customer and to produce and deliver the product? How easy or dif- ficult is it to retain a customer?

It is also essential to fully consider the competition. The plan must identify current competitors and their strengths and weaknesses, predict how they will respond to the new venture, indicate how the new venture will respond to the competitors’ responses, identify future potential competi- tors, and consider how to collaborate with or face off against actual or potential competitors.

The original plan for Zappos was for its website to com- pete with other online shoe retailers by offering a wider selec- tion than they did. However, most people buy shoes in stores, so Zappos cofounders Nick Swinmurn and Tony Hsieh soon realized that they needed a broader view of the competition. They began focusing more on service and planning a distribu- tion method that would make online shopping as successful as visiting a store.93

The environmental context should be a favorable one from regulatory and economic perspectives. Such factors as tax policies, rules about raising capital, interest rates, infla- tion, and exchange rates will affect the viability of the new venture. Importantly, the plan should make clear that you know that the context inevitably will change, should forecast how the changes will affect the business, and should describe how you will deal with the changes.

The risk must be understood and addressed as fully as possible. Although you cannot predict the future, you must contemplate head-on the possibilities of key people leaving, interest rates changing, a key customer leaving, or a powerful competitor responding fero- ciously. Then describe what you will do to prevent, avoid, or cope with such possibilities.

You should also speak to the end of the process: how to get money out of the business eventually. Will you go public? Will you sell or liquidate? What are the various possibilities for investors to realize their ultimate gains?94

The opportunity should provide a competitive

advantage that can be defended.

Entrepreneurs should carefully consider the five key factors when developing a business plan: the people, the opportunity, the competition, the context, and risk and reward. Commonly, financial projections dominate the plan while these other important factors are overlooked or undervalued.

©John Lund/Marc Romanelli/Getty Images RF

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Selling the Plan Your goal is to get the right investors to support the plan. You want more than just finan- cial support; you want high-quality partners so that your relationships will continue to be productive.95 Thus an important decision is whom you try to convince to back your plan.

Many entrepreneurs want passive investors who will give them money and let them do what they want. Doctors and dentists generally fit this image. Professional venture capital- ists do not—they demand more control and more of the returns.

But when a business goes wrong—and chances are, it will—nonprofessional investors are less helpful and less likely to advance more (needed) money. Sophisticated investors have seen sinking ships before and know how to help. They are more likely to solve problems, provide more money, and navigate financial and legal waters.96

View the plan as a way for you to figure out how to reduce risk, maximize reward, and convince others that you understand the entire new venture process. Don’t put together a plan built on naïveté or overconfidence, or one that cleverly hides major flaws. You might not fool others, and you certainly would be fooling yourself.

Nonfinancial Resources Also crucial to the success of a new business are nonfi- nancial resources, including legitimacy in the minds of the public and the various ways in which other people can help. The nearby “Multiple Generations at Work” box suggests that start-ups are more likely to gain legitimacy and success by employing multiple generations.

Legitimacy An important resource for the new venture is legitimacy—people’s judgment of a company’s acceptance, appropriateness, and desirability.97 When the market confers legitimacy, it helps overcome the liability of newness that creates a high percentage of new venture failure.98

Legitimacy helps a firm acquire other resources such as top managers, good employees, financial resources, and government support. In a three-year study of start-ups, the likeli- hood a company would succeed at selling products, hiring employees, and attracting inves- tors depended most on how skillfully entrepreneurs demonstrated that their business was legitimate.99

A business is legitimate if its goals and methods are consistent with societal values. You can generate legitimacy by visibly conforming to rules and expectations created by gov- ernments, credentialing associations, and professional organizations; by visibly endorsing widely held values; and by visibly practicing widely held beliefs.100

Networks The entrepreneur is aided greatly by having a strong network of people. Social capital—being part of a social network and having a good reputation—helps entrepreneurs gain access to useful information, gain trust and cooperation from others, recruit employees, form success- ful business alliances, receive funding from venture capitalists, and become more success- ful.101 Social capital provides a lasting source of competitive advantage.102

Top Management Teams The top management team is another crucial resource. Gordon Logan is CEO and founder of Sport Clips, a hair salon franchise specially designed to appeal to male customers of all ages. After experiencing an early setback as an entrepreneur, Logan brought together a top management team to design a plan to help Sport Clips grow at a rapid yet manageable pace. In 2017, Sport Clips had over 1,500 franchises operating in every state of the union. Logan was named 2016 Entrepreneur of the Year by the International Franchise Association.103

Advisory Boards Whether or not the company has a formal board of directors, entrepreneurs can assemble a group of people willing to serve as an advisory board. Board members with business experi- ence can help an entrepreneur learn basics such as how to do cash flow analysis, identify needed strategic changes, and build relationships with bankers, accountants, and attorneys.

legitimacy

People’s judgment of a company’s acceptance, appropriateness, and desirability, generally stemming from company goals and methods that are consistent with societal values.

social capital

Goodwill stemming from your social relationships; a competitive advantage in the form of relationships with other people and the image other people have of you.

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Multiple Generations at Work Millennial Entrepreneurs Can Learn from Others with More Experience

Jerry Jao, CEO and cofounder of Retention Science, enjoys asking older entrepreneurs for advice. Jao reached out to Matt Hulett, CEO of ClickBank, who has decades more experience, and asked him what younger entrepre- neurs could learn from more experienced entrepreneurs.

Hulett said that Millennial entrepreneurs should make sure they enjoy and celebrate the small successes and not just the large ones (e.g., getting another round of funding). He added that his younger counterparts shouldn’t be afraid to fail; the important thing is to learn from those missteps.

Some Millennial entrepreneurs are tapping into senior wisdom by cofounding firms with older, more seasoned partners or hiring them as consultants. Here are some areas in which Boomers can help start-ups achieve scal- ability and success:

1. Angel investors and advisers. Boomers can bring funding and advice for business plan development and marketing strategies.

2. Partnership or executive positions. Boomers may be willing to work with founders for an equity stake in the business. This can create a win–win for the cash- starved start-up that needs experienced people.

3. Talent management. Boomers have decades of expe- rience dealing with talent management issues such

as hiring, firing, training, compensation, and perfor- mance evaluation. This can free up the founders to focus on the core activity of the start-up.

By handling those tasks, Boomers can empower the founders and other employees to focus on devel- oping and improving products, sales, and marketing (traditional and social media) to Millennial and Gen X customers.104

©ZUMA Press, Inc./Alamy Stock Photo

Partners Often two people go into business together as partners. Partners can help one another access capital, spread the workload, share the risk, and share expertise.

But despite the potential advantages of having a compatible partner, partnerships are not always marriages made in heaven. “Mark” talked three of his friends into joining him in starting his own telecommunications company because he didn’t want to try it alone. He learned quickly that while he wanted to put money into growing the business, his three part- ners wanted the company to pay for their cars and meetings in the Bahamas. The company collapsed. “I never thought a business relationship could overpower friendship, but this one did. Where money’s involved, people change.”

To be successful, partners need to acknowledge one another’s talents, let each other do what they do best, communicate honestly, and listen to one another. Partners also must learn to trust each other by making and keeping agreements. If they must break an agree- ment, it is crucial that they give early notice and clean up after their mistakes.

Corporate Entrepreneurship

Large corporations are more than passive bystanders watching independent entrepreneurs create new businesses. Even established companies try to find and pursue new and profit- able ideas—and they need in-house entrepreneurs (sometimes called intrapreneurs)105 to do so.

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Building Support for Your Idea A manager who has a new idea to capitalize on a market opportunity will need to get others in the organization to buy in or sign on. In other words, you need to build a ne