Management 2

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Management

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Management

Christopher P. Neck, Ph.D. Arizona State University

Charles L. Lattimer Cooperative Leadership Institute

Jeffery D. Houghton, Ph.D. West Virginia University

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VICE PRESIDENT & EXECUTIVE PUBLISHER George Hoff man

EXECUTIVE EDITOR Lisé Johnson

DEVELOPMENTAL EDITOR Susan McLaughlin

PROJECT EDITOR Brian Baker

EDITORIAL ASSISTANT Jacqueline Hughes

EDITORIAL OPERATIONS MANAGER Yana Mermel

DIRECTOR OF MARKETING Amy Scholz

SENIOR MARKETING MANAGER Kelly Simmons

MARKETING ASSISTANT Marissa Carroll

SENIOR CONTENT MANAGER Dorothy Sinclair

SENIOR PRODUCTION MANAGER Valerie Vargas

SENIOR PRODUCT DESIGNER Allison Morris

MEDIA SPECIALIST Elena Santa Maria

SENIOR PHOTO EDITOR Mary Ann Price

PHOTO RESEARCHER Susan McLaughlin

DESIGN DIRECTOR Harry Nolan

SENIOR DESIGNER Tom Nery

Th is book was set in 10/12 Kepler by MPS Limited and printed and bound by Courier. Th e cover was printed by Courier.

Th is book is printed on acid free paper.

Founded in 1807, John Wiley & Sons, Inc. has been a valued source of knowledge and understanding for more than 200 years, helping people around the world meet their needs and fulfi ll their aspirations. Our company is built on a foundation of principles that include responsibility to the communities we serve and where we live and work. In 2008, we launched a Corporate Citizenship Initiative, a global eff ort to address the environmental, social, economic, and ethical challenges we face in our business. Among the issues we are addressing are carbon impact, paper specifi cations and procurement, ethical conduct within our business and among our vendors, and community and charitable support. For more information, please visit our website:  www.wiley.com/go/citizenship. 

Copyright © 2014 John Wiley & Sons, Inc. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc. 222 Rosewood Drive, Danvers, MA 01923, website www. copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, (201)748-6011, fax (201)748-6008, website http:// www.wiley.com/go/permissions.

Evaluation copies are provided to qualifi ed academics and professionals for review purposes only, for use in their courses during the next academic year. Th ese copies are licensed and may not be sold or transferred to a third party. Upon completion of the review period, please return the evaluation copy to Wiley. Return instructions and a free of charge return shipping label are available at www.wiley.com/go/returnlabel. Outside of the United States, please contact your local representative.

978-1-118-74954-8 (BRV) 978-1-118-74956-2 (IE)

Printed in the United States of America

10 9 8 7 6 5 4 3 2 1

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We dedicate Management to all of our students who have believed in us,

inspired us, and encouraged us to try new ways of teaching.

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ix

About the Authors

CHRISTOPHER P. NECK Dr. Christopher P. Neck is currently an associate professor of management at Arizona State University, where he holds the title “University Master Teacher.” From 1994 to 2009, he was part of the Pamplin College of Business faculty at Virginia Tech. He received his Ph.D. in management from Arizona State University and his MBA from Louisiana State University. Neck is author of the books Fit To Lead: Th e Proven 8-Week Solution for Shaping Up Your Body, Your Mind, and Your Career (St. Martin’s Press, 2004; Carpenter’s

Sons Publishing, 2012), Mastering Self-Leadership: Empowering Yourself for Personal Excel- lence, 6th edition (Pearson, 2013), Th e Wisdom of Solomon at Work (Berrett-Koehler, 2001), For Team Members Only: Making Your Workplace Team Productive and Hassle-Free (Ama- com Books, 1997), and Medicine for the Mind: Healing Words to Help You Soar, 4th edition (Wiley, 2012). Dr. Neck’s research specialties include employee/executive fi tness, self-leadership, lead- ership, group decision-making processes, and self-managing teams. He has contributed to over 90 publications in the form of books, chapters, and articles in various journals. Some of the outlets in which Neck’s work has appeared include Organizational Behavior and Human Decision Processes, Th e Journal of Organizational Behavior, Th e Academy of Management Exec- utive, Journal of Applied Behavioral Science, Th e Journal of Managerial Psychology, Executive Excellence, Human Relations, Human Resource Development Quarterly, Journal of Leadership Studies, Educational Leadership, and Th e Commercial Law Journal. Due to Neck’s expertise in management, he has been cited in numerous national pub- lications, including the Washington Post, Th e Wall Street Journal, the Los Angeles Times, the Houston Chronicle, and the Chicago Tribune. Additionally, each semester, Neck teaches an introductory management course to a single class of anywhere from 500 to 1,000 students. Dr. Neck was the recipient of the “2007 Business Week Favorite Professor Award. He is featured on www.businessweek.com as one of the approximately 20 professors from across the world to receive this award.

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x About the Authors

CHARLES L. LATTIMER Charles is the CEO and founder of the Cooperative Leadership Institute, a private leadership and management development company founded at Virginia Tech. As a keynote speaker, exec- utive coach, leadership guide, and technology entrepreneur, Charles has directed and designed international and enterprise- level organizational development and training programs for the past 15 years. He has over a decade of experience in designing, developing, and delivering programs and strategic planning solu-

tions for thousands of executives to ensure sustainable results through a balanced approach to management. Charles regularly speaks about all areas of leadership capacity development, entrepre- neurship, courage in business, innovation, creativity, learning organizations, and systems thinking. He has designed development programs for managers and executives from Akridge, Alpha Pharmaceuticals, B. F. Saul Company, Club Corporation of America (ClubCorp), e5 Systems, General Electric, LPGA’s Duramed Tour, LTD Management, Marriott, U. S. Foreign Service Institute, Virginia Tech, Wal-Mart, Whole Child Learning Company, local govern- ments, schools systems, and many others. Charles has lifetime memberships in Phi Beta Kappa and Phi Kappa Phi and is President Emeritus of Virginia Tech’s Phi Beta Kappa chapter.

JEFFERY D. HOUGHTON Dr. Jeff ery D. Houghton completed his Ph.D. in management at Virginia Tech and is currently an associate professor of man- agement at West Virginia University. He previously held faculty positions at Abilene Christian University (TX) and Lipscomb University (TN). Prior to pursuing a full-time career in academ- ics, he worked in the banking industry as a loan offi cer and branch manager.

A member of the honor society Phi Kappa Phi, Dr. Houghton’s research specialties include human behavior, motivation, personality, leadership, and self-leadership. Dr. Houghton has presented his research at various professional meetings and has published more than 30 peer-reviewed journal articles and book chapters. In addition to his research activities, Dr. Houghton has done consulting and conducted training seminars for companies, including the Federal Bureau of Investigations (FBI), Pfi zer Pharmaceuticals, and the Bruce Hardwood Floors Company. In his spare time, he enjoys traveling, classic mystery novels, racquetball, mountain biking, and snow skiing. Finally, he has trained for and completed two marathons: the Marine Corps Marathon in Washington, D.C., and the Dallas White Rock Marathon in Dallas, TX.

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xi

PREFACE

An innovative and very contemporary way of teaching management. —Douglas M. McCabe, Georgetown University

I think your using the systems approach to critical thinking is a great thing. Getting students thinking critically from a systems perspective and looking at the intended and unintended consequences of decisions is much needed.

—Kenneth J. Harris, Indiana University Southeast

Writing style was superb—more interesting and involving than any principles of man- agement textbook I have read. It just draws the reader in, like a well-written novel, yet imparts management key principles that all management texts wish to do.

—Verl Anderson, Dixie State College

We would like to off er a warm welcome to instructors and students to Management. In a rapidly changing business world, this is an exhilarating time for 21st-century managers! Globalization and technological innovation has revolutionized every aspect of our daily lives, changing the way we work and learn. Today’s managers need to be equipped with the right skills to deal with the growing number of challenges facing them within this uncertain eco- nomic climate. Dealing with the competition, coping with ethical dilemmas, identifying and hiring talent, managing diversity, building sustainability, and adapting to the latest technol- ogy are just a few of the many challenges that today’s managers face. Th is book is designed to give you a better idea of what management really is, who the most successful managers are, how to become a great manager, and how to think critically. It is our hope that this book will help prepare you for these challenges and support you in your future careers as managers. We have been told that it’s not very often a book reviews the way this one has, and we have been humbled and honored by the feedback we have received as we wrote and revised this text. From the start of this project, professors told us that we were on to something. Our critical thinking approach, novel style of writing, systems thinking emphasis, and coverage of Positive Psychology got their attention, and they were sure that it would get their stu- dents’ attention, too. Th ey told us that it was truly diff erent from any introductory manage- ment book they had used or reviewed before. And they said that a new and unique approach

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Prefacexii

to teaching management for future managers and anyone who will ever work in an organi- zation was critical, exciting, and sorely needed. Th ey told us they are excited to use our book and think their students will be, too! As with any endeavor, it started with an idea—to write a book that would introduce students to management using a critical thinking approach and a storytelling style. We put together a prospectus, wrote a few chapters, and started talking to friends, colleagues, coworkers, entrepre- neurs, small business owners, chief executive offi cers (CEOs), and chief fi nancial offi cers (CFOs), and gathered practical insights into the practice of management. We heard about their success stories, failures, and lessons learned, and we incorporated them, along with our own experiences teaching and working, into the plan for this book and the teaching and learning resources that accompany it. Th roughout the writing and development of the manuscript, we listened to our customers—professors and students (over 200 in total!)—through reviews, emails, phone calls, and virtual and in-person focus groups. We shared our message and goals for the book with all these people and have been encouraged and inspired by everyone who has been part of our jour- ney. We are so grateful for all the help we received from this feedback, and we thank everyone who contributed their comments. Th is would not be the book it is without you!

Philosophy Based on extensive research, along with our own experiences of teaching, we have found that traditional management texts centered purely on theory-based methods of learning were not stimulating enough for our students, nor were they suffi cient to prepare students for the real-life demands of a continuously evolving business environment. We think that a text that promoted more active learning and engagement with the realities of management would encourage students to think like managers, rather than just learning about them. Th is is why we have developed a new text based on a critical thinking approach, to pre- pare future managers for the challenges of business. We believe that by learning to think critically, students will play a more active role in the learning process, engage with the con- tent, and really understand what it is like to be a manager. And our ideas are supported by a national market segmentation survey that Wiley conducted with principles of management professors. Over 80 percent of those surveyed said the number one thing that students need to learn is how to think critically. Our goal is to show you that the study of management is exciting and stimulating. To il- lustrate this, we have included several management stories, based on real-life scenarios, that describe epic failures, risings and fallings, overnight successes, poetic justices, dilemmas, and plain, hardworking people that fi nd meaningful ways to make a diff erence. We believe that a storytelling approach inspires students to think critically by putting themselves in the place of a manager to resolve management dilemmas.

Pedagogy Th e content of Management is based on sound pedagogical foundations that aim to support students in learning quickly and effi ciently. As educators, our goals are to:

• Help students realize that management is extremely relevant to each and every one of them . . . that management begins with each of them . . . that before we can manage oth- ers, we have to learn to manage ourselves, and that, ultimately, management is relevant to us all.

• Challenge our students to embrace all types of organizations, from start-ups to large corporations, and to understand that eff ective management is essential for all employ- ees in every type of organization.

• Improve our students’ critical thinking skills. Why? Because research shows that em- ployers want and value employees who can think critically.

• Enhance our students’ understanding of current organizational issues that aff ect busi- nesses, society, and individuals.

• Inspire lifelong learning about management that stretches beyond the duration of a single management course.

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Preface xiii

Our approach incorporates a balance between the following characteristics:

• Management theory and real life experience. • Historical teachings and current trends and theories. • Self-management and managing an organization. • Providing information and allowing students to formulate their own questions. • Th e four functions of management.

Critical Thinking Increasingly used in business as a problem-solving tool, the critical thinking approach is a powerful analytical method that helps managers to consider intended and unintended consequences of behaviors on their teams, organizations, and communities. Organizations need managers who think independently, without judgment and bias; predict patterns of be- haviors and processes; and ask the right questions: “How?” and “Why?” versus just “What?” in order to make eff ective and thoughtful decisions. To support the teaching of critical thinking skills, we draw from several management theo- ries such as systems thinking and Positive Psychology, providing students with systems arche- types, research, and management stories to illustrate the relationship between the facets of each theory. Th e management stories are based on real-life case studies and scenarios which we feel really help to demonstrate the application of critical thinking. Some of the characters you will meet include Chris Heppler, a new manager from the Dolphin Resort & Hotel, whose mission is to save a family business from bankruptcy; newly appointed chief of police Robin Richardson, who sets out to revolutionize the Metropolitan Police Department (MPD) in Washington D.C.; Julian Wales, group leader of Upstream Fisheries, whose goal is to increase productivity and motivation through leadership; and university friends Katy Johnson, Fred Arters, and Lisa Fang, who leave their respective jobs to begin a new entrepreneurial venture together. We feel strongly that once the art of critical thinking is mastered, it can become a very powerful tool that can be applied to many diff erent scenarios. Take the issue of sustainability, for example. Events of the past few decades have resulted in increased demand for corporate accountability and social responsibility, even as manag- ers are realizing the benefi ts of fi nding new ways to balance the needs of stockholders, em- ployees, and communities. We believe that through critical thinking, young managers can contribute to building a more sustainable and responsible global marketplace by making logical decisions based on evidence and reason.

Content and Organization Management incorporates a learning model based on critical thinking that captures the imagination of the students, transporting them into real-life work dilemmas to better pre- pare them for their future careers. Th e chapter content is current, timely, and structured to promote fl ow and accessibility.

Part One: Introduction Two chapters introduce management, beginning with the challenges facing today’s man- agers, followed by the origins of management. Th ey are Chapter 1, “Management in the 21st Century,” and Chapter 2, “Th e Evolution of Management.”

Part Two: Sustaining: A Balanced Approach to Management Four chapters discuss the environment within which managers work, in the context of critical thinking and sustainability. Th ey are Chapter 3, “Critical Th inking for Managers,” Chapter 4, “Organizations and Change Management,” Chapter 5, “Diversity in a Global Econ- omy,” and Chapter 6, “Ethics and Social Responsibility.”

Part Three: Planning Th ree chapters cover decision making, goal setting, and strategy design, all within a frame- work of one comprehensive management story. Th ey are Chapter 7, “Making Better Deci- sions,” Chapter 8, “Setting Goals,” and Chapter 9, “Designing Strategies.”

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Prefacexiv

Part Four: Organizing Th ree chapters explore how managers organize structures, individuals, and teams, through a new management story. Th ey are Chapter 10, “Organizational Structures,” Chapter 11, “Th e Human Side of Management,” and Chapter 12, “Managing Team Performance.”

Part Five: Leading Th ree chapters illustrate leadership within another original management story. Th ey are Chapter 13, “Managers as Leaders,” Chapter 14, “Understanding Individual Behavior,” and Chapter 15, “Communicating and Motivating Others.”

Part Six: Controlling Two chapters discuss how managers exercise controls within a business environment, as portrayed by another innovative management story. Th ey are Chapter 16, “Information and Operations,” and Chapter 17, “Performance Development.”

Part Seven: The Future of Management Th e fi nal chapter, “Entrepreneurship and Innovation,” combines many elements of the previ- ous chapters and follows the journey of a group of entrepreneurs and the challenges they face along the way.

Management Stories For this book, we have created several rich, extended management stories that enable stu- dents to engage critically with the exciting complexities of the real world. Th ese narratives serve two key purposes: 1) off er fully imagined characters and relationships that refl ect ac- tual challenges and opportunities that managers encounter, and 2) provide suffi ciently rich contexts to practice critical thinking skills usefully, in ways that mimic actual workplace dynamics. We fi rmly believe that a sustained, compelling narrative helps students move be- yond the mere memorization of terms and concepts to a critical understanding that lasts beyond the fi nal exam.

Voices of Management In the “Voices of Management” feature, we use interviews with real-life managers and lead- ers to augment the learning and storytelling style for each chapter. Th ese interviews were researched or conducted during the development of the chapter, so as to increase the rel- evance of each manager’s perspectives.

Research @ Work In the “Research @ Work” feature, we balance key research in the fi eld of management with current topics of interest to practicing managers by synthesizing leading academic journal research. Each “Research @ Work” box is accompanied by a “Critical Th inking in the Class- room” exercise to further promote active engagement.

Chapter Exercises We have designed exercises and examples that activate management principles for college students to build valuable experience and increase skills through decision-oriented chal- lenges that relate specifi cally to the business environment and student organizations. Stu- dents will have unparalleled access to management and leadership tools and resources that real-world professionals use to increase personal and team performance.

Key Terms Th roughout the chapter, key terms are defi ned within the narrative and highlighted where they fi rst appear. Th e defi nitions of each key term are repeated in the “Additional Resources” section at the end of each chapter.

In Review and Self-Tests For each chapter, we include traditional chapter review materials: a recap of the chapter content, organized by learning objective, and a self-test that includes multiple-choice, fi ll- in-the-blank, and short-answer questions, with an answer key.

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Preface xv

Teaching and Learning Resources WileyPLUS WileyPLUS is a research-based, online environment for eff ective teaching and learning that now includes an adaptive learning experience that guides students as they build their profi ciency on topics. Based on cognitive science, WileyPLUS with ORION helps students learn by learning about them.

Instructor’s Manual Th e Instructor’s Manual, written by Jeff ery Houghton, off ers help- ful teaching ideas. It has advice on course development, sample assignments, and recom- mended activities. It also off ers chapter-by-chapter text highlights, learning objectives, lecture outlines, class exercises, lecture notes, and tips on using cases. Because the Instruc- tor’s Manual was written by one of the textbook’s authors, it matches perfectly with the book.

Test Bank Th is comprehensive Test Bank, written by Jeff ery Houghton and available on the instructor portion of the Management 1e website, includes true/false, multiple-choice, and short-essay questions that vary in degree of diffi culty. All the questions are tagged to learn- ing objectives and diffi culty. Th e Respondus Test Bank allows instructors to modify and add questions to the master bank and to customize their exams. Because the Test Bank was written by one of the textbook’s authors, professors can be assured that it is consistent with the structure and style of the book.

Practice Quizzes Th is online study guide, with quizzes of varying levels of diffi culty writ- ten by Jeff ery Houghton, helps students evaluate their progress through each chapter. It is available on the student portion of the Management 1e website. Because the Practice Quiz- zes were written by one of the textbook’s authors, they match with each chapter of the book.

Pre- and Post-Lecture Quizzes Included in WileyPLUS , the Pre- and Post-Lecture Quiz- zes focus on the key terms and concepts. Th ey can be used as stand-alone quizzes or in combination to evaluate students’ progress before and after lectures.

PowerPoint Presentation Slides Th is robust set of Microsoft PowerPoint slides can be accessed on the instructor portion of the Management 1e website. Lecture notes accompany each slide.

Management in Action Videos One video per chapter presents the major themes of each chapter, both with the authors of the textbook and with industry insiders.

Lecture Launcher Videos Short video clips developed from CBS News source materi- als provide an excellent starting point for lectures or for general class discussion. Teaching Notes are available, with video summaries and quiz and discussion questions.

Personal Response System Th e Personal Response System (PRS) questions for each chapter are designed to spark classroom discussion and debate. For more information on PRS, please contact your local Wiley sales representative.

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xvi

Acknowledgm ents

Th e authors would like to thank all those people who have supported our eff orts in writing this book. Th ere are a plethora of people who contributed to making this text a reality. First, we’d like to thank Emma Murray for her amazing talents, as she served as the best content editor an author team could ever have. We also want to thank Shelley Smith for her above- and-beyond eff orts to keep us on track, as well as keeping the book afl oat throughout the writing process. We’d also like to thank our respective deans, Amy Hillman at Arizona State (W. P. Carey School of Business) and Jose “Zito” Sartarelli at West Virginia University’s Col- lege of Business & Economics, for their support for this project. We’d like to thank our de- partment heads (Gerry Keim, Arizona State, and Joyce Heames, West Virginia University) for their encouragement as well. Chris Neck would also like to thank Fred Corey (Vice Provost, Dean of University College and Director of the School of Letters and Sciences at Arizona State University) for his steadfast support and encouragement to excel in the classroom. In addition, we would like to thank the fi ne folks at Wiley for bringing this book to fruition. Our dream of creating an innovative management textbook and ancillary package has be- come a reality due to our amazing, energetic and encouraging executive editor, Lise Johnson. She has been a champion for this book and our ideas (and there were many!), every step of the way. We can’t thank her enough for her dedication and support. Susan McLaughlin, our talented developmental editor, pushed us to explore new ideas and kept us on track to write the best book possible. Brian Baker, our project editor, made sure that everything that needed to happen did indeed happen, and kept all of us on track. We appreciate all of his hard work, creativity, and attention to detail. We are also grateful to Maria Guarascio from Wiley. Designer Tom Nery came up with an elegant and contemporary look for this book that visually brings to life our ideas more than we could have ever imagined. Valerie Vargas and Edward J. Dionne, our organized and effi cient production editors, kept us on track. Jackie Hughes, editorial assistant, took care of a myriad of tasks during the development of the manuscript with an energy and enthusiasm that was inspiring. Kelly Simmons, our marketing manager, did a great job coordinating the promotion of our book, from orga- nizing focus groups to overseeing all of the professor outreach eff orts. And we would like to thank our families for “living without us” as we worked diligently on completing this textbook.

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Acknowledgments xvii

Additionally, there are a number of folks at Wiley that helped make this book happen, including:

George Hoff man, Vice President and Executive Publisher

Yana Mermel, Editorial Operations Manager Amy Scholz, Director of Marketing Marissa Carroll, Marketing Assistant Dorothy Sinclair, Senior Content Manager

Allison Morris, Senior Product Designer Elena Santa Maria, Senior Media Specialist Mary Ann Price, Senior Photo Researcher Harry Nolan, Design Director Maria Danzilo Rhea Siegel

We would also like to thank the following colleagues, who gave invaluable feedback at various stages of this book with their constructive feedback:

Manuscript Reviewers

Ryan Atkins, University of Georgia Larry Able, Johnson County Community College Allen Amason, University of Georgia Lydia Anderson, Fresno City College Verl Anderson, Dixie State College Randall Andre, Winona State University Bonnie Bachman, Missouri University of Science

and Technology Reuel Barksdale, Columbus State Community

College William Becker, Texas Christian University Ellen Benowitz, Mercer County Community

College Tony Bledsoe, Meredith College Queen Esther Booker, Minnesota State University Paula Buchanan, Jacksonville State University Harry Candler, Valencia College Diana Carmel, Golden West College Glen Chapuis, St. Charles Community College Frank Christopian, Brevard Community College Gary Corona, Florida State College Brad Cox, Midlands Technical College Suzanne Crampton, Grand Valley State University Tom Craven, York College of Pennsylvania Joseph DeFilippe, Suff olk County Community

College Gregory Dickens, Sam Houston State University Michael Drafke, College of DuPage Charlene Dykman, University of St. Th omas Bob Eliason, James Madison University Cassandra Elrod, Missouri University of Science

and Technology

Rodney Erakovich, Texas Wesleyan University David Feller, Brevard Community College Mark Fenton, University of Wisconsin Janice Gates, Western Illinois University Terry Girdon, Pennsylvania College of Technology Michael Gordon, Rutgers State University Susan Greer, Horry-Georgetown Technical College Kenneth Harris, Indiana University Southeast Karen H. Hawkins, Miami Dade College Linda Heff erin, Elgin Community College Sherman Herbert, Long Island University Nathan Himmelstein, Essex County College Peter Holland, Napa Valley College Phil Holleran, Mitchell Community College Jenni Hunt, Southern Illinois University Chip Izard, Richland College David Jalajas, Long Island University

Janice Karlen, CUNY, LaGuardia Community College

David Kalicharan, Nova Southeastern University George Kelley, Eerie Community College Angela Kiser, University of the Incarnate Word Susan Kowalewski, D’Youville College John Leblanc, Cedarville University Beverly Little, Horry-Georgetown Technical

College Emilio Lopez, Eastfi eld College Denise Lorenz, Wake Technical Community

College Richards Lynn, Johnson County Community

College Ralph Marra, Stony Brook University Daniel Marrone, Farmingdale State College William Martello, St. Edwards University David Matthews, SUNY Adirondack Jeanne McNett, Assumption College Catherine Michael, St. Edwards University Amy Mickel, California State University Elouise Mintz, St. Louis University Susan Monaco, Molloy College John Myers, Jeff erson College Anthony Narsing, Middle Georgia State College Steven Nichols, Metropolitan Community College Lisa Nieman, Indiana Wesleyan University Lizzie Ngwenya-Scoburgh, University of

Cincinnati John Okpara, Bloomsburg University Nathan Oliver, University of Alabama Dianna Parker, Ozarks Technical Community

College

Nicholas Peppes, St. Louis Community College Alan Platt, Florida Gulf Coast University Patrizia Porrini, Long Island University Tracy Porter, Cleveland State University Jessica Reyes, Temple College David Ruderman, University of Colorado Paul Salada, Fayetteville Technical Community

College

Trent Salvaggio, College of Charleston Kelly Schultz, University of Wisconsin Michael Shaner, St. Louis University Sarah Shepler, Ivy Tech Terre Haute Marc Siegall, California State University Lisa Slevitch, Oklahoma State University Andrea Smith-Hunter, Siena College Ann Snell, Tulane University

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Acknowledgmentsxviii

Rieann Spence-Gale, Northern Virginia Community College

Jeremy Staff ord, University of North Alabama Alice Stewart, North Carolina A&T State University Charlotte Sutton, Auburn University James Swenson, Minnesota State University Marguerite Teubner, Nassau Community College Ronald Th omas, Oakton Community College

Itoe Valentine, Albany Technical College Maria Vitale, Brandman University Anita Vorreyer, Georgia Gwinnett College Robert Waris, University of Missouri Dennis Williams, Pennsylvania College of

Technology Dilek Yunlu, Northern Illinois University Mary Zellmer-Bruhn, University of Minnesota

Message Testing

Verl Anderson, Dixie State College Lydia Anderson, Fresno City College Bonnie Bachman, Missouri University of Science

and Technology Karen Bangs, Cal Poly San Luis Obispo William Becker, Texas Christian University Ellen Benowitz, Mercer County Community College Edward Bewayo, Montclair State University Tony Bledsoe, Meredith College Melvin Blumberg, Penn State Glen Chapuis, Saint Charles Community College Frank Christopian, Brevard Community College

and Rollins College Th omas Craven, York College of Pennsylvania Paul Croitoru, Wilbur Wright College Joseph DeFilippe, Suff olk County Community College Michael Drafke, College of DuPage Cassandra Elrod, Missouri University of Science

and Technology Raymond Gibney, Penn State Terry Girdon, Pennsylvania College of Technology Nathan Himelstein, Essex County College Peter Holland, Napa Valley College David Jalajas, Long Island University Susan Kowalewski, D’Youville College Emilio Lopez, Eastfi eld College Denise Lorenz, Wake Technical Community College

William Martello, St. Edward’s University Catherine Michael, St. Edward’s University Larry Michaelsen, University of Central Missouri Elouise Mintz, Saint Louis University Susan Monaco, Molloy College Diane Nelson, Washington State University Lizzie Ngwenya-Scoburgh, University of Cincinnati Lisa Nieman, Indiana Wesleyan University John Okpara, Bloomsburg University of

Pennsylvania Nicholas Peppes, St. Louis Community College David Ruderman, University of Colorado Denver Mike Shaner, Saint Louis University Sarah Shepler, Ivy Tech Marc Siegall, California State University Lisa Slevitch, Oklahoma State University Paul Smith, Missouri University of Science and

Technology Andrea Smith-Hunter, Siena College Ann Snell, Tulane University Marguerite Teubner, Nassau Community College Ronald Th omas, Oakton Community College Itoe Valentine, Albany Technical College Tim Waid, University of Missouri Dennis Williams, Pennsylvania College of

Technology

Focus Group Participants

Elsa Anaya, Palo Alto College Harry Bernstein, Essex County College Kenneth Harris, Indiana University Southeast Th omas Mobley, Miami University Middletown Miles Smayling, Minnesota State University Laurie Taylor-Hamm, California State University

Darrell Coleman, University of Utah Randy Kidd, Longview Community College David Wilhelm, Metropolitan Community College Xia Zhao, California State University Mitch Zimmer, Penn State

Principles of Management Summit Attendees

Bob Eliason, James Madison University Michael Gordon, Rutgers University Harrychand Kalicharan, University of Maryland

University College Nathan Oliver, University of Alabama

Paul Salada, Fayetteville Tech Community College Trent Salvaggio, College of Charleston Jeremy Staff ord, University of North Alabama Alice Stewart, North Carolina A&T University Charlotte Sutton, Auburn University

Academic Advisory Board

Dean Cleavenger, University of Central Florida William Furrell, Moorpark College Melanie Hilburn, Lonestar College Nathan Himelstein, Essex County College Moronke Oke, Grand Canyon Unive rsity

Paul Salada, Fayetteville Tech Community College Mike Shaner, St. Louis University Marc Siegall, California State University Tim Waid, University of Missouri Sheila Webber, Suff olk University

Private Industry Advisory Board

Robert Adler, Terrapin Management Timothy Beres, CNA

Anthony Beverina, Digital Sandbox Bobby Christian, Impact Enterprises

FMPref.indd xviii 21/08/13 12:31 AM

Acknowledgments xix

Kim Drumgo, Blue Cross Blue Shield Jim Flowers, VT KnowledgeWorks Pat Horner, E5 Systems Chuck Jones, Th undermist Community Centers Ken Kovach, B. F. Saul Company Cathy Lanier, Metropolitan Police Department

Washington DC

Camye Mackey, B. F. Saul Company Hotel Division David Makarsky, Gold Key/PHR

Patrick Matthews, Rackspace John McCann, Partners in Performance Donald Norris, Ph.D., Strategic Initiatives Richard Rodgers, Resource Network Scott Shilling, E5 Systems Keith Smith, Riverside Health Long-Term Division Ric Stroup, E5 Systems Michael Woodhead, Gold Key/PHR

Independent Industry Reviewers

David Attardi, Jennifer Barton, Frank Beamer, Timothy Beres, Anthony Beverina, Kimberly Carlson, Ph.D., Bobby Christian, Candice Clemenz, Ph.D., Alex Coburn, Chuck DeSantis, Melanie Flagg, Jim Flowers, Christine Gilmore, Joan Hirt, Pat Horner, Ph.D., Jack Kimbell, Benjamin Knapp, Ph.D., Cathy Lanier, Craig Lambert, Camye Mackey, David Makarsky, James Martin, Ph.D., Nancy Martini, Patrick Matthews, John McCann, Patrick McCarthy, Amy McNally, Joe W. Meredith, Ph.D., Jeff ery Mitchell, Donald Norris, Ph.D., Steve Picarde, Jr., Richard Rodgers, Peggy Fang Roe, Steven Schneider, Starr Shafer, Ph.D., Scott Shilling, Th omas Snediker, Ric Stroup, Joel Williams, Ph.D., and Christopher Zobel, Ph.D.

FMPref.indd xix 21/08/13 12:31 AM

xx

Brief Conten ts

PART ONE: Introduction Chapter 1: Management in the 21st Century 2

Chapter 2: The Evolution of Management 30

PART TWO: Sustaining: A Balanced Approach to Management Chapter 3: Critical Thinking for Managers 56

Chapter 4: Organizations and Change Management 84

Chapter 5: Diversity in a Global Economy 116

Chapter 6: Ethics and Social Responsibility 142

PART THREE: Planning Chapter 7: Making Better Decisions 168

Chapter 8: Setting Goals 200

Chapter 9: Designing Strategies 226

PART FOUR : Organizing Chapter 10: Structuring Organizations 254

Chapter 11: The Human Side of Management 274

Chapter 12: Managing Team Performance 300

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xxiBrief Contents

PART FIVE: Leading Chapter 13: Managers as Leaders 324

Chapter 14: Understanding Individual Behavior 350

Chapter 15: Communicating and Motivating Others 372

PART SIX: Controlling Chapter 16: Information and Operations 398

Chapter 17: Performance Development 416

PART SEVEN: The Future of Management Chapter 18: Entrepreneurship and Innovation 438

CASE STUDIES 461

GLOSSARY 482

ENDNOTES 493

NAME INDEX 521

SUBJECT INDEX 523

ORGANIZATION INDEX 537

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xxii

Contents

Introduction

1 | Management in the 21st Century 2 Introduction 4

1.1 What Is Management? 6

Voices of Management: Mark Price 6

What Do Managers Do? 7 How Is Management Both an Art and a Science? 8 How Do Managers Make a Difference? 8

1.2 The Four Management Functions 10

Planning 10 Organizing 11 Leading 11 Controlling 12

1.3 Sustaining: A Balanced Approach to Management 13

1.4 Management Roles 14

1.5 Managers at Work 15

Types of Organizations 15 Types of Managers 17

PART ONE

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Contents xxiii

1.6 Values, Mission, and Vision 17

1.7 Successful Management 20

Skills 20 Strengths 21

ADDITIONAL RESOURCES 24

Key Terms 24 In Review 25 Self-Test 25 Chapter Exercises 26 Answer Keys 29

2 | The Evolution of Management 30 2.1 The Historical Foundations of Management 32

Wealth of a Nation 33 The Corporation 33

2.2 Discovering and Teaching Management Theory 33

Bureaucratic Management: Max Weber 33 Administrative Management: Henri Fayol 35

2.3 The Quantitative Approach 37

Scientifi c Management: Frederick W. Taylor 37 Motion Studies: Frank B. Gilbreth 39 Scientifi c Management and the Mind: Lillian M. Gilbreth 40 Visualizing Management: Henry Gantt 40 Quality Movement 42

2.4 The Humanistic Approach 43

Hawthorne Studies 44 Confl ict: Mary Parker Follett 45 Motivation: Douglas McGregor 47 Research @ Work: Theory Y in Practice 48

2.5 The Balanced Approach 48

Cooperation: Chester I. Barnard 49 Systems: Jay W. Forrester 49

ADDITIONAL RESOURCES 51

Key Terms 51 In Review 51 Self-Test 52 Chapter Exercise 53 Self-Assessment 53 Self-Test Answer Key 54

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Contentsxxiv

PART TWO Sustaining: A Balanced Approach to Management

3 | Critical Thinking for Managers 56 3.1 How Managers Apply Critical Thinking to Make a Difference 58

Voices of Management: Michael Woodhead 59

3.2 Seeing Systems with Diagrams 60

Stock and Flow Diagrams 60 Behavior Over Time (BOT) Diagrams 61

3.3 Systems Behaviors and Feedback Loops 63

Systems Behavior 64

3.4 Analyzing Systems and Knowing What to Change 66

Causal Loops 67 Building a Culture of Change 67

3.5 Common Systems Patterns 68

Senge’s Eight Archetypes 69

ADDITIONAL RESOURCES 80

Key Terms 80 In Review 80 Self-Test 81 Chapter Exercise 82 Self-Assessment 82 Self-Test Answer Keys 82 Self-Assessment Answer Key 83

4 | Organizations and Change Management 84 Introduction 86

ManagementStory: Featuring Katy Johnson, Fred Arters, and Lisa Fang 86

Internal and External Environments 86

4.1 Internal Environment 87

Culture and Its Characteristics 87 Slogans, Stories, and Symbols 88 Rituals and Ceremonies 89 Heroes 89

4.2 External Environments 90

4.3 Specifi c Environment 91

Customers 91 Talent 92 Advocacy 93 Suppliers 94 Regulation 94 Competitors 96 Voices of Management: Jean-Francois Zobrist 97

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Contents xxv

4.4 General Environment 97

Politics and Laws 97 Resources 99 Technology 101 Sociocultural Forces 102 Economy 102

4.5 How Do Managers Change Organizations? 105

Resistance to Change 106 The Art of Persuasion 107 Driving and Restraining Forces 107 Stages of Change 108 Leading Change 108 Research @ Work: Implementing Change 110

ADDITIONAL RESOURCES 112

Key Terms 112 In Review 113 Self-Test 113 Chapter Exercise 114 Self-Assessment 114 Self-Test Answer Key 115

5 | Diversity in a Global Economy 116 5.1 Managing in a Global Economy 118

Global Organizations, Trade Rules, and Agreements 119 Strategic Partnerships 119 Applying Critical Thinking: Success to the Successful 120

5.2 Cultural Differences 121

Cultural Values and Dynamics 121 Dimensions of Culture 121 Approaches to Cultural Differences 124

5.3 Legal Basics for Managing Diversity 125

Voices of Management: Ursula Burns 126

Research @ Work: Trust 127

5.4 Talent in a Diverse Workforce 129

Changing Workforce Demographics 129 Outsourcing and Offshoring Talent 130

5.5 Managing Diversity as an Advantage 132

“One Recipe, Many Ingredients” 132 Diversity as a Strategy 133 How Diversity Affects Creativity, Innovation, and Performance 133 Fostering Diversity 134 Applying Critical Thinking: Fixes That Fail 135

ADDITIONAL RESOURCES 138

Key Terms 138 In Review 139

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Contentsxxvi

Self-Test 139 Chapter Exercise 140 Self-Assessment 140 Self-Test Answer Key 141

6 | Ethics and Social Responsibility 142 6.1 What Are Ethics? 144

Individuals 145 Organizations 146 Stakeholders 147 Applying Critical Thinking: Escalation 149

Governments 149 The Globe 150

6.2 Making Ethical Decisions 151

Principles of Ethics 152 Codes of Conduct 153 Voices of Management: Lonnie J. Williams 153

6.3 Social Responsibility 154

Corporate Social Responsibility 155 Research @ Work: Internal Transparency 156

6.4 How Does Social Responsibility Pay Off? 157

Social Investing 157

6.5 Managing Responsibly Today 158

Internalizing Externalities 158 Building an Ethical Culture 158 Ethics Training 159 In the Interests of Self or Others? 161

ADDITIONAL RESOURCES 163

Key Terms 163 In Review 164 Self-Test 164 Chapter Exercise 165 Self-Assessment 166 Self-Test Answer Key 166

Planning

7 | Making Better Decisions 168 7.1 Decisions That Make a Difference 170

Manager Profi le: David J. Makarsky 170

ManagementStory: Featuring Chris Heppler 171

Types of Decision Making 171

PART THREE

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Contents xxvii

7.2 Identifying and Understanding the Problem 173

Symptomatic Effects 174 Voices of Management: Bob Adler 174

Underlying Causes 175 Research @ Work: Effective Intuition 178

7.3 Generating Alternatives 182

7.4 Evaluating Alternatives 184

7.5 Path Selection 186

7.6 Implementation 188

7.7 Feedback and Results 188

ADDITIONAL RESOURCES 193

Key Terms 193 In Review 194 Self-Test 195 Chapter Exercise 196 Self-Assessment 197 Self-Test Answer Key 198

8 | Setting Goals 200 8.1 Setting Goals That Make a Difference 202

ManagementStory: Featuring Chris Heppler 203

Applying Critical Thinking: S.M.A.R.T. Goals 204

Research @ Work: Increasing Productivity 206

When Goals Go Wrong 207 Applying Critical Thinking: “The Boiled Frog” 208

8.2 Goal Plans 209

Principles of Goal Setting 209 Goal Plan Types and Components 211

8.3 Effective Goals 213

Types of Goals 213

8.4 Team Commitment 215

Management by Objectives (MBO) 217

8.5 Individual Performance 217

Action Plans 217

8.6 How Managers Track Progress 218

Performance Dashboards 218

ADDITIONAL RESOURCES 221

Key Terms 221 In Review 222 Self-Test 223 Chapter Exercise 223 Self-Assessment 224 Self-Test Answer Key 224

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Contentsxxviii

9 | Designing Strategies 226 9.1 How Managers Plan to Make a Difference 228

ManagementStory: Featuring Chris Heppler 228

9.2 Different Levels of Strategy 230

9.3 Organizational Strategies 231

9.4 Industry and Competitive Analysis 232

Voices of Management: Akhil Jain 233

Five Forces Model 233

9.5 Organizational Position and Capacity 237

Company Position 237 Capabilities and Resources 240

9.6 Divisional and Functional Strategies 243

Research @ Work: Seeing the Balanced Scorecard 244

9.7 Strategies for Performance 245

ADDITIONAL RESOURCES 248

Key Terms 248 In Review 249 Self-Test 250 Chapter Exercises 250 Self-Assessment 251 Self-Test Answer Key 251

Organizing

10 | Structuring Organizations 254 10.1 The Basics 256

Designing Performance Cultures 256 ManagementStory: Featuring Robin Richardson 258

10.2 Vertical Approach 259

Vertical Model at Work 261 Changing Organizational Structure 262

10.3 Horizontal Approach 264

Researching Organizational Structures 264

10.4 Adaptive Approach 267

10.5 Beyond the Organization: Free Agents and Virtual Teams 268

Voices of Management: Ken Lancaster 268

ADDITIONAL RESOURCES 270

Key Terms 270 In Review 271 Self-Test 271 Chapter Exercises 272

PART FOUR

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Contents xxix

Self-Assessment 272 Self-Test Answer Key 273

11 | The Human Side of Management 274 11.1 Human Resource Management 276

Making the Human Side of Management Strategic 277 ManagementStory: Featuring Robin Richardson 279

11.2 Identifying Talent 279

Defi ning and Planning Human Resource Needs 280 Internal and External Recruiting 282 Interviewing Potential Candidates 285 Selecting Candidates 287

11.3 Training Talent 287

Onboarding Programs 287 Types of Training Strategies 288

11.4 Retaining Qualifi ed Talent 289

Planned and Unplanned Turnover 290 Pay and Benefi ts 290 Employee Engagement 290 Research @ Work: Engaging Employees 291

11.5 Performance Development 291

Designing Appraisals 292 Assessing Behaviors and Results 293

ADDITIONAL RESOURCES 294

Key Terms 294 In Review 295 Self-Test 295 Chapter Exercise 296 Self-Assessment 298 Self-Test Answer Key 299

12 | Managing Team Performance 300 12.1 How Teams Make a Difference 302

The Power of Teams 303 ManagementStory: Featuring Robin Richardson 303

12.2 Team Characteristics 304

Different Types 304 Size and Roles 307

12.3 Team Dynamics 308

Forming—Storming—Norming—Performing 308 ManagementStory: Featuring Robin Richardson 309

Research @ Work: Too Much of a Good Thing? Team Cohesion and Groupthink 310

12.4 Managing Confl ict 311

Addressing Unhealthy Confl ict 312 Encouraging Productive Confl ict 312

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Contentsxxx

12.5 Strategies to Increase Performance 315

Effective Meetings 316 Performance Development 316 Recognizing Excellence 316

ADDITIONAL RESOURCES 318

Key Terms 318 In Review 319 Self-Test 319 Chapter Exercise 320 Self-Assessment 320 Self-Test Answer Key 321

Leading

13 | Managers as Leaders 324 13.1 Managers as Leaders 326

Voices of Management: Kelly Flatley 327

Leadership in a Global Economy 328 ManagementStory: Featuring Julian Wales 328

13.2 How Leaders Gain Authority 329

Positional Power 329 Personal Power 329

13.3 Types of Leaders 330

Applying the Leadership Typology 331

13.4 The Evolution of Leadership 332

The Trait Perspective 332 The Behavioral Perspective 334 The Contingency Perspective 336 Contemporary Perspectives 341

13.5 Beyond Traditional Leadership 342

Research @ Work: Combat Training for Business Leaders 344

ADDITIONAL RESOURCES 345

Key Terms 345 In Review 346 Self-Test 346 Chapter Exercise 347 Self-Assessment 348 Self-Test Answer Key 349

14 | Understanding Individual Behavior 350 14.1 How Individuals Make a Difference 352

The Power of Perception and a Positive Approach 354 ManagementStory: Featuring Julian Wales 355

PART FIVE

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Contents xxxi

14.2 Personalities and Strengths 356

“Big Five” Personality Traits 357 Research @ Work: The Big Five Personality Traits and Job Performance 358

Focusing on Strengths 360

14.3 Attitudes and Belief Systems 361

Co-aligning with Organizational Values 362

14.4 Stress, Deviance, and Dysfunctional Behavior 363

Managing Stress 363 Preventing Destructive Behavior 364

14.5 Positive Deviance and Performance 365

Purposeful Thinking and Change Management 366

ADDITIONAL RESOURCES 367

Key Terms 367 In Review 368 Self-Test 368 Chapter Exercise 369 Self-Assessment 370 Self-Test Answer Key 371

15 | Communicating and Motivating Others 372 15.1 How Managers Achieve Great Results with Others 374

Maslow’s Hierarchy of Needs 375 ERG Theory of Motivation 375 Two-Factor Theory of Motivation 375 ManagementStory: Featuring Julian Wales 376

15.2 Communicating with Others 377

Process of Communication 377 Communication Networks 381 Increasing Effi ciency and Effectiveness 382

15.3 Power of Challenging Work 383

Shifting the Burden 384 Expectancy Theory 384 Goal-Setting Theory 385

15.4 Reinforcing Positive Behaviors 386

Behavior Modifi cation 387 Empowering Others 387

15.5 Rewarding Performance 388

Executive Compensation 388 Research @ Work: Equity Theory, Status, and Employee Theft 389

Equity, Gainsharing, and Cooperatives 389

ADDITIONAL RESOURCES 392

Key Terms 392 In Review 393 Self-Test 393 Chapter Exercise 394

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Contentsxxxii

Self-Assessment 396 Self-Test Answer Key 396

Controlling

16 | Information and Operations 398 16.1 How Controls Make a Difference 400

Voices of Management: Don Hardenbrook 401

Types of Controls 401

16.2 Information, Technology, and Systems 402

ManagementStory: Featuring Spencer Jones 402

Types of Information 403 Organizing Information Using Technology and Systems 403

16.3 Management Information Systems 404

16.4 Information and Controls for Operations 406

Types of Controls 406 Research @ Work: Hotspotting 407

Infl uencing Behavior Using Information and Controls 408

16.5 Managing Operational Performance with Controls 409

ADDITIONAL RESOURCES 413

Key Terms 413 In Review 413 Self-Test 414 Chapter Exercise 415 Self-Assessment 415 Self-Test Answer Key 415

17 | Performance Development 416 17.1 How Performance Development Makes a Difference 418

Connecting Space, Process, and People 418 ManagementStory: Featuring Spencer Jones 418

17.2 Physical Space and Facilities Management 421

Facilities Layout 421 Research @ Work: The Apple Store Effect 422

Technologies and Automation 423 Managing a Facility 423

17.3 Processes for Making Quality Products and Services 423

Lean Manufacturing 423 Purchasing and Inventory Management 424 Supply Chain Management 424

17.4 Achieving Results through Talent Management 427

Dynamic Steering 427 Continuously Evolving Facilities and Processes 427

PART SIX

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Contents xxxiii

17.5 Managing for Excellence 431

Total Quality Management (TQM) 431 Six Sigma 432 Malcolm Baldrige Award 432

ADDITIONAL RESOURCES 433

Key Terms 433 In Review 434 Self-Test 434 Chapter Exercise 435 Self-Assessment 436 Self-Test Answer Key 436

The Future of Management

18 | Entrepreneurship and Innovation 438 18.1 How Entrepreneurship Makes a Difference 440

Voices of Management: Nesha Sanghavi 441

People, Processes, and the Ecosystem 442 ManagementStory: Featuring Katy Johnson, Fred Arters, and Lisa Fang 443

18.2 Opportunities and Challenges That Entrepreneurs Face 444

Growth Accelerants 444 Challenges to Growth 445 Opportunities and Risks for New Ventures 446

18.3 Managing and Leading New Ventures 449

Different Strategies for New Ventures 449

18.4 Managing the Creative Process 450

The Discipline of Creativity 451 Research @ Work: Q-Levels and Teams 453

18.5 Global Entrepreneurship and Innovation 454

The Great 21st-Century Opportunity 455

ADDITIONAL RESOURCES 457

Key Terms 457 In Review 458 Self-Test 458 Chapter Exercise 459 Self-Assessment 460 Self-Test Answer Key 460

CASE STUDIES 461

GLOSSARY 482

PART SEVEN

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Contentsxxxiv

ENDNOTES 493

NAME INDEX 521

SUBJECT INDEX 523

ORGANIZATION INDEX 537

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1

One Part

Chapter 1 | Management in the 21st Century

Chapter 2 | The Evolution of Management

Introduction

c01Managementinthe21stCentury.indd 1 20/08/13 6:19 PM

2

Management in

the 21st Cent ury

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c01Managementinthe21stCentury.indd 2 20/08/13 6:19 PM

C H A P T E R O U T L I N EC H A P T E R O U T L I N E

3

Learning Objectives

Introduction 1.1 | What Is Management?

VOICES OF MANAGEMENT: Mark Price What Do Managers Do? How Is Management Both an Art and a Science? How Do Managers Make a Diff erence?

1.1 | Defi ne management.

1.2 | The Four Management Functions Planning Organizing Leading Controlling

1.2 | Describe a manager’s four major tasks: planning, organizing, leading, and controlling.

1.3 | Sustaining: A Balanced Approach to Management

1.3 | Describe sustaining as a balanced approach to management.

1.4 | Management Roles 1.4 | Correlate managers’ tasks with the organizational roles that they play.

1.5 | Managers at Work Types of Organizations Types of Managers

1.5 | Compare and contrast diff erent types of organizations, managers, and the decisions they make.

1.6 | Values, Mission, and Vision 1.6 | Explain the purpose of organizational values, mission, and vision.

1.7 | Successful Management Skills Strengths

1.7 | Demonstrate how focusing on skills and strengths leads to success as a manager.leads to success as a manager.

Key Terms

In Review

Self-Test

Chapter Exe rcises

Answer Key s

Additional Resources

By the end of the chapter, you will be able to:

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c01Managementinthe21stCentury.indd 3 20/08/13 6:19 PM

Chapter One Management in the 21st Century4

Introduction Th ere is one light bulb inside a room. You are outside the room and unable to see if

the light is on or off . In front of you, there are three switches, all of them set to an “off ”

position. Your challenge is to fi nd out which of the three switches controls the light bulb

inside the room—yet you are permitted to enter the room only once. How do you fi gure

out which switch controls the light bulb?

What skills do you think you would need to solve this riddle? To solve the riddle, we need to adopt a new way of thinking that allows us to delve deeper beneath the surface and fi nd the most rational solution. Th is is called critical thinking , which is the ability to diagnose situations and predict patterns of behaviors, which result in better decision making. While there are a plethora of critical thinking defi nitions out there, most if not all include the ability of a person to use his or her intelligence, knowledge and skills to question and carefully explore situations to arrive at thoughtful conclusions based on evidence and rea- son. A critical thinker is able to put aside biases and view situations from diff erent perspec- tives to ultimately improve his or her understanding of the world.1 Let’s return to the above mentioned riddle. Using our critical thinking skills here involves asking the right questions, evaluating the information provided, gathering evidence, and drawing from our reasoning and existing knowledge to reach an objective and logical solu- tion. When we follow this process, we have a greater chance of solving the puzzle. So what’s the answer? Turn two of the switches on and leave one switch off , and wait about a minute.

Th en, turn one switch from on to off . Enter the room and feel the light bulb. If the bulb is lit, then it is controlled by the switch you left on, obviously. If the bulb is warm but unlit, then you can deduce that it is controlled by the last switch you turned off . If the bulb is cold and unlit, then it is the switch that you left in the off position the whole time.2 Yet, critical thinking is not simply good for solving riddles; it can be applied to every facet of daily life, from trying to solve a math problem to assessing whether a job is right for you. In today’s workplace, it is fast be- coming one of the most important skills that employers look for in 21st- century managers. Why is critical thinking important? A multitude of research shows that critical thinkers will enjoy more success in education, the workplace, and life in general because the more we can critically think, the more we can handle diffi cult situations and make the right decisions. Th e following data supports the impact of critical thinking in the workplace:

1. When more than 400 senior human resources (HR) professionals were asked in a survey to name the most important skill their employees will need in the next fi ve years, critical thinking ranked the highest— beating out innovation and information technology.3 ©

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Critical thinking The ability to diagnose situations and predict patterns of behaviors, which result in better decision making.

Introductionnnn Th ere is one light bulb inside a room. You

the light is on or off . In front of you, there

position. Your challenge is to fi nd out wh

inside the room—yet you are permitted t

out which switch controls the light bulb?

What skills do you think you would need t to adopt a new way of thinking that allows the most rational solution. Th is is called cr situations and predict patterns of behaviors While there are a plethora of critical thin the ability of a person to use his or her int

Critical thinkikikiingngngng The ability to diagnose situations and predict patterns of behaviors, which result in better decision making.

c01Managementinthe21stCentury.indd 4 20/08/13 6:19 PM

5Introduction

2. Senior executive-development professionals report that future leaders are lacking chiefl y in strategic thinking skills—which are closely related to critical thinking skills.4

3. A 2009 study by Ones and Dilchert found that the most successful senior executives (compared to the less successful ones) scored higher on critical thinking skills.5

So, why are critical thinking skills so important for today’s managers? Th e process of globalization brings about many new challenges for managers who need to adapt quickly and meet customer and market expectations. Managers in the 21st century recognize that decisions have complex cause and eff ects, and that they need to think critically by asking the right questions and suspending judgment or bias to solve problems. Some of the main challenges facing managers today are dealing with a fl uctuating and uncertain economic climate, keeping up with the latest technological developments, identifying and hiring tal- ent, keeping up with (and staying ahead of) the competition, managing diversity, and adapt- ing to an ever-changing company culture. Managers have a multitude of decisions to make every day, and each of them must be made carefully to ensure a successful outcome. Critical thinking will help managers make the best choices for their companies; their roles involve the need to evaluate, analyze, and conceptualize information constantly to reach a clear un- derstanding of the organization within which they are working. Successful managers apply their skills and strengths to diagnose and anticipate the consequences of their decisions. Th ese judgment calls aff ect the performance of an organization; but equally important, these actions determine outcomes for both internal and external environments. Given this contention that critical thinking is essential to our managerial lives, the ques- tion that arises is, how do we learn to think critically? Critical thinking is both a concept and a process. Conceptually, critical refers to impor- tance and thinking to analysis. Managers with strong critical thinking skills know what chal- lenges and opportunities are important to spend time analyzing. One of the main roles of managers is to prioritize their time and resources to solve problems as they are happening and prevent similar problems from occurring in the future. Th e process of critical thinking will provide you with the tools to visualize the many forces aff ecting any given business situation and how your decisions as a manager may have eff ects beyond the immediate situation. Th ese forces change human, material, and informa- tion behaviors. Th e generally accepted critical thinking methodology addresses this in seven steps (Figure 1-1 ): observe (recognize the behavior), interpret (understand the cause and eff ects of be- havior), analyze (investigate the causes and eff ects of behavior), infer (propose paths to change behavior), evaluate (assess the consequences of changing behavior), explain (justify a change to behavior), and meta-think (consider the process used to propose this behavior change).6

Figure 1-1 Seven Steps to Changing Behavior with Critical Thinking Managers follow the seven steps of critical thinking, which include analyzing, observing, and evaluating, to initiate behavioral change.

Interpret

ObserveMeta-Think

Analyze

Infer

Behavior Change

Evaluate

Explain

c01Managementinthe21stCentury.indd 5 20/08/13 6:20 PM

Chapter One Management in the 21st Century6

For example, suppose that you are an HR manager specializing in employee relations. One day, a member of the company staff comes to you and accuses another employee of bully- ing. As you don’t have all the facts, you must use critical thinking skills to investigate the real source of the problem. First, it is important to observe the situation objectively, suspending all bias and judgment. You might begin by conducting fact-fi nding interviews with other mem- bers of the staff to assess the level of bullying and take people’s statements. Th is will help you to interpret the causes and eff ects of the bullying behavior on other employees. If you fi nd suffi cient evidence to establish that bullying is taking place in the workplace, then you might analyze these eff ects and infer a way to deal with the behavior. You could fi re the bully, but what if this particular employee is excellent at his job? Maybe his absence would severely af- fect the rest of the team’s performance. In such a case, you might evaluate the situation and assess the consequences of trying to change his behavior. You might explain to your boss why you believe that an attempt to change the behavior might be justifi ed. Finally, you will need to meta-think by devising a process to instigate this behavior change. One option might include arranging a meeting with the accuser and the person suspected of bullying to see if some sort of resolution could be reached. Th ere are many outcomes that could arise from this situation, and critical thinking will help you to fi nd the most appropriate solution. Over the course of this book, we will explore situations that are inspired by actual events. By the end, you will be able to recognize problematic symptoms, diagnose situations, rec- ommend alternative paths, and make better choices using critical thinking tools. In the sec- tions that cover each of the four management functions, stories span multiple chapters, off ering you the chance to fully immerse yourself in situations that accurately refl ect the complexity of real life and address challenges that you will fi nd in the workplace.

1.1 | WHAT IS MANAGEMENT?

1.1 | Defi ne management.

Management is the process of working with people and distributing an organization’s resources to achieve goals effi ciently and eff ectively. Mark Price, CEO of Firewire Surf- boards, consulted with a lot of people when deciding how to use the company’s resources

W hen I started with Firewire Surfboards, we had a small team with big, global dreams—to make the highest performance surfboard in the world using environmentally friendly materials. With this goal in front of us, our team came up with a way to get the best surfers in the world to just ride our boards one time and give us their feedback. They loved the product. One of the top surfers in the world starting surfi ng [with] our board, and we caught the biggest wave of our lives. Sure, there were some tough times, but the team stayed motivated, and last year, our sales exceeded $1 million for the fi rst time. It is great to fi nally be making good money, but the most fulfi lling thing I have done in my life is to work with this team to raise awareness for the environment. We all feel like we are preserving the oceans and the sport we love so much.

Company Profi le

Name: Firewire Surfboards

Founded: 2005 in Australia

Owner: Gordon “Grubby” Clark

Company Story: Firewire Surfboards uses “Future Shapes Technology” when designing surfboards. Materials such as parabolic balsa (a lightweight wood) are used to add strength and fl exibility to the board. Mark Price states: “Our company was founded by surfers, and our daily effort is driven by and centered around the act of going surfi ng. We’re stoked on what we’ve been able to accomplish in an incredibly short space of time and look forward to the Future of Shape.”

Fun Facts: The Firewire philosophy features, “unortho- dox and high-tech materials such as bamboo and car- bon . . . and the fact that [the company] has developed a high-capacity computer-aided process that includes environmentally friendly lamination. The result is a featherweight product that suggests new ways of riding waves.” ■

Voices ofManagement Mark Price, CEO, Firewire Surfboards7

Management The process of working with people and distributing an organization’s resources to achieve goals effi ciently and effectively.

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71.1 | WHAT IS MANAGEMENT?

and successfully launch its new surfboard worldwide. Firewire achieved this goal by building a loyal team that came together during the tough times, running a fi nancially healthy company that created jobs, protecting the environment by using renewable mate- rials in their manufacturing process, and launching an innovative and direct appeal to customers.8 In this textbook, you’ll learn and practice the critical skills that managers need to build and maintain healthy and sustainable organizations. Successful managers who understand and appropriately apply management principles can create positive change for people both inside and outside their organizations. Th ese principles are constantly evolving to better meet the four things every organization needs to be successful: 1) access to resources— primarily money and talent, 2) eff ective leaders, 3) competent employees, and 4) interested consumers or advocates.9 (Figure 1-2 ) To demonstrate the diff erence that managers can make in building and sustaining suc- cessful organizations, we’ll present managers and leaders who work in a variety of compa- nies, as well as the people who work with them. Th eir challenges and successes, and the lessons they’ve learned from their careers, will introduce you to many diff erent types of orga- nizations and management styles. But most important, you’ll gain an understanding of what managers do and how they help their organizations achieve their goals.

What Do Managers Do? Every type of company needs managers—from scheduling fi lm crews for a Hollywood movie to deciding who should be promoted to run a new Citibank branch offi ce in Hong Kong, managers have a pivotal role in ensuring that decisions are made. Managers might conduct a web demonstration of the company’s latest cell phone or choose which video games to put into production for next season. Th ey might set up a conference to sell existing clients on the latest iPhone application or instruct volunteers on how to clean up a contaminated waterway. What would a day look like for one of these managers? Since we’ve already met him, let’s take a look at a day in the life of Mark Price. Mark Price’s day is typical for a manager. He has a great deal of information to com- municate, feedback to gather, decisions to make, meetings to host with clients, and moti- vation to off er the team. Price might begin his day surfi ng with the director of marketing and get to the offi ce just before 9:00 a.m. But don’t let the casual start to his workday fool you. His day quickly gets busy, and it usually includes six to nine meetings, calls to regional sales teams, web demos for new customers, a tour of a manufacturing facility, and a review of designs for next year’s product off ering. Th is sounds like a lot to fi t into a workday, doesn’t it? Managers are always busy, as many people rely on their feedback, perspectives, and decisions to complete their own daily tasks. As you will learn in this book, managers’ activities are both people-focused and technically focused. Th eir tasks fall into four main

Figure 1-2 Success Factors for Organizations Organizations need four main factors to be successful, including access to resources and effective leadership.

Access to Resources +

Effective Leadership +

Competent Team +

Interested Consumers and Advocates

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Chapter One Management in the 21st Century8

categories which will be discussed a little later in this chapter: planning, organizing, lead- ing, and controlling.

How Is Management Both an Art and a Science? Managers collaborate and communicate with their team to pursue a goal. Th is task could include setting up and leading monthly sales meetings to look at progress, organizing and hosting a celebration for an employee who has completed 10 years of service, or presenting the company’s quarterly results to the media. We often describe this people-focused side of a manager’s duties as the “art of management.” Another side of the management job is equally exciting but more technical. Tasks in this category might include testing a new manufacturing process to reduce energy costs at a plant, using an online program to track employees’ progress on developing a new product, or reviewing customer feedback to decide whether to continue providing a service that is losing money. In general, we can think of these more technical activities as the “science of management.” Of course, as Figure 1-3 demonstrates, eff ective managers must balance the people-focused and technical sides of their jobs.10 But managers don’t just get things done. Th ey have a unique opportunity to make a dif- ference in organizations, communities, and people’s lives. Th is is not a new phenomenon, but a long tradition that began over 100 years ago. Consider Ford Motor Company, known throughout its long history for its innovation of interchangeable parts, assembly-line tech- niques, and automobile mass production. On January 5, 1914, the company announced its plan to give $10 million to 26,000 employees in a profi t-sharing program in recognition of the commitment made by its employees when the company began to run its plant 24 hours a day. Th e company released the following statement: “It is our belief that social justice begins at home. We want those who have helped us to produce this great institution and are help- ing maintain it to share our prosperity.”11 Managers have the ability to make a diff erence, not only within the boundaries of the company itself but within the lives of their employees.

How Do Managers Make a Difference? Increasingly, managers focus on more than just profi ts. Instead, they look at how their prac- tices aff ect their triple bottom line, defi ned as the “3 P’s”: people, profi t, and planet.12 Taking a balanced approach to these three areas has yielded great results by enabling companies to recruit happy and talented employees, increase revenue, create new jobs, and attract new cus- tomers. One company that has successfully adopted this approach is Patagonia, a fi rm head- quartered in Ventura, California, that was originally founded in 1965 to sell mountain-climbing

Figure 1-3 The Art and Science of Management Management can be both people-focused (art) and technical (science).

• Collaborating • Communicating • Presenting • Leading meetings • Building relationships • Celebrating • Handling conflict • Motivating • Negotiating

• Observing • Gathering data • Analyzing data • Tracking goals • Modeling budgets • Refining processes • Reviewing feedback • Collecting figures • Processing • Documenting

Art Science

c01Managementinthe21stCentury.indd 8 20/08/13 6:20 PM

9

equipment, but expanded its products to clothing for outdoor enthusiasts in the 1970s.13 Th e chief executive offi cer (CEO), Yvon Chouinard, the top manager in the organization, has estab- lished a very high standard for making a diff erence. Let’s take a look at how Chouinard applies the 3 P’s to Patagonia, in order to “cause the least harm while doing business.”14

People How would you like a job where you could set your own work schedule, based on your passions and interests? Want to go mountain climbing on pretty days in the fall, or go skiing after a perfect snow? Th is is exactly what Patagonia asks its employees to do. Why? Because Chouinard knows that happy, loyal employees who are also expert outdoors people off er customers better service and product recom- mendations. Th at is good business. Management can make a diff erence through people by investing in wellness pro- grams, training and education, retirement accounts, health- care benefi ts, career advancement opportunities, and fl exible environments where work is fun, engaging, meaningful, and productive. Patagonia even goes one step further. Any em- ployee can volunteer his or her time with an organization that supports environmental causes, and Patagonia will pay full salary and benefi ts for the duration.15 Clearly, if a company wants to make a diff erence, it must encourage and support its employees to make a diff erence for their community and the planet. A question worth asking here is, “Th is sounds great, but does it make good fi nancial sense? Can you actually make any money with this philosophy?” Let’s answer that next.

Profi t To make a diff erence through profi t , managers make sure that their company is fi nancially healthy so it can off er employees stable jobs, hire new college graduates, reward investors, and support local and global causes. We’ve established that Patagonia is a fun place to work that encourages its employees to do good things for the planet, but this goal is possi- ble only if the company has the money to support its beliefs. Let’s look at Patagonia’s fi nancial health. By delivering reliable products that people want and carefully managing its resources, the company earns over $300 million in revenues a year and profi ts of about $30 million an- nually. Chouinard has committed 10 percent of Patagonia’s profi ts to fund grants to nonprofi t organizations focused on the environment, so that’s about $3 million each year. Of course, this all sounds remarkable, but now we may wonder: “Why is supporting or protecting the environment important to the health of the company? Isn’t that just a ’feel good’ thing to do?”

Planet It won’t surprise you that Chouinard doesn’t look at it that way. At Patagonia, pro- tecting and supporting the environment is about ensuring that the company will be around 100 years from now, along with people to buy its products. Focusing on the planet is actually broader than simply caring about the environment. To make a diff erence for the planet , com- panies must concentrate on communities and causes as well. Organizations do not operate in a vacuum. Th ey need vital local communities where their employees live, healthy towns where people can get services and goods from around the world, and clean, renewable re- sources to ensure that these communities can thrive over the long term. By working to protect communities, causes, and the environment, Patagonia’s manag- ers are yielding signifi cant value for the organization through increased employee morale, greater customer loyalty, and a positive public image. Consider this: Patagonia’s managers “contract out to mills and factories worldwide, [and] they select companies that share their values, including fair treatment of workers, and environmentally sound business practices.” Th is practice ensures that Chouinard’s business philosophy of making a dif- ference is carried out not just at Patagonia, but among its suppliers in communities all around the world. “Making a diff erence” or “doing well by doing good” is the fulfi llment of Corporate Social Responsibility (CSR) , an organization’s self-defi ned commitment to the health and well- being of the local and global community beyond its legal obligations. However, not every organization or manager agrees that companies should be strongly socially responsible. U.S. economist Milton Friedman (1912–2006) famously said that the only responsibility of

Corporate social responsibility An organization’s self-defi ned commitment to the health and well-being of the local and global community, beyond its legal obligation.

1.1 | WHAT IS MANAGEMENT?

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Chapter One Management in the 21st Century10

a for-profi t company is to maximize the amount of money it can make for the stockholders who own a piece of the fi rm.16 It was up to these individuals, then, to do good privately. What is the mainstream view of U.S. business? In 2007, more than 300 of the Financial Times Global 500 companies submitted CSR Reports.17 For Chouinard, the reason for report- ing the fi rm’s social responsibility was very clear: “Only those businesses operating with a sense of urgency . . . constantly evolving, open to diversity and new ways of doing things, are going to be here 100 years from now.” With 67 percent of global businesses wanting to ensure a healthier society, it appears that Patagonia is not alone in its quest. Managers that build sus- tainable organizations do so by balancing needs and results for people, profi t, and the planet.

1.2 | THE FOUR MANAGEMENT FUNCTIONS

1.2 | Describe a manager’s four major tasks: planning, organizing, leading, and controlling.

Whatever managers do and however they make a diff erence, we can categorize their actions by using four distinct management functions. Henri Fayol (1841–1925) a French mining engineer and management theorist in the early twentieth century, proposed that manag- ers had fi ve administrative functions: planning, organizing, commanding, coordinating, and controlling.18 In the 1970s, management writers streamlined these to four: planning, organizing, leading, and controlling. Since then, as work environments have evolved rapidly, managers’ roles have expanded, but those four functions are still relevant when describing the work and responsibilities of managers today. Th at said, managers today must embrace dramatic fl uctuations in the economy, tech- nology innovations, cultural dynamics in a global marketplace, and a changing workforce. Th e traditional view of management sees the management functions as separate steps in a linear process (Figure 1-4 ). Today, however, to ensure that organizations can respond quickly to change, managers need to see them as overlapping and interconnected. Why? To keep up with the speed of communication, production, and service, managers must often do all these functions simultaneously.

Planning Working toward a specifi c destination is imperative to being successful in business. Defi ning what the organization wants to achieve and how it will get there is called planning. Planning is the process of setting goals for the future, designing appropriate strategies, and deciding on the actions and resources needed to achieve success. Amazon.com, for instance, took

Figure 1-4 Management Functions: Traditional View vs. Today’s Approach Today’s approach to management takes a strikingly different tack from the traditional view of management functions.

Traditional Management Functions Model

VERSUS

Planning Organizing Leading Controlling

Planning Organizing

Leading Controlling

Goal Achievement

GOAL ACHIEVEMENT

Planning The process of setting goals for the future, designing strategies, and deciding on the actions and resources needed to achieve success.

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111.2 | THE FOUR MANAGEMENT FUNCTIONS

on a competitor, the giant low-price retailer Wal-Mart, by engaging in a price war for many consumer products.19 Organizational planning has evolved over time from a centralized activity performed only by a handful of top managers in the company to a process that starts with manage- ment’s clear sense of the company’s purpose, which it communicates directly to its cus- tomers, employees, and communities. When Howard Schultz founded Starbucks and began setting his goals for the company’s future, his purpose was to create a “third place” between home and work, where the customer’s experience was as important as the coff ee. With a direction this clear, the smaller goals and strategies he needed to achieve became obvious. Starbucks stores feature relaxing music, comfortable chairs, and warm, inviting interiors that are consistent (though not identical) across thousands of stores. But even a successful company like Starbucks, if it loses its commitment to these fundamentals, can begin to feel disconnected from its customers, employees, and communities.20 When Starbucks suff ered a decline in sales revenue, many won- dered why. Many believe that the company’s fi nancial losses were due to their pricing strategy. As Starbucks grew more successful, it had replaced some of its cheaper (yet popular) products with more expensive ones. Many customers questioned the higher prices they were paying for sandwiches, bagels, and coff ee, and simply went somewhere else. Starbucks tried to generate more revenue by sell- ing knick-knacks and promotional music. Eventually this strat- egy had the unintended consequence of obscuring the idea of the “third place” experience. How did Starbucks respond? Th e company rehired Schultz, who had retired as CEO, and began reinventing the customer experience, but with a plan very diff erent from the origi- nal one. Instead of a small number of top managers making deci- sions for thousands of others, Starbucks assigned individual store managers with the task of understanding their specifi c customers, employees, and communities and designing specifi c goals and strat- egies to meet their needs. Th is planning process, through which the company attempts to respond to local needs and keep a consistent product and service, will defi ne whether Starbucks can reconnect with customers and increase its revenue.21

Organizing Once the plan is in place, as a manager you might be asked to assemble a team of people to implement it. Th is is organizing , the process of orchestrating people, actions, resources, and decisions to achieve goals. At the fi lm animation studio Pixar, a manager will have a number of responsibilities when it comes to preparing for an upcoming fi lm. Th is includes the following phases: voice talent begins recording; editorial team makes preliminary videotape; art department cre- ates the look and feel of sets and characters; models are sculpted; sets are dressed; shots are laid out; shots are animated; sets and characters are shaded; lighting completes the look; computer data is rendered; and fi nal touches are added. Th e organizing process for the $92 million fi lm Th e Incredibles , for example, took hundreds of people years to complete and was critical to creating a movie that met Pixar’s high quality standards and creative vision. Th anks to superb management, the project was kept within its time and budget constraints.22

Leading Planning and organizing are essential functions of management. Any seasoned manager will tell you, however, that things rarely go as planned, and that organizing is a continuous process. A manager’s greatest opportunity to ensure that activities go as planned is through leading : the process of eff ectively motivating and communicating with people to achieve goals. When it comes to large projects, it can be diffi cult for employees and team members to realize the importance of their individual roles within the process. Understanding what motivates employee behavior and communicating eff ectively with a diverse team are even

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Organizing The process of orchestrating people, actions, resources, and decisions to achieve goals.

Leading The process of effectively motivating and communicating with people to achieve goals.

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Chapter One Management in the 21st Century12

more critical for a manager when the team experiences a setback or disappointment. Let’s look at a sports example: October 25, 2007 was a cold, rainy Th ursday night. Th e number 3–ranked Virginia Tech Hokies football team was playing Boston College’s Eagles at home, and ESPN was televising the game to a national audience. Virginia Tech was winning 10–0, with two minutes left and serious hopes for a national championship season. But in those fi nal minutes, Boston scored 14 points, upending the Hokies’ aspirations. Th is was surely not the plan. What does a leader do in this moment? In the locker room after the game, Virginia Tech’s head coach Frank Beamer brought everyone together and said, “What happened out there tonight was a devastating loss, a heartbreaking loss. But people are going to remember this foot- ball team not by what happened out there on the football field tonight, but by how we finish this season. We can’t make this

loss everything. If we work hard, practice tough, and care for each other, we will make it through this.” It was a clear leadership moment. Beamer’s powerful communications skills motivated the team by encouraging them to focus on what lay ahead. In business, dramatic moments like this are rare, but we can imagine a manager needing to motivate a sales team at an auto dealership after several months of a sluggish economy, or communicating the needs of a community hit by a hurricane by inspiring a group of volunteers to aid in cleanup eff orts. Virginia Tech went on to win the Atlantic Coast Conference championship that year—an extraordinary accomplishment.23

Controlling So, you have the plan . Everything is organized . You are leading the team. Th ings are getting done. Are the right things getting done in the right way, and in the manner you anticipated and expected? Let’s take another look at Pixar and how it ensures that its fi lms get completed on time, within the budget approved during the planning process, and meeting the high quality standards that audiences expect. Th is function is controlling —the process of monitoring activities, measuring results and comparing them with goals, and correcting performance when necessary. Just one small part of developing Th e Incredibles was producing the special eff ects, such as the dust that came up around the character Dash’s feet as he ran. In fact, the movie required the design and creation of hundreds of such eff ects. Th e technical director creating the dust eff ect works in a team of 15–20 artists and has an immediate supervisor who reviews the team’s work. Th e art director ensures the quality of the eff ect; the movie director approves the work as consistent with the artistic vision; and fi nally a producer makes sure that not too much time is spent developing any one eff ect. Th is balancing act ensures that the hundreds of eff ects are achieved in the fi lm with the human and fi nancial resources available to the producer and director. Knowing that things rarely go as planned or organized, managers on the fi lm meet regularly (most likely every day) to review prog- ress, analyze artists’ renderings, make adjustments to production schedules, reallocate

funding from one budget to another, and approve or redo work based on Pixar’s quality standards.24

You should now have a solid understanding of the functions and examples that represent the things that managers do during any given workday. But if a manager understands the functions and eff ectively executes them, does that ensure long-term success for the organization? Not necessarily. Indeed, for the past decade, managers and management theorists have struggled to understand why organizations that have been run by competent man- agers have, nevertheless, failed.

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Controlling The process of monitoring activities, measuring results and comparing them with goals, and correcting performance when necessary.

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131.3 | SUSTAINING: A BALANCED APPROACH TO MANAGEMENT

1.3 | SUSTAINING: A BALANCED APPROACH TO MANAGEMENT

1.3 | Describe sustaining as a balanced approach to management.

Jeff rey R. Immelt, the CEO of General Electric (GE), begins and ends each annual meeting of GE’s offi cers and senior managers by reemphasizing the company’s primary principle of integrity: “GE’s business success is built on our reputation with all stakeholders for lawful and ethical behavior.”25 Taking our cue from this principle, we will now discuss how a balanced approach to management can ensure that organizations are both eff ective in the short and long term. Immelt presents unethical behavior as one challenge that can prevent a company from surviving over the long term. Other threats faced by organizations include limited natural resources, uneducated workforces, ris- ing energy costs, global political instability, and economic turbulence. Eff ec- tive managers today understand these threats and approach every function in full consideration of the consequences of their decisions on their organi- zation, community, and environment. Th is balanced approach to management is called sustaining , which means seeing, analyzing, and designing systems to achieve long-term organizational, community, and environmental health. Before managers decide on goals, coordinate activities, motivate their team to do great things, or measure how their organi- zation is progressing toward achievement (the four functions), they must be sure that the balanced approach of sustaining underpins all their critical thought and decision making (Figure 1-5 ). As Immelt suggests, sustaining goes beyond corporate social responsibility and encompasses ethical decision making and behavior.26 To create sustainable organi- zations, successful managers see the organization as a system that is connected to the internal and external environment, where their responsibilities are to think through, ana- lyze, and design the systems of behaviors and processes that help the organization achieve its goals. At GE, for example, Immelt, through continuous written and oral communications, charges the company’s business leaders with the responsibility of maintaining integrity within their division’s operations. Th is message is reinforced by incorporating global stan- dards of integrity into business policies and practices as often as possible. GE plant man- agers and manufacturing leaders are held directly responsible for health, environmental, and safety issues within their divisions. Quarterly reports tracking key indicators such as accident rates are compiled into a master matrix that compares the performance of each plant. Because the master report ultimately is sent to Immelt for review, being in the bottom quartile of the rankings can be a great incentive for improvement.27 One goal of the sustaining approach to management is to create, build, and continuously nurture trust among customers, employees, and communities. Without this, organizations fi nd it diffi cult, if not impossible, to operate. It’s sobering to realize how much time and eff ort it can take to build trust, yet how quickly it can be lost. In 1994, Immelt’s predecessor, Jack Welch, reportedly vomited shortly after hearing about a $300 million loss created by one unethical trader.28

Sustaining Seeing, analyzing, and designing systems to achieve long- term organizational, community, and environmental health.

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Figure 1-5 A Balanced Approach to Management Managers must consider a sustaining approach before implementing the four functions of management.

Planning Organizing

Leading Controlling

Goal Achievement SUSTAINING

Planning Organizingrr

Leading Controlling

Goal Achievement SUSTAININGTT

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Chapter One Management in the 21st Century14

Once we explore the evolution of management, we will fully discuss the balanced approach of sustaining, followed by the major management functions of planning , orga- nizing , leading , and controlling . Th e four functions of management, based on the balanced approach of sustaining, provide the structure of this textbook. As our discussion of GE sug- gests, Jeff rey Immelt has demonstrated several of the roles and skills that managers must adopt to be successful decision makers. Let’s explore another popular theory that focuses on organizing the discipline of management: roles.

1.4 | MANAGEMENT ROLES

1.4 | Correlate managers’ tasks with the organizational roles that they play.

Henry Mintzberg (b. 1939), management researcher, strategy theorist, and author of Th e Nature of Managerial Work , has been observing managers in their organizational environ- ments since the late 1960s. Based on his observations outlined in Table 1-1, he suggests that we can describe a manager’s work most accurately in terms of managerial roles , or orga- nizational expectations that determine the actions of managers, including interpersonal , informational , and decisional roles. In interpersonal roles , managers build relationships with the people they work with and act as a public symbol for the many people they repre- sent. Informational roles require managers to gather, assess, and communicate informa- tion to individuals and teams in support of the organization’s values, mission, vision, and goals. And in decisional roles , managers are responsible for making judgments and deci- sions based on available information and analysis of the situation. Mintzberg observed that managers were required to act as fi gureheads, analyze and monitor data, and understand information so the organization can pursue goals and maximize resources eff ectively.29

Managerial roles Organizational expectations that determine the actions of managers, including interpersonal , informational , and decisional roles.

Interpersonal roles Managerial roles in which managers build relationships with the people they work with and act as a public symbol for the many people they represent.

Table 1-1 Henry Mintzberg’s Management Roles

Source: Adapted from H. Mintzberg, The Nature of Managerial Work (Englewood Cliffs, NJ: Prentice Hall, 1980).

Categories Roles Example Actions

Interpersonal Manager’s actions that include symbolic, public- facing activities.

Figurehead • Speaking or being present at ceremonial events, hosting guests (e.g., vendors, clients, or potential employees)

Leader • Motivating and infl uencing employees’ behaviors, train and mentor employees

Liaison • Keeping up information links internally and externally to the organization

Informational Manager’s actions relating to gathering, assessing, and communicating information.

Monitor • Gathering data and information, studying industry papers, reading reports, maintaining interpersonal relationships

Disseminator • Sending messages (email, text, and voice), writing memos, forwarding relevant information

Spokesperson • Making speeches, citing the organization’s position on a subject

Decisional Manager’s actions that include making judgments and decisions based on situations and information gathered.

Entrepreneur • Identifying new business opportunities, nurturing new projects or initiatives, selling new business

Disturbance handler • Working through employee confl ict, conducting efforts during a crisis, interpreting and responding to internal and external change

Resource allocator • Approving and setting budgets, deciding the benefi ciaries of internal resources, setting priorities

Negotiation • Mediating discussions with unions, protecting the organization’s interests, bargaining and agreeing to supplier deals

Informational roles Managerial roles in which managers gather, assess, and communicate information to individuals and teams in support of the organization’s values, mission, vision, and goals.

Decisional roles Managerial roles in which managers are responsible for making judgments and decisions based on available information and analysis of the situation.

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151.5 | MANAGERS AT WORK

We will focus on examples of management functions throughout this book, but it is also notable to recognize the importance of Mintzberg’s role theory and explore how it applies to managers.

1.5 | MANAGERS AT WORK

1.5 | Compare and contrast diff erent types of organizations, managers, and the decisions they make.

Management’s primary functions are consistent across organizations, but the types of orga- nizations where they work can diff er dramatically based on employee and manager atti- tudes, beliefs, decision-making styles, availability of resources, purpose, and tolerance of risk, to name just a few factors. Let’s look into the diff erent types of organizations and the internal and external forces that their managers negotiate.

Types of Organizations An organization is an entity formed and structured to achieve goals. In Chapter 4 , we will take an in-depth look at organizations, but as a form of introduction, let’s look at some examples of sizes and types of organizations. In the United States, there are three business sizes: small, mid-size, and large, defi ned by the number of people they employ. Small orga- nizations have fewer than 100 employees, mid-size organizations between 100 and 500, and large organizations more than 500 employees (see Figures 1-6 and 1-7 ). Represented in all these size categories are start-ups, multinational corporations, growth companies, non- profi t organizations, and student organizations.

Start-up Companies While at Stanford University, Ph.D. computer science students Larry Page and Sergey Brin developed a set of algorithms as part of a research project that they called BackRub. BackRub allowed people to quickly fi nd web pages relevant to their requests for information. Th e two friends soon realized that running a search en- gine required a huge amount of computer resources, as well as over half the university’s bandwidth. In fact, their work regularly brought down Stanford’s Internet connection.30

However, thanks to the support of the university staff , they were able to gain access to

Small organizations Organizations with fewer than 100 employees.

Mid-size organizations Organizations with between 100 and 500 employees.

Large organizations Organizations with more than 500 employees.

Figure 1-6 Organization Sizes by Number in the United States Small businesses represent the greatest number of organizations in the United States.

Fi 1 6

17,047

5,782,199

86,538

Small Medium Large

Figure 1-7 Organization Sizes by Number of Paid Employees in the United States Small and large businesses have the greatest number of paid employees in the United States.

Fi 1 7

41,839,70156,477,472

16,757,751

Small Medium Large

Organization An entity formed and structured to achieve goals.

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Chapter One Management in the 21st Century16

the resources they needed to complete their study. It was out of this initial research project that Google was born. As the new search engine grew in popularity on campus, it began to attract more widespread attention. In Au- gust 1998, Brin and Page met with Andy Bechtolsheim, co-founder of Sun Microsystems, who gave the friends a check for $100,000. One month later, Page and Brin formed a company called Google Inc. and set up opera- tions in a friend’s garage. Th is is a classic story of a start- up company : a newly formed organization with limited or no operational history.31

Multinational Corporations Fast-forward to today and consider how Google has grown into a multinational corporation. A multinational corporation has opera- tions in multiple countries, usually employs more than 10,000 people, and designs, develops, and sells products and services to customers all over the world. Today, you can access Google in nearly 40 languages, and it has

almost 20,000 employees with offi ces in China, Europe, North America, Middle East, South America, and Russia.32

Growth Companies A growth company is an organization that increases its annual revenue faster than its competitors. Imagine managing a company that has 4,056 percent revenue growth in only fi ve years. Th at is exactly what fl at-panel TV manufacturer Vizio accomplished between its founding in 2002 and 2007. Vizio’s revenues grew from $46 million to over $3 billion between 2004 and 2012. Founder and CEO William Wang talks about how the company got started and the importance of managing resources in a growth company: “We started the company with $600,000. I borrowed some money from my parents, mort- gaged my house, and had a couple of friends who helped me. When I started, I worked 14 hours a day. I’ve cut down on that. I work 8 hours a day.”33

Nonprofi t Organizations Nonprofi t organizations are required by the Internal Rev- enue Service (IRS) to reinvest all profi ts back into the organization, as opposed to dis- tributing that money to investors or employees. Religious organizations, charities, arts organizations, and free health clinics are all nonprofi ts.34 When Wendy Kopp was a senior at Princeton University, she wrote her undergraduate thesis about how she believed that recent college graduates would be interested in serving low-income communities if a teaching corps existed for them to join. After graduation, she raised $2.5 million to found Teach for America in 1990. In its fi rst year, Teach for America signed up over 500 people to teach in six communities across the United States. By 2012, this nonprofi t had over 10,000 volunteers and 28,000 alumni and had served over 3 million students across the country.35

Student Organizations It is not uncommon for a large university to have as many as 500 student organizations , groups formed to engage students further in the col- lege experience through academic, political, religious, sports, environmental, and social action. Why are we highlighting student organizations in a management book? They provide great opportunities for college students who want to practice management, take on leadership responsibilities, and build their résumés. In 2006, for example, the Indiana University chapter of Business Careers in Entertainment Association was voted the best student organization on campus. This organization has a president, vice presi- dents, and directors and seeks “to provide internships, job opportunities, hands-on ex- perience, and career information to undergraduate students interested in the business end of the entertainment industry.” With almost 30 positions on its executive board, this organization gives students a number of opportunities to participate and get valu- able management experience.36 Throughout this book, we will explore student organi- zations through case studies and exercises in which you can investigate and practice management.

Start-up company A newly formed organization with limited or no operational history.

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Growth company An organization that increases its annual revenue faster than its competitors.

Nonprofi t organizations Organizations that are required by the Internal Revenue Service (IRS) to reinvest all profi ts back into the organization, as opposed to distributing that money to investors or employees.

Student organization An organization formed to engage students further in the college experience through academic, political, religious, sports, environmental, and social action.

Multinational corporation An organization with operations in multiple countries, usually more than 10,000 employees, and designs, develops, and sells products and services to customers all over the world.

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171.6 | VALUES, MISSION, AND VISION

Types of Managers Both the functions and roles of managers provide a thoughtful framework to consider the craft of management, yet most organizations refer to managers by type, so people inside and outside the organization can better understand each manager’s decision-making power and scope of authority. Traditional organizations are formed hierarchically (like a pyramid), with a few senior managers at the top and a proportionally greater number of lower-level manag- ers below who are responsible for daily tasks and actions of staff . Th is structure is designed to ensure that lines of communication, authority, and reporting responsibilities are clear to everyone. We can organize managers as top managers, middle managers, and fi rst-line managers. Each type makes decisions with diff erent time horizons, from days to decades. Top manag- ers set the organization’s direction and make decisions that aff ect everybody. Middle man- agers report to upper management and direct the work of fi rst-line managers; they are also responsible for divisions or departments. And fi rst-line managers direct daily activities for producing goods and services. For example, a top manager might choose to partner with another company to launch a new software product, which could aff ect the organization for fi ve to seven years or longer. A fi rst-line manager at a retail store might settle on how to schedule employee work hours most eff ectively over a holiday season, which could have an impact on the organization for two to three weeks.37 Table 1-2 provides a breakdown of types of managers, their typical titles, the kinds of decisions they make, and the time frames of those decisions.

1.6 | VALUES, MISSION, AND VISION

1.6 | Explain the purpose of organizational values, mission, and vision.

Up to this point, we’ve explored management’s functions, roles, types, and success fac- tors. Now let’s put these components into context. Inside organizations, managers fi nd and create forces that determine how people interact and what they are expected to do.

Top managers Managers who set the organization’s direction and make decisions that affect everybody.

Middle managers Managers who direct the work of fi rst-line managers and are responsible for divisions or departments.

First-line managers Managers who direct daily activities for producing goods and services.

Source: Adapted from T. V. Bonoma and J.C. Lawler, “Chutes and Ladders: Growing the General Manager,” Sloan Management Review (Spring 1989): 27–37.

Table 1-2 Types of Managers

Types Titles Decisions Time Frames

Top managers Set the organization’s direction and makes decisions that affect everyone.

CEO President Executive director Director General manager Executive vice president

Establish partnerships Approve signifi cant purchases Approve strategic plans Commit resources for new opportunities

Daily, weekly, monthly, quarterly, annually, decades

Middle managers Direct the work of fi rst- line managers and are responsible for divisions or departments.

Vice president Assistant vice president Manager

Assign fi nancial and human resources Allocate budget resources Set production and service offerings

Daily, weekly, monthly, quarterly, annually

First-line managers Direct daily activities for producing goods and services.

Associate director Project manager Coordinator Assistant manager Team leader

Set employee schedules Hire and promote staff Change processes to improve daily tasks and actions

Daily, weekly, monthly

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Chapter One Management in the 21st Century18

Th ese forces—values, mission, and vision—shape decision making, products and services, beliefs, and relationships with people inside and outside the organization. Th ey provide consistent and predictable environments in which employees and clients can work and do business. Values, mission, and vision are the philosophical statements and beliefs that managers use to allocate resources, provide consistent feedback to employees, make decisions, and foster organizational culture, which is the company’s atmosphere and expectations that emerge in response to its philosophies and beliefs—“how we do things around here.” In Fig- ure 1-8 , these three internal forces are organized by the time frame of their impact on the organization: timeless, lifetime of the leader, and 1–10 years.38 Organizational values are beliefs that shape employee and organizational behaviors and are intended to be timeless. As a consumer, can we experience the eff ect of diff er- ent company values? Can you see the diff erences between the two companies shown in Figure 1-9 ?

Mission is an organization’s central purpose, intended to generate value in the mar- ketplace ( for-profi t) or community (nonprofi t), which lasts for the life of the leader. In Figure 1-10, we look at two companies with diff erent missions operating in the same indus- try. Now, think about Starbucks Coff ee. Th is organization sells strong, bold coff ee for an extraordinary price, gives its customers a place to sit and be comfortable for hours without

Vision 1 to 10 Years

Life of Leader

Timeless

Time Impact of Vision, Mission, and Values

Mission

Values

Figure 1-8 Values, Mission, and Vision Time Frames Vision, mission, and values can be differentiated based on the time impact on the organization.

Values Beliefs that shape employee and organizational behaviors and are intended to be timeless.

Figure 1-9 Comparing Kroger and Whole Foods Market Values Kroger and Whole Foods Market’s value statements tell us a lot about the company’s priorities relating to service, products, and their relationship with the community.

Honesty – Doing the right thing and telling the truth Integrity – Living our values in all we do, united approach to how we do business and treat each other Respect – Valuing opinions, property, and perspectives of others Diversity – Reflecting a workplace that includes a variety of people from different backgrounds and cultures, diversity of opinions and thoughts Safety – Watching out for others, being secure and safe in you workplace Inclusion – Your voice matters, working together works, encouraging everyone's involvement, being the best person you can be

Selling the highest-quality natural and organic products available Satisfying and delighting our customers, supporting team member happiness and excellence Creating wealth through profits and growth, caring about our communities and our environment Creating ongoing win-win partnerships with our suppliers Promoting the health of our stakeholders through healthy eating education

Kroger Whole Foods Market

Mission An organization’s central purpose intended to generate value in the marketplace (for-profi t) or community (nonprofi t) and which lasts for the life of the leader.

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19

Figure 1-10 Compare Starbucks Coffee and Dunkin’ Donuts Missions Starbucks Coffee and Dunkin’ Donuts missions are quite different. This has led each company to create unique products and services that attract different kinds of customers.

interruption, and puts inspirational quotes on its cups to give customers something to ponder. Consider the traditional coff ee shop business model before Starbucks entered the market. Th is model off ers customers regular coff ee, minimal store atmosphere, hard seats, and grab-and-go food that’s ultra-convenient. It’s Dunkin’ Donuts. What’s the diff erence?39

Mission. By consistently holding to the values of the company, the organization’s leadership defi nes its mission and projects its vision , a description of an optimal future 1–10 years from now. Let’s look at Microsoft and Apple Computers, two companies that compete and have two distinct stated visions for their companies (Figure 1-11 ). How do these diff ering visions change the products and services that you have seen from each company? Does each company seem to be achieving its vision? Values, mission, and vision are the forces that managers, depending on their type, can control and shape directly. What are the forces that are outside of managers’ control that determine the conditions in which companies must operate?

Vision A description of an optimal future 1–10 years from now.

1.6 | VALUES, MISSION, AND VISION

Mission Statements

Deliver innovative product choices at the right price served fresh, meeting the needs of people who are busy living.

To inspire and nurture the human spirit—one person, one cup, and one neighborhood at a time.

Mission Statements

Deliver innovative product choices at the right price served fresh, meeting the needs of people who are busy living.

To inspire and nurture the human spirit—one person, one cup, and one neighborhood at a time.

Dunkin' Donuts Starbucks Coffee

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Figure 1-11 Compare Microsoft and Apple’s Visions Visions shape how companies innovate, where they spend their resources, and what customers attract. Can you connect the difference in these two companies’ vision statements and their products?

Microsoft Apple

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Create experiences that combine the magic of software with the power of Internet services across a world of devices.

To make a contribution to the world by making tools for the mind that advance humankind.

Vision Statements

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Chapter One Management in the 21st Century20

1.7 | SUCCESSFUL MANAGEMENT

1.7 | Demonstrate how focusing on skills and strengths leads to success as a manager.

We have looked at what managers actually do, but it is equally important to discuss what they should do. Managers are expected to continuously seek ways to increase eff ectiveness and effi ciency through other people and systems, and they are successful when they accom- plish this objective. Eff ectiveness is the level to which people or organizations achieve agreed-upon goals, and effi ciency means using the smallest amount of resources to achieve the greatest output. Organizations and managers need both eff ectiveness and effi ciency to be successful, but it is the balance of these two ideals that managers constantly monitor. Let’s look at an exam- ple of a start-up company that sells specialty rugby shirts and wants to conduct 100 percent of its business online. With very limited fi nancial resources, the company’s management has to make a critical decision of balancing effi ciency and eff ectiveness when it comes to developing its website. Th e most effi cient process to build the company’s website might be to hire a friend who designs websites on the weekends. With this strategy, the company would have a marginal website operational in a couple of weeks that does not have the attractive design qualities of its competitors, but as it has been built for almost nothing, the company can start making money in a very short period of time. Th e most eff ective process to launch the company’s website might be to hire a professional design fi rm that will also help make sure the website is recognized by search engines, such as Google, Yahoo!, and Bing. Th is could cost 10 times more money and take a few months to launch, but the expected revenue would be much higher. Th is is an example of one of the classic dilemmas that managers face. Many organizations believe that managers can achieve superior results if they learn how to do their jobs better. GE spends almost $1 billion every year on developing its managers; its top 191 managers have spent 12 months in training over the past 15 years. Jack Welch, former CEO of the fi rm, once said, “At GE, our core product is management. We build great managers around here. Now all I need to do is fi nd them good businesses to run.”40 Only a few organiza- tions can aff ord to spend a billion dollars on training their managers, but most approach devel- oping their managers in similar ways. Let’s look at building skills and focusing on strengths as a common, fundamental process to developing successful management practices.

Skills Skills are talents or abilities that enable a person to complete a particular task, interaction, or process eff ectively and effi ciently. Th ree types of skills determine managers’ success or failure in carrying out their responsibilities, whether at the top level of the fi rm or on the front lines: conceptual , technical, and relational . Although the type of manager you are aff ects how important each skill is to accomplishing your goals, all managers use all three of these skills, as shown in Figure 1-12.

Effectiveness The level to which people or organizations achieve agreed-upon goals.

Effi ciency Using the smallest amount of resources to achieve the greatest output.

Skills The talents or abilities that enable a person to complete a particular task, interaction, or process effectively and effi ciently.

Conceptual skills Technical skills Relational skills

Top Manager Middle Manager First-line Manager

Figure 1-12 Skills Required by Types of Managers Top managers need a higher level of conceptual skills than middle or fi rst-line managers; middle managers require a greater degree of relational skills; and fi rst-line managers need to possess more technical skills.

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211.7 | SUCCESSFUL MANAGEMENT

Let’s consider how these skills apply. Conceptual skills are the ability to think through complex systems and problems. How hard could it be to make one surfboard? At Firewire Surfboard, it takes 14 days, 10 suppliers from fi ve countries, and 20 employees. For the busi- ness to be profi table and provide customers with a good price, management has to see the big picture and at the same time be able to think through the details at each point in the process. Suppose one of Firewire’s suppliers, let’s call it Float My Boat, shared Firewire’s commit- ment to making a diff erence. It off ers an ecologically sound foam product that costs $25 more per surfboard than competitors’ components—a substantial diff erence. Most manag- ers would likely seek out cheaper foam. But suppose Firewire’s managers did some research and found that Float My Boat off ers three additional products that they also can use, cutting the cost diff erence to only $5. Using conceptual skills, they can make a decision compat- ible with their organization’s desire to support environmental causes and keep profi ts at a healthy level.

Technical skills are the ability to perform job-specifi c tasks. Imagine that Starbucks has just hired you to be a store manager. After your fi rst three months, you will go through a seven-week management training program. What skills will you acquire there? Training may include learning how to do the following:

● Access the company intranet ● Complete fi nancial reports ● Hire and train new employees ● Ensure quality for the store’s 87,000 possible beverage combinations ● Schedule employees ● Organize inventory ● Clean and maintain the expensive beverage machines and equipment ● Respond to customer concerns and employee complaints ● Complete and submit quarterly performance reports

Th ese are a few of the job-specifi c tasks that managers at Starbucks might be expected to perform.

Relational skills are the ability to collaborate and communicate with others. Ever wonder who founded Birkenstocks USA, the company that imports those comfortable sandals? It was a woman named Margot Fraser, who fi rst saw the odd-looking shoes on a trip to Europe. She got a $6,000 loan from the bank to start her company and by 2009 had turned it into a $50 million business. How? Fraser credits her company’s success to the relationships that she built with the manufacturing company in Germany.41 When Birkenstock USA was just getting started and was distributing san- dals through a few health stores across the country, the company’s manu- facturers in Germany were reluctant to make any changes or upgrades to their shoes. Unable to convince Mr. Birkenstock that purple suede, popular in the United States at the time, was a good idea, she built a relationship with a woman on the manufacturing fl oor, who made sure that Fraser got her wish and manufactured purple suede Birkenstocks for the U.S. market. Just imagine the impact of a relationship with one person on the manufactur- ing fl oor halfway around the world.42 Th is is the power of collaborating and communicating.

Strengths Strengths are the skills in which managers demonstrate the greatest aptitude. After more than 30 years of research, Marcus Buckingham and Donald O. Clif- ton found that professionals who focused primarily on their strengths were more successful than those who spent more time trying to fi x their weaknesses. In their book Now, Discover Your Strengths , they off er the example of legendary composer and songwriter Cole Porter.

Conceptual skills The ability to think through complex systems and problems.

Technical skills The ability to perform job-specifi c tasks.

Relational skills The ability to collaborate and communicate with others effectively.

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Chapter One Management in the 21st Century22

Porter’s strength was his ability to write wonderful melodies and perfect lyrics. However, creating believable characters and plots in his Broadway musicals were not his strong suit. Many people choose to work hard on improving their weaknesses, but not Porter. Instead, Porter pursued an aggressive yet counterintuitive strategy for managing his weaknesses. Porter believed that if he focused on refi ning his skills as a songwriter, audiences would overlook his weaknesses. His strategy worked. Driven by sophisticated melodies and clever lyrics as opposed to well-developed plots and characters, Porter’s musicals (including Any- thing Goes and Kiss Me Kate ) have become classics. Research demonstrates that managers who focus on the skills at which they are already very good at will someday have the oppor- tunity to achieve greatness.43 As we have explored, management is both an art and a science; where managers must learn to juggle people skills with technical skills. Indeed, we might say that the real skill in management is achieving a balance between these two major functions. To do this, manag- ers must recognize and understand their own key strengths and endeavor to ascertain and nurture the strengths of others. So, how can managers apply this skill to bringing out the best in themselves and their employees? Over the past 10 years, a new branch of psychology has emerged. First introduced by Martin Seligman and Mihaly Csikszentmihalyi, Positive Psychology explores ways to help people recognize their positive traits or strengths and nurture them to their full poten- tial. Traditionally, psychology has been rooted in mental illness; that is, looking for what is wrong with a patient and then attempting to fi x the problem. However, Seligman and Csikszentmihalyi, believed that psychology could be used in a diff erent way: to help people defi ne and cultivate the strengths within them, and thrive and fl ourish as a result. Dr. Barbara Fredrickson, a research psychologist in the study of positive emotions and an advocate of Positive Psychology, has created a “broaden-and-build” positive psychological approach.44 According to this theory, positive emotions such as joy and happiness serve to broaden or expand our awareness and encourage us to think more creatively, while nega- tive emotions actually narrow or restrict our behavior. More and more organizations are beginning to explore the potential of Positive Psychology as a tool to enhance the work-

ing environment by encouraging, rewarding, and motivating employees.45 Arguably, one of the more diffi cult challenges that man- agers have to face since the inception of globalization is a change in mindset. With this new era comes a need for a new vision: to fi nd unique ways to tackle this ever-changing world and become less reliant on the “old ways” of doing things. Managers need to make room for a diff erent paradigm about how the world works. But changing our way of thinking does not happen overnight. Indeed, any kind of change is often per- ceived as a threat. In a sense, our mindset is programmed to maintain a deep set of beliefs that form our perspective about the world around us. In the past, organizations relied solely on a problem-solving model that focused on “fi xing” people’s weaknesses rather than building on their strengths. However, as many companies have discovered, in an environment that is constantly in fl ux, this model has its limitations. Th e latest organizational behavioral research has shown that there is a

notable shift in organizations from a traditional problem-solving model to a more sustain- able one. Although shifting our way of thinking is a challenging process, it is entirely possible. Th e environmental scientist, teacher, and writer Donella Meadows believed that we all have the power to “self-organize” or change and create new systems; and the ability to dis- cover areas of intervention in a system to instigate shifts and changes. By identifying “lever- age points” in the system (i.e., the areas within a system), “where a small change could lead to a large shift in behavior,” we all have the ability to mold and adjust the system.46 With the help of new management theories such as Systems Th inking, which we will explore in Chapter 3 , we have the potential to take a systemic approach to critical thinking, which will help to change our mindset, adjust our behaviors, and use our existing skills to enhance strengths within ourselves and others.

Positive Psychology A fi eld of psychology that helps people defi ne and cultivate their personal strengths, so they can thrive and fl ourish with a sense of purpose through challenging work.

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23

As we discuss in future chapters, by applying a systems approach to critical thinking and adopting the principles of Positive Psychology, managers will have a clearer understanding of how the organization functions, make better decisions, and have the ability to encourage and motivate their employees, which in turn will help to boost morale, increase loyalty, and make the workplace a happy and productive one. All of this will have a notable impact on both the internal and external environment, as well as the ever-important bottom line. Th roughout this text, we are presenting a number of case studies and scenarios to dem- onstrate the application of critical thinking. Some of the characters you will meet include Chris, a new manager from the Dolphin Resort and Hotel, whose mission is to save a fam- ily business from bankruptcy; newly appointed chief of police Robin Richardson, who sets out to revolutionize the Metropolitan Police Department (MPD) in Washington D.C.; Julian Wales, group leader of Upstream Fisheries, whose goal is to increase productivity and motivation through leadership; and university friends Katy, Fred, and Lisa, who leave their respective jobs to begin a new entrepreneurial venture together. By now, you should have a fundamental understanding of management, where managers work, the forces they contend with inside and outside the organization, and how each per- son can seek to become a more successful manager. It’s worth repeating that managers are expected to boost eff ectiveness and effi ciency for their organizations. As they do, managers face opportunities and challenges each day that they need to overcome. As you continue through this textbook and explore new management concepts, theories, and practices, remember to ask yourself: “Wherever I’m working, how might I as a manager make a diff erence for my organization, the local and global community, and the people I have an opportunity to work with?” Th at’s where successful management begins.

1.7 | SUCCESSFUL MANAGEMENT

CaseSnapshot Chapter 1 Case: Management in the 21st Century:

Facebook can be found on pg. 462

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Chapter One Management in the 21st Century24

ADDITIONAL RESOURCES

KEY TERMS Conceptual skills The ability to think through complex systems and problems. (p. 21)

Controlling The process of monitoring activities, measuring results and comparing them with goals, and correcting perfor- mance when necessary. (p. 12)

Corporate social responsibility An organization’s self-defi ned commitment to the health and well-being of the local and global community, beyond its legal obligation. (p. 9)

Critical thinking The ability to diagnose situations and predict patterns of behaviors, which result in better decision making. (p. 4)

Decisional roles Managerial roles in which managers are re- sponsible for making judgments and decisions based on avail- able information and analysis of the situation. (p. 14)

Effectiveness The level to which people or organizations achieve agreed-upon goals. (p. 20)

Effi ciency Using the smallest amount of resources to achieve the greatest output. (p. 20)

First-line managers Managers who direct daily activities for pro- ducing goods and services. (p. 17)

Growth company An organization that increases its annual rev- enue faster than its competitors. (p. 16)

Informational roles Managerial roles in which managers gather, assess, and communicate information to individuals and teams in support of the organization’s values, mission, vision, and goals. (p. 14)

Interpersonal roles Managerial roles in which managers build relationships with the people they work with and act as a public symbol for the many people they represent. (p. 14)

Large organizations Organizations with more than 500 employ- ees. (p. 15)

Leading The process of effectively motivating and communicat- ing with people to achieve goals. (p. 11)

Management The process of working with people and distribut- ing an organization’s resources to achieve goals effi ciently and effectively. (p. 6)

Managerial roles Organizational expectations that determine the actions of managers, including interpersonal, informational, and decisional roles. (p. 14)

Middle managers Managers who direct the work of fi rst-line managers and are responsible for divisions or departments. (p. 17)

Mid-size organizations Organizations with between 100 and 500 employees. (p. 15)

Mission An organization’s central purpose intended to generate value in the marketplace (for-profi t) or community (nonprofi t) and which lasts for the life of the leader. (p. 18)

Multinational corporation An organization with operations in multiple countries, usually more than 10,000 employees, and de- signs, develops, and sells products and services to customers all over the world. (p. 16)

Nonprofi t organizations Organizations that are required by the Internal Revenue Service (IRS) to reinvest all profi ts back into the organization, as opposed to distributing that money to investors or employees. (p. 16)

Organization An entity formed and structured to achieve goals. (p. 15)

Organizing The process of orchestrating people, actions, re- sources, and decisions to achieve goals. (p. 11)

Planning The process of setting goals for the future, designing strategies, and deciding on the actions and resources needed to achieve success. (p. 12)

Positive Psychology A fi eld of psychology that helps people de- fi ne and cultivate their personal strengths, so they can thrive and fl ourish with a sense of purpose through challenging work. (p. 22)

Relational skills The ability to collaborate and communicate ef- fectively with others. (p. 21)

Skills Talents or abilities that enable a person to complete a par- ticular task, interaction, or process effectively and effi ciently. (p. 20)

Small organizations Organizations with fewer than 100 employ- ees. (p. 15)

Start-up company A newly formed organization with limited or no operational history. (p. 16)

Student organization An organization formed to engage stu- dents further in the college experience through academic, po- litical, religious, sports, environmental, and social action. (p. 16)

Sustaining Seeing, analyzing, and designing systems to achieve long-term organizational, community, and environmental health. (p. 13)

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Additional Resources 25

Technical skills The ability to perform job-specifi c tasks. (p. 21) Top managers Managers who set the organization’s direction and make decisions that affect everybody. (p. 17)

Values Beliefs that shape employee and organizational behav- iors and are intended to be timeless. (p. 18)

Vision A description of an optimal future 1–10 years from now. (p. 19)

IN REVIEW 1.1 | Defi ne management. Management is the process of working with people and distrib- uting resources to achieve goals effi ciently and eff ectively. Ef- fectiveness is the level to which people or organizations achieve agreed-upon goals, and effi ciency is using the smallest amount of resources to achieve the greatest output.

1.2 | Describe a manager’s four major tasks: planning, organizing, leading, and controlling.

Th e four management functions are planning, organizing, lead- ing, and controlling. Planning is defi ning what the organization wants to achieve, which includes setting goals for the future, designing strategies, and deciding the actions and resources needed to achieve success. Organizing means orchestrating people, actions, resources, and decisions to achieve goals. Man- agers have the greatest opportunity to ensure that events occur as planned or better than planned by leading , eff ectively moti- vating and communicating with people to achieve goals. Asking whether the right things are getting done in the right way and in the manner that you anticipated is controlling , which includes measuring and monitoring activities, comparing results with goals, and correcting performance.

1.3 | Describe sustaining as a balanced approach to management.

Th e purpose of the sustaining approach to management is sus- tainable organizations, achieved through managers’ ability to see, analyze, and design systems that seek organizational, com- munity, and environmental stability.

1.4 | Correlate managers’ tasks with the organizational roles that they play.

Mintzberg identifi es three categories of management roles: in- terpersonal , including symbolic, public-facing activities ; informa- tional , gathering, assessing, and communicating information; and decisional , making judgments and decisions based on situa- tions and gathered information.

1.5 | Compare and contrast diff erent types of organizations, managers and the decisions they make.

An organization is an entity formed and structured to achieve goals. It can be a small, mid-sized, or large company. A variety

of diff erent types of organizations and businesses can fall into these various size categories. A start-up company is a newly formed organization. A growth company increases annual rev- enue faster than its competitors. Multinational corporations usually have thousands of employees and operate all around the world. Nonprofi t organizations are required by the IRS to reinvest all profi ts back into the organization, as opposed to distributing it to investors or employees. Examples include religious orga- nizations, charities, arts organizations, and free health clinics. Student organizations are intended to engage students further in the college experience. Th eir focus can be academic, politi- cal, religious, sports, environmental, or social. Top managers set the organization’s direction and make decisions that aff ect ev- erybody; middle managers direct the work of fi rst-line managers and are responsible for divisions or departments; and fi rst-line managers , who direct daily activities for producing goods and services.

1.6 | Explain the purpose of organizational values, mission, and vision.

Organizational values are beliefs that shape employee and orga- nizational behaviors and are intended to be timeless. Mission is an organization’s central purpose intended to generate value in the marketplace ( for-profi t) or community (nonprofi t) and lasts for the life of the leader. By consistently holding to the values of the company, the organization’s leadership defi nes the mission and sets forth a vision , a descriptive picture of an optimal future 1–10 years from now.

1.7 | Demonstrate how focusing on skills and strengths leads to success as a manager.

Skills are talents or abilities that enable a person to complete a particular task, interaction, or process eff ectively and effi ciently. Th ree types of management skills are conceptual, technical, and relational. Strengths are skills for which managers demonstrate the greatest aptitude. Research demonstrates that managers who focus on existing strengths earn the opportunity to be great in those skills one day.

SELF-TEST 1.1 | Defi ne management 1. Management is the process of working with people and

distributing an organization’s resources to achieve goals .

a. Profi tably and ethically b. Effi ciently and eff ectively c. Quickly and cheaply d. For the benefi t of shareholders e. None of the above

W

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Chapter One Management in the 21st Century26

2. Managers have the ability to “make a diff erence” through a balanced approach to: a. Employee and customer satisfaction b. Doing well by doing good c. Th e triple bottom line of people, profi t, and planet d. Effi ciency and eff ectiveness e. Values, mission, and vision

3. Using examples, compare and contrast the “art” and “science” of management.

4. Organizations are legally required to have Corporate Social Responsibility programs. a. True b. False

5. U.S. economist Milton Friedman famously stated that: a. Th e only responsibility of a for-profi t company is to

maximize the amount of money that can be made for shareholders.

b. Organizations have to establish trust with employees, communities, and shareholders to operate eff ectively.

c. Th e earth’s resources are limited and it is the responsibility of all organizations to conserve.

d. A company can aff ord to lose a lot of money, but not one shred of reputation.

1.2 | Describe a manager’s four major tasks: planning, organizing, leading, and controlling.

6. Give an example of how Starbucks’ planning process has changed over the past decade.

7. During what function do managers have the greatest opportunity to ensure things go as planned and possibly even better? a. Planning b. Organizing c. Leading d. Controlling

8. Illustrate how the management function of controlling was used at Pixar to make Th e Incredibles.

9. Diagram the four management functions and their relationship to goal achievement.

1.3 | Describe sustaining as a balanced approach to management.

10. Explain how sustaining provides a balanced approach to management.

1.4 | Correlate managers’ tasks with the organizational roles that they play.

11. To which of Mintzberg’s 10 management roles does each of the following correspond? a. Sit down with two team members to discuss an ongoing

argument that has started to interfere with performance. b. Present the company’s quarterly fi nancial results to the

media. c. Train new employees to complete monthly performance

reports. d. Reallocate budget resources to increase the marketing

budget for one of the company’s services. e. Host conference call with top management to update

them on sales projections. f. Attend an award dinner where the CEO of the company

will accept a community award on behalf of the company.

1.5 | Compare and contrast diff erent types of organizations, managers and the decisions they make.

12. Compare and contrast start-up companies with growth companies.

13. Contrast for-profi t and nonprofi t organizations.

14. Decide what type of manager should make the following decisions. a. Set employee schedules.

Top manager Middle manager First-line manager b. Allocate budget resources.

Top manager Middle manager First-line manager c. Hire staff .

Top manager Middle manager First-line manager d. Prioritize fi nancial resources.

Top manager Middle manager First-line manager e. Establish partnerships.

Top manager Middle manager First-line manager

1.6 | Explain the purpose of organizational values, mission, and vision.

15. Match each of the following internal factors with the time frame of its impact.

Values 1–10 years Mission Timeless Vision Life of leader

1.7 | Demonstrate how focusing on skills and strengths leads to success as a manager.

16. Summarize the theory that Marcus Buckingham and Donald O. Clifton propose in Now, Discover Your Strengths .

CHAPTER EXERCISES The “Orange Effect” Exercise Purpose In this real-world-inspired scenario, you’ll consider how a manager might use team member strengths, negotiate internal and external dynamics, and take behaviors into account when making decisions.

Characters

Sterling Montgomery, Student Government Association (SGA) president

Behaviors: Builds and uses relationships to get work done. Talks a lot and enthusiastically persuades and motivates others. Good intuitive understanding of interpersonal relations. Strongly in- dependent in putting forth his own ideas, which are innovative and original. Fights back hard when challenged. Strong sense of urgency. Focused on goals and the people he needs to get there, not details or plans.

Skill Strengths (in descending order): 1) Relational, 2) Con- ceptual, 3) Technical

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Additional Resources 27

Julie Simmons, SGA secretary

Behaviors: Relatively formal and reserved. Requires some “proof ” to build trust in new people. Attention to detail; follows through on tasks to ensure completion. Th inks about what needs to be done and how to do it well and generally follows the plan. More focused on technical matters than social ones. Consistent and thoughtful. Not inclined to change.

Skill Strengths (in descending order): 1) Technical, 2) Con- ceptual, 3) Relational

Leslie Harris, SGA treasurer

Behaviors: Connects quickly with others. Strongly motivated to build and uses relationships to get work done. Talks a lot. En- thusiastically persuades and motivates others by adjusting his message. Very collaborative, works almost exclusively with and through others. Socially focused, he naturally empathizes with people, easily seeing their point of view. Teaches and shares. Often puts team/company goals before his own personal goals.

Skill Strengths (in descending order): 1) Relational, 2) Tech- nical, 3) Conceptual

Situation Overview

Sterling Montgomery, the new president of the Student Govern- ment Association (SGA) at Washington Technology Institute (WTI), is ready to set a new standard for how the SGA can bring student and alumni communities together to support campus spirit through sports. Sterling believes that the basketball team already provides great energy on campus, and if he could make this energy more visible, alumni would get more involved in campus life. Th is could be his legacy—his real chance to make an impact.

Here’s his idea. Sterling has heard that Ohio State University sells tens of thousands of colorful, team-inspired T-shirts for each football game. He thought, “If we could just do 1/10 of their re- sults, I’d be a hero!” He calls a meeting with Julie and Leslie to dis- cuss his new vision for bringing students, faculty, staff , and alumni together—to have all attendees at WTI basketball games wearing T-shirts in the same school color. Th e school colors are orange and white, so Sterling called his new initiative “the Orange Eff ect.”

The Meeting During the meeting, Sterling wants to get consensus from the team to move forward with the Orange Eff ect idea; create a plan, including next steps to take; and assign tasks to the most appropriate person. Although the three of them know each other well, the meeting does not go as Sterling hoped. He met resistance from one of the team members, who wanted to do a lot more homework before committing and was reluctant to launch a new program, as opposed to continuing with an existing program. Explore the background information and following qustions to see what might have gone wrong.

Background Information

WTI’s Mission Th rough its focus on teaching and learning, re- search and discovery, and outreach and engagement, WTI cre- ates, conveys, and applies knowledge to expand personal growth and opportunity, advance social and community development, foster economic competitiveness, and improve the quality of life.

WTI’s Vision Work with administration, faculty, staff , alumni, and students to bring the university to a top-tier academic rank- ing. We will accomplish this by ensuring that all our major con- stituencies are collaborating to increase research funding, foster collective school spirit, and drive up the value of education at WTI.

WTI’s Values Innovation, integrity, social impact, resource re- sults, and personal transformation

Questions

1. In what ways is Sterling’s vision for “Orange Eff ect” consistent or inconsistent with the university’s mission, vision, and values?

2. Based on their behaviors, which team member do you think was resistant to Sterling’s idea in the meeting, and why?

3. After agreeing to include information gathering as a part of the initial plan, Sterling has persuaded Julie and Leslie to move forward with the Orange Eff ect plan. Th e team has come up with the following list of tasks to complete by the next meeting. Who should be responsible for each task, and why? (Hint: if the answer is not clear based on skill strengths, consider the impact of the person’s dominant behaviors.)

Task #1 Contact student government presidents at other schools with similar programs, collect information about how they made their programs successful, and organize this feedback into a spreadsheet so the team can write a plan.

Sterling Julie Leslie

Task #2 Meet with T-shirt companies and negotiate the best possible price.

Sterling Julie Leslie

Task #3 Prepare the budget for the fi rst year of the program, with detailed supporting data.

Sterling Julie Leslie

Task #4 Host a dinner meeting with the president of the Alumni Boosters to garner support for the program and get a commitment from the boosters to promote the T-shirts in their newsletter.

Sterling Julie Leslie

Task #5 Write a plan for how volunteers will receive, sell, and distribute the T-shirts.

Sterling Julie Leslie

Task #6 Find fi ve volunteers to help run the program this year.

Sterling Julie Leslie

Task #7 Get sample T-shirts and ask students which shirts they would most likely buy at basketball games and what price they would be willing to pay.

Sterling Julie Leslie

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Chapter One Management in the 21st Century28

4. After three hours of evaluating how the Red Cross can have the greatest impact on the recovery eff orts, Brian calls the executive team of Red Cross to give them his preliminary recommendations.

Figurehead Leader Liaison Monitor Disseminator

Spokesperson Entrepreneur Disturbance Resource Negotiator handler allocator

5. Th e mayor invites Brian to stand behind her at a national press conference to demonstrate to the world that recovery eff orts are organized and moving forward.

Figurehead Leader Liaison Monitor Disseminator

Spokesperson Entrepreneur Disturbance Resource Negotiator handler allocator

6. Brian meets with a national account executive from Enterprise Rent-a-Car to get the best price on 250 rental cars for families with no transportation.

Figurehead Leader Liaison Monitor Disseminator

Spokesperson Entrepreneur Disturbance Resource Negotiator handler allocator

Check your answers in the “Answer Key” section.

Just the Right Type Digital Sandbox, a risk management and anti-terrorism software company, has seen extraordinary growth over the past decade in response to turbulent market, political, and environmental conditions. In just a few years, the company has grown from a small team of four friends to almost 100 employees. During a management meeting, the company’s president, Anthony Beverina, lists major management activities and needs to make a decision on how to best assign those activities and decision- making responsibilities based on the types of managers.

Directions: Circle the type of manager that you would associate with the following tasks, actions, and decisions.

1. Th e company has a major project to do for the Port Authority of New York. Which manager should organize the tasks of each of the team members and set work schedules between now and project completion?

Top manager Middle manager First-line manager

2. As the number of clients has increased, the company’s telephone support group has begun having trouble keeping up. Someone needs to identify software programs to purchase and decide what kinds of support will still be handled over the phone. Existing clients should still feel as though they can talk to a real person when they phone in. Who should make this call?

Top manager Middle manager First-line manager

3. No More Risk Software Co. off ers a complementary product, and its CEO has off ered to sell the company to Digital Sandbox. Who should assess the market opportunity that this purchase might off er?

Top manager Middle manager First-line manager

Task #8 Based on information gathered, write a description of the Orange Eff ect plan to present to the university president.

Sterling Julie Leslie

Task #9 Meet with the university president to present the Orange Eff ect plan for approval.

Sterling Julie Leslie

Role of a Lifetime Brian Troy, West Coast Area Manager for the Red Cross, has just mobilized his team and a large group of volunteers to respond to a wildfi re that spread rapidly across southern California. Circle the role in Mintzberg’s theory that best matches the actions that Brian took the fi rst week after the hurricane.

1. Two of the engineers assessing the damage to a bridge that crosses a bay strongly disagree about whether to reopen the roadway. Th ey have stopped talking. Brian invites them both for coff ee to discuss the situation, so that the engineers can come to a consensus decision.

Figurehead Leader Liaison Monitor Disseminator

Spokesperson Entrepreneur Disturbance Resource Negotiator handler allocator

2. Brian speaks at a press conference for local television stations and newspapers to update the media on how the Red Cross is working with local offi cials to provide response services for families displaced from their homes.

Figurehead Leader Liaison Monitor Disseminator

Spokesperson Entrepreneur Disturbance Resource Negotiator handler allocator

3. Brian receives a report from the federal government that outlines expected aid, funding, and National Guard participation. He forwards this to his team members.

Figurehead Leader Liaison Monitor Disseminator

Spokesperson Entrepreneur Disturbance Resource Negotiator handler allocator

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4. With a new government project just approved, the company needs to hire a project manager and coordinator for government services. Who should take on this task?

Top manager Middle manager First-line manager

5. Th e budgets were approved in January, and it is now August. Th e company had thought it would need to spend $50,000 to

build a new website, but a friend of Anthony’s just started a web design company and did the whole project for $20,000. Who should decide what to do with the $30,000 that was not spent?

Top manager Middle manager First-line manager

Check your answers in the “Answer Key” section.

ANSWER KEYS Chapter Exercises

The “Orange Effect”

1. Sterling’s idea for the “Orange Eff ect” program is consistent with the university’s mission and vision, with not such a clear connection to values. In the mission statement, the university states its commitment to “outreach and en- gagement.” Th is could certainly include connecting with alumni as an outreach eff ort and further engaging students through a large, highly visible project. More than anything else, “Orange Eff ect” seems squarely focused on the univer- sity’s vision to “foster collective school spirit.”

2. Based on her list of dominant behaviors, it would make sense that Julie might be resistant to launching a new pro- gram right out of the gate. Her need to be detail-oriented and resistance to change could provide a signifi cant barrier to launching the “Orange Eff ect” program. It would have been a very good idea for Sterling to have a conversation with Julie before the meeting and include her early in the planning process. As opposed to presenting a fully devel- oped idea, Sterling could exchange ideas with Julie and ask that they both gather some more information before pre- senting thoughts at the offi cer’s meeting.

3. Although there are a few doable combinations, we suggest the following distribution of tasks for the offi cer team: Task #1 —Leslie, Task #2 —Sterling, Task #3 —Julie, Task #4 — Sterling, Task #5 —Julie, Task #6 —Leslie, Task #7 —Leslie, Task #8 —Julie, Task #9 —Sterling.

Role of a Lifetime

an organizational goal, such as setting up and leading a monthly sales meeting. Th e science of management refers to technically focused activities, such as tracking data to ensure quality on an assembly line.

4. b. False

5. a. Th e only responsibility of a for-profi t company is to maximize the amount of money that can be made for shareholders.

6. Store managers must understand and listen to custom- ers so that the store can refl ect the local culture and community.

7. c. Leading

8. Controlling was used to ensure that the quality of eff ects was consistent with the director’s vision and within the budget constraints.

9.

Planning Organizing

Leading Controlling

Goal Achievement SUSTAINING

10. Without ethical and socially responsible decision mak- ing, the other management functions cannot be properly executed.

11. a—Disturbance handler, b—Spokesperson, c—Leader, d—Resource allocator, e—Disseminator, f—Figurehead

12. A start-up company does not have an operating history, compared to a growth company, which has a track record and increases its revenues faster than industry standards or competitors

13. For-profi t organizations distribute profi ts to shareholders and employees, compared to nonprofi ts that must reinvest all surplus resources back into the organization

14. a. First-line manager, b. Middle manager, c. First-line manager, d. Middle manager, e. Top manager

15. Values—Timeless, Mission—Life of leader, Vision— 1–10 Years

16. When managers focus on the skills where they are stron- gest, they will see greater performance results than when they focus more on their weaknesses.

Self-Test 1. b. Effi ciently and eff ectively

2. c. People, profi t, and planet

3. Th e art of management refers to the things that manag- ers do to collaborate and communicate in pursuit of

1. Disturbance handler 2. Spokesperson 3. Disseminator

4. Disseminator 5. Figurehead 6. Negotiator

1. First-line manager

2. Middle manager

3. Middle manager

4. Middle manager

5. Top manager

Just the Right Type

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30

The Evolutio n

of Manageme nt

two Chapter

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C H A P T E R O U T L I N EC H A P T E R O U T L I N E

31

Learning Objectives

2.1 | The Historical Foundations of Management

Wealth of a Nation Th e Corporation

2.1 | Describe the historical foundations of management.

2.2 | Discovering and Teaching Management Theory

Bureaucratic Management: Max Weber Administrative Management: Henri Fayol

2.2 | Explain the beginning of modern management theory and education.

2.3 | The Quantitative Approach Scientifi c Management: Frederick W. Taylor Motion Studies: Frank B. Gilbreth Scientifi c Management and the Mind:

Lillian M. Gilbreth Visualizing Management: Henry Gantt Quality Movement

2.3 | Outline the progression of the quantitative approach to management.

2.4 | The Humanistic Approach Hawthorne Studies Confl ict: Mary Parker Follett Motivation: Douglas McGregor RESEARCH @ WORK: Theory Y in Practice

2.4 | Outline the progression of the humanistic approach to management.

2.5 | The Balanced Approach Cooperation: Chester I. Barnard Systems: Jay W. Forrester

2.5 | Interpret the factors that led to a balanced approach to management.

By the end of the chapter, you will be able to:

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approach to management.

Additional Resources Key Terms

In Review

Self-Test

Chapter Exe rcise

Self-Assess ment

Self-Test

Answer Key

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32 Chapter two The Evolution of Management

“Th e past reminds us of timeless human truths and allows for the perpetuation of

cultural traditions that can be nourishing; it contains examples of mistakes to avoid,

preserves the memory of alternatives ways of doing things, and is the basis for self-

understanding . . .”

—Bettina Drew

2.1 | THE HISTORICAL FOUNDATIONS OF MANAGEMENT

2.1 | Describe the historical foundations of management.

In Chapter 1, we explored critical thinking and how important it is for 21st-century manag- ers. Although some believe the theory of critical thinking is a relatively new concept, it can in fact be traced back 2,500 years to the time of Socrates, the Greek philosopher. Socrates ques- tioned the beliefs of authority fi gures and found that even those in positions of high power did not have all the answers. Refusing to accept the thoughts and ideas of others at face value, Socrates looked beyond the surface to delve into the deeper realities of reason and logic. Plato and Aristotle followed suit, and the adoption of critical thinking spread through the Middle Ages, the Renaissance, and right up to today.1 In this chapter, we have included some of history’s greatest managers and how they used critical thinking skills to question the “norm” and establish a better way of running their businesses. Each of these managers gathered evidence and used reasoning and exist- ing knowledge in order to form objective and logical viewpoints. Let’s take a look at the evolution of management and the impact made by these critical thinkers on organizations throughout the ages. What can managers learn about courage and success from the evolution of manage- ment theory and practice? In business, history has more to do with forging the future than looking back. So where did modern business get its start? Th e genesis of manage- ment can be found in early civilizations; from the Egyptians erecting the pyramids to the Chinese Empire building the Great Wall of China. Here, we will focus on the development of management practices, the origins of which can be traced back to the Declaration of Independence. 2

Imagine the economic and business landscape of the early United States. Small regional economies were driven by self-employed artisans and small, family-owned shops. Collab- orative networks of towns and communities were slowly forming a national economy. 3 As machines began to transform the economy, production migrated from homes to factories. Th is shift transformed these patched-together, fragile economies of self-employed individ- uals and family businesses into the globally integrated, national economy we have today. How did management facilitate this economic revolution? Two moments in history ini- tiated modern management practice: Adam Smith’s book Th e Wealth of Nations and the Industrial Revolution.

“Th e past reminds us of timeless human

cultural traditions that can be nourishin

preserves the memory of alternatives wa

understanding . . .”

2.1 | THE HISTORRRRIIIICCCCAL OF MANAGGGGEEEEMEN

2.1 | Descriiibebebe the historical foun

In Chapter 1, we explored critical thinking a

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332.2 | DISCOVERING AND TEACHING MANAGEMENT THEORY

Wealth of a Nation In 1776, prominent critical thinker Adam Smith (1723–1790), a Scottish economist and philosopher, published Th e Wealth of Nations, which argued that division of labor could increase production by having workers specialize on a task. Let’s say that it takes 18 tasks or steps to make one pin. By analyzing the production process, Smith suggested that 10 employees, each completing all the tasks needed to make a pin, might make only 20 pins in a day, or 200 total. In contrast, those same employees, each specializing in no more than a couple of tasks and working together, could manufacture 48,000 pins in the same amount of time. When workers focus on completing a limited number of tasks, it is referred to as specialization . If you were an 18th-century pin manager selling pins for 5 cents each, the economics of specialization were simple to understand, and the numbers were very compelling. 4

The Corporation Th is concept, known as “division of labor,” gave self-employed and family-owned busi- nesses a model for expanding their enterprises and creating more wealth. Th is expan- sion also created greater political power for business owners. In the late 18th century, businesses were still subject to the direct control of government, and these burgeoning enterprises sought legal protection and autonomy. Corporations , a type of organization, are legal entities formed and structured to achieve goals with special protections for own- ers. In 1819, the U.S. Supreme Court ruling in the Dartmouth College v. Woodward case gave corporations rights that were similar to those of individuals, providing the context for the modern corporation. 5

2.2 | DISCOVERING AND TEACHING MANAGEMENT THEORY

2.2 | Explain the beginning of modern management theory and education.

Let’s imagine the rapid growth that occurred over the past two centuries, allowing today’s managers to collaborate with teams across the globe, to manufacture products using parts from multiple countries and cultures, and to build customer relationships using the Inter- net as a medium. In 1800, there were no roads, railways, intricate canal systems, or phones, and it was easier to cross the Atlantic Ocean than travel halfway across your state. Today, a manager can email millions of stakeholders with the touch of a button, build collaborative communities online through Facebook, Twitter, and LinkedIn, ship a package around the world within days, or deliver a ton of goods 40 miles away in less than an hour. Th e rapid development of infrastructure and factories was made possible through Smith’s division of labor. But the application of Smith’s theories also created an avalanche of complexities for managers and workers; specifi cally, it was diffi cult to identify who was responsible for certain activities and who had the authority to make decisions when problems arose. With so many new systems, technologies, and infrastructures changing how organizations oper- ated, how did managers use critical thinking skills to make sense of these changes and take advantage of them?

Bureaucratic Management: Max Weber One of the initial theories for management came from a scholar seeking to understand capitalism, an economic system that is defi ned by private ownership. Max Weber (1864– 1920), German sociologist and economist, asked why certain European countries were successful at implementing this system and others were not. Weber said that he witnessed

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34 Chapter two The Evolution of Management

Characteristics Advantages Disadvantages and Distortions

Division of Labor Managers increased production over 2,000% (as per Smith’s pin economics), and workers knew exactly what they were supposed to do through specialization.

Managers took this concept to an extreme and began overanalyzing work to increase efficiency. Workers became bored and tired; as a result, they began to underperform, often on purpose.

Managerial Hierarchy Managers had confi dence in their responsibility and authority in the organization, and employees knew who they reported to and had the authority to make decisions.

Managers mistook authority for power, and used the power of their position for personal gain. Employees with bad bosses felt like they had no recourse because of their supervisors’ legitimate authority.

Formal Selection Managers needed to consider the skills necessary to complete the tasks of a job and ensure that the best possible candidates were identifi ed. Employees were more likely to be successful in the position because they were selected based on their skills and strengths that matched with the job.

Managers overlooked good candidates because they did not have the requisite experience for the job, instead of spending the time to train and nurture a potentially great performer. Employees were disqualifi ed from selection because of lack of experience.

Career Orientation Managers were invested in the long-term welfare of the people that worked for them, and employees did not feel like a replacement part on a machine.

Managers and employees felt entitled to their jobs regardless of job performance.

Formal Rules and Controls Managers could document the best way to accomplish tasks and share those expectations with employees. Employees understood the parameters of their work and what the organization needed them to accomplish.

Managers could create a rule for everything, which built an organizational culture that lacked creativity and innovation. Employees stopped trying to improve their tasks, although they were in the best position to do so, because they simply followed the rules.

Impersonality Managers focused on the responsibility and authority of their position, not their personal desires and likes. Employees would not have to be subjected to the whims of their managers.

Managers mistook this for being cruel, distant, aloof, and fear-inducing. Employees became afraid to approach management and express new ideas or opinions.

Source: Adapted from C. A.Rodrigues, “Fayol’s 14 Principles of Management Then and Now: A Framework for Managing Today’s Organizations Effectively,”

Management Decision 39, no. 10 (2001): 880–889.

Table 2-1 Max Weber’s Characteristics of Bureaucracy

the “spirit of capitalism” in 1904, when he visited several prominent cities in the United States, where innovation and competition were encouraged. 6 Weber noted that “U.S. man- ufacturing and marketing had grown from small stores and owner-managed businesses to large professionally managed fi rms that were bound together by an intercontinental network of communication and transportation.” 7 Th is was in stark contrast to the capi- talistic practices in his home country of Germany, where small groups of powerful people controlled prices and distribution. Weber defi ned the ideal management of an organization as a bureaucracy , a form of organization marked by the division of labor, managerial hierarchy, rules and regulations, and impersonality (see Table 2-1 ). In business today, the term bureaucracy is often used to describe an organizational structure, usually the government, which operates with the greatest number of rules and the least amount of eff ort, motivation, and sense of

Bureaucracy A form of organization marked by division of labor, managerial hierarchy, rules and regulations, and impersonality.

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352.2 | DISCOVERING AND TEACHING MANAGEMENT THEORY

urgency. Weber thought of bureaucracy quite diff erently, as the ultimate state of organizational and managerial excellence, defi ned by six model charac- teristics: division of labor, managerial hierarchy, formal selection, career orientation, formal rules and controls, and impersonality. 8 Th is became the intellectual basis for many theories that follow in this chapter. Often misunderstood, Weber’s characteristics of bureaucracy sought to bring humanity to the workplace, where workers could rely on the rules and controls of the organization, not necessarily the whims of the people managing them.

Administrative Management: Henri Fayol Predating Weber’s theoretical fi ndings, Henri Fayol had created an- other theory of management. In the 1860s, Fayol, a mining engineer, observed the need for managers to gain both responsibility and au- thority through a greater set of skills than those that simply increased production output and quality. 9 He also saw a need for management theory, which for him was “a collection of principles, rules, methods, and procedures tried and checked by general experience.” Th is need was ap- parent when the mine where he worked shut down because a horse broke its leg. Th e mine’s manager was not present, and no one else at the mine had the authority to procure another draft horse. Everything stopped. Management failed. For Fayol, this was a failure due to poor planning and organization and to a com- munication disconnect between management and employees. 10 Following this debacle, Fayol implemented a team concept for miners and shifted decision-making authority to these work groups. Fayol’s ideas became the foundation for administrative theory , which identifies the functions of management in an organization and the principles needed to make sense of a complex set of organizational tasks. Fayol’s views incorporated some of We- ber’s bureaucracy theory, where legitimate authority was inherent in a position and organizational hierarchy attempted to create order—a rules-based approach that dis- regarded the personal needs of individual workers. However, Fayol linked motivated and satisfied employees to successful management, a departure from Weber. This led to his original concept of the “functions of management”: planning, organizing, command, coordination, and control. Beyond the func- tions of management, Fayol noticed a need for managers to have principles by which they conducted their functions. These princi- ples were not meant to be an exhaustive list; moreover, Fayol began to call for studying the art of management— “there is nothing rigid in or absolute in management affairs, it is all a question of propor- tion. Principles are flexible and capable of adaptation to every need; it is a matter of how to make use of them, which is a difficult art requiring intelligence, experience, decision, and proportion.” 11 Table 2-2 shows Fayol’s original principles and how they have changed in today’s practice. Th e theories of Weber and Fayol, along with Fayol’s principles, gave management educators a base of knowledge to begin teaching the workforce of the 20th century. In 1881, Joseph Wharton, philanthropist and cofounder of Bethlehem Steel Corporation, recognized the need for American managers to have a way to share experiences and to train the next generation of managers. He funded the Wharton School of Finance and Economy at the University of Pennsylvania, the fi rst suc- cessful undergraduate school of business. Here, managers, scholars, and governments began the quest to understand, refi ne, and optimize management practices to create competitive advantages for organiza- tions and countries. 12

Administrative theory Identifi es the functions of management in an organization and the principles needed to make sense of a complex set of organizational tasks.

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36 Chapter two The Evolution of Management

Principles Fayol’s Intent Today’s Practice

Division of work Workers specialize in one task or a few tasks.

Employees are encouraged to generalize their activities to create diverse contributions.

Authority Managers hold the power. Employees are empowered.

Discipline Managers implement formal rules and controls.

Employees work in teams where the pressure to perform is self- or peer-induced.

Unity of command Workers have one boss. Employees could have one boss, many bosses, or no bosses, depending on the culture of the company and the situation.

Unity of direction Employees work for one manager with one plan.

Employees work with managers on multiple plans.

Subordination of individual interests to the general interest

Shared purpose means that employees are committed to the organization’s direction.

Shared purpose means that the organization and employees are committed to their mutual direction.

Remuneration Employees receive reasonably based pay for reasonable performance.

Employees receive performance- based pay for creating expected and unexpected value for the organization.

Centralization Employees take orders from a hierarchal management.

Employees participate in decision making and are expected to decide the best course of action on an ad hoc basis.

Scalar chain (line of authority) Communication is controlled with a top-down approach.

Communication is open and shared freely, when and where possible.

Order Internal information is used to control activities.

Internal information is used to control and coordinate activities.

Equity Managers earn employees’ commitment through kindness.

Managers earn employees’ commitment through shared purpose, thus a sense of ownership.

Stability of tenure of personnel Managers train employees when they start working for the organization and then continuously encourage them to stay.

Managers train and develop employees continuously so they will want to stay.

Initiative Managers create the direction of the company and tell employees to go there.

Employees create the direction of the company and managers and employees go there together.

Esprit de corps Managers avoid confl ict to keep worker attitude high.

Managers look for productive confl ict to grow the organization, creating worker trust.

Table 2-2 The Evolution of Fayol’s Principles

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372.3 | THE QUANTITATIVE APPROACH

2.3 | THE QUANTITATIVE APPROACH

2.3 | Outline the progression of the quantitative approach to management.

Charles Babbage (1792–1871), inventor of the fi rst mechanical computer, was also inter- ested in questions of management, particularly the ineffi ciencies that he observed in the modern factory. 13 He found that specialization led to bored workers, and bored workers de- creased productivity. Workers being subjected to the same monotonous tasks, day after day, led to unprofi table behaviors for companies and demotivating conditions for employees. In a manufacturing environment, speed is critical. Th e faster everybody performs, the more goods can be produced and the more money can be made. Workers began to test management by performing as slowly as possible while giving their supervisors the impression that they were working fast. Th is is known as soldiering . Two types of soldiering were observed: workers were said to be doing natural soldiering when they were simply “taking it easy,” as opposed to systemic soldiering, when workers consciously and deliberately underworked. Natural soldiering could be easily addressed by inspiring and mo- tivating the team, but systemic soldiering was emerging as a negative phenomenon in the 19th century. 14 So what was Babbage’s solution? He conducted time studies , documenting the amount of time that it took workers to complete tasks, so he could better understand the amount of performance that was reasonable to expect from workers. Th ere were certainly critics of this practice. Luddites (workers who opposed the threat of technology and machines to their jobs) rebelled against the emergence of manufacturing and Babbage timing their eff orts. In response, Babbage suggested that managers implement profi t-sharing, so that employees could benefi t directly from maximizing production. Th is began the quantitative approach to management—applying objective methods to enhance decision making. Th is approach became practice through management science , using statistics, mathematics, and other quantitative methods to improve effi ciencies. 15

Scientifi c Management: Frederick W. Taylor As a manager at the Midvale Steel Company, critical thinker Frederick W. Taylor (1856–1915) observed soldiering among his workers. 16 By observing his team, and analyzing the informa- tion he had gathered, he suspected that the team was underperforming at about a third less than their potential, and felt that both managers and workers bore responsibility. Heated debates between managers and workers regarding “a fair day’s work for a fair day’s pay” were common. From this atmosphere of unproductive confl ict, Taylor sought to create a reliable system to solve these problems—a science for management. 17 Th is classical perspec- tive sought to make organizations and workers operate as effi ciently as possible. Continuing Charles Babbage’s eff orts to create an equitable workplace where both own- ers’ and workers’ needs were met, Taylor started conducting his own time studies in 1881. Armed with a stopwatch, scale, and tape, he meticulously weighed materials, measured dis- tances that workers walked to conduct a task, and the exact time it took to complete each step of an activity. In contrast to the earlier work of Babbage, which described worker activ- ity, Taylor’s time studies searched for new ways to improve performance through a scientifi c, quantitative approach. 18 Th is was revolutionary at the time; suddenly, managers could break down a job into basic movements, understand what performance standards were possible, and set expectations for each employee. Th is focus on analyzing and synthesizing the fl ow of work to maximize productivity is called scientifi c management . Taylor sought “the ultimate standardization of all ele- ments surrounding and accompanying a job,” 19 including methods, materials, and ma- chines. Applied in the wrong way, this approach often had the unintended implication of diminishing Taylor’s concern for the worker, for he focused his concern for workers by advocating improving incentives, much like Babbage, and a new management meth- odology he called the task-management system , a combination of setting performance standards, selecting the best worker for the job, and building good relations between managers and employees.

Soldiering A way that workers tested management by performing as slowly as possible, while giving their supervisors the impression that they were working fast.

Quantitative approach Applying objective methods to enhance decision making.

Management science Using statistics, mathematics, and other quantitative methods to improve effi ciencies.

Scientifi c management Using a quantitative approach to analyzing and synthesizing the fl ow of work to maximize productivity.

Task-management system A combination of setting performance standards, selecting the best worker for the job, and building good relations between managers and employees.

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38 Chapter two The Evolution of Management

Task-Management System Frederick Taylor defi ned management as “knowing exactly what you want men to do, and then seeing that they do it in the best and cheapest way.” He also believed that “the relations between employers and men form without question the most important part of [management]”. 20 Th ese philosophies became the guiding principles of the task-management system. First, he separated “planning” work from “performing” tasks, and created four principles of scientifi c management that defi ned the task-manage- ment system 21 (see Table 2-3 ). Harrington Emerson (1853–1931) became the fi rst “effi ciency engineer,” a title that he cre- ated for himself. As a management consultant, Emerson focused on many of the same prin- ciples as Taylor’s task-management model and incentive system. Within a couple of years of working with the Atchison, Topeka, and Santa Fe Railroad, Emerson saw great success with his client, improving manufacturing output by 57 percent, cutting costs 36 percent, and increasing the pay of workers by 14.5 percent. 22 Although he was inspired by and took advan- tage of the scientifi c management methods of his time, Emerson saw a better way. Much like the managers who felt subjugated by Taylor’s removal of their authority, Em- erson believed that line-level management needed to maintain unity of command, but he also thought that they should have access to the specialized knowledge that was necessary to operate the day’s large and ever-growing corporations. 23 Here was his solution. First, he created a chief of staff position that would oversee the activities of four subdivisions: 1) employee relations; 2) machines, tools, and equipment; 3) materials, including purchasing, handling, and inventory; and 4) records and accounting. Next, Emerson gave full authority to line-level managers to lead the activities of workers, with the added benefi t of access to staff with specialized knowledge. 24 With this simple evolution of Taylor’s task-management model, Emerson successfully transformed how most companies organized staff and line- level management. Th ese advances earned Emerson a title that he probably would not have felt comfortable giving himself—the High Priest of Effi ciency. In addition to his revolutionary staff model, he made signifi cant strides in cost accounting, which had been merely descriptive, meaning that records were kept solely based on money that was spent and earned. 25 Emerson imple- mented cost accounting processes that estimated costs before work started, giving managers another tool to set standards and ideals for performance. Th is evolution of thought parallels the change in perspectives from Babbage’s to Taylor’s time studies, where managers were now expected to understand the possibilities of performance, as opposed to simply observ- ing and documenting what had been performed. In Emerson’s 1913 book Th e Twelve Principles of Effi ciency, he articulated a new set of principles for management, based on observation and understanding what is possible to achieve, which became the historical blueprint for the art and science of management. 26

His fi rst fi ve principles defi ne the art of management and dealing with people. By shifting a manager’s attention to seeking ideal performance, Emerson established the concept of goals , which became his fi rst management principle, “clearly defi ned ideals.” He under- stood that ideals were realistic only when they were developed and understood by both managers and employees. To achieve his fi rst principle, he created his second principle, where he implored managers to look everywhere in the operation, regardless of position, for the best perspectives to help the team achieve the ideal performance standard. Th is required management to select, hire, and retain the most knowledgeable staff to support

Frederick Taylor’s Principles

Principle #1 Develop a quantifi able, scientifi c way to measure performance.

Principle #2 Select workers based on scientifi c methods.

Principle #3 Train employees based on measurable standards.

Principle #4 Work closely, side by side, with employees.

Table 2-3 Four Basic Principles

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392.3 | THE QUANTITATIVE APPROACH

fi rst-line managers, which was his third principle. Likely inspired by Weber’s work on bureaucracy, Emerson wanted to balance the open discussion between managers and employees through his fourth principle, which sought discipline through adherence to rules. In his fi fth and fi nal principle relating to people, he set the standard for employee- employer fairness. Th e last seven principles of Emerson’s management manifesto dealt with the science of management, with easily measurable processes and methods. Easy to follow, these seven principles were keeping accurate, timely, and permanent records; planning activi- ties; standards and timing for tasks; “standardized conditions”; “standardized operations”; written documentation for processes; and rewards for achieving ideal effi ciency. 27 (For more, see Table 2-4 .)

Motion Studies: Frank B. Gilbreth Frank B. Gilbreth (1868–1924), a contemporary of Taylor, sought a much more detailed ap- proach to effi ciency than observed in Taylor’s time studies, measuring motion in units as small as 1/1,000 of a minute. As a journeyman bricklayer and the slowest one on the job, he began to break down and understand each and every movement needed to lay one brick.

Emerson Fayol Weber

Clearly defi ned ideals Unity of direction NA

Discipline Discipline NA

The fair deal Equity NA

Reliable, immediate, and adequate records Order Formal rules and controls

Standards and schedules Order Formal rules and controls

Standardized conditions Order Formal rules and controls

Standardized operations Order Formal rules and controls

Written standard-practice instructions Order Formal rules and controls

Dispatching Centralization NA

Effi ciency-reward Remuneration NA

Common sense NA NA

Competent counsel NA NA

NA Division of work Division of labor

NA Scalar chain (line of authority) Managerial hierarchy

NA Subordination of individual interests to the general interest

Formal selection

NA Stability of tenure of personnel Career orientation

NA Authority Impersonality

NA Initiative NA

NA Unity of command NA

NA Esprit de corps NA

Table 2-4 Evolution of Management Theory from Weber to Fayol to Emerson

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40 Chapter two The Evolution of Management

Gilbreth determined that exactly 18 motions of the hand were used to lay one brick. By designing new working methods, such as building a shelf at the right height to save the bricklayer bending down and creating innovative types of scaf- folding, he was able to reduce that number to six. 28 At the time, a journeyman was expected to lay 175 bricks in a day—after reducing the number of motions to lay one brick to 6, Gilbreth could lay 350. 29 Not only did Gilbreth improve the effi ciency of the bricklayers, but the quality of their work was better as well. In ad- dition, thanks to the new working methods, the men were no longer as fatigued as they had once been. With this understanding of creating effi ciency, Gilbreth started his own con- struction business, eventually employing over 10,000 workers all over the world. As his business and reputation grew, Gilbreth decided he wanted to evolve scientifi c management. Management challenges in factories were much more complex than the task of laying a brick, so Gilbreth set forth to apply motion studies, where he used a motion-picture camera to capture the step-by-step movements that were taken to complete a task. 30 Th is method was employed wherever possible and applicable—in such widely varying areas as surgery, nurs- ing, golf, and baseball. By applying scientifi c management methods, Gilbreth’s motion studies sought effi ciencies by orchestrating the maximum results for the least worker eff ort. With their smallest physical movements being analyzed, what must workers have thought? At the time, there was no one better to study the psychological impact on workers than Frank Gilbreth’s wife and collaborator, psychologist Lillian Gilbreth.

Scientifi c Management and the Mind: Lillian M. Gilbreth Lillian M. Gilbreth (1878–1972) was a fi rst-rate scholar and management consul- tant. Her ability to connect scientifi c management to “the psychology of man- agement” secured her place in the annals as a great management thinker. In her 1912 doctoral thesis, Th e Psychology of Management , she studied the perceptions, emotions, and thoughts of managers, and how these aff ected work and employ- ees. Consistent with the motion studies of her husband and the eff orts of Taylor’s scientifi c management, Lillian Gilbreth centered her attention on understanding the precise workings of the manager’s mind so that behaviors could be taught and orchestrated. In her analysis, she compared three historical types of management: traditional, transitory, and scientifi c. Traditional management depended on cen- tralized authority. Transitory represented the confused shift between central au- thority and manager-employee cooperation. And scientifi c management relied on positive manager-employee relationships, which could be maximized by refi ning methods for employee selection, incentives, and welfare. Th is work made Lillian Gilbreth a pioneer in the fi eld of human resource management , as it bridged theo- rists’ dual focus on profi t and people and made the seemingly intangible visible. 31

Visualizing Management: Henry Gantt Babbage, Taylor, and Frank Gilbreth specialized in observing and documenting the visible, making it possible to eventually set ideals, or goals, for performance. Lillian Gilbreth observed and documented the invisible workings of the mind, or psychology, in order to create ideal environments for managers and employees

to establish productive performance-based relationships. Many other invisible forces af- fected the day-to-day management of production as well. What might managers gain from observing, documenting, and making these dynamics visible, with the intent to create new performance standards?

Th is was the managerial quest of Henry L. Gantt (1861–1919). A mechanical engineer, Gantt joined the Midvale Steel Company in 1872, where he met and worked with Taylor. Using the philosophies that he learned from Taylor, Gantt became a management consul- tant in 1901. His methods and advice were not always embraced by his clients. At Sayles

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412.3 | THE QUANTITATIVE APPROACH

Bleacheries, a textile plant in Rhode Island, both management and employees refused to go along with Gantt’s recommendation and the employees went on strike , which is when employees stop work in pursuit of a concession from management. In an attempt to restore order, Gantt hired new employees and quickly taught them their tasks and “habits of indus- try,” which we now refer to as training. Th ese “habits” of industriousness and cooperation were behaviors that could be observed, documented, standardized, and idealized. 32 Yet, the inter- nal forces that determined these habits were invisible; training sought to make them visible. Another dynamic that managers must contend with every day is time . Before he could solve the challenge of visualizing time, for many years Gantt had refi ned methods for visu- alizing performance standards. 33 For example, if a worker was expected to lay 175 bricks a day, Gantt introduced color so that managers could quickly assess performance, with black indicating that the employee was meeting or exceeding performance standards, and red indicating failure to meet expectations. If you were Gilbreth, managing 10,000 employees on hundreds of job sites, this would have been a marvelous breakthrough in terms of effi ciency, as you would now have the necessary data to analyze performance (see Table 2-5 ). Th ese progressive methods established Gantt as a management consultant of the fi rst order. His talent for graphically representing performance was sought after by the U.S. Army in World War I, for whom he worked from 1914 to 1918. At the time, the army was an organi- zational mess: “plants [were] scattered all over the nation, shipments were late, [and] ware- houses were crowded or disorganized.” 34 Eventually, Gantt had an insight that would change how managers viewed projects forever. He noted, “We have all been wrong in scheduling on a basis of quantities; the essential element in the situation is time , and this should be the basis in laying out any program.” Let’s put this in context. A bricklaying job has three primary operational tasks: material delivery, bricklaying, and cleanup. Managers had previously measured tasks independently: the quantity of materials sent, the number of bricks that were laid in a day, and the amount of waste removed from the job site. Th ough this method was probably suffi cient for simple projects, it led to chaos in the complex environment of the growing corporation, and espe- cially the U.S. Army, because these tasks are dependent on each other in time. For instance, if the bricks and mortar were supposed to be on the job site on Monday but did not arrive until Th ursday, the bricklayers could not work until Friday, where they had originally planned on starting Tuesday. Chaos resulted when a manager was planning and organizing hundreds of tasks and had no way of visualizing when a project was behind schedule. Gantt introduced the progress chart, which would be later known as the Gantt Progress Chart and has been described as “the most notable contribution to the art of management made in this generation.” 35 Th is simple solution to a complex problem broke down tasks by planned time to perform and actual time to perform. Th is provided managers with immediate visual feedback as to when a project was behind schedule and required corrective attention. 36 See Figure 2-1 for an il- lustration of a Gantt chart. Scientifi c management, including time studies, motion studies, and worker incen- tives, combined with advances in graphically representing performance, gave managers many methods to increase worker productivity. At the same time, mass production —the production of large quantities of a product requiring the standardization of processes and

Performance Standard of 175 Bricks Laid per Day

Workers Mon Tues Wed Thur Fri Mon Tues Wed Thur

John 142 201 187 133 192 125 152 200 220

Alan 199 190 150 124 220 180 192 168 173

Neville 178 180 190 198 129 127 112 125 135

Loren 171 175 173 176 178 177 181 177 170

Table 2-5 Gantt’s Management Color Performance

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42 Chapter two The Evolution of Management

parts—was becoming common practice and setting new standards for production. Remem- ber Smith’s concept of division of labor, where diff erent employees were responsible for dif- ferent tasks in the manufacturing process? Based on this theory, the ideal state of effi ciency would be when each part created by each employee was exactly the same, so the assembly of those parts would take the least amount of time, and an amount that could be predicted. Th e endless pursuit of this ideal state of effi ciency became the quality movement .

Quality Movement At the turn of the century, cars were still only for the wealthy, but the masses yearned to own them, too, either to get places more quickly or to rid the streets of the stench of horse manure. In 1899, Henry Ford (1863–1947) founded the Detroit Automobile Com- pany, which closed down operations only two years later due to poor quality and high prices. Learning from his mistakes, Ford founded the Ford Motor Company in 1903 with a passion to create a high-quality car that was aff ordable for the masses. In 1908, the Ford Motor Company introduced the Model T, an automobile that cost $825. Over the course of the next 10 years, the company sold 472,000 Model Ts, which retailed for $360 per car. By 1927, the Ford Motor Company had produced and sold more than 15 million cars. 37 How did they do it? Quality. Th e American Society for Quality suggests that “quality has two meanings: 1) the char- acteristics of a product or service that bear on its ability to satisfy stated or implied needs; 2) a product or service free of defi ciencies.” 38 For the Ford Motor Company, this meant that they needed to produce a car that met the needs of the American middle class (their customers), with as few defects as possible. To accomplish this, the company invented a process for manufacturing called the assembly line , where parts are added sequentially to construct a product faster. Th is process was sped up dramatically by de- signing and manufacturing interchangeable parts . Th ese were parts that were of such a high quality that they appeared to be identical. Th rough advances in quality, through the assembly line and interchangeable parts, the build time for a Ford Model-T dropped from days to 93 minutes. 39 Th e United States and its allies in World War II used the advances made at the Ford Motor Company to produce airplanes and weapons quickly, cheaply, and in great numbers. Indeed, refi ning production was a critical component in increasing output during the war, but the management needs of the military exceeded those of civilian management. Mili- tary managers needed to lead global production and distribution, with very defi ned goals that had to be achieved. Operations research became a central management theme during World War II, in an attempt to establish a quantitative rationale for decisions that would lead to goal achievement. During the war, William E. Deming (1900–1993) a statistician from the U.S. Census Bureau known for his use of mathematics to improve operational processes, was called on to help engineers improve their effi ciency and eff ectiveness. In 1947, after the conclusion of the war, Deming went to Japan to help set up the country’s census process. Curious, he immersed himself in the culture of Japan, including theater and conversations with local

Figure 2-1 A Bricklaying Week, with Planned and Actual Performance The Gantt progress chart allows managers to plan and schedule projects, estimate the length of time that a project should take, decide the required resources, and arrange the order of tasks.

Time

Material Delivery

Bricklaying

Cleanup

Planned performance Actual performance

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432.4 | THE HUMANISTIC APPROACH

business executives. Th ese conversations led to an invitation in 1950 by the Union of Japanese Scientists and Engineers ( JUSE) to speak on his statistical methods for quality. His impact was extraordinary in Japan: only one year later, the country established the Deming Prize, a national quality award for businesses.40 One of the primary philosophies of the quality movement is the ongoing eff ort to improve a process, method, service, or product, called continuous im- provement . Deming referred to this as “Plan-Do-Act,” and suggested that a man- ager’s job was to distinguish between real problems and trivial mishaps that happen on a day-to-day basis. By focusing on the big problems fi rst, managers would be more likely to fi x the 20 percent of operational ineff ectiveness that causes 80 percent of the quality problems. Deming and a colleague, Joseph M. Juran (1904–2008), suggested using statistical methods combined with planning, organizing, and controlling to lead companywide quality eff orts. Establishing teams called quality circles , companies in Japan (most notably Toyota) brought together knowledge spe- cialists, supervisors, and workers to continuously discuss ways to improve. In addition, all workers were given permission to stop the assembly in the plant if they noticed a problem. 41 Quality in Japan’s manufacturing became the premier standard for the world. Yet, given that both Deming and Juran were Americans, why did Japan’s quality standards begin to exceed U.S. carmakers? An NBC television program in 1980, If Japan Can . .  . Why Can’t We? asked a similar question. Deming was a guest on the program, and U.S. manufacturing companies were embarrassed by his answer. During the previous 30 years, Deming was largely ignored by U.S. companies, and throughout his interview on the NBC show, he made it clear that U.S. management was to blame. 42 Within days, his phone began to ring with calls from Ford Motor Company and General Motors (GM), who were having their worst financial performance since World War II. Never very popular with U.S. car executives, Deming was nearly banned from GM for yelling at its president at the time, Jim McDon- ald, in front of GM workers and executives, “Who is responsible for quality problems? You are!” To underscore his philosophy that quality started at the top of an organiza- tion, Deming famously walked off stage after Ford’s CEO at the time, Donald Peterson introduced Deming as a speaker to a group of senior staff members and announced that he would rejoin them after lunch. When Peterson asked where Deming was going, Deming retorted, “If this isn’t important enough for you, it’s not important enough for me.” Peterson cancelled his meetings and joined the group. 43 U.S. business started to listen. Th e quality movement was the predominant theme in the qualitative approach to man- agement through the 1980s. Many quality programs were introduced based on the principles outlined by Deming and Juran; these included lean manufacturing , Total Quality Manage- ment (TQM), and Six Sigma , which was founded at Motorola and popularized by General Electric (GE). In contrast to production management, the quality movement understood the need for every employee in the company, regardless of role, to participate in the problem- solving eff orts to achieve stated goals. 44

2.4 | THE HUMANISTIC APPROACH

2.4 | Outline the progression of the humanistic approach to management.

When scientifi c management began to place rigid expectations on workers, it’s fair to say that employees were not happy about it. Joseph Wharton, businessman and man- agement education pioneer, once asked Frederick Taylor to consult for Bethlehem Iron Company (later called Bethlehem Steel) to decrease costs and improve overall effi ciency.

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44 Chapter two The Evolution of Management

In 1899, during his stint at the company, the price of pig-iron, a type of crude iron, soared. Th is increased demand for high-quality iron, and Bethlehem sold 10,000 tons of its iron in a short period of time. Th is also increased demand on workers to load the iron onto railcars. Workers at this time were earning by “piece rate”—meaning they were paid for how much “pig-iron” they loaded, which were iron ingots or moulds that each weighed 92 pounds. Taylor and his team selected the 10 best workers at Bethlehem and asked these men to work at “maximum speed” for one day. Th ey loaded a staggering 75 long tons (2,240 pounds) in one day, compared to the usual 12.5 long tons expected by aver- age workers. Th ey were physically exhausted. With this new data, Taylor and his team created a new performance and pay plan at Bethlehem. Th e “fi rst-class” workers were expected to load 45 long tons a day, almost quadruple the previous expectation. Th ese workers would be paid $.0375 per long ton or $1.85 a day, which represented a 60 per- cent raise in pay. 45 Certainly management and shareholders saw great value in the new system—but what about the worker? As scientifi c management became popular, laborers organized into labor unions to bar- gain collectively for worker rights. Th e unions saw scientifi c management as an emerging evil in the burgeoning capitalistic economy; as companies applied Taylor’s methods, the fi rst-class workers kept their jobs, but many others lost theirs. Union leaders petitioned Congress to investigate Taylor and scientifi c management methods. Th e phrase fi rst-class worker invited particular scrutiny that started a monumental argument between William B. Wilson, the chairman of a special committee of the U.S. House of Representatives looking into the matter, and Taylor. 46 Th e phrase suggested that the other workers were disposable, and the public debate brought scientifi c management and its impact on people to the fore- front of national discussion in management. An increasingly disgruntled workforce, as well as management eager to avoid strikes, brought about the humanistic approach , which focused on the human side of management.

Hawthorne Studies Hawthorne Works, a division of the Western Electric Company and the sole supplier of telephone parts to AT&T, was a special place to work in the mid-1920s. Athletic and social programs, savings and stock plans, a restaurant with discount meals, and other generous benefits defined the Hawthorne culture, and employee morale was high. 47 This became the context for one of the most cited management studies in the modern era (revered by some, but criticized by others). The Hawthorne Studies, conducted be- tween 1924 and 1932, seemingly verified that employees were motivated by many fac- tors, not just money, and that group dynamics had an impact on employee morale and performance.

Illumination Study (1924–1927) Led by Dugald C. Jackson, electrical engineering professor at the Massachusetts Institute of Technology (MIT) and in collaboration with the Council on Industrial Lighting, the Illumination Study had the simple objective of observing the effect of lighting on worker productivity. Researchers selected two teams of participants with equal performance records and experience. One team was the con- trol group (no change in their lighting conditions), and the other team was the vari- able group (their lighting conditions would change). What the researchers found was baffling and inconclusive: In the variable group, their performance increased with any change in the lighting conditions, regardless of the brightness of the room or whether the lighting went up or down, dark or light. This led researchers to two unsatisfying conclusions: 1) there was no correlation between lighting and performance output, and, by default, 2) performance productivity must have multiple factors. The MIT research- ers and company employees were intrigued by the unpredictable outcome of the study and sought to set up another study to understand the multiple factors that could be affecting productivity.48

Relay-Assembly Test Room Study (1927–1932) In 1927, the research team, now led by Homer Hibarger and Charles E. Snow, was energized to understand these factors and went about assessing the eff ects of work conditions on employee productivity, includ- ing breaks, meals, and length of workday. Th is time, the researchers selected fi ve women

Humanistic approach A focus on the human side of management in response to negative worker response to scientifi c management principles.

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452.4 | THE HUMANISTIC APPROACH

for the study who assembled relays. 49 Invited to a sepa- rate observation room, the women were asked to pro- duce relays at a “comfortable pace” and assured that any increase from their previous, “normal” output would be “returned to them entirely.” During the fi rst several months, the researchers introduced many changes in the work conditions: two 5-minute breaks, six 5- minute breaks, two 10-minute breaks, and even free lunch at the company restaurant. No one could have predicted what happened next—regardless of the change, productivity increased. Seemingly, all that was required to increase productivity was to change work conditions in some way. Could this be possible? After a year, the researchers changed their strat- egy and removed all breaks, the work week was in- creased from 40 to 48 hours, and the assemblers had to bring their own lunch. Performance output actually increased overall, but it declined on an hourly basis. When breaks were reinstituted a month later, perfor- mance increased to its best output in the study. After physical and mental examinations, the research team concluded that fatigue was not a cause of the perfor- mance increase; rather, breaks off ered the team time to socialize, which improved “at- titude.” At this point, both the researchers and workers were coming to conclusions as to why the performance had increased. Th e research team identifi ed fi ve major reasons, “in order of importance: 1) working in a small group, 2) a less restrictive and friendlier supervisory style, 3) increased earnings, 4) the novelty of being a study participant, and 5) attention given to the assemblers by company offi cials and the researchers.” 50 Th e as- sembly workers gave two reasons: “[Th e study room and research environment] was fun,” and they liked the friendlier supervisory style. 51

The Interviewing Program (1925–1932) Interviewing was a component of the re- search that off ered insights into worker attitudes. When the study was initiated, researchers using the directive method asked questions that could easily be answered “yes” or “no,” such as “Are you satisfi ed with your work?” 52 After about four years, the research team was not yielding the information needed to help analyze which work conditions had the greatest impact. Th ey needed a diff erent perspective. G. Elton Mayo (1880 – 1949), a professor at Harvard University, brought an approach to the interviews that clarifi ed fi ndings and inspired a new management theory. Mayo was already known for his theory that management could not be reduced to individual indepen- dently operating factors, such as incentive pay; instead, he proposed an industrial “psychol- ogy of the total situation.” Upon visiting Hawthorne, he recommended that the research team use a non-directive interview method, which would encourage workers to share their overall feelings and experiences.53

Something delightful happened. As researchers built relationships with the workers, be- coming genuinely interested in their concerns and aspirations, the workers, no longer in- timidated by authority, began to relax and establish friendships in their group that extended beyond work hours. Th is bred group cooperation and loyalty, which increased productivity. Th e interviewing program became the methodology for teaching supervisors how to talk with employees, to learn about their personal lives, and, most important, to listen. 54, 55 In short, for the fi rst time, a management theory gave managers permission to treat workers as people and to approach groups informally.

Confl ict: Mary Parker Follett According to the Hawthorne studies, working groups increased performance in a more infor- mal environment, where they could express themselves with each other and the leader and be heard. For Mary Parker Follett (1868 – 1933), however, simply looking at group dynamics,

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46 Chapter two The Evolution of Management

absent their relationship to authority, was not enough. A political philosopher, Follet argued that the American notion of individual rights over the interests and well-being of the group was counterproductive. 56 “When we say that there is the One which comes from the Many, this does not mean that the One is above the Many.” Th is one line sums up a philosophy that she then applied to confl ict resolution, leadership, authority, and power. She introduced the concept of “the group principle,” where the whole of the group is comprised of equally weighted and integrated individual diff erences. 57 In the business world of measuring tapes, assembly lines, Weber’s bureaucracy, Taylor’s task management, and single lines of authority, this was a revolutionary idea.

Confl ict Resolution Where are power dynamics in groups most apparent? Confl ict. Have you ever been a part of a group project that one person “takes over”? For example, let’s say that you are a part of a fi ve-person team asked to set up a customer appreciation event for your company. Th e company president’s only request is that the event include family fun and take place on a Saturday afternoon in September. In the fi rst meeting, the group would like to decide on theme and location. About an hour into the conversa- tion, many ideas have been presented, from a bowling tournament to a picnic. In the past 15 minutes, one of the group members has repeatedly said, “We have a lot of salary sitting around this table. I’ve got a lot of work to do. Let’s make a decision.” Th is person fi nally erupts in frustration and suggests, “Okay, this is taking too much time. Let’s just do the bowling tournament. Th e bowling alley will handle most of the logistics, and we don’t have to worry about it raining. And, we can hand out trophies—people love to win something.” In Follett’s Creative Experience , she suggests that there are four possible outcomes to this scenario (as outlined in Figure 2-2: 1) group submission —the group sits silently for a mo- ment, and to avoid confl ict, everyone says, “OK, fi ne, let’s do that”; 2) struggle for victory —one or two people push back and demand that a picnic is more appropriate for a corporate event, with one of the two sides (typically the most stubborn one) eventually winning; 3) compromise— one or two people push back and demand that the picnic is more appropriate for a corporate event, with eventually someone suggesting an enclosed tent with catered food at a local park; and 4) integration —Follett’s ideal state of confl ict resolution—one or two people push back and demand that the picnic is more appropriate, and through further discussion and adherence to the merits of each individual’s idea, the group decides to set up a large barbecue pit for grilling, with picnic tables adjacent to a large tent equipped with games and extra seating. In Follett’s view, integration is the ideal state of confl ict resolution, but unfortunately, most groups settle for compromise. Th is anecdote demonstrates Follett’s constructive confl ict concept, where positive out- comes for group confl ict emerge when individual ideals remain intact and become a part of a “single whole.”58

Figure 2-2 Visualization of Follett’s Confl ict Resolution Model, Where “A” Asserts a Position of Power Follett’s confl ict resolution model illustrates the power dynamics between groups where person A asserts a position of power.

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472.4 | THE HUMANISTIC APPROACH

Power with People Using scientifi c management, managers typically tried to keep work- ers happy through pay incentives tied to performance output. Unfortunately, by focusing on pay incentives, managers were not seeing workers as people with complex sets of needs. Follett’s constructive confl ict philosophy recognized individual complexity and sought ways for groups to embrace and incorporate each person’s needs. Why did businesses listen to Follett, a female political philosopher, in the “scientifi c management” frenzy of the 1920s and 1930s? Remember, informal groups with good attitudes are more productive, meaning greater profi ts, as shown in the Hawthorne Studies. Follett’s philosophies challenged the premise that owners had an interest and laborers had an interest, which were sometimes amenable but always in discord. But doesn’t somebody’s interest have to prevail? Isn’t busi- ness a constant back-and-forth of gaining and losing power—the economy is bad, so man- agement can demand more work for less pay; times are good again, so labor needs to get back what it appears to have lost? Follett saw this reality, but she did not accept it as a foregone conclusion—“Labor and [management] can never be reconciled as long as labor persists in thinking that there is a [management] point of view and [management] thinks there is a labor point of view. Th ere is not. Th ese are imaginary wholes which must be broken up before [management] and labor can cooperate.” 59 Here, she is asking business managers to reconsider their power over labor by clarifying their interests and fully understanding labor’s interests, thus creating a relation- ship between management and workers where they create common interest, a shared ideal. Th is shift in perspective required managers to share the planning, organizing, and leading of the organization with labor. Th is was “power with people” not “power over people.”

Motivation: Douglas McGregor But wasn’t Follett missing something? Didn’t workers dislike working and managers enjoy au- thority? Douglas McGregor (1906–1964), management professor at MIT and later president of Antioch University, thought diff erently: “A manager who believes that people in general are lazy, untrustworthy, and antagonistic towards him will make very diff erent decisions [ from] a manager who regards people generally as cooperative and friendly.” Having studied manage- ment in an academic setting for decades, it wasn’t until his actual management experience as president of a university that he realized that “a leader cannot avoid the exercise of authority any more than he can avoid responsibility for what happens to his organization.” In Th e Human Side of Enterprise , McGregor states that managers build eff ective and inef- fective relationships with employees based on one of two primary assumptions of human nature: Th eory X or Th eory Y, as seen in Table 2-6. Th eory X is a negative view of the worker stating that people do not like to work; therefore, workers need to be coerced, told what to do, and intimidated. Otherwise, left on their own, workers will soldier, or, worse yet, do nothing at all. Th eory Y is a positive view of the worker stating that people enjoy the mental and physical purpose that work provides; therefore, when participating in a group with a shared commitment, people will direct themselves and look for ways to expand their per- sonal contributions and responsibilities. 60 Obviously a student of Follett’s work, McGregor suggested that an organization where management and employees applied Th eory Y as a system of beliefs could “achieve their own goals best by directing their eff orts toward the success of the enterprise.” 61 Th is changed the role and authority of management in that

Theory X A negative view of the worker stating that people do not like to work; therefore, workers need to be coerced, told what to do, and intimidated.

Theory Y A positive view of the worker stating that people enjoy the mental and physical purpose that work provides; therefore, when participating in a group with a shared commitment, people will direct themselves and look for ways to expand their personal contributions and responsibilities.

Theory X Theory Y

Premise People don’t like to work. People enjoy the sense of purpose provided by work.

Managerial Action Coerce and intimidate employees into getting the job done.

Motivate and nurture employees; facilitate creation of a shared group purpose.

Locus of Power Managers have power over employees. Managers share power with employees.

Table 2-6 Theory X and Theory Y

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48 Chapter two The Evolution of Management

power was shared, but the manager had a responsibility to nurture and motivate employees by paying attention to their best intentions and actions. Th e results were individual and group goal-pursuing behaviors nurtured, inspired, and directed by management. Th eorists and practitioners call this motivation . Th e philosophies and practices that initiated in the interview rooms at Hawthorne where Mayo opened a conversation, the political situations where Follett questioned the produc- tivity of authority, and the university boardrooms that McGregor led, all brought forth a new dimension to management—people. Th is qualitative approach to management theory created the fi eld of human resources , which continues to formalize processes, methods, and manager training so that people in an organization can meet their needs to be motivated and to achieve goals. From this approach, the behavioral management perspective relies on understanding individual behaviors, decisions, and attitudes to motivate employees. Where does this leave scientifi c management, quality, and the overall quantitative approach to management?

2.5 | THE BALANCED APPROACH

2.5 | Interpret the factors that led to a balanced approach to management.

Management theorists in the mid-20th century began to recognize that each of the his- torical management approaches had something useful to off er. What managers needed to do was to recognize what approach would be most eff ective in a particular sitiua- tion and be fl exible enough to change approaches as needed. Called contingency (or situational) theory , this states that diff erent organizations, situations, and contexts require diff erent approaches. 63 Contigency theory laid the groundwork for the balanced approach that is emerging in management practice today. Management theory, respond- ing to the forces of technology, capitalism, and globalization, required a new model to

Behavioral management Understanding individual behaviors, decisions, and attitudes to motivate employees.

Contingency (or situational) theory A management theory that states that different organizations, situations, and contexts require different approaches.

Theory Y in Practice 62 It’s easy to assume that old theories cease to be relevant as we learn new and better ways of managing. However, there is a growing school of thought that believes that McGregor’s theories are widely used in practice and may even have universal application. In their article “McGregor’s Legacy: The Evolution and Current Application of Theory Y Management,” authors P. F. Sorensen and M. Minahan believe that McGregor’s Theory Y is far from irrelevant. In fact, they have found a link between Theory Y and appreciative inquiry (AI), which is an organizational approach that focuses on the organization’s strengths and how they can be improved, rather than trying to fi x its weaknesses. The belief is that people are more likely to be motivated toward achieving a goal if they are given the opportunity to make things better.

Professor’s Response What’s most exciting about this research is the idea that the application of Theory Y might well be useful in all cultural

contexts. That could be a useful tool for understanding and managing international businesses and increasingly diverse workforces.

Manager’s Response I can certainly see how Theory Y ideas work well for certain personality types and certain positions, but frankly, there are some jobs that just aren’t that inspiring, and there are some people who really aren’t motivated by anything other than their paycheck. So while I can see that Theory Y might often be relevant, I don’t think I’d call it universal, in my experience.

Critical Thinking in the Classroom If you were a manager, which premise would you feel was most benefi cial in the workplace, Theory X or Theory Y? And what managerial action would you take to apply it to your employees?

Research@Work

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492.5 | THE BALANCED APPROACH

rethink the roles and responsibilities of employees, managers, and organizations today. Th is model needed the discipline of the quantitative approach, with its determination to continuously improve processes and methods, and the perspective of the qualitative approach, with its understanding of motivation and a manager’s power and authority. Th ese ways of thinking about management have come together to form a balanced ap- proach to management theory.

Cooperation: Chester I. Barnard Chester I. Barnard (1886–1961), college dropout, experienced executive, and management theorist, saw organizations and their systems as being comprised of three components: 1) “willingness of members to cooperate”; 2) “a common purpose”; and 3) “members able to communicate with each other.” 64 Barnard believed that ineffi cient organizations were doomed to fail through continued entropy , or loss of social and market-based energy lead- ing to the decline of the system. Th erefore, the manager’s responsibility and authority is to establish negative entropy , social and market-based energy that builds or maintains a system. Where does this energy come from? Barnard states that management is aff ected by forces inside and outside the organiza- tion. Managers can achieve eff ective and effi cient systems by understanding how to main- tain an equilibrium of these forces and their relationship to the organization, including management, employees, shareholders, customers, and suppliers. In contrast to Follett’s view of power and authority, Barnard saw this “equilibrium” as a cooperative system , in which organizations are eff ective and effi cient when managers control and infl uence people’s behaviors by modifying their motives. 65 He believed that individuals had the right to join a cooperative system, and the primary benefi t to the individual was the collective power to accomplish something greater than one could do alone—build a car, lay a trans- continental rail system, or design the iPod. However, Barnard agreed with Follett that the interests of individuals need to be compatible with the interests of the organization. If not, that individual employee would become unmotivated, lose interest, and stop participating. Th erefore, it was the individual, the employee, that gave authority to management, not the other way around. Barnard’s theories benefi ted from his extensive experience as an executive at AT&T and as the president of several nonprofi t organizations. Th ese experiences, combined with his concept of cooperative systems, led to Barnard’s ideas on the “function of an executive,” which were threefold: 1) “to provide a system of communication,” 2) “to promote the secur- ing of essential eff orts,” and 3) “to formulate and defi ne purpose.” 66 He compared the role of manager to the body’s central nervous system, whose function is to transmit information continuously to enable all other parts to perform.

Systems: Jay W. Forrester In 1956, engineering professor Jay W. Forrester became a management faculty member in MIT’s new Sloan School of Management, primarily because he thought it would be an “interesting challenge to look at what an engineering background could mean to man- agement.” Forrester took on a problem faced by GE managers, who were “puzzled why their household appliance plants in Kentucky were sometimes working three and four shifts, and then a few years later, half the people would be laid off .” Forrester drew a con- ceptual system of GE’s inventory as it related to the company’s decision to hire or lay off employees, a method that became known as system dynamics . System dynamics allowed Forrester to show the management team at GE a simulation that demonstrated unin- tended consequences of their hiring practices. His fi ndings enabled managers to connect faulty decision-making practices to instability in the number of people employed at their factories. System dynamics sought to enable managers to achieve “equilibrium” and sta- bility in their organizations. Using words like equilibrium and analogies such as the central nervous system, Barnard and Forrester were both biologists at heart. It would take another biologist to create the theory that would enable management theorists to understand, plan, and organize in a global economy defi ned by computers and information. Th e Austrian biologist Ludwig

Entropy The loss of social and market-based energy, leading to the decline of an organization.

Negative entropy Social and market-based energy that builds or maintains a system.

Cooperative system A kind of equilibrium in which organizations are effective and effi cient when managers control and infl uence people’s behaviors by modifying their motives.

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50 Chapter two The Evolution of Management

von Bertalanff y (1901–1972) looked for a way to describe and understand real world activ- ities, based on his theoretical comprehension of organisms and biological life forms. Th ese studies uncovered the General Systems Th eory (GST). He observed three factors that were consistent among a multitude of disciplines, not just management: 1) a study of orga- nizations must make an observation of the whole (i.e., the interdependent subsystems , smaller interdependent systems that make up the whole system); 2) organizations seek a state of equilibrium; and 3) organizations are open systems —they have the power to change and be changed by external and internal forces. 67 Much like Follett’s shifting of power away from people toward the situation, Forrester encourages modern theorists to see management as a series of ever-changing social systems with limitations and depen- dencies on environments. We now have a good understanding of how the concept of management has evolved over the centuries, together with the diff erent challenges faced by managers over several genera- tions. Each era gives rise to a new set of management theories, from a quantitative approach to a humanistic approach to theorists applying all historical lessons learned for a balanced analytical process that leads to better decisions. Th is evolution in theory requires contem- porary managers to apply similar critical thinking methods, which take into account an interconnected system of cooperative stakeholders. In the next chapter, we will explore the importance and practicalities of a systems approach to critical thinking and its relevance within the daily functions of 21st-century managers.

Subsystem Smaller, interdependent systems that make up the whole system.

Open systems Systems that have the power to change and be changed by external and internal forces.

CaseSnapshot Chapter 2 Case: The Evolution of Management:

Valve Corporation can be found on pg. 463

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51Additional Resources

ADDITIONAL RESOURCES

KEY TERMSS Administrative theory Identifi es the functions of management in an organization and the principles needed to make sense of a complex set of organizational tasks. (p. 35)

Behavioral management Understanding individual behaviors, decisions, and attitudes to motivate employees. (p. 48)

Bureaucracy A form of organization marked by division of labor, managerial hierarchy, rules and regulations, and impersonality. (p. 34)

Cooperative system A kind of equilibrium in which organiza- tions are effective and effi cient when managers control and infl u- ence people’s behaviors by modifying their motives. (p. 49)

Contingency (or situational) theory A management theory that states that different organizations, situations, and contexts require different approaches. (p. 48)

Entropy The loss of social and market-based energy, leading to the decline of an organization. (p. 49)

Humanistic approach A focus on the human side of manage- ment in response to negative worker response to scientifi c man- agement principles. (p. 44)

Management science Using statistics, mathematics, and other quantitative methods to improve effi ciencies. (p. 37)

Negative entropy Social and market-based energy that builds or maintains a system. (p. 49)

Open systems Systems that have the power to change and be changed by external and internal forces. (p. 50)

Quantitative approach Applying objective methods to en- hance decision making. (p. 37)

Scientifi c management Using a quantitative approach to ana- lyzing and synthesizing the fl ow of work to maximize productivity. (p. 37)

Soldiering A way that workers tested management by perform- ing as slowly as possible, while giving their supervisors the im- pression that they were working fast. (p. 37)

Subsystem Smaller, interdependent systems that make up the whole system. (p. 50)

Task-management system A combination of setting perfor- mance standards, selecting the best worker for the job, and building good relations between managers and employees. (p. 37)

Theory X A negative view of the worker that states that people do not like to work; therefore, workers need to be coerced, told what to do, and intimidated. (p. 47)

Theory Y A positive view of the worker that states that peo- ple enjoy the mental and physical purpose that work pro- vides; therefore, when participating in a group with a shared commitment, people will direct themselves and look for ways to expand their personal contributions and responsibilities. (p. 47)

IN REVIEWW 2.1 | Describe the historical foundations of management. Two moments in history initiated the theories and practices of modern management: 1) the concept of division of labor, as ar- gued in Adam Smith’s Th e Wealth of Nations , and 2) the Industrial Revolution. Division of labor suggested that manufacturing could increase productivity by having workers specialize in tasks, as opposed to being responsible for activities in the assembly or making of a product. Th e division of labor helped lead to the de- velopment of corporations, which are legal entities formed and structured to achieve goals with special protection for owners.

2.2 | Explain the beginning of modern management theory and education.

Two early management theorists were Max Weber and Henri Fayol. In Weber’s theory of bureaucracy, power was embed- ded in organizational roles and rules, rather than in individ- ual people, thus protecting workers from the whims of their managers. Fayol’s administrative theory built on Weber’s work, linking motivated and satisfi ed employees to successful man- agement. Th ese theoretical advances provided a curriculum framework for higher education. In 1881, Joseph Wharton,

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52 Chapter two The Evolution of Management

philanthropist and cofounder of Bethlehem Steel Corporation, funded the Wharton School of Finance and Economy at the University of Pennsylvania, the fi rst successful undergraduate school of business.

2.3 | Outline the progression of the quantitative approach to management.

Th e quantitative approach attempted to improve performance by applying objective methods to decision making. Frederick W. Taylor (1856–1915), an innovator of this approach, sought to create a reliable system to solve the problems facing managers through scientifi c application. Using a quantitative approach to analyzing and synthesizing the fl ow of work to maximize productivity is scientifi c management. Taylor created the task-management system and “functional foremanship.” Har- rington Emerson, in his 1913 book Th e Twelve Principles of Ef- fi ciency, articulated a new set of principles for management based on observation and understanding what is possible to achieve. By shifting a manager’s attention to seeking an ideal performance, Emerson established the concept of goals , which became his fi rst management principle, “clearly defi ned ide- als.” Where Taylor’s time studies measured movements in feet, weight in pounds, and time in seconds, Frank Gilbreth wanted to help workers with the motions of their tasks by removing wasteful movements. Lillian Gilbreth expanded the scope of scientifi c management by studying the movements of the mind. To help visualize these scientifi c performance results, Henry Gantt contributed to the evolution of the quantitative approach through visualization techniques that are still used today.

2.4 | Outline the progression of the humanistic approach to management.

Th e humanistic approach to management was a direct response to a workforce who resented and resisted scientifi c management. Using innovative methods, researchers in the Hawthorne Studies group showed the positive eff ects that good interpersonal rela- tionships between management and labor had on productivity. Political philosopher Mary Parker Follett developed methods of improving group dynamics, including non-intuitive approaches to confl ict resolution that “integrated” individual interests. Her work inspired Douglas McGregor, who proposed Th eory X , in which it is assumed that people do not like to work and must be coerced into doing so; and Th eory Y , in which it is assumed that people enjoy working in a group with a shared purpose and will self-motivate.

2.5 | Interpret the factors that led to a balanced approach to management.

Chester I. Barnard’s theories laid the foundation for a balanced approach to management. He believed organizations and their systems were comprised of three components: 1) “willingness of members to cooperate,” 2) “a common purpose,” and 3) “mem- bers able to communicate with each other.” Th is focus on organi- zations as systems fed into the work of Ludwig von Bertalanff y, who created “general system theory” and observed three factors that were consistent among a multitude of disciplines: 1) a study of organizations must make an observation of the whole (i.e., the interdependent subsystems that make up the organization); 2) organizations seek a state of equilibrium; and 3) organizations are open systems—organizations have the power to change and be changed by external and internal forces.

SELF-TESTT 2.1 | Describe the historical foundations of management.

1. When workers focus on completing a limited number of tasks, it is referred to as: a. task focus b. specialization c. limited production d. industrialization

2. Explain how Adam Smith’s Th e Wealth of Nations infl uenced the foundations of management thought.

2.2 | Explain the beginning of modern management theory and education.

3. A form of organization marked by the division of labor, managerial hierarchy, rules and regulations, and impersonality is: a. democracy b. theocracy c. bureaucracy d. aristocracy

4. What important lessons did Henri Fayol learn from a horse’s broken leg?

2.3 | Outline the progression of the quantitative approach to management.

5. Th e quantitative approach to management involves applying subjective methods to enhance decision making. a. True b. False

6. A focus on analyzing and synthesizing the fl ow of work to maximize productivity is called: a. scientifi c management b. synthesis management c. management by analysis d. management by objectives

7. What are Taylor’s four principles of scientifi c management that defi ned the task-management system?

8. What was the purpose of Frank Gilbreth’s motion studies?

9. A Gantt Progress Chart provides managers with immediate visual feedback as to when a project is behind schedule and requires corrective attention. a. True b. False

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53Additional Resources

2.4 | Outline the progression of the humanistic approach to management.

10. Th e Hawthorne Studies, conducted between 1924 and 1932, seemingly verifi ed that money had the most important impact on employee morale and performance. a. True b. False

11. Explain Mary Parker Follett’s constructive confl ict concept.

12. A Th eory Y perspective of human nature assumes that: a. people do not like to work b. workers need to be coerced, told what to do, and

intimidated c. left on their own, workers will soldier d. people will direct themselves and look for ways to expand

responsibilities

2.5 | Interpret the factors that led to a balanced approach to management.

13. states that diff erent organizations, situations, and contexts require diff erent approaches. a. Contingency (or situational) theory b. Behavioral theory c. Diff erential theory d. Disintegration theory

14. Explain Chester I. Barnard’s concept of a cooperative system.

15. An open system is one that has the power to change and be changed by external and internal forces. a. True b. False

CHAPTER EXERCISEE The Legacy of Scientifi c Management Scientifi c management is still with us today. Th e legacy of scientifi c management lives on in the form of modern, fast, and effi cient assembly lines. Scientifi c management techniques are used in every fi eld, from fast food to surgery to job design, selection, and training.

A. List some general ways in which scientifi c management principles are incorporated into our modern world:

B. Provide some specifi c examples of how scientifi c management concepts are being applied in various industries (such as manufacturing, fast food, medical, etc.)

C. What are some ways in which scientifi c management concepts and principles aff ect your personal life on a daily basis?

SELF-ASSESSMENTT Are you a Theory X or Theory Y Manager? Douglas McGregor created and developed Th eory X and Th eory Y as contrasting concepts of human motivation at the Sloan School of Management at MIT in the 1960s. Th e following assess- ment will help you to understand whether you are likely to take more of a Th eory X or Th eory Y perspective on management.

Choose the statement that best describes your feelings:

1. Employees are inherently: a. lazy b. ambitious

2. Employees tend to: a. avoid work if they can b. seek out and accept responsibilities

3. Most workers believe that work: a. is distasteful b. can be as natural as play

4. Workers should be: a. closely supervised b. allowed to use their natural creativity to solve problems

5. In most organizations: a. comprehensive systems of control should be developed b. employees’ talents are underutilized

6. should be used to gain employee compliance and commitment.

a. Th reats and coercion b. Self-direction and self-control

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54 Chapter two The Evolution of Management

7. Most people: a. are only out for themselves b. want to do well at work

Scoring:

A. Count the number of times you selected choice “a” and write it here:

B. Count the number of times you selected choice “b” and write it here:

C. If your score on line A is higher, you tend to take a Th eory X perspective on management. If your score on line B is higher, you tend to take more of a Th eory Y perspective on management.

SELF-TEST ANSWER KEY 1. b.

2. Smith argued that division of labor could increase produc- tion by having workers specialize on a task. Th e division of labor helped lead to the development of c orporations, which are legal entities formed and structured to achieve goals with special protection for owners.

3. c.

4. A draft horse at a mine broke its leg. Th e mine’s manager was not present, and no one else at the mine had the authority to procure another horse, causing production to stop. Fayol believed that this failure occurred due to poor planning and organization and to a communica- tion disconnect between management and employees. Fayol implemented a team concept for miners and shifted decision-making authority to these work groups. Fayol’s ideas became the foundation for his administrative theory, which identifi es the functions of management and other important management concepts.

5. b. False. It involves applying objective methods to enhance decision making. Th is approach became practice through management science, using statistics, mathematics, and other quantitative methods to improve effi ciencies.

6. a.

7.

8. Gilbreth used a motion-picture camera to capture step- by-step movements that were taken to complete a task. By applying scientifi c management methods, Gilbreth’s mo- tion studies sought effi ciencies by producing the maximum results with the least worker eff ort.

9. a. True

10. b. False. Th e Hawthorne Studies, conducted between 1924 and 1932, seemingly verifi ed that employees were motivated by many factors, not just money, and that group dynamics had an impact on employee morale and performance.

11. According to Follett, positive outcomes for group confl ict emerge when individual ideals remain intact and become a part of a “single whole.” Her philosophy recognized indi- vidual complexity and sought ways for groups to embrace and incorporate each person’s needs.

12. d.

13. a.

14. According to Barnard, a cooperative system is one in which managers control and infl uence people’s behaviors by modifying their motives.

15. a. True

Frederick Taylor’s Principles

Principle #1 Develop a quantifi able, scientifi c way to measure performance.

Principle #2 Select workers based on scientifi c methods.

Principle #3 Train employees based on measurable standards.

Principle #4 Work closely, side by side, with employees.

Notes

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Part Two

Chapter 3 | Critical Thinking for Managers

Chapter 4 | Organizations and Change Management

Chapter 5 | Diversity in a Global Economy

Chapter 6 | Ethics and Social Responsibility

Sustaining: A Balanced Approach to Management

55

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56

Critical Thinking for

Managers

Three Chapter

Ja m

ie R

o ac

h/ Sh

ut te

rs to

ck

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Learning Objectives

57

C H A P T E R O U T L I N E

By the end of the chapter, you will be able to:

3.1 | How Managers Apply Critical Thinking to Make a Difference

VOICES OF MANAGEMENT: Michael Woodhead

3.1 | Explain how managers use a systems approach to critical thinking to achieve results.

3.2 | Seeing Systems with Diagrams Stock and Flow Diagrams Behavior Over Time (BOT) Diagrams

3.2 | Illustrate how systems diagrams are used to show cause-and-eff ect relationships.

3.3 | Systems Behaviors and Feedback Loops Systems Behavior

3.3 | Show how systems balance and reinforce their behavior over time.

3.4 | Analyzing Systems and Knowing What to Change

Causal Loops Building a Culture of Change

3.4 | Analyze system discrepancies to determine a manager’s intervention.

3.5 | Common Systems Patterns Senge’s Eight Archetypes

3.5 | Diagram the eight most common systems archetypes that managers can expect to encounter.

3.5 | Diagram the eight most common systems archetypes that managers can expect to encounte

Additional Resources Key Terms

In Review

Self-Test

Chapter Exe rcise

Self-Assess ment

Self-Test

Answer Key s

Self-Asses sment

ANSWER KEY JP

G re

en w

o o

d /G

et ty

Im ag

es

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58 Chapter Three Critical Thinking for Managers

3.1 | HOW MANAGERS APPLY CRITICAL THINKING TO MAKE A DIFFERENCE

3.1 | Explain how managers use a systems approach to critical thinking to achieve results.

In Chapter 2, we explored the evolution of management and the diff erent business ap- proaches that arose through each era. Each of these management approaches and theories was highly relevant at the time. Some of them continue to be applicable in organizations today. However, we live in a culturally and fi nancially connected world where most coun- tries are aff ected by other countries ’ behaviors and market conditions. In other words, the world itself is a system where economics, politics, culture, and international relations have an impact not just on one country, but on a global level. Th is is why a systems approach to critical thinking, as discussed in Chapters 1 and 2, is gaining ground as an innovative way of approaching the current challenges facing managers today. A systems approach to critical thinking allows managers to fully visualize the “intercon- nected set of elements that is coherently organized in a way that achieves something.” 1 It involves looking at an organization as a whole (a set of interrelated parts, such as people, processes, and structures that are all dependent on each other) and understanding how these parts infl uence each other. Understanding and using a systems approach to critical thinking requires a real para- digm shift. When it comes to problem solving, managers are used to linear business models that identify a problem, fi x it, and then move on. A systems approach encourages us to see an organization as a fl uid arrangement of many diff erent parts, such as employees, teams, and departments, all of which depend on each other. Th e role of a manager is to look at these interconnected systems as a whole to understand the importance of each part and how it contributes to the organization. A systems approach holds that “we must look beyond indi- vidual mistakes or bad luck to understand important problems. We must look beyond per- sonalities and events. We must look into the underlying structures which shape individual actions and create the conditions where types of events become likely.” 2 It encourages us to look beyond perceived weaknesses, use and enhance strengths, and avoid the blame culture to ascertain the real root of the problem. Th e following example illustrates what happens when managers fail to understand how an organization functions and the consequences of not seeing the bigger picture. A company experiences a drop in sales due to an economic recession. Senior management decides to ter- minate middle manager positions, resulting in several families losing their income. Th ese fami- lies then rely on local, state, and federal help, straining public resources. Th e company expects more production and results from the remaining managers and employees with no additional compensation, which leads to lower employee satisfaction. When the economy begins to re- cover, these dissatisfi ed managers and employees fi nd other jobs. Th e company is surprised and attempts to fi nd replacements, and the stress of the recent events encourages some se- nior managers to retire. Having terminated most of the company ’s middle management, the

3.1 | HOW MANAGEEEERRRRSSSS THINKING TOOOO MMMMA

3.1 | Explain how managers use a thinking to achieve results.

In Chapter 2, we explored the evolution o proaches that arose through each era. Each was highly relevant at the time. Some of th today. However, we live in a culturally and tries are aff ected by other countries ’ behavi world itself is a system where economics, p an impact not just on one country, but on a critical thinking as discussed in Chapters 1

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593.1 | HOW MANAGERS APPLY CRITICAL THINKING TO MAKE A DIFFERENCE

organization now lacks the ability to function properly, or even sustain itself. An exaggeration? Th is is an actual example from a billion-dollar organization with experienced and well-inten- tioned leaders. Because they did not foresee the possible consequences of their decisions, these managers made choices that had negative impacts inside and outside the organization. Th is theory of systems thinking was popularized as a practical tool for managers in Peter Senge ’s seminal text Th e Fifth Discipline . 3 An American scientist and senior lecturer at the Massachusetts Institute of Technology (MIT), Senge believes that by learning to see an organization as a whole “system,” or a set of interrelated elements rather than a number of separate parts, managers are better able to understand the underlying structure and apply the principles of systems theory to address existing issues and prevent those issues from recurring in the future. Th e fi ve main disciplines described by Senge include 1) personal mastery, which involves focus, patience, and holding on to our vision; 2) mental models, which are the perceptions we form about the world around us and how they shape our behavior; 3) building a structure where we share our vision of the future with others to inspire and motivate; 4) team learning, where we open up a dialogue with our team members to encourage a free fl ow of thoughts and ideas; 5) and fi nally, systems thinking, which integrates the previous four disciplines. As Senge explains, “Systems thinking also needs the disciplines of building shared vision, mental models, team learning, and personal mastery to realize its potential. Building shared vi- sion fosters a commitment to the long term. Mental models focus on the openness needed to unearth shortcomings in our present ways of seeing the world. Team learning develops the skills of groups of people to look for the larger picture beyond individual perspectives. And personal mastery fosters the personal motivation to continually learn how our actions aff ect our world.” 4

Senge believes that many organizations are hampered by a number of “disabilities” which stunt growth and productivity. For example, people who see themselves as mere “cogs in the wheel” of a company will fail to make any proactive changes, as they believe that they have very little infl uence. Th ere may also be a pervading blame culture, when people point fi ngers at others or their competition when things go awry, which leads to inertia; or people take a short-term view that impedes their ability to see the big picture. According to Senge, organizations should ideally be “learning organizations,” which are

“. . . organizations where people continually expand their capacity to create the results they truly desire, where new and expansive patterns of thinking are nurtured, where collective aspiration is set free, and where people are continually learning to see the whole together.” 5

Systems thinking A methodology of analysis that managers use to understand interconnected cause- and-effect relationships that change organizational behaviors and dynamics.

Voices of Management Michael Woodhead,Vice President of Business Development, EscapeWire 6

M y clients require fast solutions, innovative ideas, and a real partner in the marketplace. Ten years ago, there was a lot of talk about solving problems with clients. In my opinion, the greatest change in that conversation is a shift to possibility. Companies and their managers want to know what is possible. I think I know why . . . Solving a problem somehow suggests looking back at how we did it yesterday and solving the pain of today. Creating possibilities solves today ’s pain with an eye on the future. The companies that I work with that do that best are winning in this highly competitive market environment.

Company Profi le

Name: EscapeWire Solutions

CEO: Mike Beecher

Company Story: EscapeWire provides solutions and services for clients nationwide. Our innovative use of emerging technologies allows us to build IT solutions that are of the highest quality and meet the fl exibility and mobility needs of most businesses.

Critical Thinking in the Classroom

If you were a manager of EscapeWire, how would you perceive the “shift to possibility” as benefi cial to your clients? ■

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60 Chapter Three Critical Thinking for Managers

By adopting the fi ve disciplines, of which systems thinking is the cornerstone, managers will be able to build organizations where everybody shares in a vision, works together as a team, and creates an environment that inspires continuous learning and an eff ortless free fl ow of ideas.

3.2 | SEEING SYSTEMS WITH DIAGRAMS

3.2 | Illustrate how systems diagrams are used to show cause-and- eff ect relationships.

An important part of systems theory is the application of system dynamics, fi rst intro- duced in the 1950s by Jay Forrester (see Chapter 2) as a way of understanding the un- derlying problems within organizations. Th is involves using diagrams and models to highlight diff erent aspects of system behavior. Th e two main systems diagrams adopted by managers are stock and fl ow diagrams , and behavior over time (BOT) diagrams . Let ’s consider each of these.

Stock and Flow Diagrams Systems have two basic components: stocks and fl ows. In systems theory, stocks mean ma- terial, or information that has accumulated over time. Stocks can be physical items such as trees in a forest, water in a reservoir, and money in a bank account; or they can be non- physical elements such as the level of satisfaction you have doing a job and the amount of empathy you have for others. Flows are the physical or informational forces that increase or decrease stocks. An infl ow increases stock, and an outfl ow decreases stock. 7 Figure 3-1 shows a basic system of stock and fl ows. Notice the empty clouds on either end. Th ese are placeholders indicating that the source of the infl ow and the deposit of the outfl ow are not known or are not being considered. Let ’s look at a reservoir as an example of a system. In a reservoir, the stock is the amount of water it contains. Infl ows of rain and rivers can increase the stock of water, and outfl ows through evaporation and discharge decrease the stock of water. Figure 3-2 illustrates this example, showing two diff erent infl ows and two diff erent outfl ows. Notice again the empty clouds. Th ey mean that in this fi gure, we are not considering where the river is coming from or where the extra water is being discharged. It is important to remember that all systems diagrams necessarily simplify reality. Let ’s add a little complexity to this diagram and consider more carefully one compo- nent—the infl ow from the river. You can see from this simple example how you can use a stock and fl ow diagram to understand the following better:

● Th e forces ( fl ows) aff ecting a particular stock ● Th e causes and eff ects of a particular infl ow or outfl ow, and ● How diff erent stocks and fl ows are interconnected in a system.

Behavior over time (BOT) diagrams A visual tool that allows managers to see the change in measurements across a span of time.

Stocks Material or information that can be measured.

Infl ows Increase the value of a stock measurement.

Outfl ows Decrease the value of a stock measurement.

Inflow Outflow

Stock

Inflow Outflow

Stock

Figure 3-1 Basic System of Stock and Flow A basic stock and fl ow diagram illustrating infl ows and outfl ows.

Source: Adapted from Figure 1 in Thinking in Systems: A Primer, Copyright © 2008 by Donella Meadows et al., with permission by Chelsea Green Publishing (chelseagreen.com).

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613.2 | SEEING SYSTEMS WITH DIAGRAMS

Behavior Over Time (BOT) Diagrams Systems are dynamic. Th at is, they change over time as stocks and fl ows increase and decrease. Understanding how systems will change in response to alterations in stocks and fl ows is a key component in using systems thinking as a decision-making tool. Let ’s consider another example: your personal fi nancial system. In this case, the stock is the amount of money in your bank account. You have an infl ow of income from your summer job, and an outfl ow of money to pay for living expenses as shown in Figure 3-3 . We can visualize how this system will behave over time using a graph in which we repre- sent the infl ow , the outfl ow , and the stock level. To keep things simple, we will presume a few things: 1) you started with $0; and 2) you made $3,000 a month in June, July, and August; and, fi nally 3) you have fi xed monthly expenses of $1,500. Th e graph appears in Figure 3-4 .

Figure 3-2 System with Multiple Flows A system with multiple fl ows, using the water in a reservoir as an example.

River Inflow Water

in Reservoir

Rain

Discharge

Evaporation

River Inflow Water

in Reservoir

Rain

Discharge

Evaporationrr

Source: D. H. Meadows, Thinking in Systems: A Primer, D. Wright, ed. (White River Junction, VT: Chelsea Green Publishing Company, 2008): 19.

Income from Summer Job

Living Expenses

Bank Account

Income from Summer Job

Living Expenses

Bank Account

Figure 3-3 Bank Account Represented as a System A system showing how money fl ows in and out of a bank account.

Figure 3-4 Graph Diagram of System Behavior A fi gure illustrating system behavior over time on a bank account.

Source: L. Booth Sweeney, and J. D. Sterman, “Bathtub Dynamics: Initial Results of a Systems Thinking Inventory,” System Dynamics Review 16, vol. 4 (2000): 249–294.

5,000

4,000

3,000

2,000

1,000

0

May Jun Jul Aug Sep Oct Nov Dec

Inflow (Job income) Outflow (Living expenses) Stock level (Bank account)

5,000

4,000

3,000

2,000

1,000

0

May Jun Jul Aug Sep Oct Nov Dec

Inflow (Job income) Outflow (Living expenses) Stock level (Bank account)

S h S d S h b l l f S h k

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62 Chapter Three Critical Thinking for Managers

Graphing these three elements, we see that your bank balance will be zero at the begin- ning of December. Why do we need to graph all three elements? Isn ’t knowing the behav- ior (in this case the account balance) suffi cient? Visualizing the infl ow and outfl ow of the system allows managers to predict the delayed patterns of behavior. Figure 3-4 represents a very simple system, without adding the complexities of interest (infl ow) or unexpected expenses, such as your car breaking down (outfl ow). When your bank account is graphed over time, we can see the behavior of your bank account, as the infl ow changes and the stock level rises and falls.

System Change Once you understand how the various inflows, outflows, and stocks affect a system ’s function, as a manager, you can make better decisions to get the re- sults you want from that system. Let ’s look again at your personal financial system. Your desire is to have enough money in your bank account to cover your living ex- penses for the entire year. By mapping the system ’s behavior over time, you see that your bank account will be empty by the end of November. There is a discrepancy be- tween your desired stock level and the actual stock level. Seeing that discrepancy mo- tivates you to change. So what can you do? You ’ve identified one inflow (summer job income) and one outflow (living expenses). Working with just these two flows, you have three options: increase the inflow (work more), decrease the outflow (eat out less), or do a little of both. But let ’s say that you ’ve already trimmed your living expenses as much as possible, and you don ’t see any way to make more money over the summer. In that case, you might decide to add a new inflow, such as picking up a part-time job during the school year. Looking at your graph, you might think that you could start working your part-time job on December 1, when your bank account is slated to hit zero. But that decision would not accommodate the lag time, or delay , that is inherent in any system change. Delay means that any change to the system, whether from external forces or from intentional decisions, takes time to have an eff ect. Let ’s say that you started working on December 1. When would you get your fi rst paycheck? Probably not until the end of the month. And that means your bank account would still be zero in December, because you had not made allowances for the delay. To continue our example, let ’s say that you are interested in working part-time and have the potential to earn $1,500/month during the semester. In addition, you have a goal of getting an account balance of $750 by November 15. In Figure 3-5 , we demonstrate that you would need to begin work by October 15. How might managers use this theory to make better decisions? Let ’s assume that the summer employment opportunity is no longer available, so you will need time to look for a position, and this could take 30 to 60 days. You would need to seek employment actively in August to ensure that the behavior of your checking

Delay Refers to the time a force, internal or external, takes to have an effect on system behavior.

Figure 3-5 Delayed Behavior in a System The effects of delayed behavior in a system.

5,000

4,000

3,000

2,000

1,000

0

May Jun Jul Aug Sep Oct Nov Dec

Inflow (Job income) Outflow (Living expenses) Stock level (Bank account)

Started new job

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633.3 | SYSTEMS BEHAVIORS AND FEEDBACK LOOPS

account was at a desirable equilibrium in November. Th e ability to diagnose and predict these system behaviors allows managers to make more eff ective decisions, such as al- locating resources, hiring employees, marketing products and services, training staff to increase quality, investing in growth, and expanding an organization ’s capacity to serve customers.

3.3 | SYSTEMS BEHAVIORS AND FEEDBACK LOOPS

3.3 | Show how systems balance and reinforce their behavior over time.

To our systems diagrams of stocks, fl ows, and discrepancies, we can add feedback loops , reactionary forces that cause fl uctuations in behavior. A balancing loop seeks stabilization or an equilibrium. It counteracts a force of change in an eff ort to keep stock at the same level. An example of equilibrium in a balancing loop is room temperature, where a glass of ice water or cup of hot tea over time will warm or cool—homing in on the room tempera- ture. You can then adjust the thermostat, which alters the equilibrium higher or lower. After a delay in behavior, both the glass and cup of water then stabilizes in relationship to the new room temperature as illustrated in Figure 3-6 . A reinforcing loop , on the other hand, encourages and amplifi es change that increases or decreases a stock. An example of amplifi - cation in reinforcing loops is practicing a musical instrument. Th e more you practice playing the piano, the prettier the sounds produced, and the more you enjoy listening to the music you play. Th is encourages you to practice even more, thus increasing your skill, the beauty of the music, and your appreciation of playing and listening. In Figure 3-6 , balancing loops are identifi ed in the diagrams as B, and reinforcing loops are signifi ed by R.

Balancing loop A reactionary force that seeks stabilization toward a stock level equilibrium, typically a goal or desired state.

Reinforcing loop A self-multiplying reactionary force that amplifi es change in a stock level.

Feedback loop A reactionary force that causes fl uctuations in behavior.

Current Room Temperature

Thermostat Setting

Practice Musical Instrument

B

RMusic Appreciation

Skill Level

Desired Temperature

Figure 3-6 Balancing and Reinforcing Loops Room temperature is a balancing loop, which can be adjusted using a thermostat to reach the desired temperature. A musical instrument, which when practiced increases the skill level and music appreciation of the player, illustrates a reinforcing loop B, balancing loop; R, reinforcing loop.

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64 Chapter Three Critical Thinking for Managers

Systems Behavior To explore feedback loops further, let ’s revisit an earlier example. While you are in col- lege, your bank account probably goes up and down depending on the sum of your outflows and inflows. In reality, you can adjust the inflow of your account by working another shift at your job and the outflow of your account by taking a cross-country road trip with friends. Or, better yet, your bank account might be interest-bearing, which will increase the inflow without you doing anything. The causes of these fluctua- tions are the feedback loops, occurring when the inflow or outflow behaves due to the level of stock.

Balancing Behavior Let ’s say your goal is to have $9,000 (the equivalent of setting a ther- mostat for a desired room temperature) by the end of August, and you go on a cross-coun- try trip with friends for the last two weeks of July. At the time of your departure, you have $4,500 in your account. For those two weeks, you do not make your normal $1,500, and you spend $1,500 while you are gone. When you return from your trip, you notice that the stock level of your bank account is lower than desired. To reach your goal, you must increase the infl ow to your bank account by an additional $6,000. Th is encourages you to work double shifts until you have a desired level of cash stored. When a feedback loop tries to achieve stability or a goal, this is called a balancing loop (shown in Figure 3-7 ) . Th is example also shows us that feedback loops have levels of intensity , which if controllable, can be altered to achieve a desirable outcome. Th is means that if your bank account is too low, you can cre- ate the intensity of the factors that aff ect “income from summer job,” which means working more hours, resulting in a stronger intensity for this feedback loop. If you work more hours, presumably you will need to change the intensity of factors that aff ect “living expenses,” which means taking fewer vacations with friends, resulting in a weaker intensity for this feedback loop. In business, examples of systems will become more complex, but the same principles apply. One common phrase used in organizations is “work-life balance,” referring to people ’s needs to stabilize their time spent at work and their time spent with friends, family, and community. For you, that might mean a goal of spending 48 hours a week at work. Spend- ing more or less time than 48 hours at work can occur for a variety of reasons: you coach a soccer team, work projects are due, and/or long-term care of a family member demands your focus. Figure 3-8 illustrates the concept of work-life balance. Th e diff erence between an infl ow or outfl ow goal and sum of fl ow is a discrepancy . If a project is due and you work 59 hours one week, you have a discrepancy of 11 hours. It is important not to confuse

B B

Discrepancy between money in account and

cost of having fun

Income from Summer Job

Living Expenses

Bank Account

Discrepancy between money needed for college and actual money in account

Time Spent Working Travel with

Friends

Figure 3-7 System with Balancing Loop A balancing loop showing the effects of income on a bank account and living expenses B, balancing loop.

Discrepancy The difference between an infl ow or outfl ow sum of fl ow, relative to an equilibrium or desired state.

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65

a goal with a purpose. Th e goal of your time spent at work is 48 hours. So, what is the pur- pose of this “work-life balance” system? Presumably, you equate a healthy balancing of time between your personal and work lives to happiness. Th e purpose of this system, then, is to achieve a stable happiness.

Runaway Behavior Now let ’s say that in addition to your bank account, you have a trust fund that your very generous Uncle Albert set up for you when you were 5 years old. This trust fund earns interest and is a stock that you cannot touch until you are 25 years old, so it is not affecting the level of your bank account. Uncle Albert lets you choose between two options. He will set aside either 1) $5,000 earning 10 percent inter- est or 2) $10,000 earning 5 percent interest. In 20 years, if you went with option 1, you would have $33,637.50; and with option 2, you would have $26,532.98. After 20 years, you would have 26 percent more money, so if you chose option 1, you did quite well. What if you completely forget about this money until you receive a bank notice when you retire at the age of 65? How much money would each option offer you? After 60 years, option 1 increases the level of your trust fund to $1,522,408.20; in comparison, option 2 will have a level of only $186,791.86. After 60 years, you will have 815 percent more money choosing option 1, which is a great example of amplification! Compounding is when money made through interest is added to the stock and earns future interest, which is then added to the stock to earn future interest, and so on. This is called a runaway or reinforcing loop , where feedback becomes self-multiplying or amplifying to the level of stock. Rarely is a system left unbalanced, where a runaway loop is allowed to increase exponentially, unless it is ignored—like forgetting about your trust fund until you are 65. Exponential growth or decay is when a stock increases or decreases relative to its size. Interest is a runaway loop that leads to exponential growth or decay, as illustrated in Figures 3-9 and 3-10 . Runaway loops can produce positive and negative self-multiplying eff ects. We have discussed the positive results of runaway behavior, but what about the negative conse- quences? Consider what would happen when runaway behavior directly depletes a limited resource. Th e classic example in society today is fossil fuels. Societies around the world are becoming more industrialized, which often leads to more energy usage. With a limited resource such as oil, this behavior could eventually lead to a depletion in the world ’s supply of fossil fuel to nearly zero.

Responsibilities at Work

Discrepancy between desired and actual time

spent at work

Soccer Practice

B B

Discrepancy between time needed for self and

work responsibilities

Time for Self

Time Spent

at Work

Family Demands

Desired Time: 48 Hours Figure 3-8

System Showing “Work-Life” Balance A system showing the discrepancies between responsibilities at work and making time for yourself B, balancing loop.

Exponential growth or decay When a stock increases or decreases relative to its size, wherein the stock is self-multiplying.

3.3 | SYSTEMS BEHAVIORS AND FEEDBACK LOOPS

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66 Chapter Three Critical Thinking for Managers

Organizations experience diffi cult challenges when runaway loops are ignored, un- checked, and/or unbalanced. It is the fundamental responsibility of management to create positive runaway loops and balance them over time so that the organization can sustain healthy growth and achieve stability. Th is is the “balanced approach” to management, where managers continuously change the system when necessary. 8

3.4 | ANALYZING SYSTEMS AND KNOWING WHAT TO CHANGE

3.4 | Analyze system discrepancies to determine a manager ’s intervention.

Now that you have a fundamental understanding of how systems work, let ’s look at another example. Amazon, the world ’s largest online retailer, saves energy costs by removing the bulbs in the vending machines, saving the company a signifi cant amount of money. Amazon also has a “cloud computing” initiative, where instead of storing information on one com- puter for people to retrieve (also called a computer server ), this information is stored on multiple servers. 9 Cloud computing off ers people the ability to access applications and ser- vices over the Internet from anywhere in the world, rather than through traditional network access. 10

Cloud computing allows a large number of “requests” to be sent to multiple computers, so that no single computer gets overwhelmed. In 2009, Amazon ’s “cloud” had 1.8 million servers, with customer demand that could increase that number to 5.4 million in 2010. 11

What does this have to do with the vending machines? At Amazon, energy consumption is a subsystem of the company (a system). Computer servers use energy, and a lot more of it than vending machines do. Both servers and vending machines have an impact on this subsystem, one greater than the other. Management at Amazon has the ability to unscrew the lightbulbs from the vending machines with no noticeable eff ect on company perfor- mance. Conversely, as more customers demand cloud computing services, management will continue to add computer servers. 12 Th is will predictably increase energy consumption and costs, which will grow at a greater rate than management ’s ability to fi nd lightbulbs to unscrew. 13

What can managers do to balance the company ’s need to grow and provide share- holder value and contain energy costs and usage? First, let ’s create this system one step at a time, starting with the stock and fl ows. Th e stock of this system is energy cost, with the infl ow and outfl ow being usage and savings, respectively. Next, in analyzing a

Figure 3-10 Exponential Decay of 10 Percent   0 percent to 60 percent—Percentage of Decay (Negative Growth) $0 to $6,000—Loss in Dollars (Negative Growth) This graph shows the exponential decay of 10 percent interest on a stock and the effect of this negative growth in dollars.

$0 0 10 20 30 40 50 60

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F Figure 3-9 Exponential Growth of 10 Percent   0 percent to 60 percent—Percentage Growth $0–$2,500,000—Dollars of Interest Growth This graph shows the exponential growth of 10 percent interest on a stock and the effect of this increase in dollars.

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673.4 | ANALYZING SYSTEMS AND KNOWING WHAT TO CHANGE

management system, we need to ask, “Is there a runaway loop necessary for the com- pany to achieve growth?” Let ’s add a runaway loop from cost of energy (the stock) to usage (the infl ow). Next, we need to know the system ’s purpose. For you as a manager and leader, this is a vital task because the system ’s purpose aff ects your team ’s behavior and, as a result, how the system behaves. We will say that the purpose of this system is to stabilize the company ’s energy costs. Th e goal is to have these costs represent the same percentage of expenses in 10 years that they are today. Before we add more feedback loops, this is the time to consider all the factors that aff ect this loop—specifi cally, goals or discrepancies . In this example, the primary factor aff ecting this runaway loop is cloud computing growth. We know that the company ’s purpose is to have “energy costs rep- resent the same percentage of company expenses in 10 years that they are today.” Now, as a manager, you might ask, “To achieve the purpose of this system, is there a feedback loop that can balance the exponential eff ects of growth in cloud computing (a runaway loop)?” Th is question becomes the inspiration for a “balanced approach” to organiza- tional change. To stabilize the impact of a runaway feedback loop, a manager must introduce a bal- ancing loop that continuously seeks the goal of the subsystem. In this example, we need to increase the intensity of savings (outfl ow) to compensate for the growth in usage (infl ow). Th is will then require the addition of a balancing loop, which infl uences savings. What factors might aff ect the intensity of savings? Two ideas are unscrewing lightbulbs (low in- tensity) and purchasing renewable energy (potentially high intensity). In this example, we can assume that the manager responsible for building the cloud computing business for Amazon is not also overseeing the energy budget. As we said before, there are not enough lightbulbs for Amazon to unscrew, so management will likely consider purchasing renew- able energy sources. In fact, there are two popular ideas that have proposed at Amazon to create renewable energy for computer server farms: water dams (hydroelectric) and cow manure (biofuel).

Causal Loops In rapidly changing environments, managers also need to see the “whole system” to predict patterns of behavior. Causal loop diagrams map out the structure of a system and show how the components of a system interact with each other. Th ey allow managers to visualize discrepancies and provide managers a systemic view of a behavior, which enables them to make decisions. Figure 3-11 shows an example of a causal loop diagram using the “Amazon Energy Budget System.” Th roughout this book, we will explore causal loop diagrams and stock and fl ow diagrams for predicting behaviors and consequences that managers make or consider for change.

Building a Culture of Change Organizations go through continuous change. Managers create a culture for healthy change when they clearly 1) understand the company ’s mission, 2) comprehend the purpose of its subsystems, 3) acknowledge the imbalances or discrepancies that feedback loops are im- posing on the subsystem ’s purpose, 4) design a plan to achieve balance, and 5) communicate to all relevant employees a subsystem ’s purpose and discrepancies. Th e Amazon energy management quandary is a classic example of why diff erent di- visions, or subsystems, in a company should communicate with one another. Th e two managers responsible for cloud computing and energy management need to understand the purpose and goal of their respective subsystems (divisions or business units) to help achieve balance for the overall system (the company). Th is mutual understanding gives each manager the knowledge they need to know when and how to change the behav- ior of their subsystem. Th is reasoning allows managers to communicate eff ectively why change is necessary to internal and external stakeholders. 14 (Table 3-1 demonstrates this approach.) In the next chapter, we will further explore how managers deal with cultural and organi- zational changes taking place within their internal and external environments.

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68 Chapter Three Critical Thinking for Managers

Discrepancy between energy usage budgeted

and needed to grow “cloud computing”

initiative

Goal: Stabilize energy costs in 10 years to

7% of operating expenses

R B

Discrepancy between energy budget goal and

ability to save energy

Usage Savings

Energy Budget

Acquiring Renewable Energy Sources

“Server Farm” Growth

Unscrewing Lightbulbs

Figure 3-11 Seeing Systems: Amazon ’s Energy Budget System A causal loop diagram using Amazon ’s Energy Budget System to show the discrepancies between usage, growth, resources, and the ability to save energy B, balancing loop; R, reinforcing loop.

3.5 | COMMON SYSTEMS PATTERNS

3.5 | Diagram the eight most common systems archetypes that managers can expect to encounter.

In the previous section, we explored system dynamics as a useful method for managers to assess the functions and behavior of complex systems. Th e early study of system dynamics allowed other systems thinking researchers to expand on the recurring underlying prob- lems aff ecting organizations and how they might be resolved. In Th e Fifth Discipline , Senge outlines some of these problems or “disabilities” that impede the performance of an organi- zation, resulting in stagnation, and lack of productivity. Th rough Systems Th eory, Senge clas- sifi es these complex problems into eight predictable patterns called systems archetypes . 15

Table 3-1 Reasons for Change Management

Top Five Reasons Managers Should Change

1. Goal for growth in one subsystem makes it implausible to achieve stability in another

2. Intensity of balancing loop not suffi cient to curb behavior in runaway loop

3. Purpose of subsystem inconsistent with mission of system

4. Organization does not have the talent, customers, or suppliers to achieve goals

5. Capacity to infl ow or outfl ow exceeds the environment's ability to saturate or evaporate resources to and from the system

Systems archetypes Peter Senge ’s classifi cation of common patterns of complex problems that managers encounter.

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693.5 | COMMON SYSTEMS PATTERNS

Managers can use these archetypes as eff ective tools for establishing the underlying rea- sons for recurring problems. Once the patterns of behavior are revealed, managers can then take steps to resolve the issue and break the pattern before it becomes embedded in the system structure. Th e following section provides an example of each of the eight systems archetypes, which are Limits to Growth , Shifting the Burden , Eroding Goals , Escalation , Success to the Successful , Tragedy of the Commons , Fixes Th at Fail , and Growth and Underinvestment .

Senge’s Eight Archetypes 1. Limits to Growth

“The harder we run, the more we seem to stay in the same place.” 16

Many organizations experience rapid growth for a certain period of time before coming to a seemingly inexplicable halt. Generally, this happens because the process of growth, caused by a “reinforcing feedback process,” has come up against a balancing process that can slow down the rate of improvement or even cause the business to come to a standstill. Th e cycle begins when a process has proved so successful that certain problems go un- noticed or management reinforces the situation by relying too much on the “old way of doing things” instead of addressing the issues. Th is is mainly because the management and employees are so caught up with the accelerating growth or expansion of the company that a “reinforcing feedback” process occurs, where each individual buys into an “If it ain ’t broke, don ’t fi x it” approach. However, the more they rely on the same business model, the more static the business becomes. Recognizing and understanding the factors that are causing these limits to growth and development, as shown in Figure 3-12, is essential when an organization reaches a bump in the road. Many managers compensate with this faltering growth by pushing themselves and the team even harder to restore the company to its former glory. However, this method only results in tired, overworked employees and potentially a lowering of morale. By addressing the underlying reasons for the limitations, the source of the problem can be removed and the company ’s balance restored.

Helen ’s Story Helen works as a product manager for a successful, high-quality luggage man- ufacturing company. She fi rmly believes that the success of the company is based upon its core values, which include quality, customer satisfaction, and innovation. Every employee in the company is expected to adhere to the company ’s values and performance standards. Lately, her team has been trying to fi nd ways to make their suitcases more eco-friendly. Although the team has some good ideas about how to manufacture the new product, its

Limits to Growth archetypes A systems pattern where an external or internal force restricts the ability to expand a service or product offering.

Efforts R1 B2Performance Limiting Action

Constraint

Effortsffff R1 B2PerfPP ormancff e Limiting Action

Constraintrr

Figure 3-12 Limits to Growth Systems Archetype This shows limits to growth on work efforts and performance where the growth process is impeded by constraints that limit progress B, balancing loop; R, reinforcing loop.

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members lack the expertise needed to design and work with the new material. Helen does some research and decides to hire a couple of product specialists to work with her team to handle the design and oversee the manufacturing of the new luggage. At fi rst, the team works well with the new members, and soon the new, lightweight, eco- friendly luggage is ready for sale. Th e product is a big hit with customers and sells particu- larly well at airports and specialist shops. Predicted sales begin to double, resulting in more demands for the suitcases. Furthermore, customers have asked for a wider range of designs and colors. Helen realizes she needs more members on the team to deal specifi cally with the new luggage product and to meet the needs of the customers. Th e team expands, and before long there are twice as many employees than there were before. Orders are met, designs are created, and customer feedback is positive. Internally, however, things are not going so smoothly, and friction is rising between the old team mem- bers and the new team members. Th e old team members are concerned that the new mem- bers seem to lack the values of the company. Th e new members are undoubtedly effi cient, but there is some concern that they “cut corners” and don ’t spend enough time assessing essential market feedback. In turn, the new team members dismiss the old team members ’ suggestions that they follow “the old way of doing things.” Helen notices the divisions within the team, but she puts the dissension down to com- petition; the most important thing is that the team performs and continues to make money for the company. As the company ’s profi t grows, she pushes the team to work even harder to meet demand. She is so caught up with meeting the fi nancial goals that she fails to notice the eff ect of the extra pressure on the team members. Th ey grow further and further apart until, eventually, communication breaks down altogether, leading to confusion and failure to fulfi ll orders. It is not long before sales begin to drop, customers complain about quality, morale hits rock bottom, and disgruntled employees start to leave. Helen realizes that if she wants to save the new product from extinction, she must fi nd a solution. Helen sits down with her boss to discuss the plummeting fi nancial fi gures and analyze what has happened and how they can remove the limitations to growth. One of the major underlying reasons for the falling team performance is the growing distance and tension between the old and new team members. Helen suggests that they call a meeting to address the internal friction and try to fi nd ways to reconcile the team. Helen ’s boss agrees: they need to fi nd some way of boosting morale, and get the team excited about the new product once more. In the end, they hold some team-building events, and contests, with the winners receiving a set of luggage as a prize. Th e relationship between the team members gradually improves, and so does the company performance. Problem solved; but Helen continues to keep a close eye on her staff and makes sure she addresses any other potential issues before they escalate.

2. Shifting the Burden

“Look here, this solution has worked so far! What do you mean there ’s trouble down the road?” 17

Shifting the Burden shown in Figure 3-13 occurs when people use quick fi xes when resolving an underlying problem that seems too time-consuming, diffi cult, or costly to address fully. Because the fi x seems to work initially, it is used repeatedly. However, as the fundamental issue still exists, these “fi xes” are usually only short-term solutions; it is inevitable that the situation will worsen over the long term and produce unwanted side eff ects further down the road. Another example of Shifting the Burden is when organizations bring in outside “interven- ers” to help resolve a problem. Again, this can be useful in the short term—the external team identifi es and solves the issue and once more restores balance and order to organizational processes. Th e disadvantage to hiring external help is that the existing employees fail to learn the skills that could help them to fi x the problem themselves, which fosters depen- dency on the outside teams whenever the issue recurs. Th e key here is to fi nd a long-term, enduring solution to the problem rather than relying on a quick fi x. At best, the Shifting the Burden method should be used only to buy time while a lasting solution is being put in place.

Tony ’s Story When Tony founded a start-up business selling gourmet pet food, he was extremely excited. Within the first year, business was booming, and orders were coming

Shifting the Burden archetypes A systems pattern, similar to “Fixes that Fail,” where managers use short-term fi xes that result in long-term problems, typically by using non-sustainable resources to address a challenge.

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in fast. However, by the second year, sales had started to taper off, and Tony was get- ting concerned. Looking at the database, he saw that the company was selling well to existing customers, but it had been months since they had any new customers. Tony reasoned that his sales and marketing team were too busy with their existing customer base to stump for new business, so he elected to contract external help for a couple of months. At fi rst, the outside sales team made great strides in attracting new customers. Th ey designed a better strategy, defi ned a diff erent target market, and built a new sales system. Soon, the company was getting more orders than ever before, and business was really taking off . Two months later, the contract with the outside sales team was up, and Tony had to let the team leave. Suddenly, business began to decline again due to a number of glitches. As the existing sales team had never learned how to use the new system, they had no idea how to correct errors or mend system breakdowns. Orders were lost or delayed, and custom- ers began to complain. Furthermore, unlike the external team, Tony ’s own team had never established any kind of relationship with the new clients and did not know how to cater to their needs. As business began to go downhill, Tony realized that shifting the burden to another team had worked in the short term but had brought about a new set of problems in its place. Consequently, he started to look for a long-term solution to prevent his company from going under. Tony reasoned that the main problem was lack of knowledge: his existing team had no idea how to work the new system implemented by the external team, nor did they have a good understanding of how to deal with the new target customer base. Immediately, Tony introduced a range of training sessions and held open forums to answer any questions or concerns. Th ree months later, armed with their new knowledge, and reassured by the mana- gerial support, the team began to perform much better. Within six months, Tony ’s gourmet pet-food business had started to make a profi t once again.

3. Eroding Goals

“It ’s okay if our performance standards slide a little, just until the crisis is over . . . ” 18

Solution for Symptom

Side Effect

B

R

Delay

Problem Symptom

Solution for Root Cause

B

Solution for Symptom

Side Effeff ct

B

R

Delay

Problem Symptom

Solution for Root Cause

B Figure 3-13 Shifting the Burden Systems Archetype This diagram shows shifting the burden of solving problems to external forces, resulting in delays and other side effects B, balancing loop; R, reinforcing loop.

3.5 | COMMON SYSTEMS PATTERNS

Eroding Goals archetypes A systems pattern where managers impose short-term solutions, leading to the decline of long-term goals.

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Eroding Goals shown in Figure 3-14 is another case of shifting the burden. Too much de- pendence on relieving the symptom rather than the underlying problem by employing easy fi xes and short-term solutions will have a negative impact on long-term fundamental goals. In this uncertain economy, it is easy for a company to fall prey to accepting lower perfor- mance levels. By making comparisons to other struggling organizations in the same indus- try, managers can perceive their falling standards and slipping goals as “good enough under the circumstances.” Once more, the balancing feedback loop is overcome by the reinforcing feedback loop. In other words, if managers and employees accept this goal-slipping process and allow for lowering performance standards rather than taking corrective action, then the balance will shift and business will continue to decline gradually. Th ere is a choice between allowing goals to slip and improving the situation. Organiza- tions can avoid the pitfalls of the goal-eroding trap by maintaining absolute performance standards regardless of whatever crisis they may be facing, or how the economy is perform- ing. Indeed, if the perception shifts from “well, we ’ve done our best under the circumstances,” to “let ’s see this as a temporary setback and fi nd ways to improve performance,” then the company will achieve its goals in a much shorter time.

Seline ’s Story Seline is a physician in a large hospital in Florida. Her job includes treating patients, forming diagnoses, and communicating with other departments when a patient needs specialized care. When Seline refers a patient to another department or hospi- tal for cardiology or respiratory care, for example, she needs an effi cient way of sharing information. Fortunately, a couple of years ago, one of her hospital ’s goals was to invest in the latest IT healthcare systems and technology, which allow each department to exchange accurate information about a patient with other departments and hospitals quickly and effi ciently. Seline is an advocate of this product and works closely with other hospitals to teach them how to use the technology. For the past two years, Seline has championed this technology, doing demonstrations and exalting the benefi ts of the system. In many cases, her eff orts have paid off , and she has succeeded in persuading hospitals to use the new technology. In spite of her success, however, a few hospitals in the area have been slow to employ the system. Th is means that when Seline or other doctors need to send a patient to another hospital for further treatment, instead of using the system, they must handwrite everything, which is time consuming and prone to errors.

Gap

Goal Pressure to Lower Goal

B1

B2

Efforts to Improve Situation

Delay

Situation

Gap

Goal Pressure to Lower Goal

B1

B2

Efforts toffff Improve Situation

Delay

Situation Figure 3-14 Eroding Goals Systems Archetype A Shifting the Burden concept where a short-term solution is put in place, leading to the erosion of a long-term goal B, balancing loop; R, reinforcing loop.

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As the economy dips, some of the hospitals that use the system start to view it as an un- necessary expense. Seline ’s boss has also started to instigate budget cuts, which include the decision not to renew the contract with the software company that leases the system to the hospital. Seline is told that this is only a temporary measure until the hospital gets back on its feet. Seline and the other doctors resort to writing patient diagnoses manually once more, leading to loss of patient records and general confusion. As Seline observes performance standards slipping within her own hospital as well as others, she realizes that she needs to fi gure out how she is going to weather the storm and if she can help maintain the hospital ’s original objective. Seline decides that she needs to convince her boss to bring back the new system, so she sets up a meeting with him for the following week. She spends the next few days analyzing and gathering information to prepare for the discussion. By using charts and statistics, Se- line is able to show her boss how performance standards have declined as a direct result of taking away the system. She is also able to report a higher level of negative patient feedback since the software has been decommissioned. Seline ’s boss responds that while the situation is not ideal, the hospital simply does not have the budget for the system. Anticipating this re- sponse, Seline outlines a plan where they could keep the system but introduce cost savings elsewhere, such as encouraging hospital staff to turn off lights and computers when they go home, which would bring about signifi cant savings. She also suggests holding a weekly brainstorming session with the staff so they can put forward ideas on how the hospital could save money in other areas. Impressed by Seline ’s proposal, her boss puts her in charge of a new initiative to implement cost-cutting measures—and he promises that if they work, he will reintroduce the system. Th ree months later, the system is back up and running, and performance levels improve once more.

4. Escalation

“If our opponent would only slow down, then we could stop fi ghting this battle and get some other things done.” 19

Escalation shown in Figure 3-15 takes place when competition between two individuals or organizations gets completely out of hand, leading to a “lose-lose” situation. Of course, healthy competition is imperative for businesses to survive, but when it becomes overly aggressive, there can only be negative results. When one party launches an attack, the other side inevita- bly sees this as a threat and fi ghts back, leading to a snowball eff ect. Th is often occurs when companies have price wars, where one company lowers its prices to compete with another company in the same industry. Th e other company ends up reducing its prices to compete, the fi rst company responds in kind again, and so on, until both companies are losing profi ts. Escalation can be avoided if managers look for ways for both sides to achieve their goals. Th is involves cooperation, mutual understanding, and open discussion.

Figure 3-15 Escalation Systems Archetype One individual or organization aggressively competes against another individual or organization, leading to escalation B, balancing loop.

B BResults of A Relative to B

B’s ResultsA’s Results

Actions by A

Actions by B

3.5 | COMMON SYSTEMS PATTERNS

Escalation archetypes A systems pattern where two competing interests eventually take irrational actions against one another, resulting in a “lose-lose” situation.

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Jamal ’s Story Jamal is an entrepreneur and an inventor. Having recently patented his ideas and received endorsement from a number of investors, Jamal can ’t wait to build his start-up company and put it on the road to success. Th e fi rst invention that Jamal will use to test the market is a three-wheeled scooter for adults and children. Safe, lightweight, and aff ordable, the scooter quickly fl ies off the shelves, and Jamal is delighted to fi nd himself inundated with orders. Within a year, however, another growth company that specializes in bicycles manufac- tures its own three-wheeled scooter, almost identical to Jamal ’s invention, and starts to sell it at a lower price. When sales start to fall and Jamal ’s fl edgling company begins to struggle, he panics and lowers the price to match his competitor ’s price. Eager to increase market share, Jamal ’s competitor drops the price even further. As this pattern continues over sev- eral years, both companies suff er a blow to their bottom line. Customers begin to become suspicious of such “cheap” products, and soon the survival of the scooter and the companies themselves are called into question. Facing bankruptcy, Jamal has to fi nd a way to save his invention, restore investor faith, and build up his company once more. He knows that at this critical point, he has nothing to lose by arranging a meeting with his biggest adversary. To his surprise, Jamal ’s competi- tor is interested in discussing ways in which both businesses can break free of the pattern and thrive once again. Th ey agree that they need to diff erentiate rather than being in direct competition with each other. Jamal confesses that he has a number of other inventions that he would like to market, and his competitor reassures him that he intends to focus solely on bicycle manufacturing in the future. As for the three-wheeled scooter, the two parties agree to sell it at the same price in each of their stores. In the end, Jamal ’s new inventions take his business in an entirely diff erent direction from his competitor ’s, and his company gets back on track once again.

5. Success to the Successful Th e Success to the Successful paradigm shown in Figure 3-16 occurs when two eff orts or activities compete for the same resources. Th e more success one eff ort achieves the more support it gets, to the detriment of the other. Again, this is another example of a lose-lose situation. One party is thriving and the other is struggling. However, as they are competing for the same resource, it is only a matter of time before that resource becomes limited or runs out altogether, leading to loss for both parties. Th e key here is to strike a balance between the two activities. Ascertain the reasons why the other party is struggling and try to make the resource accessible to both. If the resource is already under pressure, then fi nd ways to distribute it evenly or present another alternative.

Marielle and Rachael ’s Story Marielle and Rachael have known each other since childhood; they went to the same schools, achieved similar academic results, and attended the same

Figure 3-16 Success to the Successful Systems Archetype Two activities compete for the same resources. One activity becomes more successful, depriving the other of support and resources R, reinforcing loop.

R1 R2Allocation to A Instead of B

Success of BSuccess of A

Resources to A

Resources to B

R1 R2Allocation to A Instead of B

Success of BSuccess of A

Resources to A

Resources to B

Success to the Successful archetypes A systems pattern where two efforts compete for the same resources, and the more successful effort today gets more support, regardless of future potential of the competing effort.

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university. Both have a passion for the hotel industry, and each graduated with honors in hotel management. When they both got jobs as trainee hotel managers at one of the world ’s most luxurious hotels, Marielle and Rachael were excited. Th ey joked about which one of them would climb the career ladder quicker. On their fi rst day, the new trainees found out that they would both be reporting to the same manager. Marielle and Rachael exchanged a look: the pressure was really on now; they would be competing against each other. Th eir fi rst few weeks went well. Th ey worked hard and worked well together on tasks, and soon both stood out in the eyes of their manager. One day, Rachael receives some bad news; her grandfather has passed away. Devastated, Rachael fl ies home to attend the funeral, and she is gone for almost a week. During her ab- sence, the hotel experiences a minor fi re. Marielle jumps into action and makes sure that all the guests are out of their rooms and brought to safety. Marielle ’s boss is so impressed with her ability to take initiative, together with her impressive work performance, that he puts her up for promotion. When Rachael returns, she notices a distinct camaraderie between her manager and Marielle. She becomes frustrated that her suggestions never seem to be taken into account, and she is constantly assigned the more menial tasks, while Marielle gets the more reward- ing assignments. When she tries to talk to her manager about the situation, she is waved away or told that she is being paranoid. As time goes by, Rachael feels that she is being pushed further and further out; either the situation needs to improve or she will have to get another job. As Rachael ’s manager is unable to see her point of view, Rachael feels that she has no other recourse but to go to the executive hotel manager to explain the situation. To her relief, the executive manager is sympathetic to her plight and suggests that Rachael work for a diff erent manager in the hotel, where she would be carrying out duties that would not necessarily overlap with her previous role. Rachael agrees to try out the new approach and fi nds her new boss supportive and encouraging and her new responsibilities interesting and varied. As they are not in direct competition any longer, Rachael and Marielle are able to maintain their friendship, and both become fully qualifi ed hotel managers in the same amount of time.

6. Tragedy of the Commons

“There used to be plenty for everyone. Now things are getting tough. If I ’m going to earn any profi t this year, I ’ll have to work harder.”20

Tragedy of the Commons shown in Figure 3-17 occurs when individuals use a common lim- ited resource purely for their own gain, without paying attention to the eff ects that they are having on it.21 Th e more they use it, the less resource they have, until eventually the resource is depleted. Competing companies that continue to mine for the same natural resources until they are in danger of running out is an example of a tragedy of the commons. Managers can address this problem of regulating the available resource by gaining input from the individuals who use it.

Max ’s Story Max is a senior manager for a large car manufacturing company and is respon- sible for managing the company ’s suppliers. One of his main responsibilities is to monitor the company ’s oil manufacturers to ensure that the oil is made to exact specifi cations and delivered on time by the suppliers. When the company decides to manufacture its own oil, engineered specifi cally for its own type of car, Max is delighted. He reasons that the fi rm can gain market share by improv- ing on the quality of the oil, as well as providing the customer with a unique product. Max realizes he will have to liaise even more closely with the oil supplier to get the blend just right. Although the idea is top secret, information about it leaks out. Suddenly a local rival com- pany copies the idea and makes its own unique brand of oil. As both companies rely on the same oil resource, signifi cant pressure is put on the suppliers to deliver. Within a few years, both companies are thriving: customers are satisfi ed with the en- hanced quality of the engine oil and don ’t seem to mind paying a higher premium for it. Rising market share, increased profi t, and a reduction in internal expenditure means that business is booming. However, the suppliers begin to fall behind on their orders and warn

3.5 | COMMON SYSTEMS PATTERNS

Tragedy of the Commons archetypes A systems pattern where multiple efforts are competing for the same resource, where self-interest overrides a collective solution.

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their clients that the oil supply is becoming signifi cantly depleted. Yet, both companies con- tinue to place orders to manufacture their unique brands of oil until one day, there is no oil left. Almost instantly, revenues drop, customer orders go unfi lled, and staff is let go. Shocked that the company has used up their entire supply of a natural resource, Max vows to fi nd a solution to the situation. On further investigation, Max feels that the problem that has led to the oil scarcity lies in lack of regulation. Max ’s company and its rival did not regulate the amount of oil that they were using, nor did they heed the warnings from the suppliers. Max eventually fi nds an oil alternative that is superior to the one they originally manufactured, and business slowly returns to normal. Th is time, he makes sure that the company regulates its supply and even holds talks at other companies to encourage them to use regulation and educate them about the dangers of overusing natural resources.

7. Fixes That Fail

“It always seemed to work before; why isn ’t it working now?”

When an urgent problem arises, managers are tempted to address the matter as quickly as possible by putting in a solution to fi x the issue. Many times, however, this fi x is merely a short-term solution and does not fully correct the problem in the long term, leading to adverse consequences in the future. Th is is called Fixes Th at Fail, as illustrated in Figure 3-18.

Net Gains for A

A’s Activity

Delay

B’s Activity

Net Gains for B

Total Activity

Gain per Individual Activity

R1

R2

R3

R4

B5

B6

Resource Limit

Net Gains for A

A’s Activity

Delay

B’s Activityt

Net Gains for B

Total Activityt

Gain per Individual Activityt

R1

R2

R3

R4

B5

B6

Resource Limit

Figure 3-17 Tragedy of the Commons Systems Archetype Individuals use common limited resources until the resources are diminished or eradicated altogether B, balancing loop; R, reinforcing loop. Source: From D. Kim, Systems Archetypes II (Waltham, MA: Pegasus Communications, Inc., 1994). Printed with

permission by the author, Dr. Daniel H. Kim ([email protected]).

Fixes That Fail archetypes A systems pattern where managers use short-term fi xes that result in long-term problems, typically signifi cantly worse than the original challenge.

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77

Focusing on the long term instead of the short term by implementing a fundamental solution that will have longer-lasting eff ects helps managers to avoid quick fi xes.

Jane ’s Story Jane works for a top healthcare company in New York City. As fi nance manager, she is responsible for the overall budget. When the company starts losing revenue, the CEO of the company turns to Jane to see how it can mitigate the loss against the existing budget. Jane starts by investigating the expenses of each department to see if she can fi nd the weak link in the chain. After a few days, it is clear that the sales department is overspending more than the other areas, and so it is dangerously close to exhausting its allocated budget for the year. On further investigation, it appears that some of the employees have been expensing items that do not fall under the acceptable expense limits. When she questions a senior salesperson, Bill, about his habit of expensing high-priced lunches, he tells her that they were business lunches, and that as far as he was concerned, the company ought to pay for the client as well as himself. Jane tries to explain that the lunch bills were far above the al- located budget and he would have to cut down on the business lunches and fi nd a diff erent way for himself and his sales team to conduct meetings. Bill refuses to comply and tells Jane that business lunches are a fundamental part of being in sales. Jane is frustrated. As far as she is concerned, the only way she can cut costs, balance the books, and get the budget back on track is to lay down the law with the sales department: either dismiss some of them or give them an ultimatum to cut down on expenses. When the sales team still refuses to comply, Jane makes the decision to fi re the main off enders without consulting her boss. Within a month, Jane is pleased to fi nd that by getting rid of the “troublemakers,” the departmental budget was back on track. However, without the extra staff , sales revenue is down. Jane has to hire new salespeople to replace the others, but fi nds that wages have risen. She will have to factor in higher salaries for the new employees, which will have a se- vere impact on her budget. When Jane is called into a meeting with the CEO, she fears the worst—and she is right. Angry that Jane used a quick-fi x approach without consulting him, he immediately gives Jane her notice. Jane is disappointed and upset at losing her job, but not surprised; she knew she could have handled the situation diff erently. Maybe if she had held a meeting with the sales team explaining the eff ect of overspending on the bottom line, and asked them to introduce new initiatives in which the sales department could reduce its spending, there might have been a diff erent outcome. More important, she should have kept her boss fully informed of her actions.

8. Growth and Underinvestment

“Well, we used to be the best, and we ’ll be the best again, but right now, we have to conserve our resources and not overinvest.”22

B1

R2

Problem Symptom

Fix

Unintended Consequence

Delay

B1

R2

Problem Symptom

Fix

Unintended Consequence

Delay

Figure 3-18 Fixes That Fail Systems Archetype Short-term fi xes can have unintended consequences and cause more problems in the long run B, balancing loop; R, reinforcing loop.

3.5 | COMMON SYSTEMS PATTERNS

Growth and Underinvestment archetypes A systems pattern where managers reduce resource allocation to increase profi ts temporarily or to avoid risk, with the unintended consequence of losing its equilibrium in the marketplace.

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78 Chapter Three Critical Thinking for Managers

In these economically challenging times, many organizations tend to batten down the hatches and avoid exposure to “risky” expenditures. Plenty of companies have experienced meteoric growth, only to fall into bankruptcy not long thereafter. Some companies grow too rapidly and fail to meet rising demand. Underinvestment is just as risky as overinvestment if an organization is to maintain its equilibrium in the marketplace. If managers let perfor- mance standards slide so they can conserve resources, then the company is on a slippery slope to lower expectations and can lead to a potential collapse. Figure 3-19 illustrates the concept of growth and underinvestment. To address the balance, managers need to determine if there is capacity for investment and real potential for growth. Th ey need to stay focused on the original vision of the com- pany, work hard to attain these goals, and maintain performance standards to achieve suc- cess. Blaming the economy, competition, or internal staff for the slowing of growth will only lead to deterioration and poor morale.

Peter ’s Story Peter is the owner and manager of a small boutique hotel in Cape Cod. Th e hotel has 12 rooms, a gourmet restaurant, and stellar customer service. Awarded a fi ve-star rating (out of fi ve) in its fi rst year of business, the hotel is in fi rst place among all the other small hotels in the area. Th e hotel enjoys a comfortable annual profi t and attracts repeat and new business, year after year. Often, Peter has to turn away customers, as the rooms fi ll up quickly. One summer, another boutique hotel springs up about a mile away from Peter ’s hotel. It has almost double the number of rooms as Peter ’s hotel, as well as a kitchen run by a top chef, and a swimming pool. Soon, Peter ’s hotel is losing customers to its rival, and profi ts are beginning to erode. When Peter looks at the books, he realizes that there is potential for his hotel to expand or at least add a few improvements. However, he is worried that he might drive his existing customers away by closing the hotel for a couple of months to make the necessary adjustments and so he decides to sit tight. In the meantime, business slows down, the staff members are bored, and without the usual number of guests, they have less to do. Th e quality of their service begins to suff er. When a hotel inspector threatens to downgrade the hotel from A to C, Peter realizes he needs to act quickly to prevent his business from slipping away. Peter sends an email out to all his regular guests, informing them of the hotel ’s temporary closure, and he promises them an upgraded facility and a complimentary lunch the next

Figure 3-19 Growth and Underinvestment Systems Archetype Companies that underinvest remain in their current state, leading to stagnation and unfulfi lled goals B, balancing loop; R, reinforcing loop.

Fi 3 19

BR BGrowing Action

Current State

Slowing Action

Perceived Need

Goal

Slowing Avoidance

Delay

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79

time they come to stay. When the hotel reopens two months later, it includes deluxe, reno- vated rooms, a refurbished restaurant and menu, and new features that diff erentiate itself from its rivals: concierge service, free mineral water, WiFi, and luxurious guest robes. Within six months, Peter ’s hotel is more popular than ever. Over the course of the following chapters, we will apply a systems approach to critical thinking so that we can design and visualize how all the factors outlined in this chapter interact. You will be able to assess systems archetypes and visualize systems that become a blueprint for management decisions, which stabilize organizations to achieve predictable and desirable outcomes. We will use this skill throughout the remainder of the book as a practical tool for analyzing management challenges and opportunities. From here, this book will guide you through today ’s management thought, as it seeks to fi nd a balanced approach to decision making. As management theorists Gary Hamel and Bill Breen say in their book Th e Future of Management , “Look around you: what things have demonstrated their adaptability across decades, centuries, and eons? What sets the bench- mark for adaptability? From my vantage point, life, markets, democracies, faith, and cities all seem surprisingly adaptable. Th ey must become the role models for 21st century [manage- ment].” 23 Th ese role models of adaptability are complex and durable systems, designed by communities of critical thinkers.

3.5 | COMMON SYSTEMS PATTERNS

CaseSnapshot Chapter 3 Case: Critical Thinking for Managers:

Airbnb can be found on pg. 464

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80 Chapter Three Critical Thinking for Managers

KEY TERMSS Balancing loop A reactionary force that seeks stabilization to- ward a stock level equilibrium, typically a goal or desired state. (p. 63)

Behavior over time (BOT) diagrams A visual tool that allows managers to see the change in measurements across a span of time. (p. 60)

Delay Refers to the time a force, internal or external, takes to have an effect on system behavior. (p. 62)

Discrepancy The difference between an infl ow or outfl ow sum of fl ow, relative to an equilibrium or desired state. (p. 64)

Eroding Goals archetype A systems pattern where managers impose short-term solutions, leading to the decline of long-term goals. (p. 71)

Escalation archetype A systems pattern where two competing interests eventually take irrational actions against one another, resulting in a “lose-lose” situation. (p. 73)

Exponential growth or decay When a stock increases or de- creases relative to its size, wherein the stock is self-multiplying. (p. 65)

Feedback loop A reactionary force that causes fl uctuations in behavior. (p. 63)

Fixes That Fail archetype A systems pattern where managers use short-term fi xes that result in long-term problems, typically signifi cantly worse than the original challenge. (p. 76)

Growth and Underinvestment archetype A systems pattern where managers reduce resource allocation to increase profi ts

temporarily or to avoid risk, with the unintended consequence of losing its equilibrium in the marketplace. (p. 77)

Infl ows Increase the value of a stock measurement. (p. 60) Limits to Growth archetype A systems pattern where an ex- ternal or internal force restricts the ability to expand a service or product offering, (p. 69)

Outfl ows Decrease the value of a stock measurement. (p. 60) Reinforcing loops A self-multiplying reactionary force that am- plifi es change in a stock level. (p. 63)

Shifting the Burden archetype A systems pattern, similar to “Fixes that Fail,” where managers use short-term fi xes that re- sult in long-term problems, typically by using non-sustainable resources to address a challenge. (p. 70)

Stocks Material or information that can be measured. (p. 60) Success to the Successful archetype A systems pattern where two efforts compete for the same resources, and the more suc- cessful effort today gets more support, regardless of future po- tential of the competing effort. (p. 74)

Systems archetypes Peter Senge’s classifi cation of common patterns of complex problems that managers encounter. (p. 69)

Systems thinking A methodology of analysis that managers use to understand interconnected cause-and-effect relationships that change organizational behaviors and dynamics. (p. 59)

Tragedy of the Commons archetype A systems pattern where multiple efforts are competing for the same resource, where self- interest overrides a collective solution. (p. 75)

ADDITIONAL RESOURCES

IN REVIEW W 3.1 | Explain how managers use systems thinking to achieve results.

With the help of systems thinking, we have the potential to change our mindset, adjust our behaviors, and use our existing skills to enhance strengths within ourselves and others. Systems thinking allows managers to understand and analyze the “inter- connected set of elements that is coherently organized in a way that achieves something.”

3.2 | Illustrate how systems diagrams are used to show cause-and-eff ect relationships.

Two kinds of systems diagrams that managers use in their work, each highlighting a diff erent aspect of system behavior, are stock and fl ow diagrams , and behavior over time (BOT) diagrams . Stocks are material or information that can be measured, such as trees in a forest, water in a reservoir, electricity produced, money in a bank account, or satisfaction doing a job. Flows are the physical

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81Additional Resources

or informational forces that increase or decrease stocks. An in- fl ow increases stock, and an outfl ow decreases stock. You can see from this simple example how you can use a stock and fl ow diagram to better understand:

● Th e forces ( fl ows) aff ecting a particular stock;

● Th e causes and eff ects of a particular infl ow or outfl ow; and,

● How diff erent stocks and fl ows are interconnected in a system.

BOT diagrams help managers visualize the changes and the way the stock level rises and falls. Once you understand how the various infl ows, outfl ows, and stocks aff ect a system ’s function, then as a manager, you can make better decisions to get the re- sults you want from that system over time. When there is a dis- crepancy between your desired stock level and the actual stock level, that discrepancy motivates change.

3.3 | Show how systems balance and reinforce their behavior over time.

Balancing loops are reactionary forces that seek stabilization to- ward a stock level equilibrium, typically a goal or desired state. Reinforcing loops are self-multiplying reactionary forces that am- plify change in a stock level. Organizations experience diffi cult challenges when runaway loops are ignored, unchecked, and unbalanced. It is the fundamental responsibility of management

to create positive runaway loops and balance them over time so that the organization can sustain healthy growth and achieve stability. Th is is the “balanced approach” to management, where managers continuously change the system when necessary.

3.4 | Analyze system discrepancies to determine a manager ’s intervention.

To stabilize the impact of a runaway feedback loop, a manager must introduce a balancing loop to seek the goal of the subsys- tem continuously. Visualizing discrepancies in a stock and fl ow diagram enables managers to make specifi c policy-based deci- sions. In rapidly changing environments, managers also need to see the “whole system,” to predict patterns of behavior. Causal loop diagrams provide managers with a systemic view of a be- havior, which is helpful in understanding more complex relation- ships between variables.

3.5 | Diagram the eight most common systems archetypes that managers can expect to encounter.

In Th e Fifth Discipline , Peter Senge outlines the “disabilities” that impede the performance of an organization, resulting in stagna- tion and lack of productivity. Th rough Systems Th eory, Senge classifi es these complex problems into eight predictable pat- terns, called systems archetypes , that managers encounter: Lim- its to Growth, Shifting the Burden, Eroding Goals, Escalation, Success to the Successful, Tragedy of the Commons, Fixes Th at Fail, and Growth and Underinvestment.

SELF-TEST T 3.1 | Explain how managers use a systems approach to critical thinking to achieve results.

1. Th e ability to see an organization as a whole “system,” or a set of inter-related elements rather than a number of separate parts, is known as: a. Interconnectedness b. Systems thinking c. Big picture thinking d. Interrelatedness

2. Describe the fi ve main disciplines described by Peter Senge.

3.2 | Illustrate how systems diagrams are used to show cause-and-eff ect relationships.

3. are the physical or informational forces that increase or decrease stocks. a. Flows b. Dynamics c. Power bases d. Dispositions

3.3 | Show how systems balance and reinforce their behavior over time.

4. Explain the diff erence between a balancing and reinforcing feedback loop.

5. Th e diff erence between an infl ow or outfl ow goal and sum of fl ow is known as a discrepancy. a. True b. False

3.4 | Analyze system discrepancies to determine a manager's intervention.

6. Explain how Amazon uses systems thinking to cut energy costs.

7. map out the structure of a system and show how the components of a system interact with each other.

3.5 | Diagram the eight most common systems archetypes that managers can expect to encounter.

8. Which of the following is not one of Senge ’s eight most common system archetypes that managers can expect to encounter? a. Limits to Growth b. Shifting the Burden c. Escalation d. Tragedy of the Commons e. Overachievement

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82 Chapter Three Critical Thinking for Managers

CHAPTER EXERCISEE Aliens at the Ballpark Suppose that an alien delegation is visiting Earth to observe and better understand human customs, practices, and norms. You have been asked to serve as tour guide for the aliens on a trip to a professional baseball game. Upon arrival at the ballpark, the aliens become quite confused and have many questions for you. You fi nd it surprisingly diffi cult to explain baseball, a game you understand quite well, to the aliens. For example, how would you answer the following questions:

1. What is a game?

2. What is a team?

3. Why are there no female players in the game?

4. Why do people in the stadium get so excited about watching other people play a game?

5. Why can ’t the people in bleachers go down on the fi eld and play too?

6. Why are winning and losing so important?

Thinking like a tour guide for an alien delegation will help you to become a more effective critical thinker. Looking at something the way that an outsider unfamiliar with the process might can help you to realize that much of what we do and how we think are based on deeply imbedded assumptions and values. Our basic values and ways of doing things may appear less logical and “correct” when viewed from the perspective of an alien. Trying to think like an alien tour guide can help you to think critically when addressing challenges and solving problems.

SELF-ASSESSMENT T Critical Thinking Skills

“Between truth and lie are images and ideas we imagine and think are real, that paralyze our imagina- tion and our thinking in our effort to conserve them.”

— R. D. Laing

One of the greatest challenges to critical thinking involves self-imposed constraints that are not actually part of the prob- lem that we are facing. Riddles are often diffi cult because we im- pose constraints on our thinking that are not part of the stated problem. Test your critical thinking skills by trying to solve the following classic riddles (see answers on the following page):

1. Two Masked Men One evening, a man leaves home and starts running. He runs for a while and then makes a left turn. He runs some more before making another left turn. After running a while longer, he makes another left turn. As he approaches home, he encounters two masked men. Why is he not alarmed?

2. Th ree Bags of Gold You have three bags full of gold pieces. One bag contains fake gold pieces that weigh 1 ounce more than the genuine gold pieces, which weigh 1 pound each. You have a penny scale and just one penny. How can you determine which bag contains the fake gold?

3. Th e Missing Dollar Th ree guests decide to share a hotel room. Th e clerk says the bill is $30, so each guest pays $10. Th e clerk later realizes that the bill should have been $25. Th erefore, he gives $5 to the bellhop to return to the guests. On the way to the room, the bellhop realizes that he cannot divide the money equally. As the guests didn ’t know they would be getting a refund, the bellhop decides to just give each guest $1 and keep $2 for himself. Each guest got $1 back: so now each guest only paid $9; bringing the total paid to $27. Th e bellhop has $2. If the guests originally paid $30, what happened to the remaining $1?

SELF-TEST ANSWER KEYss 1. b.

2. 1) personal mastery, which involves focus, patience and holding on to our vision; 2) mental models, which are the perceptions that we form about the world around us and how they shape our behavior; 3) building a shared vision, where we share our vision of the future with others to in- spire and motivate; 4) team learning where we open up a dialogue with our team members to encourage a free fl ow of thoughts and ideas; 5) systems thinking, which inte- grates the other four disciplines.

3. a.

4. A balancing loop seeks stabilization or an equilibrium. It counteracts a force of change in an eff ort to keep stock at the same level. An example of equilibrium in a balanc- ing loop is room temperature, where a glass of ice water or cup of hot tea over time will warm or cool—homing in on the room temperature. A reinforcing loop, on the other

hand, encourages and amplifi es change that increases or decreases a stock. An example of amplifi cation in reinforc- ing loops is practicing a musical instrument. Th e more you practice playing the piano, the prettier the sounds you make and the more you enjoy listening to the music that you play.

5. a. True.

6. Amazon saves energy costs by removing the bulbs in the vending machines, saving the company a signifi cant amount of money. Amazon also has a “cloud computing” initiative, where instead of storing information on one computer for people to retrieve (also called a computer server ), this information is stored on multiple computer servers.

7. Causal loop diagrams

8. e.

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83Additional Resources

Self-Assessment ANSWER KEY Riddle Solutions: 1. Two Masked Men You are playing baseball and have just

hit a home run. Th e masked men are the umpire and the catcher.

2. Th ree Bags of Gold Take one gold piece from the fi rst bag, two pieces from the second bag, and three pieces from the third bag. Place all six pieces on the scale and insert the penny. If the pieces weigh 6 pounds and 1 ounce, the fake gold is in the fi rst bag. If the pieces weigh 6 pounds and 2 ounces, the fake gold is in the second bag. If the pieces weigh 6 pounds and 3 ounces, the fake gold is in the third bag.

3. Th e Missing Dollar Th e initial payment of $30 is ac- counted for, as the clerk takes $25, the bellhop takes $2, and the guests get a $3 refund. It adds up. After the refund has been applied, we only have to account for a payment of $27. Again, the clerk keeps $25 and the bellhop gets $2. Th is also adds up. Th ere is no reason to add the $2 and $27—the $2 is contained within the $27 already. Th us, the addition is meaningless (mixing cost and cash). Instead, the $2 should be subtracted from the $27 to get the revised bill of $25.

Notes

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84

Organization s

and Change

Management

Chapter four

Ja m

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C H A P T E R O U T L I N EC H A P T E R O U T L I N E

85

Learning Objectives

By the end of the chapter, you will be able to:

Introduction Internal and External Environments

4.1 | Internal Environment Culture and Its Characteristics Slogans, Stories, and Symbols Rituals and Ceremonies Heroes

4.1 | Illustrate how internal infl uences create unique types of cultures.

4.2 | External Environments 4.2 | Describe and compare general and specifi c external environments.

4.3 | Specifi c Environment Customers Talent Advocacy Suppliers Regulation Competitors

VOICES OF MANAGEMENT: Jean-Francois Zobrist

4.3 | Explain how managers analyze challenges and opportunities in organizations.

4.4 | General Environment Politics and Laws Resources Technology Sociocultural Forces Economy

4.4 | Summarize the common reasons why managers change how their organizations operate.

4.5 | How Do Managers Change Organizations?

Resistance to Change Th e Art of Persuasion Driving and Restraining Forces Stages of Change Leading Change

RESEARCH @ WORK: Implementing Change

4.5 | Summarize how managers change organizations by intervening in systems.

JP G

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4.5 | Summarize how managers change organizatio by intervening in systems.

Additional Resources Key Terms

In Review

Self-Test

Chapter Exer cise

Self-Assess ment

Self-Test

Answer Key

I N S I D E T H I S C H A P T E R

ManagementStory: Featuring Katy Johnson, Fred Arters, and Lisa Fang

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86 Chapter four Organizations and Change Management

M an

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: Fe

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Introduction University of Texas (UT) students Katy Johnson, Fred Arters, and Lisa Fang have been friends since they met sophomore year at a student organization meeting for young leaders. 1 In addi- tion to their shared student experiences, they have something exciting in common—within the past week, they each received job off er letters to enter management training programs. Katy, fi nishing a double major in marketing and chemistry, is excited that multinational elec- tricity company Reliable Energy off ered her a fuel marketing management position located in Houston, Texas, which is close to her family. Fred majored in computer science with a minor in management, and he can ’t wait to begin his career at a gaming company called Perfect Planet Interactive in California, with operations based in Europe. And Lisa, with a major in informa- tion systems and a minor in marketing, landed her “dream job” at Hannah ’s, one of the world ’s largest online retailers, specializing in women ’s products, located in Los Angeles. Up until now, their experiences at UT have been similar, with shared courses, student organi- zations, and extracurricular activities. In this chapter, we will follow these three young managers as they go through their training programs and fi rst major job assignments. Th ese stories will highlight how managers use critical thinking to 1) create unique experiences and expectations for employees, 2) respond to controllable and uncontrollable infl uences outside the company, and 3) adapt to create new products and services for customers to ensure the sustainability of the organization. By the end of the chapter, you will be able to chart an organization and understand the forces that aff ect its ability to change and be competitive in ever-evolving environments.

Internal and External Environments Th ere are two diff erent types of environments that managers must deal with when operating an organization: internal and external. An internal environment corresponds to the forces inside an organization, and an external environment is made up of forces outside an organi- zation. Depending on the environment and its forces, managers can have direct, moderate, or little power to eff ect change. Regardless of their level of infl uence, it is the responsibility of managers to understand and respond eff ectively to these forces, which means that manag- ers must decide how to focus their attention to maximize long-term organizational perfor- mance as outlined in Figure 4-1 . Let ’s explore where managers have historically focused their attention. Th ere have been three stages of modern capitalism that have shaped how managers respond to an organiza- tion ’s internal and external environments: management-focused, shareholder-focused, and customer-focused. 2 Th e management-focused era began in the early 20th century with the advent of scientifi c management and human resources management, as discussed in Chapter 2. Th is approach to capitalism inspired managers to maximize performance through a focus on the internal environment of an organization. You will recall from Chapter 1 that the next era, shareholder-focused management, was ushered in by Milton Friedman ’s treatise in the 1960s, where creating value for the owners of the company became the focus of management. 3 Management in the United States began to apply these principles in the mid-1970s and early 1980s, when Jack Welch, the former CEO of General Electric (GE), famously shifted the

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874.1 | INTERNAL ENVIRONMENT

company to a “profi ts-fi rst focus.” 4 In the beginning of the 21st century, managers and inves- tors began to reconsider the wisdom of the “profi t-fi rst focus” because, ironically, investors made more money from 1933 to 1976 than from 1977 to 2008, with average annual returns of 7.6 percent and 5.9 percent, respectively. 5 We briefl y discussed the impact that the Internet browser had on communication in Chapter 2, where businesses not only have the luxury of selling to millions of customers but are able to form collaborative relationships with their customers as well. Th is has changed how managers build value for their organizations, resulting in customer-focused capitalism.

4.1 | INTERNAL ENVIRONMENT

4.1 | Illustrate how internal infl uences create unique types of cultures.

A company ’s internal environment comprises the forces inside the organization that aff ect how managers set expectations, how employees perform their roles, and how the company interacts with stakeholders and responds to the external environment. Th ese forces include everything from behaviors of individuals to the facility and offi ces where employees per- form. Because of the broad impact on how an organization operates, eff ective managers ensure that the internal environment of the company is consistent with its mission and val- ues. Th is focus on internal environment happens well before employees start their positions. Most successful organizations understand that selecting employees who are well suited to adapt to the internal environment of the company is essential. Th e internal environment of the company is experienced immediately by all employees and successful managers.

Culture and Its Characteristics Organizational culture is a collection of beliefs that individuals and groups share to help their organization respond to environmental forces and changes. From the time you sub- mit an application to your fi rst day on the job to leading a large project team, culture guides

Internal environment The forces inside an organization that affect how the managers set expectations, how employees perform their roles, and how the company interacts with stakeholders and responds to external environments.

Organizational culture A collection of beliefs that individuals and groups share to help their organization respond to environmental forces and changes.

Figure 4-1 Organizational Environments and Managers ’ Power to Affect Them Different types of organizational environments.

(All Organizations)

(Organization-Specific)

(Industry-Specific)

General External Environment

Technology - Political - Legal Economy - Resources - Sociocultural

Internal Environment

Slogans - Stories - Symbols Rituals - Ceremonies - Heroes

Specific External Environment

Customers - Talent - Suppliers Competitors - Advocacy - Regulation

Power to Change

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your behaviors and decision making to ensure that they are consistent with management ’s expectations. 6 Culture is experienced on two diff erent levels: conscious and unconscious . Conscious aspects of culture include the things that can be seen or heard openly in the organization, including dress codes, mission statements, slogans chanted at meetings, and even the offi ce furniture. 7 For example, on Lisa ’s fi rst day at Hannah ’s, she was given a tour of a fulfi llment center. She had already noticed the company ’s attention to detail, so Lisa was surprised to see that some of the offi ces were unlit. When she asked about this, one of the managers explained that the company uses motion sensor lighting that goes off at a certain time, usually around 5 p.m. Th is not only saved the company thousands of dollars in electricity but encouraged staff to leave at the end of the day rather than working overtime. Lisa was impressed with Hannah ’s sensible approach to cost-cutting and was especially relieved to fi nd that the company also worked toward achieving a work-life balance for their employees. Th e unlit offi ces are a visual, conscious element that supports an unconscious aspect of Hannah ’s culture. Unconscious components of a culture refer to the beliefs, perceptions, and values of an organization—the things that employees feel or think. Th e dark offi ces at Hannah ’s represent an unconscious level of culture that supports, as an example, energy con- servation and frugality. Successful managers understand the need to support what the orga- nization feels and thinks with visual and spoken indications as outlined in Figure 4-2 .

Slogans, Stories, and Symbols Walking through the halls at Perfect Planet Interactive, Fred was beginning to wonder whether he was going to fi t in. Th ere was an odd combination of eccentric, individualistic personalities and an inclusive, private community. Over the course of the morning, Fred heard at least a dozen times that he should focus on the “Planet Power” and he would be just fi ne. “Planet Power” is a slogan , a repetitive phrase intended to support an organization ’s culture, mission, vision, or values. “Planet Power” is refl ected in Perfect Planet Interactive ’s value of committment to strong, high-quality products. Th roughout the course of the day, Fred saw symbols and heard stories that supported the company ’s values and beliefs. Stories are narratives, usually fi ctionalized or enhanced over time, based on actual organizational experiences. One story that Fred enjoyed involved the launch of Galaxy Millennium, a game he remembered standing in line for the day after Christmas and which he played nonstop though New Year ’s Eve with a friend. One developer told him that after the launch of Galaxy Millennium, the team had taken three months trying to come up with ideas for

Slogan A repetitive phrase intended to support an organization’s culture, mission, vision, or values.

Story A narrative, usually fi ctionalized or enhanced over time, based on actual organizational experiences.

Figure 4-2 How Employees Experience Organizational Culture Conscious and unconscious components of organizational culture.

Conscious

Unconscious

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894.1 | INTERNAL ENVIRONMENT

the next game that they would make. Th e team had lived and breathed the Galaxy Mil- lennium game to such a degree that there was a consensus that no one on the team was interested in ever working on it again, even though their most loyal customers were already asking for a sequel. But as the months passed, the team began to talk about all the things that they wish they could have done to make Galaxy Millennium an even better game. Th e team was also excited about the feedback from customers, and sales of the game were breaking industry records. In a meeting, one of the team leaders asked the group members to stay focused on the company values of committing to quality and being passionate about their work. He also wanted to know if they believed that the company could learn and grow by developing a sequel to their best-selling game—thus, Galaxy Millennium II was born. By the end of the day, Fred was getting more comfortable with the internal environment and was feeling that he had made the right decision to take this job. On his way out, his new team leader stopped him for a little quiz: “What was the one thing that every person you met today had in common, including staff in the cafeteria, receptionists, graphic designers, sales representatives, and computer programmers?” By asking this question, his new boss was quizzing Fred about the company ’s symbols —events, situations, objects, people, or other artifacts that provide greater meaning to the organization. Without giving Fred time to think about it, the boss answered his own question: “We are all geeks and gamers!” Th e team leader was not joking. Th e values of Perfect Planet Interactive require all employees to play and be passionate about computer games and encourages every person to embrace their inner geek.

Rituals and Ceremonies Before joining Reliable Energy, Katy knew the company had a reputation. It was known as a tough place to work, where profi t came fi rst and fun was nonexistent. Th is was reinforced when Katy sat down for her fi rst meeting with her boss. Th e 23-year veteran of Reliable Energy made it clear: “If you survive here during the next 20–30 years, you will probably have 10–15 diff erent jobs and learn every aspect of this business. Th ere are three things you need to know in order to be successful here: 1) document everything, 2) safety is a top priority, and fi nally, 3) we are here to make our shareholders money.” Her boss went on to explain the company ritual of writing memos. Rituals are formalized activities intended to communi- cate and teach the organization ’s culture. 8 Clearly, the company ’s culture of documentation is supported by writing memos. Th e ritual of memo-writing has the intended consequence of ensuring that decisions are well considered, formally approved, and shared broadly in the organization. 9 To say that Reliable Energy was not a fun place to work was probably an exaggeration. Later in the day, hundreds of employees gathered in the company cafeteria to eat the big- gest cake Katy had ever seen. What was the celebration? Th e management team at one of the company ’s refi neries was being recognized for Reliable Energy ’s “Safety First” award, celebrating over 10 years of safety in the organization. In addition to the cash bonuses and cake, there was a feeling of festivity and pride. Th is was the fi rst year that a local team had won this award, and the occasion was attended by the top executives, including the company ’s CEO. Such ceremonies are events that provide one or more stakeholders with a sense of purpose and meaning connected to the organization and are powerful tools for managers to reinforce the mission and objectives of the company, especially when it involves recognizing excellence in front of peers and senior management. 10 When senior management attends ceremonies like the Safety First Award event, employee pride and commitment grows.

Heroes In business, as in life, people need to believe in something greater than themselves in order to handle the anxiety that comes with change, barriers, growth, and loss. We have just examined how diff erent organizational cultures use everything from slogans like “Safety First” to stories that exemplify the determination of the company to adhere to its values, as demonstrated in Perfect Planet Interactive ’s commitment to build Galaxy

Symbol An event, situation, object, person, or other artifact that provides greater meaning to the organization.

Ritual A formalized activity intended to communicate and teach the organization’s culture.

Ceremony An event that provides one or more stakeholders with a sense of purpose and meaning connected to the organization.

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90 Chapter four Organizations and Change Management

Millennium II. Heroes are real or imaginary people who represent an ideal performer specifi c to the organizational culture, and these people help managers demonstrate to employees the determination to succeed in a particular organizational context. In Th e Hero with a Th ousand Faces , 20th-century philosopher Joseph Campbell showed the hero ’s journey as universal and having three stages: 1) leaving home for adventure, 2) fac- ing barriers that question success, and 3) returning home successful (Figure 4-3 ). 11 At lunch, Lisa asked if she would ever meet Hannah ’s founder and CEO, Hannah Mills. Th e eyes of her fellow employees lit up, and stories of Mills fi lled the air. Clearly, they regarded their boss as a hero. Th e rise to success of Hannah Mills also mirrors the stages, described by Campbell, of a hero ’s journey. Mills left her modest home in Vallejo, San Francisco, to attend Harvard University. After graduation, she joined a Wall Street fi rm and was quickly pro- moted to senior vice president. While she was there, Hannah had the idea to sell eco-friendly beauty care products over the Internet and, from there, started one of the fi rst major online retail companies exclusively for women. After quitting her Wall Street job, Mills and her fam- ily left their New York City home and relocated to Los Angeles. Not long after she moved, Mills rented a small offi ce in a warehouse close to her home. Th ere, she set up a couple of computers and got to work. Th ree months later, the company had sales of $30,000 a week. However, with such rapid growth, Mills knew she couldn ’t keep this up alone, so she rented some offi ce space, hired a marketing and IT team, and forged ahead with Hannah ’s. However, fi ve years later, the company was facing serious fi nancial challenges. Although they had $2 billion in revenue, they had lost $300 million in the previous quarter alone. Th e following year, Hannah ’s had its worst year ever and posted a $1.5 billion loss. Mills knew that she had to employ a diff erent strategy to turn the company around or else it would fall into bankruptcy. Her plan was to lead the company through signifi cant change by completely altering its business model. Mills realized that one of the problems with her original model was that her range of products was too narrow. Women were used to having more choices. She decided to expand their online off erings and sell products from other well-known women ’s companies. Just one year later, Hannah ’s began to experience success once more, with sales taking off and its fi rst annual profi t of $5 million. Several years after her landmark decision, in the middle of one of the worst economic recessions in history, Hannah ’s successfully launched a revolutionary skincare product which put the company in the big leagues. In 10 years, the value of Hannah ’s grew 300 percent, to almost $70 billion. Th is is a hero ’s story.

4.2 | EXTERNAL ENVIRONMENTS

4.2 | Describe and compare general and specifi c external environments.

We just discussed internal environments, where managers have direct power to eff ect change. External environments are the specifi c and general factors outside an organiza- tion that can change how it operates. In this section, we will examine external environ- ments, from specifi c to general, or the forces where managers have only moderate to little power in eff ecting change. A common mistake made by managers is not focusing on the

Hero A real or imagined person who represents an ideal performer specifi c to the organizational culture.

External environments The specifi c and general factors outside an organization that can change how it operates.

Figure 4-3 The Stages of a Hero ’s Journey The hero ventures into the world, faces new challenges, and returns home triumphant.

Leaving Home Learning from Challenges Returning Home

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914.3 | SPECIFIC ENVIRONMENT

external environment because it appears to be separate from the operation of the organiza- tion. Let ’s look at how managers eff ectively (and sometimes ineff ectively) act in response to their external environment and the resulting consequences from those decisions.

4.3 | SPECIFIC ENVIRONMENT

4.3 | Explain how managers analyze challenges and opportunities in organizations.

An organization ’s specifi c environment is the industry-focused part of the external envi- ronment that directly aff ects an organization ’s operations and performance. Th e dimensions of a specifi c environment include customers, talent, suppliers, competitors, advocacy, and regulation. Th ese dimensions are the forces outside the organization where management can build relationships and attempt to persuade change to the benefi t of the organization. Examples in the following section show how, as managers become more customer-focused, customers can often become the company ’s talent, get frustrated, and form an advocacy group against the business ’s practices or demand regulation to force an organization to change. We ’ll also examine how managers make diff erent decisions relative to their specifi c environment when they are shareholder-focused. Th ese investigations lead us to analyze a logical question, “What are managers ’ responsibilities to monitor and build relationships with the dimensions of their specifi c environments?”

Customers It was Monday morning, and Lisa had been at Hannah ’s for three weeks. She loved her new job, but her time so far had been spent learning and reading everything about the company. She wanted to be a part of the action and do something. One day, Lisa ’s team leader asked her, “Have you ever had ‘wrap rage ’?” Lisa became nervous and wondered if she had done some- thing wrong. He continued, “Well, let me tell you . . . I bought my kid a science lab play set for her birthday. You actually had to be a brain surgeon to get this thing open! By the time I fi gured out how to open her present, I had two cuts on my hand, a stack of about 100 wire ties, and a heaping pile of shredded plastic. After all of that, I realized the two most important pieces were missing. My daughter went outside to play with her friends, and I tried to fi gure out how to stuff all of this junk back in the original box to bring back to the store. At that very moment, I had wrap rage! I want you to go work with Doug on the ‘Wrap Rage Team ’ for the next couple of months.” Intrigued at her new assignment, Lisa went along to Doug ’s team to learn all there was about “wrap rage” and how it aff ected Hannah ’s customers. Guess what one of the biggest complaints Hannah ’s gets from its customers? Having to deal with plastic cases and bubble wrap! So why do manufacturers make it so diffi cult to open products? As an example, Wal- Mart, the world ’s largest retailer who loses upwards of $3 billion because of theft, purposely makes some packages diffi cult to open. 12 Th ey realized if packages were diffi cult to open, they are less likely to be stolen. As an online retailer, however, Hannah ’s does not have to worry about shoplifters and related theft. Indeed, Hannah ’s has a customer advantage over competitors like Wal-Mart, as it provides the company with a unique opportunity to address customers ’ needs and increase their satisfaction. Which package in Figure 4-4 would you rather open? Th ere are three ways that managers respond to customer needs: reactive engagement, proactive engagement, and interactive engagement. Hannah ’s “frustration-free” eff ort is an example of reactive engagement , where management monitors positive and nega- tive customer feedback through surveys and customer communications and improves its products and services accordingly. Proactive engagement is when a company creates a product or service as an alternative to enhance the customer ’s experience. 13 If Hannah ’s encouraged its customers to purchase products in “frustration-free” packaging, this would be an instance of proactive engagement. As technology enables companies to cost- eff ectively build relationships with customers, organizations are no longer just listening to customers—they are collaborating with them to develop future products and services. Th is is called interactive engagement .

Specifi c environment The industry-focused part of the external environment that directly affects an organization’s operations and performance.

Reactive engagement Monitoring positive and negative customer feedback and improving the organization’s products and services accordingly.

Proactive engagement Creating a product or service as an alternative to enhance the customer’s experience.

Interactive engagement Collaborating with consumers to develop future products and services.

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Talent Talent refers to the people who have the skills, knowledge, creativity, and relationships necessary to optimize an organization ’s performance. In 2013, unemployment hovered at around 7.5 percent, yet Manpower ’s 2013 Talent Shortage Survey showed that 35 percent of employers felt like there was a shortage of talent. 14 What does this really mean? In 2013, there were approximately 12 million people out of work. Inconsistent with this statistic, there were also 4 million job openings, for which companies could not fi nd qualifi ed people to hire. Th is paradox is called the talent war . In 2020, the United States could face having to fi ll 10 to 14 million job openings in science-, technology-, engineering-, and mathematics- related positions, as unemployment is projected to stabilize around 5 percent. 15 Because of this, identifying and hiring talent has emerged as a challenge for managers, and companies have a broader view of the talent necessary to be competitive in a global marketplace. Man- agement now relies on talent inside and outside the organization, primarily employees and customers. Given the competition to identify qualifi ed people, how do managers fi nd talent? Fred did well in school, but he did not get recruited by Perfect Planet Interactive as a result of passing his résumé around a career fair, like many of his friends who were also recruited by organizations. He loves playing Planet Wars, a popular Perfect Planet Interac- tive game that sold 4 million copies in the fi rst month of its release. Fans of Planet Wars play this game with and against each other over the Internet and form a dedicated community committed to the company and its products. Fred was identifi ed as a potential employee after a map that he designed and submitted for the game caught the attention of Perfect Planet Interactive ’s management. By using the company ’s product and participating in its online community, Fred proved that he had already gained a good grasp of the company ’s internal environment and had played a part in its culture. Another example of fi nding talent comes from Cisco Systems, who hosted a competi- tion called the I-Prize. Th e purpose of the contest was to discover new strategies that the company could use to bring in $1 billion worth of new business. Th e winner would receive $250,000 under the condition that they would agree to give Cisco the idea and full ownership. In the end, more than 2,500 innovators from 104 countries submitted some 1,200 distinct ideas. So, what did Cisco say was the biggest benefi t of the competition? Th e answer might surprise you. Guido Jouret, chief technology offi cer of Cisco ’s Emerging Technologies Group, said: “What we gained was invaluable. We learned how people around the world think about

Talent The people who have the skills, knowledge, creativity, and relationships necessary to optimize an organization’s performance.

Figure 4-4 Frustration-Free Packaging Customer Service Strategy   Different types of packaging can either be frustration-full or frustration-free.

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934.3 | SPECIFIC ENVIRONMENT

Cisco and the markets we ought to be pursuing. We [also] learned that if you ask, you can reach a worldwide audience of smart, passionate people eager to help you drive innova- tion.” 16 When companies employ the eff orts of its custom- ers and the public to innovate and further its mission, this is called crowdsourcing . Th is and other types of interactive engagement are other ways that managers identify passion- ate and qualifi ed candidates in today ’s workforce. 17 But what happens when this passion turns against the organization?

Advocacy An advocacy group is a set of people dedicated to insti- tuting change based on their concerns or interests. Green- peace International, an environmental advocacy group, explains that it “exists because this fragile earth deserves a voice. It needs solutions. It needs change. It needs action.” 18 On April 15, 2010, Greenpeace staged a protest in front of British Petroleum (BP) headquarters in Calgary, Canada, to condemn a proposed oil sands development in Northern Alberta. To argue their position, the group sharply criti- cized BP for its involvment in tar sands as a viable energy source and its resulting mar- keting campaign, in which the company had created a new logo and slogan, “Beyond Petroleum.” Greenpeace protested using signs painted with the words, “Broken Promises,” as it believed that BP had reneged on its promise of “Beyond Petroleum” by excavating tar sands oil, which the group claimed posed a threat to the environment. However, on this day, the advocacy group was getting more criticism than support from those walking past, who questioned the environmental safety of the signs they were using. According to one passerby, “Th e yellow poles that they are using are made of plastic. Th e paint is petroleum based. So I would suggest they do some research on their protest prior to them protesting.” Th e event was reported by Canadian Broadcast Centre (CBC) News, but not many people noticed. 19 Advocacy groups use a wide array of media and communication tactics to voice their con- cerns: television, radio, on-the-street protests, Facebook, Twitter, blogs, and YouTube. Each of these can be used for a variety of purposes. In some cases, advocacy groups simply have a goal of providing factual information so consumers can make informed decisions. Th ey may be raising money to support a particular cause. 20 Th e above-mentioned protest is an example of an advocacy group trying to convince a company to change an aspect of their business plan. Another method that can be used in an attempt to change the actions of a specifi c organiza- tion is to convince other consumers not to purchase a company ’s products and services; this is called a boycott . Katy, who had just applied for a position at Reliable Energy, was not aware of this small protest in Canada on April 15, 2010. Some scoff ed at the protesters. On April 20, however, Katy and many people around the world certainly took notice when the Deepwater Horizon oil well operated by BP exploded and sank into the Gulf of Mexico, killing 11 workers and cre- ating an environmental catastrophe that took months to clean up. Two months later, as Katy begins her career at Reliable Energy, there is good news and bad news. Th e good news is that the company has seen an increase in gas stations that want to drop their BP affi liation and carry the Reliable Energy brand. Th e bad news is that the U.S. government instituted a moratorium on deepwater drilling, which investors fear could hurt profi ts. Although Reliable Energy had nothing to do with the Deepwater Horizon explosion and the subse- quent oil spill, the entire energy industry was

Crowdsourcing Employing the efforts of customers and the public to innovate and further an organization’s mission.

Advocacy group A set of people dedicated to instituting change based on their concerns or interests.

Boycott An attempt by an individual or group to change the actions of an organization by convincing other consumers not to purchase its products or services.

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94 Chapter four Organizations and Change Management

aff ected by this event. 21 Th is is an example of how an unexpected turn of events can make a big diff erence to a business .

Suppliers In reality, the oil spill in the Gulf of Mexico had little eff ect on the supply of oil available in the world. On a personal level, Katy was anticipating higher gas prices because of the oil spill, so she budgeted more for travel expenses as she moved her things to Hous- ton from her college apartment. Actually, gas prices stayed about the same, but she found that some local businesses had suff ered from the eff ects of the oil spill. For example, Katy ’s local fi sh restaurant, Poppy ’s, was struggling

to fi nd enough oysters to satisfy customer demand. Th e once-abundant shellfi sh had sud- denly become a precious commodity. Suppliers provide companies with the external resources needed to operate, includ- ing money, material, people, and information. Restaurants like Poppy ’s need food, fi nanc- ing, linens, temporary workers during the holidays, beverages, cleaning chemicals, and many other things to run their business. Each of their suppliers has suppliers, too. For example, Poppy ’s buys its seafood from a vendor that gets fi sh directly from fi shing boats. When the oil spill prevented fi shing boats in the gulf from fi shing and farming oyster beds, the company that supplies Poppy ’s needed to fi nd a new supplier for its oysters, and was considering a vendor from the Chesapeake Bay area in the mid-Atlantic as outlined in Figure 4-5 .

Regulation Regulations are rules set by external governing bodies that dictate standards and pro- cedures for industries, businesses, and professionals. Almost every industry and busi- ness has rules that oversee their practices. Managers must understand these rules to operate ethically and legally. In most cases, government agencies, commissions, and industry associations set standards that organizations must abide by in order to oper- ate. Oyster farmers, seafood wholesalers, and restaurants must each abide by regula- tions set by federal, state, and local agencies and commissions. As an example, oyster farmers in Louisiana must obtain licenses for their business, vehicles, and gear. The state of Louisiana states that “oysters may be taken from public grounds by dredgers, scrapers, and tongs. Dredges and scrapers used to remove oysters can be no longer than

Suppliers Entities that provide an organization with the external resources that it needs to operate, including money, materials, people, and information.

Figure 4-5 Suppliers in the Restaurant Industry Oyster farmers supply seafood wholesalers, who in turn supply restaurants.

Figure 4-5

Supplies

Oyster Farmers Seafood Wholesalers Restaurants

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Regulations Rules set by external governing bodies that dictate standards and procedures for industries, businesses, and professionals.

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954.3 | SPECIFIC ENVIRONMENT

six feet in width measured along the tooth bar. The dredge teeth shall be no longer than five inches in length, and there shall be no more than seven dredges in use on any one vessel.” 22 These types of regulations can become expensive for companies, especially small businesses. Federal regulations cost U.S. businesses $1.75 million annually, or over $8,000 per employee. 23 With the threat of additional expense, industries sometimes choose to self-regulate. Have you ever wondered who rates movies G, PG, PG-13, R, or NC-17? Th e answer: parents. In an eff ort not to have government involvement in “freedom of speech and expression,” the Motion Picture Association of America (MPAA) decided to regulate itself. It enlists a panel of parents to review and rate every fi lm formally released in the United States. Th e MPAA states that “the purpose of the ratings system is to provide clear, concise advance informa- tion to parents about fi lm content so parents can determine what movies are appropriate for their kids while preserving freedom of expression for fi lmmakers and the fi lm indus- try.” 24 In 1994, the video game industry also took steps to self-regulate, implementing a rat- ing system . Although there has been some controversy over the violent nature of some of the video games and their apparent negative infl uence on minors, a recent survey carried out by the consumer protection agency, the Federal Trade Commission (FTC), shows that self-regulation within the gaming industry has been more eff ective than other media; for example, minors are more likely to be sold explicit music and R-rated movies than adult- rated video games. 25

Government Activism However, there are times when companies work together with the government in order to seek solutions to a number of fi nancial problems. For ex- ample, during the fi nancial crisis of 2008, government and business worked together to solve issues that neither entity could solve alone. Th is is not a new phenomenon. Over half a century ago, Frank Abrams, former chair of Standard Oil, drew the following con- clusion: “Maximizing shareholder returns will continue to be the primary responsibility of managers, but to achieve that goal, they will work with government more directly than we have witnessed at any time since World War II.” 26 Today, government takes an active role in encouraging business through tax credits and other incentives to behave in ways

EARLY CHILDHOOD

CONTENT RATED BY ESRB

® EVERYONE

CONTENT RATED BY ESRB

® TEEN

CONTENT RATED BY ESRB

® MATURE 17+

CONTENT RATED BY ESRB

® EVERYONE 10+

CONTENT RATED BY ESRB

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CONTENT RATED BY ESRB

® RATING PENDING

CONTENT RATED BY ESRB

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3+

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*Must not ask for location. **References to drugs, alcohol and/or tobacco ***Focus on drug use/sale, alcohol and/or tobacco.

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13+

12+

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until rated

No objectional material

Cartoon, fantasy or mild

violence, mild language and/

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themes

Violence, suggestive

themes, crude humor, minimal blood,

simulated gambling and/ or infrequent

strong language

Intense violence,

blood and gore, sexual

content, and/ or strong language

Intense violence and/

or graphic sexual content

and nudity

Video Game Age Rating Systems Compared

Google Android

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96 Chapter four Organizations and Change Management

that are in the public interest. Th is is called government activism , detailed in Table 4-1 . For example, according to economist Robert Reich, “U.S. Department of Energy is guar- anteeing loans to small businesses that want to implement alternative-energy projects but would otherwise have trouble fi nancing them; their lenders will be repaid even if the projects go belly-up.” 27

Competitors On November 21, 2007, Amazon launched the Kindle, which sold out in 5½ hours. At the time of the launch, the Kindle was the fi rst electronic book product enabled with a non- glare screen for easier reading and cell phone technology for easier downloading of books. When a company builds a product or service where there is no competition, it is called a blue ocean strategy, and the company is said to be “fi rst to market.” 28 By 2010, several com- petitors had started selling products that challenged Amazon ’s dominant position: Sony ’s

Industry Government’s Involvement

Financial Services • Lends banks money to create stability in the market. • In certain cases, takes ownership stakes. • Regulations to align fi nancial institution ’s interests with the public ’s. • Anticipated future involvement: require banks to have more money relative to their debt,

more disclosures/transparency, and restrictions on fi nancial instruments called derivatives.

Housing • The U.S. government is guaranteeing or taking over a large percentage of outstanding mortgage loans.

• Provide incentives for lenders and borrowers to refi nance their home loans at subsidized rates.

• Anticipated future involvement: more oversight of lenders.

Insurance • The U.S. government became a major investor in insurance markets. • Subsidize lower-income individuals and families to help them afford private health insurance. • Affordable Healthcare Act.

Automobiles • Countries around the world are providing their automakers with loans and taking ownership positions.

• Supply funds to develop fuel-effi cient cars. • Anticipated future involvement: incentives to favor domestic automakers over foreign.

Energy • Countries around the world are subsidizing the development of non-carbon-based energies.

• U.S. spending billions of dollars each year. • Pledge to double the country ’s capacity to generate wind, solar, and geothermal power. • Anticipated future involvement: modernize systems for transmitting electricity.

Healthcare • Many countries have nationalized healthcare; the United States highly regulates the industry. • Require companies over a certain size to either insure their employees or pay into a national

healthcare pool. • Affordable Healthcare Act.

Pharmaceutical • The United States uses its purchasing power to negotiate lower drug prices for the public.

Telecom/Information Technology

• Subsidizing great broadband coverage, especially for rural areas. • Anticipated future involvement: infl uence intellectual property, privacy, and intelligence

gathering in the industry.

Adapted from Robert Reich, “Government in Your Business,” Harvard Business Review 87 (July–August 2010): 94–99.

Table 4-1 Government Activism by Industry

Government activism Government’s active role in encouraging business to behave in ways that are in the public interest through tax credits and other incentives.

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97

Reader, Apple ’s iPad, Barnes and Noble ’s Nook, Border ’s Kobo eReader, and dozens of tablet computers. When companies face competition, managers attempt to understand the features and benefi ts of their competitors ’ products and services, including strengths and weaknesses. Th is is called a competitive analysis , which helps managers respond to their competitors ’ actions in the market. 30 Now that many companies have developed handheld electronic devices intended for reading books, Amazon has changed its approach by selling and devel- oping new versions of the Kindle based on competitive analysis. Being fi rst to market has its advantages, but it does not ensure long-term success. By 2013, the iPad had an 82 per- cent share of US and Canadian tablet web traffi c compared with a 6.5 percent share for the Kindle Fire. 31

4.4 | GENERAL ENVIRONMENT

4.4 | Summarize the common reasons why managers change how their organizations operate.

Some things are out of a manager ’s control, but they still greatly aff ect the organization and how it must operate. We have explored specifi c environments, where the impact of forces is rela- tive to their industry. For example, when an oil spill damages fi shing and oyster beds, oysters become scarce, and consequently, restaurant managers must either increase prices or remove items from the menu. General environments are external forces that aff ect all organizations participating in an economy, where managers have little or no power to eff ect change. Th ese forces include political and legal, resource availability, economic, technological, and sociocul- tural. We will discuss these in the order in which managers are required to deal with these forces to accommodate the interests of their organizations, arranged from the most impact to the least.

Politics and Laws Unlike industry-specifi c regulations, which we discussed earlier in this chapter, political and legal forces relate to most, if not all, businesses. Managers are required to understand and

Voices of Management Jean-Francois Zobrist, CEO, FAVI29

T he fi rst think that Jean Francois Zobrist did when he started at FAVI, a French company that manufactures auto parts for companies like Volvo and Fiat, was to dissolve all the FAVI hierarchies. “I came in the day after I became CEO, and gathered the people. I told them, ‘tomorrow when you come to work, you do not work for me or for a boss. You work for your customer. I don ’t pay you. They do. Every customer has its own factory now. You do what is needed for the customer. ’” Instead of having a dozen different departments, each responsible for one aspect of work, Zobrist created 20 teams, each responsible for one customer, and everything related to the work for that customer, from human resources to product development. The result has been that employees are more focused on the actual quality of their work than on competing with their coworkers—with

no job titles or promotions, it only makes sense to work together. Plenty of people are skeptical about Zobrist ’s approach. But FAVI ’s work is consistently of high quality. When one customer asked to audit FAVI ’s procedures, says Zobrist, “They were not pleased, because we had no measurement system for tracking late orders—nothing in place, no plan, no process, no structure in case of delay. They [had been] a customer for over 10 years, so I say, ‘In that time, have we ever been late? ’ They say, ‘No. ’ I say, Have we ever been early? ’ They say again, ‘No. ’ And so I ask them why they want me to measure things that do not exist.”

Critical Thinking in the Classroom

How do you view Zobrist ’s approach to management? Would you apply this strategy in your company? If not, why not? ■

General environment External forces that affect all organizations participating in an economy, where managers have little or no power to effect change.

4.4 | GENERAL ENVIRONMENT

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98 Chapter four Organizations and Change Management

People

Legislation Primary Purpose Impact on Managers President Signed

Civil Rights Act of 1964

To outlaw discrimination based on race and gender in schools, housing, and hiring.

Managers had to ensure that their businesses did not discriminate in their hiring practices or in their service practices.

Lyndon B. Johnson (D)

Occupational Safety and Health Act of 1970

To ensure employees have safe conditions to work, free from hazards that are recognizable and addressable.

Identify areas of potential risk and take proactive steps to remove or minimize hazards

Richard M. Nixon (R)

Consumer Product Safety Act of 1972

Established the Consumer Products Safety Commission (CPSC) to develop safety and product recall standards for consumer products.

Identify products and processes that will fall under CPSC regulations and address issues to minimize liability

Richard M. Nixon (R)

Americans with Disabilities Act (ADA) of 1990

Provides that people with disabilities will not face discrimination in the workplace, be provided access to all public places, and be provided access to telecommunications services.

Issues with public access to disabled people must be addressed, including physical structures and telecommunications services

George H. W. Bush (R)

Profi t

Legislation Purpose Impact on Managers President Signed

Economic Espionage Act of 1996

Made the theft or misappropriation of trade secrets a federal crime.

Managers must ensure that none of their products or services are misappropriated, including those from foreign sources.

William J. Clinton (D)

Electronic Signatures in Global and National Commerce Act of 2000

Legalized the use of electronic signatures in interstate and international commerce.

Makes the transfer of funds, products, and services across state or national boundaries easier, but also creates security issues that need to be addressed.

William J. Clinton (D)

Sarbanes-Oxley Act of 2002 (SOX)

Set new and enhanced standards of fi nancial disclosure for publicly traded companies and accounting fi rms.

Managers must keep and maintain accurate and honest fi nancial records, as well as the records of any third-party accounting fi rms

George W. Bush (R)

Planet

Legislation Purpose Impact on Managers President Signed

Clean Air Act of 1963 Mandated the Environmental Protection Agency (EPA) to develop regulations to protect the public from airborne contaminates that pose a safety hazard.

Managers must be proactive in diagnosing and solving emissions problems.

Lyndon B. Johnson (D)

National Environmental Policy Act of 1969

Set up the President ’s Council on Environmental Quality, as well as setting procedural standards for federal government agencies to set up environmental assessments (EAs) and environmental impact statements (EIAs).

Governmental agencies must conduct thorough investigations into their impact on the environment.

Richard M. Nixon (R)

Clean Water Act of 1972

Mandated the elimination of releasing high amounts of toxic substances into public waters and mandated standards for surface water pollution for human sports and recreation.

Managers must be proactive in diagnosing and solving water-based pollutant problems.

Richard M. Nixon (R)

Pollution Prevention Act of 1990

Required the EPA to establish an Offi ce of Pollution Prevention to coordinate a pollution prevention strategy, as well as mandating manufacturing facilities to report annually on source reduction and recycling.

Managers must maintain or implement waste reduction programs as part of their business practices.

George H. W. Bush (R)

Table 4-2 Federal Legislation Affecting Business and Managers

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994.4 | GENERAL ENVIRONMENT

abide by the constraints of these legislative acts, which means that managers must spend time and money ensuring that their personal decisions and the behaviors of their teams are consistent with these mandates. All organizations, with some exceptions based on the size of the company, are required to follow federal laws and rules intended to change business behavior in the interest of people, profi t, and planet. Contrary to popular opinion, federal legislation that is considered “anti-business,” meaning that it mandates how organizations operate, is neither a Republican or Democratic party issue; both parties have contributed to major legislative acts over the past several decades, as shown in Table 4-2 . In 2010, the U.S. Supreme Court decided in a 5–4 ruling that corporations could not be limited in the amount that they spent to support political causes relating to business inter- ests. Th is decision, known as Citizens United, “held that corporations are covered by the First Amendment [granting these entities free speech].” In his dissenting opinion, Justice John Paul Stevens suggested that lawmakers (i.e., U.S. Congress) “consider requiring corporations to disclose how they intended to spend shareholders ’ money or to put such spending to a shareholder vote.” Th is ruling allows managers to participate actively in voicing the interests of their businesses in context of political campaigns. Th is is a departure from business ’s tra- ditional relationship with politics, and this legal ruling will have an impact on the legislation that aff ects businesses in the future. 32 In Chapter 5, we will discuss how political uncertainty can present managers with complex challenges.

Resources One certain challenge that businesses face today is resource availability and scarcity. Th ere are three categories of resources that aff ect how businesses operate globally: food, energy, and water. 33 To understand fully the challenge that organizations and businesses face, let ’s look at future demand for these resources. Th e primary factor determining demand for these resources is world population , which is currently approximately 7 billion people, with the greatest population density in Asia and India 34 (see Figure 4-6 ). Th e rate of population growth

Figure 4-6 Population Density by Country The world ’s population density per country.

Fi 4 6

1 Billion + 100 Million + 50 Million + 25 Million + 10 Million + 1 Million + <1 Million

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100 Chapter four Organizations and Change Management

Figure 4-7 Projected World Energy Consumption Non-renewable energy consumption is expected to continue over the next two decades.

1990

250 History

Quadrillion BTUs Projections

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150

100

50

0 2000 2007 2015 2025 2035

NuclearRenewablesNatural gasCoalLiquids

is currently about 1 percent a year; if this continues, the world ’s population will double in 70 years. You can watch the world population grow minute by minute, by checking the Popu- lation Clock on the U.S. Census Bureau website (census.gov/main/www/popclock.html). 35

Food One-sixth of the world ’s population is undernourished—that is, over 1 billion peo- ple go hungry every day. Hunger causes low energy, slow thinking, and loss of hope. 36

Th ese are physical, cognitive, and emotional states that are consistent with poor work- place performance. In a business environment that depends heavily on cognitive talent, organizations around the world have a lot to gain by ensuring that people are nourished and healthy.

Energy “Th e energy crisis is real. It is worldwide. It is a clear and present danger to our na- tion. Th ese are facts and we simply must face them.” U.S. president Jimmy Carter proclaimed this challenge in his 1979 “Crisis of Confi dence” speech. What progress has been made in the past three decades to address this “clear and present danger”? In 2010, the U.S. Energy In- formation Administration (EIA) stated that in 2035, the world was expected to consume 49 percent more energy than 2007 consumption levels. 37 One might assume that this is not an issue, if the energy consumed is renewable. Unfortunately, the EIA suggests that the world will continue to use non-renewable energy at about the same rate in 2035 as it does in 2010, as shown in Figure 4-7. Th e UNEP-led Green Economy Initiative (GEI) articulates barriers and opportuni- ties that managers and organizations face because of the continuing energy demands on limited resources. Launched in late 2008, the GEI’s objective is to promote investment in green sectors and help more environmentally unfriendly countries become greener. 38 By greening production processes, implementing new policy reforms and regulation changes, and seizing international trade opportunities with other countries, the GEI has assisted over 30 developing countries and least developed countries with the transition to a green

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1014.4 | GENERAL ENVIRONMENT

economy. Assisting countries to become more green builds sustainability and reduces the exploitation of natural resources. 39

Water Businesses rely on water as a primary resource for operating. In addition to drinking water and sewage, water is used in business as a coolant or solvent and to produce electric- ity. Water is a limited resource, and businesses continue to increase the amount of water that the world extracts relative to consumption as outlined in Figure 4-8 . Peter Paul van de Wijs, global issues management leader at Th e Dow Chemical Company, says that “40% of Dow sites around the world will experience some degree of freshwater stress by 2025.” 40 To help companies like Dow understand and address their water usage and needs, the World Business Council for Sustainable Development (WBCSD) has developed the “Global Water Tool,” an online application that allows companies to keep track of their water usage. 41

Technology Every year, 1,000 of the most infl uential lead- ers from across the world, including Bill Gates, and Google founders Larry Page and Sergey Brin, assemble by invitation-only and attend the Technology, Entertainment, and Design (TED) conference. 42 Why do these prominent people go to the TED conference? Th ey do this to see and understand the latest innovations from around the world in tech- nology, in art, and in solving social problems. In February 2006, Jeff ery Han, a research scientist at New York University, received a standing ovation from the esteemed crowd for his technology innovation. Han led the team that invented an “interface-free, touch-driven computer screen.” Th is inno- vation allows users to navigate their digital experience by pinching, sliding, and spread- ing their fi ngers across the screen. Han ’s

Figure 4-8 Global Industrial Waste of Water Shows the projected forecast for water consumption and waste.

2025 Forecast

1900 1925 1950 1975 2000

Difference between water extracted and

water consumed

Extraction Consumption

Source: E. Beinhocker, I. Davis, and L. Mendonca, “The 10 Trends You Have to Watch,” Harvard Business Review (July–August 2009): 55–60. St

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102 Chapter four Organizations and Change Management

demonstration on a 4 ′ × 3 ′ projectable screen was impressive. 43 In June 2007, a little over a year later, Apple launched the iPhone, which was based on the same technology concepts. One major diff erence: this piece of technology fi t in the customer ’s pocket. 44 Th e speed of technology innovation requires managers to assess and adapt continuously to its impact on internal and specifi c environments.

Sociocultural Forces Sociocultural forces are the behaviors and beliefs associated with demographic groups that comprise an organization ’s available talent and customers. Th eir demographics include age, gender, marital status, ethnicity, and geographic location; these attributes aff ect buying habits, work ethic, work-life balance expectations, travel patterns, and disposable income. Talent and consumers are represented by four generations today, which are defi ned by the year of their births: Veterans, Baby Boomers, Generation X, and Millenials. 45 Each of these generations has defi ning sociocultural characteristics that human resources and marketing managers must know well. 46 By comprehending the sociocultural forces that defi ne their available talent and customers, managers can adapt their strategies to attract and retain employees or sell to and keep customers. In Table 4-3 , we outline the attitudes and beliefs that determine the behavior patterns of these generations.

Economy An economy is an orchestrated system of talent, resources, and money with the purpose to create and distribute products and services. For organizations, managers need money to acquire resources and hire talent to achieve the company ’s goals. When the economy is doing well, it is easier for managers to get money from banks, investors, or stock mar- kets. Stock markets are primarily intended to coordinate transactions where owners can sell a piece, or share, of their company to investors. Depending on a company ’s perceived future performance and the confi dence of buyers, investors buy and sell a company ’s stock, increasing and decreasing its stock price. What do we mean by perceived future perfor- mance and confi dence? 47 As an example, Apple ’s stock price on January 5, 2007, was $85. Steve Jobs, Apple ’s CEO at the time, announced that the company would soon introduce a new product, the iPhone, on January 9, 2007, which promised to “reinvent the phone.” Investors liked what they heard. By January 12, 2007, Apple ’s stock price was selling for $94. Th erefore, if you bought

1,000 shares of Apple ’s stock on January 5 and sold it one week later, you would have earned approximately $9,000 (less fees, etc.); in other words, your investment would have increased by 10 percent. 48 Remember that Jobs had only announced the iPhone at that point; the product itself did not launch until June 2007. Managers typically look at stock mar- ket indexes as a benchmark for measuring the economy. These indexes are basically a combination of company stocks intended to represent how the overall stock market (or economy) is doing. The major mar- ket indexes in the United States are the Dow Jones Industrial Average, NASDAQ Composite, and S&P 500. The Dow Jones Industrial Average index, founded by then- editor of the Wall Street Journal Charles RO

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Sociocultural forces The behaviors and beliefs associated with demographic groups that comprise an organization’s available talent and customers.

Demographics Sociological characteristics, including age, gender, marital status, ethnicity, and geographic location, which affect buying habits, work ethic, work- life balance expectations, travel patterns, and disposable income.

Economy An orchestrated system of talent, resources, and money with the purpose to create and distribute products and services.

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1034.4 | GENERAL ENVIRONMENT

Table 4-3 Sociocultural Characteristics by Generation

G. Hammill, “Mixing and Managing Four Generations of Employees,” FDU Magazine Online, Winter/Spring 2005, http://www.fdu.edu/newspubs/ magazine/05ws/generations.htm; and Johnson Controls, “Generation Y and the Workplace Annual Report 2010”; http://www.johnsoncontrols.com/publish/ etc/medialib/jci/be/global_workplace_innovation/oxygenz.Par.41451.File.dat/Oxygenz%20Report%20-%202010.pdf.

Veterans: 1922–1945

Work Ethics/Values Hard Work; Respect Authority; Sacrifi ce; Duty Before Fun; Adhere to Rules

Work Is . . . An Obligation

Leadership Style Directive; Command-and-Control

Interactive Style Individual

Communication Style Formal; Written

Feedback and Rewards No News Is Good News; Satisfaction in a Job Well Done

Messages That Motivate Your Experience Is Respected

Work and Family Life No Balance; Work to Survive

Baby Boomers: 1946–1964

Work Ethics/Values Workaholics; Work Effi ciently; Crusading Causes; Personal Fulfi llment; Desire Quality; Question Authority

Work Is . . . An Exciting Adventure

Leadership Style Consensual; Collegial

Interactive Style Team Player; Loves Meetings

Communication Style In Person

Feedback and Rewards Money; Title Recognition

Messages That Motivate You Are Valued; You Are Needed

Work and Family Life No Balance; Work to Live

Generation X: 1965–1980

Work Ethics/Values Eliminate the Task; Self-Reliance; Want Structure and Direction; Skeptical

Work Is . . . A Diffi cult Challenge; A Contract

Leadership Style Everyone Is the Same; Challenge Others; Ask Why?

Interactive Style Entrepreneur

Communication Style Direct; Immediate

Feedback and Rewards Freedom = Best Reward; Sorry to Interrupt, but How Am I Doing?

Messages that Motivate Do It Your Way; Forget the Rules

Work and Family Life Balance

Millenials: 1981–2000

Work Ethics/Values: Multitasking; Tenacity; Entrepreneurial; Tolerant; Goal-Oriented; What ’s Next?

Work is . . . A Means to an End; Fulfi llment

Leadership Style The Young Leaders Century

Interactive Style Participate

Communication Style Email, Voice Mail

Feedback and Rewards Whenever I Want It; At the Push of a Button; Meaningful Work

Messages that Motivate Working with Other Bright and Creative People

Work and Family Life Balance

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104 Chapter four Organizations and Change Management

Figure 4-9 Historical View of the Major Stock Indexes   The rise and fall of major market indexes.

1975 1980 1985 1990 1995 2000 2005 2010

Dow Jones Industrial Average NASDAQ Composite S & P 500

Dow, represents 30 large company stocks. 49 The NASDAQ Composite index represents over 3,000 company stocks, primarily signifying growth and technology. 50 The S&P 500 represents 500 large U.S. company stocks. 51 Figure 4-9 shows these three indexes over the past few decades. What do you notice? Probably the big green spike from 1997 to 2002! During this time, the economy experienced the “Internet boom,” followed by the “Internet bust,” where technology stocks increased then decreased dramatically. The “green spike” is the NASDAQ Composite rising and falling accordingly. Gross domestic product (GDP) is the value of what a country produces on an annual basis, representing the size of its economy. GDP is represented as a total number (nominal) or per person (capita). Comparing the world ’s economies by each country ’s total GDP and their per capita amount, we see a very diff erent story as shown in Figure 4-10 . What do you see? Do you notice that not all the countries that have large nominal GDPs have large per-capita GDPs? Th is is good and bad for those countries: bad because its citizens on a per-person basis are not prospering in comparison to others around the world; and good because they have extraordinary growth opportunities. 52 In order, the largest economies are the European Union, the United States, China, Japan, India, Russia, and Brazil. Over the past two decades, the Internet and e-commerce have enabled these and all other countries around the world to exchange services easily, lead- ing to rapid expansion of economies, in particular Brazil, Russia, India, and China (BRIC, pronounced “brick”). Th e impact of international economies and business practices have on managers will be discussed in further detail in Chapter 5. So, how do GDPs and the world economy aff ect managers? To answer this question, let ’s go back and revisit Katy, Fred, and Lisa. What if these three new managers had graduated in 2001? A few months after graduation, they probably would have fi nished their job orientations and manager training programs at Reliable Energy, Per- fect Planet Interactive, and Hannah ’s, respectively. On the fateful day of September 11, 2001, when terrorists fl ew airplanes into the World Trade Center towers in New York City, the stock markets did not open, and they remained closed until September 17. When the markets reopened, the Dow Jones industrial average declined by 7.1 percent in one day, the largest single-day decline in history. Th e Dow Jones would decline by 14.3 percent over the course of the following week, which meant $1.4 trillion in value lost for the U.S. economy. During that week, Reliable Energy and Hannah ’s stock would have fallen. However, as Perfect Planet Interactive maintains operations in Europe, its stock might have risen by almost 10 percent in the two weeks following the terrorist attack. Th is is because the gaming company ’s stock is traded on the Paris Stock Exchange, which was probably perceived by investors as safer than the U.S. economic market at that time—a powerful example of how politics and confi - dence aff ect the economy.

Gross domestic product (GDP) The value of what a country produces on an annual basis, representing the size of its economy.

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105

Figure 4-10 World Economies—Nominal Versus Per-Capita GDP Nominal GDP per country and GDP per capita.

Fi 4 10

5 Billion 100 Billion

1 Trillion

5 Trillion

15 Trillion

Gross Domestic Product ($US)

Source: CIA World Factbook 2012

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4.5 | HOW DO MANAGERS CHANGE ORGANIZATIONS?

4.5 | HOW DO MANAGERS CHANGE ORGANIZATIONS?

4.5 | Summarize how managers change organizations by intervening in systems.

Change management means achieving goals by altering behaviors or processes in response to environmental forces. 53 Managers have a unique role in organizations to see and under- stand the overall internal and external environments and design ways for their teams to change behaviors in order to achieve organizational goals and missions. As we explored in Chapter 3, Systems Th eory can help managers to understand the changes that are occurring

Change management Achieving goals by altering behaviors or processes in response to environment forces.

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within and outside the organization, formulate the goals that they would like to set for the future, and help employees adapt and adjust their behavior and perspective to their evolving business environment.

Resistance to Change 54 Over the last couple of decades, organizations have been going through rapid change. Man- agers are now challenged with new products, technological innovation, government regula- tions, and a fl uctuating workforce. With so many changes taking place over such a short period of time, we could argue that managers have been left with no alternative but to apply organizational change to keep ahead of the competition. Yet, many managers confess that implementing change can be one the most challenging parts of their jobs. Why? It is because enforcing change is very much a human business. It not only involves changing ideas, inno- vations, and structures, but also requires a change in mindsets, attitudes, and behaviors, challenging long-held beliefs and in some cases transforming the entire company culture. In short, change in the workforce can be successful only when it is accepted by others. But what happens when employees resist? However well intentioned the proposed changes may be, managers still may encounter employees that reject change altogether, even when the change is perceived as benefi cial. Indeed, some people will accept change only if there is some sort of crisis. In order to imple- ment change in an organization successfully, managers must attempt to understand the individual behaviors and reactions that might lead to resistance. So, why do some people resist change?

Personal Threat Some people fear change, as they perceive it as a threat to their own personal interests. For example, due to economic factors, many organizations today have been forced to implement austerity measures wherever possible. Th e days of fl ying business class, huge bonuses, lavish corporate occasions, complimentary food and drink, and tickets to sought-after events are a thing of the past. As a result, many employees, especially top- level executives, have become resentful that these perks have been stripped away, perceiving these cutbacks as a way for the company to undermine their power and status rather than accepting them as necessary budgetary measures.

Uncertainty and Mistrust People may resist change when they do not understand what it means or if they do not trust the person initiating the new idea. Working relationships can be complex, and it is common for managers and employees to distrust each other. Th is may be amplifi ed further if a manager suggests an idea for change without explaining it eff ectively. For example, a manager might announce that a new team leader is going to be appointed from outside the organization in order to manage a team. Without a proper explanation as to why this new addition would benefi t the team and the organization as a

whole, rumours could surface and people might feel threat- ened, leading to suspicion, mistrust, and doubt.

Fear and Doubt About Abilities People who have a low tolerance for change have a fear that they do not pos- sess the required skills and abilities to cope with the new changes. For example, with the introduction of new tech- nology, many longstanding employees may struggle to em- brace such new innovations in such a short period of time.

Clashing Perspectives Th ere can also be a disparity be- tween how change is assessed by diff erent people. Diff er- ences of opinion may arise between those initiating the idea and those who are expected to accept the change. For ex- ample, a company has two databases that eff ectively do the same thing, yet they are run by two diff erent departments headed by two senior managers. Th e logical solution would be to streamline the databases to perform one function. ©

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1074.5 | HOW DO MANAGERS CHANGE ORGANIZATIONS?

However, this situation can give rise to political behavior, where one manager perceives the merger of the databases as a useful cost-saving and effi cient initiative, whereas the other may see it as a threat to his power and authority. Th e latter then may argue against the merger by coming up with all sorts of reasons why it would not work, thus delaying it or preventing it from happening altogether, leading to in-house battles and power struggles.

The Art of Persuasion Th ere are a number of ways that managers can deal with those who resist change. Some managers choose to provide emotional support to their employees in order to address the underlying fear associated with change. In certain instances, managers may give stressed-out employees some time off or an option to work from home, away from the offi ce environment. Th ey may also provide additional training to employees who are having diffi culty learning the skills required to cope with the new approach. In other situations, managers may off er fi nancial incentives, such as a wage increase or higher benefi ts, to persuade dissenters to embrace the change. Th is type of bargaining is more commonly used with companies that have strong unions that have the power to accept or reject the proposed change. Others might use a form of manipulation by enlisting support from top management in order to endorse the change, or co-opt a popular individ- ual to take an active role in the decision-making process. Th e reasoning here is that people will be more inclined to accept an idea when it is initiated by respected leaders. In more extreme circumstances, managers may use coercion to force employees to accept change—to the point of using the threat of job loss if they don ’t comply. Th is is a risky move, as it can kill morale, cause resentment, and in some cases, create mass rebellion. Most managers use a combination of the approaches described above in order to man- age resisters, but these methods are by no means foolproof. However, by formulating a clear strategy for change, analyzing the reasons behind the resistance, and choosing specifi c methods to deal with diff erent dissenters, managers will have a better chance of overcom- ing many of the obstacles that stand in the way of progress.

Driving and Restraining Forces 55 Force-Field Analysis is based on the work of Kurt Lewin, who believed that there are two main competing forces at play that infl uence change. Driving forces help to provide moti- vation toward achieving a goal, whereas restraining forces or barriers to change impede the progress of the goal. In order to implement a change, driving forces must be increased while ensuring that restraining forces are decreased. Managers can use Force-Field Analysis as an aid in the decision-making process by analyzing the forces for and against change. Once identfied, managers can make a decision as to whether the change should be implemented, and how they might go about mitigating any potential resistance. For example, say that you are the manager of a start-up company that produces personalized, handmade handbags. Customers reg- ister online and enter the details of the designs they would like displayed on their own unique handbag. Business is good, but you realize your competitors seem to be getting their product to their customers much faster than you are. The CEO of the company suggests implementing new manufacturing equipment that will help speed up the pro- cess. While the design will still be handmade, the bags themselves will be manufactured by a new machine. As manager, you conduct a force-fi eld analysis to assess the need for change and the potential obstacles that you might need to overcome before the change is made. First, you look at the driving forces or the reasons why the company needs to make some changes: the manufacturing equipment will help speed up the production process and get the handbags to consumers more quickly, making the business more competitive. However, you may also have to plan for some barriers to change; for example, your staff may feel threatened by the new equipment and fear they will be replaced by machines. Th ey may also worry that they lack the skills and abilities to operate the new technology. Th ere is also the cost of installing new equipment—can the company aff ord it, and if so, what cost benefi ts will it produce?

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Identifying both driving and restraining forces allows managers to decide a strategy for implementing the change as smoothly as possible. Once the change initiative is signed off , managers must prepare their staff for the changes ahead.

Stages of Change 56 One of the toughest functions of a manager is convincing people to accept change, espe- cially when managers deal with so many diff erent behaviors and personalities. Organiza- tional development theory suggests following three stages of change: unfreezing, changing, and refreezing, in order to secure commitment and buy-in from employees.

Unfreezing Unfreezing is the process by which managers inform their staff of the change and why it is needed. People are more likely to adjust their attitudes and behaviors to support change when they understand the reasoning behind it, as well as the potentially negative implications that might arise should the company remain static. Some organiza- tions use change agents, or organizational development specialists who help facilitate change by identifying problems and presenting them to management. As change agents come from outside the company, they provide more objective diagnoses of the existing problems that helps managers “unfreeze” their traditional, learned behaviors and adopt a new perspective.

Changing Once “unfrozen,” the change agent implements changing, a strategy for employ- ees to help reinforce the need for change. For example, some managers might create a vision and use a wide range of communication channels to deliver the new plans for change to the fi rm ’s employees. Managers could reinforce the idea further by holding town hall meetings and setting up training programs designed to help employees learn the new skills required to meet the change.

Refreezing Th e fi nal stage is refreezing, which is when people embrace the change and adopt the behaviors and attitudes needed to generate successful results. During this phase, managers might reward employees for their commitment and their participation in making the change happen.

Leading Change 57 In addition to Force-Field Analysis, and the freezing/changing/refreezing method, manag- ers can draw from the following steps in order to implement change eff ectively.

Putting the Pressure On Managers must communicate a sense of urgency to their em- ployees to implement speedier change. Th is is especially signifi cant when companies are experiencing some sort of crisis that needs to be addressed quickly.

Forming a Guiding Coalition People are more likely to buy in to an idea when they are involved in its implementation. A coalition comprised of a management team to lead the change eff ort can have a tremendously powerful eff ect in encouraging others to embrace the change, especially when the group is supported by the CEO.

Creating a Vision One of the fi rst tasks of the coalition group is to create a vision of what the organization is trying to achieve. Th is vision must be clear, easily understood, and inspi- rational to others.

Using Widespread Communication Communication is key when delivering a strategy for change. Managers can use visual presentations, hold meetings, and create webinars that

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1094.5 | HOW DO MANAGERS CHANGE ORGANIZATIONS?

can be accessed by every employee in the organization to promote their message for change. In situations where a new product, or technology initiative is being introduced, training programs help educate employees and provide them with the skills they need to handle the new technology. Armed with suffi cient education and training, employees are more likely to be motivated toward achieving the company ’s goal.

Overcoming Obstacles Although creating a vision, and optimizing the communication channels available to promote the vision are important, both eff orts will be futile if other employees resist the change or present obstacles that block progress. Managers must iden- tify the obstacles and the reasons behind them and remove them as quickly as possible to drive the change forward.

Celebrating Short-Term Wins Large-scale change often takes years before the end re- sult is achieved. Without acknowledging achievements along the way, the project could lose momentum. So it is important that managers establish milestones along the way, and reward performance by celebrating with respective teams when they achieve their objectives.

Assessing the Transformation Process Change is a continuous process, where modi- fi cations must be evaluated and reassessed constantly to make any necessary adjustments. Managers can learn from each stage of the change process and apply those lessons to future projects.

Instilling Change in the Corporate Culture Managers know change is successful when it becomes part of the corporate culture. However, organizations that experience a major cultural shift may still be subject to a few naysayers that may undermine the change and set back progress. In order for new attitudes and behaviors to become ingrained into the culture, managers must take steps to show employees the benefi ts of the change and how it has improved the organization. But how do managers change the structure of a system that is simply not functioning as well as it should? Systems theorists such as Jay Forrester and Donella Meadows at the Massachusetts Institute of Technology (MIT) believe in the power of diff erent types of leverage points or “places in the system where a small change could lead to a large shift in behavior.” 58 Meadows cites 12 leverage points, ranging from highest eff ect to low- est eff ect. Positive and negative feedback loops, delays, reinforcing feedback loops, and balancing feedback loops (as discussed in Chapter 3) are all examples of leverage points. Th ey all have the capability to set off a whole change of events, similar to a butterfl y eff ect, where small changes can result in large outcomes, if they are managed properly. But fi nding and managing these points is no easy feat; indeed, when managers do fi nd them, they might even end up pushing for change in entirely the wrong direction. Why is this? When we fi rst look at a system structure, we tend to perceive the clearest and most obvious problem. Take the leverage point of parameters, and let ’s ascribe it to crime, as one example. If we were to consider what it would take to rid society of criminal activ- ity altogether, we might try and resolve this by hiring more police and investing in more public safety programs. However, history has shown that regardless of how much we spend on crime-fi ghting, crime still exists. So, even if we fi nd a supposed solution, it is unlikely to change behavior in the long term. Th ese types of parameters are the lowest on the list of leverage points because even when identifi ed, they will not help to make any sort of long-lasting change. In Chapter 3, we explored the example of a reservoir as a system. When there is an increase in the infl ow of water, the outfl ow of water decreases, making the system stable. In this sense, the water acts as a buff er between the reservoir overfl owing or running out alto- gether. However, a reservoir can contain only so much water, and any variation in climate or even the onset of natural disasters can upset the delicate balance. Buff ers are another type of low leverage point, but like parameters, they can help to improve a system but are unable to change it immeasurably. And what if the water in the reservoir, which is a stock and fl ow

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110 Chapter four Organizations and Change Management

structure, becomes polluted? We might think that building a water treatment plant is the obvious solution, but this would require serious expenditure. With so many complex activities taking place in the system, it can be difficult to spot the difference between low leverage points and high leverage points. One of the most destructive forces to a system is lack of data. For example, if you don ’t know the reservoir is polluted, how can you do anything about it? When we are equipped with new information, we have the power to change the system. Yes, it might be expensive to build a water treatment plant, but if enough people get together to raise awareness, then it might give rise to new initiatives for treating the pollution problem. Of course, although effective, this sort of leverage point is not the most popular: as history dic- tates, the powers that be aren ’t known for their tolerance of mass uprisings. Just as accessibility to information is a powerful leverage point, so is knowledge of the rules or boundaries that exist in the system. Once managers have a clear idea of the rules, they have the ability to challenge or even change them. As introduced in Chapter 3, self-organization, which involves the creation of entirely new systems, is one of the most powerful functions of systems. Evolution and social revolution are examples of self-organization. A system that can fl uctuate and change has the highest chance of survival. However, this does not mean that it is invincible. Whole ecosystems have been wiped out through erroneous interventions by humans into nature. An even higher leverage point than self-organization is goals. What if the goal of the very highest powers was to focus on the environment, and address the issues of pollution, climate change, and extinction? Th en every leverage point discussed so far would fall under the umbrella of this goal: everybody would be kept informed, parameters would be removed, and the system ’s structure would be adapted to this new initiative. It might sound impossible, but one person has the power to shift systems in an entirely diff erent direction, sometimes for better and sometimes for worse.

Implementing Change Organizations that want to survive for the long term must be able to change and evolve. But managers often fi nd that employees resist the changes that they ’re trying to implement. So what can managers do to make transitions go more smoothly? Furst and Cable (2008) found that the degree to which employees resist change has much more to do with the quality of their relationship with their managers than with how the change is implemented. 59 Employees who have high-quality relationships with their managers are much more willing to accept change than employees with low-quality relationships with their managers.

Professor ’s Response It is often thought that an employee ’s resistance to change has to do with factors internal to the employee

(e.g., motivation, drive, etc.). But this research shows that it isn ’t just about the employee ’s attitude, but rather the relationship between the employee and manager.

Manager ’s Response It ’s easy to get caught up in overthinking how to go about implementing change, or to just assume that it ’s going to be a struggle. What I like about this research is that it emphasizes that a manager who has cultivated a good relationships with his or her employees from the beginning is always going to have an easier time of it.

Critical Thinking in the Classroom As a manager, how would you encourage your employees to accept change?

Research@Work

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111

CaseSnapshot Chapter 4 Case: Organizations and Change Management:

AstraZeneca can be found on pg. 465

Yet the most powerful leverage point of all is the ability to shift paradigms and the way that we think about the world. Many of us exist inside the system, following its rules, accept- ing the information that is passed down, and believing that this is the way that things should be. By transcending these paradigms, we can step outside the system and consider the idea that no paradigm is completely right or true. Only then will managers have the ability to see the system as a whole, successfully determine leverage points, and initiate real and long- lasting change. In the next chapter, we will explore more challenges facing managers in a global economy and the importance of successfully managing cultural diff erences and diversity.

4.5 | HOW DO MANAGERS CHANGE ORGANIZATIONS?

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ADDITIONAL RESOURCES

KEY TERMSS Advocacy group A set of people dedicated to instituting change based on their concerns or interests. (p. 93)

Boycott An attempt by an individual or group to change the actions of an organization by convincing other consumers not to purchase its products or services. (p. 93)

Ceremony An event that provides one or more stakeholders with a sense of purpose and meaning connected to the organiza- tion. (p. 89)

Change management Achieving goals by altering behaviors or processes in response to environment forces. (p. 105)

Crowdsourcing Employing the efforts of customers and the public to innovate and further an organization’s mission. (p. 93)

Demographics Sociological characteristics, including age, gender, marital status, ethnicity, and geographic location, which affect buying habits, work ethic, work-life balance expectations, travel patterns, and disposable income. (p. 102)

Economy An orchestrated system of talent, resources, and money with the purpose to create and distribute products and services. (p. 102)

External environments The specifi c and general factors out- side an organization that can change how it operates. (p. 90)

General environment External forces that affect all organiza- tions participating in an economy, where managers have little or no power to effect change. (p. 97)

Government activism Government’s active role in encouraging business to behave in ways that are in the public interest through tax credits and other incentives. (p. 96)

Gross domestic product (GDP) The value of what a country produces on an annual basis, representing the size of its econ- omy. (p. 104)

Hero A real or imagined person who represents an ideal per- former specifi c to the organizational culture. (p. 90)

Interactive engagement Collaborating with consumers to develop future products and services. (p. 91)

Internal environment The forces inside an organization that affect how the managers set expectations, how employees per- form their roles, and how the company interacts with stakehold- ers and responds to external environments. (p. 87)

Organizational culture A collection of beliefs that individuals and groups share to help their organization respond to environ- mental forces and changes. (p. 87)

Proactive engagement Creating a product or service as an alternative to enhance the customer’s experience. (p. 91)

Reactive engagement Monitoring positive and negative cus- tomer feedback and improving the organization’s products and services accordingly. (p. 91)

Regulations Rules set by external governing bodies that dictate standards and procedures for industries, businesses, and profes- sionals. (p. 94)

Ritual A formalized activity intended to communicate and teach the organization’s culture. (p. 89)

Slogan A repetitive phrase intended to support an organiza- tion’s culture, mission, vision, or values. (p. 88)

Sociocultural forces The behaviors and beliefs associated with demographic groups that comprise an organization’s available talent and customers. (p. 102)

Specifi c environment The industry-focused part of the external environment that directly affects an organization’s operations and performance. (p. 91)

Story A narrative, usually fi ctionalized or enhanced over time, based on actual organizational experiences. (p. 88)

Suppliers Entities that provide an organization with the external resources that it needs to operate, including money, materials, people, and information. (p. 94)

Symbol An event, situation, object, person, or other artifact that provides greater meaning to the organization. (p. 89)

Talent The people who have the skills, knowledge, creativity, and relationships necessary to optimize an organization’s perfor- mance. (p. 92)

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113Additional Resources

IN REVIEWW 4.1 | Describe the components that make up an organizational culture.

An organizational culture is a collection of beliefs that individu- als and groups share to help their organization respond to en- vironmental forces and changes. Culture is experienced on two diff erent levels: conscious and unconscious. Th e components of culture include slogans, stories, symbols, rituals, ceremonies, and heroes.

4.2 | Illustrate how internal infl uences create unique types of cultures.

Managers employ the components of culture to create a specifi c experience for employees and other stakeholders that estab- lishes consistent expectations. We demonstrated how managers at Perfect Planet Interactive, Hannah ’s, and Reliable Energy com- municated their organizational cultures diff erently, which led to very unique types of organizations that were well suited for their industries.

4.3 | Describe and compare general and specifi c external environments.

Specifi c environment forces include customers, talent, advocacy, suppliers, regulations, and competitors. Specifi c environments are specifi c to an organization ’s industry; therefore, these forces

have a tangible eff ect on operations. General environment forces include politics/laws, resources, technology, sociocultural, and economy. Managers have a limited impact on these infl uences, which nonetheless can have a dramatic impact on organizations and managers ’ need to change.

4.4 | Explain how managers analyze challenges and opportunities in organizations.

How do managers know what to change? First, it is vital that a manager understands the mission of the organization and pur- pose of its subsystems. Th is allows a manager to understand where process and employee behaviors are inconsistent with purpose. Exponential growth– or decay-driven runaway loops are easily identifi ed, and managers must seek to balance them. Goals and states of stability off er managers targets to adjust behavior.

4.5 | Summarize the common reasons why managers change how their organizations operate.

Organizations go through continuous change, whether manage- ment notices or not. By understanding mission and purposes, acknowledging imbalances, designing plans to stabilize the sys- tem, and communicating with stakeholders, managers can in- stitute well-considered, positive change for their organizations.

SELF-TEST 4.1 | Describe the components that make up an organizational culture.

1. List the six characteristics of corporate culture.

2. Which of the following reconstructs the stages of a “hero ’s journey”? a. Identifying Resources, Innovation, and Resource Allocation b. Idea Generation, Motivation, Success c. Plan, Organize, Lead d. Leaving Home, Learning from Challenges, Returning Home e. None of the above

3. Compare and contrast rituals and ceremonies.

4.2 | Illustrate how internal infl uences create unique types of cultures.

4. Interpret the signifi cance of Reliable Energy ’s ceremony to recognize the company ’s safety award.

5. Describe how employees at Perfect Planet Interactive demonstrate the organizational value of “embracing their inner geek.”

4.3 | Describe and compare general and specifi c external environments.

6. Cite a contemporary example of a boycott .

7. Industries are only regulated by external governing bodies. a. True b. False

8. Explain the impact of government activism on two industries by citing one example for each that is not detailed in this book.

9. Government legislation limiting the behaviors of management in support of the public ’s interest has primarily been a bipartisan issue. a. True b. False

10. Predict challenges that a manager might face with Veteran and Millennial generation employees working together on a team.

4.4 | Explain how managers analyze challenges and opportunities in organizations.

11. In the summer job scenario, what feedback loop balances the behavior of “traveling with friends”?

12. Explain the concept of a “balanced approach” to management.

13. Predict the behavior of an energy budget system, with a runaway feedback loop for savings and a low-intensity balancing loop for usage.

4.5 | Summarize the common reasons why managers change how their organizations operate.

14. Which of the “top fi ve reasons managers should change” applies to the Amazon energy budget example? Based on an analysis of the system, formulate a change in behavior to save on energy costs.

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114 Chapter four Organizations and Change Management

CHAPTER EXERCISEE Force Field Analysis Force Field Analysis is a process for analyzing the factors that drive or restrain a given outcome. It can be a very eff ective way both to examine a situation and determine the most eff ective approaches to attain a desired goal.

Instructions:

• In the space provided below, write down a goal that you would like to achieve.

• Next, consider the forces that are supporting or driving you toward achieving the goal and write these in the spaces provided in the “Driving Forces” arrow below. Write additional driving forces on a separate sheet of paper if necessary.

• Th en determine the restraining forces that are holding back your progress toward achieving the goal and write these in the spaces provided in the “Restraining Forces” arrow below. Write additional restraining forces on a separate sheet of paper if necessary.

Driving Forces 1.________ 2.________ 3.________

Restraining Forces 1.________ 2.________ 3.________

• Your success in achieving your goal can be assessed in terms of the balance between the driving and restraining

forces. Th e present situation or status quo is determined by the equilibrium between these opposing forces. If you can increase existing or create additional driving forces or reduce or eliminate restraining forces, the situation will change and allow you to make progress toward your goal. Answer the following questions:

1. Consider the restraining forces. Which restraining force is most signifi cantly impeding your progress? If you were to remove it, would you be able to change the situation enough to allow you to meet your goal? What actions would you need to take to remove it? If you can ’t remove it, what can be done to minimize its eff ects?

2. Now consider the driving forces. What can you do to increase the infl uence of the driving forces in order to off set the restraining forces? What new driving forces could you create in order to shift the equilibrium?

• Identify the three most important actions that could shift the equilibrium and allow you to achieve your goal and write them in the spaces below:

1.

2.

3.

• Develop an action plan for implementing each of the actions listed above.

Adapted from Kurt Lewin. Field Th eory in Social Science: Se- lected Th eoretical Papers, Dorwin Cartwright, ed. Oxford, U.K.: Harpers (1951).

SELF-ASSESSMENT Openness Toward Change*

For each statement, circle the number that best describes you based

on the following scale:

Not at all Accurate

Somewhat Accurate

A little Accurate

Mostly Accurate

Completely Accurate

1 2 3 4 5

1. I would consider myself to be open to the changes that I encounter in my life.

1 2 3 4 5

2. Right now, I am somewhat resistant to proposed changes in my life.

1 2 3 4 5

3. I am looking forward to changes that will occur in my life. 1 2 3 4 5

4. I am quite reluctant to consider changing the way I like to do things.

1 2 3 4 5

5. I think that future changes will have a positive eff ect on my life.

1 2 3 4 5

6. From my perspective, changes in my life will be for the better. 1 2 3 4 5

7. Th e changes in my life will be for the worse in terms of the way I get things done.

1 2 3 4 5

8. I think the changes in my life will have a negative eff ect on how I will be able to perform.

1 2 3 4 5

*Adapted from Vernon D. Miller, John R. Johnson, and Jennifer Grau. “Antecedents to willingness to participate in a planned organizational change,” Journal of Applied Communication Research 22, no. 1 (February 1994): 59–80.

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115Additional Resources

Scoring: A. Add the numbers that you circled for items 1, 3, 5, 6:

B. Add the numbers that you circled for items 2, 4, 7, 8:

C. Subtract the number on line B from the number on line A and write it here:

Interpretation:

+5 or higher: You are open to change and view it as an opportunity

–4 to +4: You are indiff erent to change; it doesn ’t really bother you but you also don ’t embrace it

+5 or lower: You are resistant to change and see it as a threat

SELF-TEST ANSWER KEY 1. Slogans, Stories, Symbols, Rituals, Ceremonies, and Heroes.

2. d.

3. Rituals communicate and teach the organizational culture, while ceremonies create a sense of purpose through recog- nition and celebration.

4. Th is ceremony celebrated the company ’s “Safety First” pro- gram commitment to safety, by recognizing the team with the best overall company performance.

5. At Perfect Planet Interactive, the company ’s value of “em- bracing your inner geek” is demonstrated by every em- ployee having an active passion for gaming.

6. Coca-Cola is currently being boycotted by consumers for depleting groundwater in India.

7. False; industries can also be self-regulating.

8. Housing industry: to stabilize the fi nancial industry, the U.S. government in 2010 announced that it would provide refi nancing options for homeowners with home loans less than $729,750. Automobiles: nearly 680,000 cars were re- placed with more fuel-effi cient vehicles, based on a govern- ment supported incentive.

9. False. Legislation over the past four decades has been evenly split between Republican and Democratic presidents.

10. Th ree dynamics that could lead to team challenges include communication style, leadership style, and work ethic. Th e Veteran generation is formal in their communications, be- lieves that leadership is earned over time, and works to sur- vive. Conversely, the Millennial generation communicates

informally with their peers, using quick and short commu- nications over mobile devices; believes that leadership in a technology-driven world is the domain of young people; and works to live a good life. Th is could lead to challenging manager situations, including miscommunication, dispar- ity in needs for recognition and power, and inconsistent ex- pectations regarding the time spent physically in the offi ce.

11. Th e balancing loop that aff ects the infl ow of “income” through a summer job.

12. A “balanced approach” to management refers to the man- ager ’s responsibility to ensure that the system and subsys- tems of an organization achieves long-term stability, with limited adverse eff ects on itself or interconnected forces. Understanding how to change system dynamics positively is a primary competence for a balanced approach to management.

13. Th is would create an eff ect on an organization ’s energy budget, where it would eventually have a surplus of energy that could be sold to other users. Th us, the energy budget would ultimately stop being an expense and actually make money.

14. “Intensity of balancing loop not suffi cient to curb behavior in runaway loop”—in order to fi nd stability in this system, one might recommend investing in alternative, renewable energy sources that the company would purchase. Th is would increase the intensity of the balancing loop for the outfl ow of savings, and thus counterbalance the anticipating increase in infl ow due the growth projections of cloud computing.

Notes

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116

Diversity in a

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C H A P T E R O U T L I N EC H A P T E R O U T L I N E

117

Learning Objectives

5.1 | Managing in a Global Economy Global Organizations, Trade Rules, and

Agreements Strategic Partnerships

APPLYING CRITICAL THINKING: Success to the Successful

5.1 | Understand how managers organize international businesses.

5.2 | Cultural Differences Cultural Values and Dynamics Dimensions of Culture Approaches to Cultural Diff erences

5.2 | Explain the challenges and opportunities of working with cultural diff erences.

5.3 | Legal Basics for Managing Diversity

VOICES OF MANAGEMENT: Ursula Burns

RESEARCH @ WORK: Trust

5.3 | Understand the legal requirements for respecting workforce diversity.

5.4 | Talent in a Diverse Workforce Changing Workforce Demographics Outsourcing and Off shoring Talent

5.4 | Recognize and explain the implications of changing workforce demographics.

5.5 | Managing Diversity as an Advantage “One Recipe, Many Ingredients” Diversity as a Strategy How Diversity Aff ects Creativity, Innovation, and

Performance Fostering Diversity

APPLYING CRITICAL THINKING: Fixes That Fail

5.5 | Interpret the dimensions of diversity as a management strategy to increase innovation, creativity, and performance.

By the end of the chapter, you will be able to:

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Additional Resources Key Terms

In Review

Self-Test

Chapter Exe rcise

Self-Assess ment

Self-Test

Answer Key

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118 Chapter Five Diversity in a Global Economy

5.1 | MANAGING IN A GLOBAL ECONOMY

5.1 | Understand how managers organize international businesses.

Damian Williams moves away from the whiteboard and looks at the ideas and strategies shared over the past three hours. Four, maybe fi ve, dry-erase-marker colors paint the wall with arrows, circles, and dollar signs for punctuation. For some reason, this chaos seems to make sense to everybody around the table. Four boxes spelling “BRIC” on the board stand out. As we learned in Chapter 4 , BRIC stands for “Brazil,” “Russia,” “India,” and “China”—the major emerging economies now competing with and providing ser- vices such as software programming to businesses in the United States and European Union (EU). Williams is the new senior vice president of information systems of Mansfield Exports, and he was hired primarily for his 25 years of experience managing teams in China, Europe, South America, India, and the United States. He has just finished giving the senior management team a lesson on the strengths and weaknesses of outsourcing software development to different regions across the world. Some of his analyses relate to costs, but to the surprise of some team members, the session has become a tuto- rial on cultural differences, and building diverse teams. As Williams said, “It ’s all about getting results by leading and managing a diversity of people with trust, respect, and loyalty.”

Managers running globalized companies are aff ected by external political, resource, economic, and social forces that can change management challenges and opportuni- ties signifi cantly. For organizations to achieve results in today ’s global economy, man-

agers must understand international business practices, including international trade rules, agreements, and legal requirements. Th is chapter will introduce you to the dynamics that managers should embrace when man- aging diverse teams, whether a team at a small start-up company in Palo Alto, California, or a multinational team. Many of the same management principles apply to man- aging diverse teams in the United States and in other countries. Th ese principles rely on managers understand- ing culture . 1 And to be eff ective, managers need to moti- vate their teams by understanding their team members ’ cultural diff erences, dynamics, and dimensions. Th ey must communicate, motivate, and achieve goals with people of diff erent cultural and ethnic backgrounds, ages, genders, and sexual orientations. As we journey through this chap- ter, we will explore these factors and ask the question: “Th rough this cultural understanding, how do managers foster diverse organizations to achieve more eff ective and effi cient results?”

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Damian Williams moves away from the wh shared over the past three hours. Four, m wall with arrows, circles, and dollar signs seems to make sense to everybody around board stand out. As we learned in Chapte and “China”—the major emerging econom vices such as software programming to b Union (EU).

Williams is the new senior vice pre Exports, and he was hired primarily for h China Europe South America India and

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1195.1 | MANAGING IN A GLOBAL ECONOMY

Global Organizations, Trade Rules, and Agreements Many companies, when they expand internationally, maintain their headquarters in their home country and develop satellite offi ces elsewhere. Th is structure is what ’s known as a global company : an organization that has operations in more than one country and its senior management decision making centrally located in one country. In contrast, Mans- fi eld Exports is organized as a multi-domestic company : an organization where senior management decision making is distributed across the countries in which it operates. Mansfi eld Exports didn ’t start out as a multi-domestic company. In its early days, Mansfi eld Exports was a small, family-owned business in Chicago that specialized in both importing , the process of acquiring products and services from another country; and exporting , the process of creating products in one country and selling them in another.

Strategic Partnerships In order to grow her family ’s business, the current chief executive offi cer (CEO) of Mans- fi eld Exports, Jill Mansfi eld, established a series of strategic partnerships with importing/ exporting companies in the emerging BRIC economies. Strategic partnerships are agree- ments between two or more organizations to share complementary resources to develop and sell products and services. 2 Each of these partner companies had its own strengths and provided a viable context for translating regional cultures and connecting to existing rela- tionships. Mansfi eld thought that these strategic partnerships were a brilliantly conceived strategy, yet in the past few years, her company has been embroiled in a series of trade dis- putes, costing it a lot of money. Th e leadership of Mansfi eld Exports in Chicago and its partners ’ managers all pleaded ignorance, and Mansfi eld realized that the company needed to shift its philosophical focus. In 2007, Mansfi eld Exports decided to buy all four of its strategic partners in Brazil, Russia, India, and China and build a global business based on shared values, mission, and vision. Buying existing or building new businesses in other countries is referred to as direct foreign investment . Mansfi eld recognized the need for Mansfi eld Exports to build its internal understanding of trade rules and regulations, so she hired Williams to oversee the creation of a global software program to track diff erent government tariff s, quotas, legislation, import standards, and subsidies. Williams recommended that they take advantage of the resources made available through organizations like the World Trade Organization (WTO) , which is responsible for global trade rules between countries. 3 As he discussed the company ’s needs with Jill Mansfi eld, Williams saw that the challenges really emerged when Mansfi eld Exports trans- formed from a small, family-owned import/export fi rm to a multi-domestic corporation trying to conduct business in multiple regional trading zones . Regional trading zones are established through trade agreements among several countries in which trade barriers are reduced or eliminated for member countries. 4 Th e United States is a member of several such zones, including the North American Free Trade Agreement (NAFTA) , an agreement between Canada, Mexico, and the United States intended to remove barriers to trade and investment. 5 On the other side of the Atlantic, the European Union (EU) is a political and economic union of 27 European countries that share a common currency, the euro. 6 For Mansfi eld Exports, the two additional important trade zones are the Union of South American Nations (UNASUR), 7 which includes Brazil; and the Asian-Pacifi c Economic Cooperation (APEC), 8 which includes China and Russia. By establishing business centers in each trading zone, Mansfi eld Exports takes advantage of these agreements, which opens up markets where they conduct business all over the world. Yet this expansion also pres- ents new challenges, as each country and trading zone has diff erent regulations and ways of doing business. Th e challenge facing Mansfi eld Exports was familiar to Williams. As a manager at a small IT fi rm, he had worked extensively with offi cials in the Association of Southeast Asian Nations (ASEAN) , a cooperative organization of 10 countries in Southeast Asia established to promote economic, political, and social progress throughout the region. 9 As Williams learned early in his career, understanding and respecting the cultural diff erences of colleagues, clients, and partners was critical to achieving goals. 10 Working with ASEAN,

Global company An organization that has operations in multiple countries and its senior management decision making centrally located in one country.

Multi-domestic company An organization with operations in multiple countries and its senior management decision making distributed across the countries in which it operates.

Importing The organizational process of acquiring products and services from another country.

Exporting The organizational process of creating products in one country and selling them in another.

Strategic partnership An agreement between two or more organizations to share complementary resources to develop and sell products and services.

Direct foreign investment Buying existing or building new businesses in other countries.

World Trade Organization (WTO) The organization responsible for global trade rules between countries.

Regional trading zones Zones established through trade agreements among several countries in which trade barriers are reduced or eliminated for member countries.

North American Free Trade Agreement (NAFTA) An agreement between Canada, Mexico, and the United States intended to remove barriers to trade and investment.

European Union (EU) A political and economic union of 27 European countries that share a common currency, the euro.

Association of Southeast Asian Nations (ASEAN) A cooperative organization of 10 countries in Southeast Asia established to promote economic, political, and social progress throughout the region.

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120 Chapter Five Diversity in a Global Economy

A p

p ly

in g

C ri

ti ca

lT hi

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Success to the Successful 11 CT Doing business internationally is “more complicated because [of the] language, physical, and cultural con- siderations,” says Ric Stroup, CEO of E5 Systems. “Sometimes we fi nd this difference disadvantages the client in unexpected ways. Because most of our clients don ’t have the language and cultural skills to build effective relationships with our team in China, they sometime assume that their ideas are the best. As an example, we see clients offer ideas for how to fi x a problem. Because they are paying us to complete the work and like their own idea, the client does not spend a lot of time trying to understand other solutions that our team in China is proposing.”

The diffi culty that Stroup faces with his clients is a clas- sic systems thinking problem, referred to as “Success to the Successful” (see Figure 5-1a ). This prime example suggests that “success or failure may be due more to the initial conditions than intrinsic merit.” 12 In Stroup ’s exam- ple, he has a client whose idea is not as good as the team in China ’s, yet the client is paying E5 Systems to develop the project and has little patience with communicating through cultural and language differences. This eventu- ally leads to the client “succeeding” at implementing an inferior solution (see Figure 5-1a ). How does E5 Systems work with their clients (see Figure 5-1b) to help under- stand the need to embrace cultural differences?

Figure 5-1a Success to the Successful

R1 R2

Success of B

Success of A

Resources to A

Allocation to A Instead of B

Resources to B

R1 R2

Success of B

Success of A

Resources to A

Allocation to A Instead of B

Resources to B

Figure 5-1b Success to the Client!

R1 R2 Time and Resources

Spent on Client’s Idea Instead of Team

in China

Success of China Team’s

Idea

Time Spent Understanding

China Team’s Ideas

Success of Client’s Idea

Time Spent Communicating

Client’s Idea

R1 R2 Time and Resources

Spent on Client’s Idea Instead of TeamTT

in China

Success of China TeamTT ’s

Idea

Time Spent Understanding

China TeamTT ’s Ideas

Success of Client’s Idea

Time Spent Communicating

Client’s Idea

c05Diversityinaglobaleconomy.indd 120 20/08/13 6:36 PM

1215.2 | CULTURAL DIFFERENCES

Williams began to understand the complexity of cultural diff erences and chose to invest only in the emerging engineering workforce of China because diversifying its holdings to Russia and India as well would be too challenging for the small growth company that he worked for at the time. Ultimately, Williams recommended that they build a knowl- edge base software application based on readily available resources through the WTO and other regional trading zones. Th e executive team at Mansfi eld Exports was excited by the possibility of having a shared resource that each of their multi-domestic teams could access. Yet, based on his recent similar experience, Williams saw the threats facing Mansfi eld Exports had as much to do with the challenges of managing cultural diff erences, both inter- nally and externally, as with navigating international rules and regulations. Armed with this information, Williams also off ered a temperate assessment of why he thought the compa- ny ’s China subsidiary had become involved in its trade dispute. He believed that it wasn ’t just a lack of understanding of regulatory knowledge or rules that was causing the problem, but also an unawareness of cultural diff erences. 13 Mansfi eld leaned back in her chair and requested that Williams further explain his perspective.

5.2 | CULTURAL DIFFERENCES

5.2 | Explain the challenges and opportunities of working with cultural diff erences

Th ose of us with little exposure to other cultures often assume that most of our values and assumptions about how the world works are universal. For example, we fi gure that people in the United States, China, New Zealand, and Sweden all have similar ideas about what it means to be successful and the ways that businesses and customers should interact. In fact, there is a great deal of variety among cultures about what we consider valuable and how we should interact with each other. 14 In a global economy, being unaware of those dif- ferences can lead to embarrassment, lost business, and legal troubles. On the other hand, cultural awareness can facilitate stronger and more profi table business relationships with companies and clients in other countries and a more diverse, fl exible, and creative work- force within a single company. 15, 16

Cultural Values and Dynamics What Williams is suggesting to Mansfi eld is that she needs to do more than improve her company ’s understanding of the legal infrastructure that shapes international trade. She also needs to build her fi rm ’s cultural intelligence — the ability to understand and make eff ec- tive decisions based on cultural diff erences. 17 Management typically takes one of three broad approaches to working with cultural diff erences: ethnocentric, polycentric, or geocentric. In an ethnocentric approach to international business, management believes that people who share their cultural values make the best managers. Managers with a polycentric attitude believe that managers from a particular country know best how to achieve results in that cultural context. In a geocentric business, management seeks talent and best prac- tices from all around the world. 18 How do you think each approach would aff ect the relation- ships of Mansfi eld Exports with its international partners? Given that Mansfi eld Exports is a multi-domestic company in the import/export business, which approach do you think will be most eff ective for management?

Dimensions of Culture As an initial resource for developing her cultural intelligence, Williams suggested that Mansfi eld look at some of the research done by Dutch sociologist Geert Hofstede and by the Global Leadership and Organizational Behavior Eff ectiveness (GLOBE) Project. Both Hofstede and GLOBE are interested in how cultural diff erences aff ect leadership and man- agement practices. Based on research with over 100,000 IBM employees in 40 diff erent

Cultural intelligence A manager ’s or leader ’s ability to understand and make effective decisions based on cultural differences.

Ethnocentric An approach to international business in which management believes that people who share their cultural values make the best managers.

Polycentric An approach to international business in which management believes that managers from a particular country know best how to achieve results in that cultural context.

Geocentric An approach to international business in which management seeks talent and best practices from all around the world.

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122 Chapter Five Diversity in a Global Economy

countries, Hofstede identifi ed fi ve value dimensions that varied among diff erent cultures as outlined in Figure 5-2: 19

1. Individualism versus collectivism . Individualism is a social view that values individual freedom and self-expression and assumes that individuals are responsible for their own welfare. Collectivism, on the other hand, values the welfare of the group over any one individual and emphasizes the responsibilities of individuals and groups ( families and organizations) to each other.

2. Power distance . A high ranking on the power distance dimension means that people from that culture accept an unequal distribution of power. A low ranking means that people expect a more equal distribution of power.

3. Uncertainty avoidance . Th e higher the ranking on the uncertainty avoidance scale, the more uncomfortable people are with uncertainty and ambiguity. Th ey are more at ease with conformity and with events that follow an expected structure. Societies with low uncertainty avoidance are more comfortable with a lack of structure and the unexpected.

4. Competition versus cooperation. Competitive and cooperative refer to whether the so- ciety as a whole places greater value on performance, achievement, material success, and contest or on quality of life, collaboration, personal relationships, and group deci- sion making. Th is dimension is also referred to as “masculine versus feminine.”

5. Long-term versus short-term orientation . Countries that tend toward long-term orien- tation are more concerned about the future than the present and value thrift and per- severance. Countries that tend toward short-term orientation, on the other hand, are more concerned with the present and past and value tradition and social obligations. 20

GLOBE Studies Th e Global Leadership and Organizational Eff ectiveness (GLOBE) research program is a network of over 150 researchers from 62 cultures around the world. Th eir goal is to “develop an empirically based theory to describe, understand, and predict the impact of cultural variables on leadership and organizational processes and the eff ec- tiveness of these processes.” 21 Expanding upon Hofstede ’s earlier work, the research team identifi ed nine dimensions that collectively describe a culture ’s disposition. Collecting re- sponses from 17,000 managers at 951 organizations, the researchers found patterns that dif- ferentiated cultures, with countries ranking high on a particular dimension exhibiting these behaviors and beliefs more dominantly as outlined in Table 5-1. 22

Individualistic Collectivistic

Canada, United States Thailand, Mexico

High Power Distance Low Power Distance

Mexico, Singapore United States, Sweden

High Uncertainty Low Uncertainty

Italy, Mexico United States, Singapore

Competitive Cooperative

United States, Mexico France, Sweden

Long-Term Orientation Short-Term Orientation

Germany, Australia China, Japan

Individualistic Collectivistic

Canada, United StatesCC Thailand, MexicoTT

High Power Distance Low Power Distance

Mexico, Singaoo pore United States, Swedenww

High Uncertainty Low Uncertaintyt

Italy,l Mexico United States, Singapoa re

Competitive Cvv ooperative

United States, Mexico France, Swrr edenww

Long-Term OrientationTT Short-Term OrientationTT

Germany, Austryy alirr a Cii hina, JapaCC n

Figure 5-2 Hofstede ’s Cultural Dimensions Hofstede ’s theory of the different cultural dimensions of certain countries.

Global Leadership and Organizational Effectiveness (GLOBE) A network of over 150 researchers from 62 cultures from around the world assembled to study cultural dynamics in leadership and management.

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123

Table 5-1 GLOBE Studies23

5.2 | CULTURAL DIFFERENCES

Assertiveness

Tough, confrontational, assertive, and competitive versus modest and tender

High-Ranked Countries Low-Ranked Countries United States Austria Sweden

New Zealand Japan

In-Group Collectivism

Express pride, loyalty, and cohesiveness in their organizations or families.

High-Ranked Countries Low-Ranked Countries Iran India China

Denmark Sweden New Zealand

Institutional Collectivism

Encourage and reward collective distribution of resources and collective action.

High-Ranked Countries Low-Ranked Countries Sweden South Korea Japan

Greece Italy Argentina

Gender Egalitarianism

Maximizes gender role differences.

High-Ranked Countries Low-Ranked Countries South Korea Egypt China

Hungary Poland Denmark

Future Orientation

Encourages and rewards . . . planning, investing in the future, and delaying gratifi cation.

High-Ranked Countries Low-Ranked Countries Singapore Switzerland The Netherlands

Russia Argentina Italy

Humane Orientation

Encourage and reward individuals for being fair, altruistic, friendly, generous, caring, and kind to others.

High-Ranked Countries Low-Ranked Countries Malaysia Ireland Philippines

Germany France Singapore

Performance Orientation

Encourages and rewards group members for performance improvement and excellence.

High-Ranked Countries Low-Ranked Countries Singapore Hong Kong United States

Russia Italy Argentina

Power Distance

Expect and agree that power should be unequally shared.

High-Ranked Countries Low-Ranked Countries Russia Thailand Spain

Denmark The Netherlands Sweden

Uncertainty Avoidance

Rely on social norms, rituals, and bureaucratic practices to alleviate the unpredictability of future events.

High-Ranked Countries Low-Ranked Countries Switzerland Sweden Germany

Russia Greece Venezuela

Universal Cultural Perspectives Once the responses were collected, researchers asked, “Are there attributes and traits that managers from organizations all across the world could agree are positive and negative?” Th e answer was “yes.” 24 Th e ideal leader or manager, has a universal set of positive attributes as shown in Table 5-2 . How might you use the lists of traits to foster personal development?

Table 5-2 Universally Positive Leadership Traits25

Universal Positive Traits

Administrative Skills Communicative Confi dence Builder Coordinator Decisive Dependable Dynamic

Effective Bargainer Encouraging Excellence-Oriented Foresight Honest Informed Intelligent Just

Motivational Motive Arouser Plans Ahead Positive Team Builder Trustworthy Win-win Problem Solver

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124 Chapter Five Diversity in a Global Economy

Th e traits and attributes listed above in Table 5-3 are universally viewed as negative .

Approaches to Cultural Differences Understanding cultural diff erences is about much more than just getting along with diff erent kinds of people. Successful management of diverse cultural attitudes and beliefs can mean the diff erence between winning and losing a contract, between meeting and missing a deadline, even between life and death. In the 1990s, Korean Airlines had one of the worst safety records in the airline industry. In 1997, a Korean Airline plane crashed in Guam, killing 228 people. Inquiries revealed that a contributing factor to the crash was a cultural mismatch. Most large aircraft are designed and built in Western, low- power-distance societies, with the expectation that there would be little power distance between the two people fl ying the plane. But South Korea is traditionally a high-power- distance culture, which made it extremely diffi cult for the copilot to be as direct in com- municating the problem as was needed. Th e result of this cultural mismatch was a fatal accident. 27

Since then, the CEO of Korean Airlines, Cho Yang-Ho, has worked to overhaul the internal culture of his organization in many ways, including empowering subordinates to speak up. Under Cho ’s direction, Korean Airlines now has one of the best safety and service records in the industry, and, bolstered by a burgeoning Korean-American population, Korean Airlines has become the largest Asian airline operating in the United States. 28

Would we expect the same cultural challenge at Lufthansa Airlines, operated in Germany? Consider the following cultural data from Hofstede ’s online resource as outlined in Figure 5-3 (http://www.geert-hofstede.com/ ).

Table 5-3 Universally Negative Leadership Traits26

Universal Negative Traits

Asocial Dictatorial Egocentric

Irritable Loner

Uncooperative Non-explicit Ruthless

Figure 5-3 Hofstede ’s Cultural Comparison of Germany and South Korea PDI = High versus Low Power Distance IDV = Individualistic versus Collectivistic COP = Competitive versus Cooperative UAI = High versus Low Uncertainty Avoidance LTO = Long-term versus Short- term Orientation 29

0

60

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Germany

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Hofstede’s Cultural rr Comparison

Germany

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c05Diversityinaglobaleconomy.indd 124 20/08/13 6:37 PM

1255.3 | LEGAL BASICS FOR MANAGING DIVERSITY

5.3 | LEGAL BASICS FOR MANAGING DIVERSITY

5.3 | Understand the legal requirements for respecting workforce diversity.

In addition to cultural dynamics, organizations rely on team members from diverse back- grounds to attract and retain high-quality talent and customers. As we discussed earlier, diversity is the degree to which an organization represents diff erent cultures. In business, as in life, people experience diversity on two levels. deep-level diversity is the degree to which individuals in a group represent diff erences that cannot be seen, such as personalities, atti- tudes, values, and perspectives. 30 Surface-level diversity is the degree to which individuals in a group represent diff erences based on visual cues, such as age, ethnicity, and gender. 31

Th ese levels are the layers that explain the dimensions of diversity , as shown in Figure 5-4 . What responsibilities do managers have when managing a diverse workforce? Following the 1964 Civil Rights Act, which made racial and sex discrimination illegal, successive presidents issued executive orders requiring affi rmative action , proactive steps taken by organizations to counteract discrimination against minorities, includ- ing women. 32 In addition to the Civil Rights Act, Congress passed the Americans with Disabilities Act (ADA) in 1990 to address discrimination against people with disabilities , physical or mental impairments that substantially limit one or more of an individual ’s major life activities. 33

Many people believe that discrimination , treating individuals or groups unfairly or negatively based on their diversity traits, including sexual orientation, age, ethnicity, gender, or disability, is no longer an issue in the workplace. Th e situation has improved because organizations have modifi ed their practices, but discrimination does still exist. 34 In business, a glass ceiling is an invisible barrier that limits the opportunities for women and minorities to advance to upper-level positions. Th ese barriers exist wherever organi- zations and management have biases that create an organizational culture of unspoken, and often unrecognized, discrimination. 35 Women, for example, have made great strides in achieving workplace equality, but are still underpaid in comparison to their male coun- terparts as outlined in Figure 5-5, and underrepresented in upper management roles per Figure 5-6 . 36 But what if the company that you work for advocates organizational policies and prac- tices that hamper your ability to progress? Many organizations are aware of these invis- ible barriers and are taking proactive steps, including affi rmative action, to correct the

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Figure 5-4 Dimensions of Diversity Wheel There are deep-level and surface- level dimensions of diversity.

Diversity The degree to which an organization represents different cultures.

Deep-level diversity The degree to which individuals in a group represent differences that cannot be seen, such as personalities, attitudes, values, and perspectives.

Discrimination Treating individuals or groups unfairly or negatively based on their diversity traits, including sexual orientation, age, ethnicity, gender, or disability.

Disabilities Physical or mental impairments that substantially limit one or more of an individual ’s major life activities.

Affi rmative action Proactive steps taken by organizations to counteract discrimination against minorities, including women.

Surface-level diversity The degree to which individuals in a group represent differences based on visual cues, such as age, ethnicity, and gender.

Glass ceiling An invisible barrier that limits the opportunities for women and minorities to advance to upper-level positions.

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126 Chapter Five Diversity in a Global Economy

Adapted from US Bureau of Labor Statistics, “Highlights of Women’s Earnings in 2011,” Report 1038, US Department of Labor (October 2012), http://www.bls.gov/cps/cpswom2011.pdf.

0

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400

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800

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American Hispanic or Latino

ethnicity Asian

Women Men

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ethnicityt Asian

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Figure 5-5 The Wage Gap Between Men and Women   Statistics show that men still earn more than women.

Adapted from “U.S. Women in Business,” Catalyst Research, July 2013, http://www.catalyst.org/knowledge/ us-women-business-0

46.9% U.S. Labor Force

51.5% Management, Professional, and

Related Occupations

14.3% Executive Officers

16.6% Fortune 500 (F500)

Board Seats

4.2% F500 CEOs

GLASS CEILING

Women in U.S. Business

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GLASS CEILING

Women in U.S. Business

Figure 5-6 Women in U.S. Business U.S. businesswomen are underpaid in comparison to their male counterparts.

Ursula Burns, CEO, Xerox Corporation Ursula Burns, CEO, Xerox Corporation

Voices ofManagement

U rsula Burns is the fi rst African American woman to be-come chairperson of a Fortune 500 company. She has been CEO since 2009. Burns says: “I ’m in this job because I believe I earned it through hard work and high performance. Did I get some opportunities early in my career because of

my race and gender? Probably. I went to work for a company that was openly seeking to diversify its workforce. So, I imag- ine race and gender got the hiring guys ’ attention. And then the rest was really up to me.” 37 ■

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127

underrepresentation of women and minority groups. Some people think this issue was solved 20+ years ago. Th ey feel that there is no longer a need for government to step in and mandate the morality of business and management. But others feel that discrimination, while less common now, nevertheless is still a problem. 39 A divisive issue, affi rmative action is passionately argued by two opposing perspectives as shown in Table 5-4 .

Table 5-4 The Affi rmative Action Controversy40

Positions for Affi rmative Action Positions Against Affi rmative Action

• The right of an applicant “to equal consideration”

• Severing reward from a “person’s character, talents, choices, and abilities”

• The right of the maximally competent to an open position

• “Subordinating merit, conduct, and character to race”

• The right of everyone to equal opportunity

• Disconnecting outcomes from actual liability and damage

5.3 | LEGAL BASICS FOR MANAGING DIVERSITY

Trust 38 How important is trust in the workplace? Recent studies have demonstrated that trust is strongly correlated to productivity— the greater the trust, the greater the productivity. For example, Boe (2002) reported that productivity, turnover, absenteeism, and motivation are all affected by employee trust. In general, management research has focused primarily on two kinds of trust relationships—between coworkers, and between managers and employees (or leaders and followers). De Jong and Elfring (2010), after studying 73 long-term teams at a large multinational consulting fi rm, found a positive correlation between team performance and two trust-building processes: refl exivity , or a team ’s ability to refl ect upon and revise their work processes, goals, and strategies openly; and effort , or the extent to which team members devote time and energy to team tasks. Knowing that trust between coworkers leads to better productivity is great, but how can a manager foster that trust? It turns out that leaders can have a great deal of infl uence on how much employees trust each other. Lau and Liden (2008) found that the more a leader trusted workers, the more coworkers trusted each other. And that correlation turns out to be especially strong during hard times. In other words, when a team is struggling to perform well, a manager ’s trust in employees has a strong impact on their trust of each other, and that, in turn, helps them to improve their performance. Trust works in the other direction, too. In Dirks and Ferrin ’s (2002) research, they found that when people trust their leader, they don ’t feel the need to “cover their backs,”

and so are able to devote more time and energy to their actual work. An atmosphere of trust also makes it easier for individuals to develop strong social relationships with each other. Strong personal relationships in the workplace increase the likelihood that individuals will help each other and that they will perform beyond minimum expectations, both of which lead to higher productivity. Bottom line? Teams in which workers and leaders trust each other and feel themselves to be trusted are productive teams.

Professor ’s Response What I fi nd interesting about this research is that it demonstrates the exponential impact of trust—the benefi ts extend beyond one-to-one relationships. I imagine that this information would encourage managers to be more explicit in their expressions of trust.

Manager ’s Response I already cultivate an atmosphere of trust with my team. We ’re all very comfortable relying on each other. But I can see how it could be helpful to share this with new managers, who sometimes are reluctant to trust their team for fear of looking like they aren ’t taking on their responsibilities fully.

Critical Thinking in the Classroom How would you, as a manager, foster a relationship based on trust with your team?

Research@Work

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128 Chapter Five Diversity in a Global Economy

Th e U.S. Equal Employment Opportunity Commission (EEOC) is the government agency charged with “enforcing federal laws that make it illegal to discriminate against a job appli- cant or an employee because of the person ’s race, color, religion, sex (including pregnancy), national origin, age (40 or older), disability, or genetic information.” 41 In the year 2012, the EEOC reported that there were nearly 100,000 workplace discrimination charges fi led, cost- ing organizations $365 million. 42 What are the practical implications of these legislative acts on managers? Table 5-5 lists some of the issues involved.

Table 5-5 A Legal Framework for Diversity in Practice43

A Manager’s Responsibility Legality of Discrimination Management Examples

Job Advertisements It is illegal for an employer to publish a job advertisement that shows a preference for or discourages someone from applying for a job because of his or her race, color, religion, sex (including pregnancy), national origin, age (40 or older), disability, or genetic information.

For example, a “Help Wanted” ad that seeks “females” or “recent college graduates” may discourage men and people over 40 from applying and may violate the law.

Recruitment It is illegal for an employer to recruit new employees in a way that discriminates against them because of their race, color, religion, sex (including pregnancy), national origin, age (40 or older), disability, or genetic information.

For example, an employer ’s reliance on word-of-mouth recruitment by its mostly Hispanic workforce may violate the law if the result is that almost all new hires are Hispanic.

Job Referrals It is illegal for an employer, employment agency, or union to take into account a person ’s race, color, religion, sex (including pregnancy), national origin, age (40 or older), disability, or genetic information when making decisions about job referrals.

For example, an employer cannot show preference for candidates that go to a certain church.

Job Assignments and Promotions

It is illegal for an employer to make decisions about job assignments and promotions based on an employee ’s race, color, religion, sex (including pregnancy), national origin, age (40 or older), disability, or genetic information.

For example, an employer may not give preference to employees of a certain race when making shift assignments and may not segregate employees of a particular national origin from other employees or from customers.

Pay and Benefi ts It is illegal for an employer to discriminate against an employee in the payment of wages or employee benefi ts on the bases of race, color, religion, sex (including pregnancy), national origin, age (40 or older), disability, or genetic information. Employee benefi ts include sick and vacation leave, insurance, access to overtime and overtime pay, and retirement programs.

For example, an employer may not pay Hispanic workers less than African American workers because of their national origin, and men and women in the same workplace must be given equal pay for equal work.

Discipline and Discharge An employer may not take into account a person ’s race, color, religion, sex (including pregnancy), national origin, age (40 or older), disability, or genetic information when making decisions about discipline or discharge.

For example, if a white employee and an Asian employee commit a similar offense, an employer may not discipline them differently.

Employment References It is illegal for an employer to give a negative or false employment reference (or refuse to give a reference) because of a person ’s race, color, religion, sex (including pregnancy), national origin, age (40 or older), disability, or genetic information.

When an employer is contacted for a reference for a female worker, it may not cite pregnancy or having children as a negative trait.

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1295.4 | TALENT IN A DIVERSE WORKFORCE

From U.S. Equal Employment Opportunity Commission, “Prohibited Employment Policies/Practices”; http://www1.eeoc.gov//laws/practices/index .cfm?renderforprint=1.

Table 5-5 Continued

A Manager’s Responsibility Legality of Discrimination Management Examples

Reasonable Accommoda- tion and Disability

The law requires that an employer provide reasonable accommodation to an employee or job applicant with a disability, unless doing so would cause signifi cant diffi culty or expense for the employer. A reasonable accommodation is any change in the workplace (or in the ways things are usually done) to help a person with a disability apply for a job, perform the duties of a job, or enjoy the benefi ts and privileges of employment.

Reasonable accommodation might include, for example, providing a ramp for a wheelchair user or providing a reader or interpreter for a blind or deaf employee or applicant.

Reasonable Accommoda- tion and Religion

The law requires an employer to provide reasonable accommodation to an employee ’s religious beliefs or practices, unless doing so would cause diffi culty or expense for the employer.

Reasonable accommodation might include, for example, providing structured breaks during the day for prayer or to attend religious services.

Training and Apprentice- ship Programs

It is illegal for a training or apprenticeship program to discriminate on the bases of race, color, religion, sex (including pregnancy), national origin, age (40 or older), disability, or genetic information.

For example, an employer may not deny training opportunities to African American employees because of their race.

Terms and Conditions of Employment

The law makes it illegal for an employer to make any employment decision because of a person ’s race, color, religion, sex (including pregnancy), national origin, age (40 or older), disability, or genetic information.

An employer may not discriminate when it comes to such things as hiring, fi ring, promotions, and pay. It also means, for example, that an employer may not discriminate when granting breaks, approving leave, assigning work stations, or setting any other term or condition of employment, however small.

5.4 | TALENT IN A DIVERSE WORKFORCE

5.4 | Recognize and explain the implications of changing workforce demographics.

Changing Workforce Demographics Jill Mansfi eld and her team of executives started working together in the Mansfi eld family business 20 years ago. Mansfi eld believes that in the next 12 years, all the senior-level talent and management in the organization will retire. What will be lost and what will be gained when this happens? Let ’s say you are manager of a manufacturing plant with a talented and dedicated team. Th e labor involved is physically demanding, and the average age of your employees is expected to rise to 47 by the year 2020. A consultant recently alerted you that with an aging workforce, you should expect your team members to call in sick more often and for lon- ger periods of time. 44 What do you do? Th is is the management dilemma that the automo- tive company BMW faces. Traditionally, companies would fi re older workers or off er them early retirement. 45 But for legal and practical reasons, this is no longer an option. 46 By 2020, 25 percent of the U.S. workforce will be aged 55 or older, while workers aged 16–24 will make up only 11 percent of the workforce. 47

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130 Chapter Five Diversity in a Global Economy

Concerned about a potential production crisis, top managers at a BMW plant in Lower Bavaria, Germany, presented the problem to production managers and asked that they set aside one production line as an experimental line and staff it with workers that represented the mix of ages expected in the local workforce in 2020. Th at meant that the average age of workers on the line was 47 as outlined in Figure 5-7. 48 At fi rst, employees were reluctant to participate in the program. Among other things, they feared that that they would be ridiculed by other employees for going on the “pension- ers” line. Aware of resistance to a “top-down” program of this sort, management actively sought out workers ’ ideas, concerns, questions, and solutions. 49 Ultimately, the line work- ers developed the solutions, including installing wooden fl oors to reduce joint pain, having adjustable chairs and tables, and using a task rotation schedule to prevent repetitive strain. By bringing together an assortment of ideas from top management, middle management, and line workers, and from people of all ages, BMW achieved its goal with the experimen- tal line: health-related absenteeism dropped from 7 percent to 2 percent, below the plant ’s average. Th e line reached BMW ’s quality goal of 10 defects per million within the fi rst three months, and by 2010, it had achieved zero defects. What about productivity? One of the big worries of an aging workforce is that older workers work more slowly and productivity will decline. But the BMW team discovered that by making employee-recommended changes, workers on the experimental line had no trouble keeping up with increasing production targets. 50

Aging is one primary concern for managers in the beginning of the 21st century, but this is just one piece of a much larger and more complex puzzle. 51 What dynamics might a manager expect to face in building and growing a company in the next 20 years? Talent in the workforce today is shifting dramatically in terms of ethnicity, age, gender, and required skills. 52 Consider Figure 5-8 , which outlines the changing workforce that you will manage. 53

What are some of the new challenges and opportunities that you might encounter with this new diversity of employees and colleagues?

Outsourcing and Offshoring Talent With so many dynamics to manage and regulations to adhere to, many companies and their management have opted to contract with specialized companies rather than hiring

Figure 5-7 Changing Workplace Age Demographics The average age of production- line workers by percentage in 2007, and projected in 2020.

100%

80%

60%

40%

20%

0%

YOUNGER THAN 31

YOUNGER THAN 31

31–40

31–40

41–50

OLDER THAN 50

2020 Production Line Average Age: 47

2007 Production Line Average Age: 39

OLDER THAN 50

41–50

Source: C. H. Loch, F. J. Sting, N. Bauer, and H. Mauermann, “How BMW Is Defusing the Demographic Time Bomb,” Harvard Business Review , March 2010, 99–102.

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131

2010 0.0%

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% Over the Age of 55

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2020 2030 2040 2050

Asian Hispanic

Figure 5-8 The Biggest Trends for the Workforce That You Will Manage 54  

Projection of the percentage of the workforce that will be over the age of 55, and the growth in the population of Asian and Hispanic workers by 2050.

individual talent. 55 Instead of hiring and managing graphic designers, software developers, and accountants, a company might instead contract with a graphic design company, a soft- ware development company, and an accounting fi rm. When an organization hires an out- side company to fulfi ll one or more of its core functions, this is called outsourcing . When an organization moves a business process to another country, it is called off shoring . Both outsourcing and off shoring can greatly benefi t a company by reducing costs and improving effi ciency. But the practices can also cause additional challenges, both within the organization and, in the case of off shoring, in the larger society. 56 Consider, for exam- ple, how U.S. companies ’ tendency to off shore manufacturing has aff ected communities in the United States whose economies have relied on large, local manufacturing plants. Or consider Boeing ’s struggles to deliver its newest aircraft, the Boeing 787 Dreamliner. With more than 600 orders for the new, fuel-effi cient plane, the launch of the 787 was one of the most successful in airline history. 57 But Boeing soon ran into trouble meeting its production deadlines. With the 787, Boeing decided to outsource much of the design and development work, something that it had not tried before. Rather than improving effi - ciency and reducing costs, Boeing found that its outsourcing decisions led to costly delays

Outsourcing Hiring an outside company to fulfi ll one or more of an organization ’s core functions.

Offshoring Moving a business process to another country.

5.4 | TALENT IN A DIVERSE WORKFORCE

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132 Chapter Five Diversity in a Global Economy

because of technical incompatibilities between the diff erent companies. 58 Originally intending to begin delivery in early 2008, Boeing ’s target date was fi nally achieved in early 2012, more than four years behind schedule. 59 However, in early 2013, the Boeing 787, was grounded as a result of battery fl aws. It is not yet clear when the aircraft will take to the skies once again. As more and more companies outsource, spe- cialized companies have sprung up to fi ll that need. Most of these companies focus on such tasks as shipping, manufacturing, or design, but others, called professional employee organizations , off er employee management services to other companies. 60 Professional employee organizations can take care of payroll, benefi ts, taxes, and all the paperwork that goes along with maintaining a workforce. But they also can manage employee rela- tions and are responsible for hiring, fi ring, training, and promotions. So where does that leave internal

managers? Ideally, managers will have more time to focus on employee relations and iden- tifying and fostering talent. 61

5.5 | MANAGING DIVERSITY AS AN ADVANTAGE

5.5 | Interpret the dimensions of diversity as a management strategy to increase innovation, creativity, and performance.

“One Recipe, Many Ingredients” Th is slogan expresses how the mulitnational food manufacturer Kellogg Company claims to make its organization a success. As one of the world ’s largest businesses, Kellogg views diversity as an advantage in four core areas of its organization: 1) delivering value, 2) serving global customers, 3) increasing innovation, and 4) attracting talent as outlined in Figure 5-9. Can management create better results by focusing on diversity? 62 Kellogg is not the only company to see diversity as an advantage. In one of the greatest turnaround stories in busi- ness history, new leadership at IBM in the mid-1990s focused on diversity as a strategic advan- tage to grow globally and attract superior talent. 63 IBM ’s diversity strategy was to identify and understand the diff erences between the many groups that made up their employee and cus- tomer pools. Rather than simply ignoring cultural diff erences, IBM chose to pursue diversity as a way of developing its internal talent pool and expanding its customer base. 64 Th ey cre- ated a management task force for each of eight demographics: Asians, blacks, gays/lesbians/ bisexual/transgendered people, Hispanic, Native Americans, people with disabilities, white men, and women. 65 Each task force was charged with answering four specifi c questions: What can IBM do to make your constituency feel welcome here? What can IBM do to maximize your constituency ’s productivity? How can we best serve your constituency as customers? And what organizations should we develop relationships with in order to under- stand your constituency better? 66

Th e changes that IBM implemented based on the task forces ’ research and recommenda- tions had powerful eff ects. Not only did they see employee production and job satisfaction improve, but they saw sales to small and medium-sized business, often owned by women and minorities, grow from $10 million in 1998 to hundreds of millions of dollars by today. And by listening to the People with Disabilities task force, IBM was ahead of the game when new regulations required that the federal government prioritize accessibility over cost when awarding federal contracts. 67

Professional employee organizations Organizations that offer employee management services to other companies.

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1335.5 | MANAGING DIVERSITY AS AN ADVANTAGE

Diversity as a Strategy At this point, it is time to put together cultural, workforce, and organizational-level diver- sity into a strategy that managers can apply. Organizations invest in diversity as a strategy because it positively aff ects creativity and innovation, which increases performance. 69 As in the cases of Kellogg and IBM, eff ective managers foster organizational cultures that translate to business strategies and policies/practices. Th e dimensions of diversity aff ect group and team processes, which have an eff ect on organizational outcomes. 70 Th e dimensions that we have discussed in this chapter can be placed in four categories: cultural, demographic, tech- nical, and cognitive. Hofstede ’s and GLOBE ’s work provided us with a research-based context to view cultural dimensions, reminding managers that understanding cultural diff erences enables them to achieve more eff ective outcomes. Th en we discussed the changing dynamics of the workforce demographics , which provides managers with challenges and opportunities for growth and innovation. In particular, BMW provides us a template for how large organi- zations can approach the complexity of a changing workforce by broadly gathering perspec- tives across the organizations and designing technical systems to respond to change. 71

Organizations and managers that use diversity as an advantage create an internal envi- ronment that supports social integration , where individuals share and collaborate based on their unique perspective, transforming individuals ’ cognitive approach to diverse view- points. 72 An organization and its management ’s approach to these dimensions creates a vital part of the company ’s culture, which then gets translated into business strategy and human resource policies and practices 73 as outlined in Figure 5-10 .

How Diversity Affects Creativity, Innovation, and Performance Each organization approaches the dimensions of diversity diff erently, which can dramati- cally change group and team processes and organizational outcomes. 74 As shown in Fig- ure  5-11 , diversity dimensions aff ect group and team processes, ultimately increasing organizational creativity and innovation by means of communication, confl ict, cohesion, and information. Successful managers understand that their team ’s capacity to be creative and innovative depends upon their ability to communicate, engage in productive confl ict, develop cohesion, and realize and share information eff ectively. 75 Th is allows organizations

Delivering Value and Achieving Our Vision

Serving Global Communities and Customers

Increasing Innovation

Gaining Diverse Talent

Diversity and Inclusion

Business Strategy

• Enhanced creativity

• Better products

• Stronger brands

• Reflecting the customers we serve and the communities where we live

• Developing more ideas, skills and perspectives

• Creating high performance teams

• Fulfilling consumer needs

• Providing nutritional value

• Responding to diverse tastes and life styles

• Partnering with diverse suppliers

• Employer of choice

• Food company of choice

• Shareowner value

Kellogg'sKellogg'sKellogg's

Figure 5-9 Kellogg Company Diversity and Inclusion Business Strategy 68

Kellogg Company ’s commitment to diversity can be seen here.

Social integration The degree to which individuals in a group share and collaborate based on their unique perspective.

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134 Chapter Five Diversity in a Global Economy

Culture

Strategy

Policies and

Practice

Culture

Strategyrr

Policies anPP d

Practicrr e

Adapted from T. Kochan et al., “The Effects of Diversity on Business Performance: Report of the Diversity Research Network,” Human Resource Management 42, vol.1 (2003): 3–21.

Figure 5-10 From Organizational Culture to Practice Diversity affects culture, which affects strategy, as well as policies and practice.

Diversity

Group and Team Processes

Outcomes

• Cultural • Demographic • Technical • Cognitive and Personality

• Communication • Conflict • Cohesion • Information • Creativity

• Employee and Customer Satisfaction • Turnover • Performance

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Figure 5-11 Translating Diversity into Outcomes   The impact of diversity on group and team processes, and the resulting outcomes.

Adapted from T. Kochan et al., “The Effects of Diversity on Business Performance: Report of the Diversity Research Network,” Human Resource Management 42.1 (2003): 3–21.

to create more relevant and/or higher-quality products and services for customers, which directly relates to three outcomes: performance, satisfaction, and turnover. Performance refers to the degree to which the company achieves its goals. Especially true in service organizations, employee satisfaction positively or negatively aff ects customer satisfaction. Satisfi ed employees demonstrate positive behaviors, such as being thoughtful, friendly, and optimistic. Positive or negative employee satisfaction translates into positive and negative customer satisfaction, respectively. 76 And satisfi ed employees have lower levels of turnover than dissatisfi ed employees 77 as described in Figure 5-11 .

Fostering Diversity Some managers fi nd fostering diversity challenging because it requires letting go of con- trol and embracing something diff erent. What things do managers and the people on their

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Fixes That Fail CT Let ’s illustrate how a strategic advantage also can become a disadvantage if management is not care- ful. 78 As you will recall in the “Success to the Success- ful” example, E5 Systems faced the challenge of clients not taking the time to understand innovative solutions provided by the team in China, largely based on cul- tural and communication differences. We can use systems thinking, cultural dynamics, and the dimensions of diversity to consider how and when fi xes work and fail. 79 Mansfi eld Exports has set up its organizational structure as a multi-domestic company, wherein most of the decision making occurs in each of its headquarters around the world. Let ’s say Mansfi eld Exports has a policy in its Chicago headquarters to have a “town hall” meeting once a month, where all employ- ees have an opportunity to express their opinions and question the decision making of senior executives. In Chicago, this has a positive impact on outcomes, in terms of performance, satisfaction, and turnover. Senior management would like to see this impact at all their headquarters, so the company mandates this policy to each management team around the world. According to GLOBE Studies research, we can anticipate challenges when this policy is implemented

in Russia. 80 Based on the cultural dynamic of power distance, we learn that Russia is one of the highest rated cultures in the world in this area, 81 where the culture “expects and agrees that power should be unequally shared.” When the Chicago headquarters mandates this policy, two things might happen: 1) the management team in Russia assumes that the policy mandate is not to be negotiated and there- fore implements it, and 2) as town hall meetings don ’t generally exist in the Russian culture, the policy has the unintended consequence of reducing man- agement and employee satisfaction and increasing company turnover, which signifi cantly decreases per- formance. (See Figure 5-12 , which illustrates these consequences.) In a “Fixes That Fail” situation like this one, the symptoms of a problem create pressure for a solution. As a result, a solution is quickly implemented that alle- viates the symptom. However, the solution itself results in unintended consequences that cause the original symptoms of the problem eventually to recur at a similar, if not worse, level of severity. This causes the application of the same or similar solution, leading to self-reinforcing cycle of “Fixes That Fail.” 82

teams really control? Regarding diversity, one can control technical and cognitive dimen- sions only by developing them over time. 83 Some managers make the mistake of attempting to homogenize the cultural and demographic characteristics of their teams in an attempt to match the organization ’s culture and perceived values. Managers that foster teams with the requisite capacities to develop collectively the technical and cognitive skills to be com- petitive in the marketplace always benefi t from embracing cultural and demographic diff er- ences. 84 Why? In a global economy, as IBM and Kellogg Company have experienced, fostering

5.5 | MANAGING DIVERSITY AS AN ADVANTAGE

Source: D. Kim, Systems Archetypes I (Waltham, MA: Pegasus Communications, Inc., 1994). S D Ki S A h I (W l h MA P C i i I 1994)I

B1

R2 Delay

Perceived lack of communication decreasing

performance

In russia, power distance cultural

dimension decreases performance

Implement town hall meeting

R2 In russia, power

distance cultural dimension decreases

performance

Perceived lack of communication decreasing

performance Implement

town hall meeting

Perceived Lack of Communication Decreasing

Performance

In Russia, Power Distance Cultural

Dimensions Decreases Performance

Implement Town Hall Meeting

Figure 5-12 A Doomed Cultural Fix

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136 Chapter Five Diversity in a Global Economy

diversity translates into expanded market opportunities because these organizations are increasing their capacity to address customer needs and desires. 85 How do managers build diversity as a strategic advantage for an organization? To begin to answer this question, let ’s continue our investigation of the Mansfi eld Exports case. Williams goes to the whiteboard to make a point. Drawing four circles on the board, he labels them “Brazil,” “Russia,” “India,” and “China.” Looking at Mansfi eld, he concedes, “Clearly, Mansfi eld Exports chose to build businesses in these markets because they are the four largest emerging economies in the world. In my career, I have done business in each of these countries, and the people and organizational values could not be more diff erent. Th e challenge you face is 10 percent regulation and rules and 90 percent under- standing how to motivate your international teams to embrace the Mansfi eld Exports culture and to want to collaborate with one another, fi rst by embracing their culture and diversity. Twenty years ago, the off shoring industry looked at the talent in India and China the way that Frederick Taylor looked at workers on an assembly line 100 years ago—simply as part of a machine, not talent to be cared for, nurtured, and fostered over time. Find a way to understand and look after your employees, and Mansfi eld Exports will be successful.” As a manager, how can Mansfield foster diversity as an advantage? Based on all the principles of culture and diversity discussed in this chapter, Mansfield might apply the following methodology to establish diversity as a strategic advantage for Mansfield Exports: First, build a company culture that embraces diversity as a core tenet. Next, design a business strategy to attract and retain talent to support the organization ’s culture and to meet client expectations. Then, establish policies and expectations of practices to support the business strategy. Finally, as the author and well-known man- agement consultant Peter Drucker reminds us, nurture individual and group skills and competencies necessary to support the organization ’s culture, strategy, and policies and practices. 86

Let ’s revisit the case analysis of IBM. In Figure 5-13 , we show the system of diversity that created a global strategic advantage for the company. In this example, we see how IBM ’s diversity management philosophy prevents the cultural mishaps that Mansfi eld could

IBM’s Diversity as a Strategic Advantage

Leadership and

Management Support

Engage Employees as

Partners

Integrate Diversity with Management

Practices

Link Diversity Goals to Business

Goals

IBM’s Diversity as a Strategic Advantage

Leadership and

Management Support

Engage Employees as

Partners

Integrate Diversity with Management

Practices

Link Diversity Goals to Business

Goals

Figure 5-13 IBM ’s Diversity as a Strategic Advantage IBM’s strategic approach to diversity.

Adapted from D. A. Thomas, “Diversity as Strategy,” Harvard Business Review , September 2004, 1–10.

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137

experience by implementing their Chicago town hall meetings in Moscow. Th is can be pre- vented if managers understand the intended and unintended consequences as a result of cultural dynamics and diversity dimensions. You should now have a good grasp of the importance of diversity in the workplace. In the next chapter, we will explore the equally important topic of ethics and social responsibility and how both are crucial to the survival of any business.

5.5 | MANAGING DIVERSITY AS AN ADVANTAGE

CaseSnapshot Chapter 5 Case: Diversity in a Global Economy:

Zumba can be found on pg. 466

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138 Chapter Five Diversity in a Global Economy

KEY TERMSS Affi rmative action Proactive steps taken by organizations to counteract discrimination against minorities, including women. (p. 125)

Association of Southeast Asian Nations (ASEAN) A coopera- tive organization of 10 countries in Southeast Asia established to promote economic, political, and social progress throughout the region. (p. 119)

Cultural intelligence A manager’s or leader’s ability to under- stand and make effective decisions based on cultural differences. (p. 121)

Deep-level diversity The degree to which individuals in a group represent differences that cannot be seen, such as personalities, attitudes, values, and perspectives. (p. 125)

Direct foreign investment Buying existing or building new businesses in other countries. (p. 119)

Disabilities Physical or mental impairments that substantially limit one or more of an individual’s major life activities. (p. 125)

Discrimination Treating individuals or groups unfairly or nega- tively based on their diversity traits, including sexual orientation, age, ethnicity, gender, or disability. (p. 125)

Diversity The degree to which an organization represents differ- ent cultures. (p. 125)

Ethnocentric An approach to international business in which management believes that people who share their cultural values make the best managers. (p. 121)

European Union (EU) A political and economic union of 27 European countries that share a common currency, the euro. (p. 119)

Exporting The organizational process of creating products in one country and selling them in another. (p. 119)

Geocentric An approach to international business in which management seeks talent and best practices from all around the world. (p. 121)

Glass ceiling An invisible barrier that limits the opportunities for women and minorities to advance to upper-level positions. (p. 125)

Global company An organization that has operations in multiple countries and its senior management decision making centrally located in one country. (p. 119)

Global Leadership and Organizational Effectiveness (GLOBE) A network of over 150 researchers from 62 cultures from around the world assembled to study cultural dynamics in leadership and management. (p. 122)

Importing The organizational process of acquiring products and services from another country. (p. 119)

Multi-domestic company An organization with operations in multiple countries and its senior management decision making distributed across the countries in which it operates. (p. 119)

North American Free Trade Agreement (NAFTA) An agree- ment between Canada, Mexico, and the United States intended to remove barriers to trade and investment. (p. 119)

Offshoring Moving a business process to another country. (p. 131) Outsourcing Hiring an outside company to fulfi ll one or more of an organization’s core functions. (p. 131)

Polycentric An approach to international business in which management believes that managers from a particular country know best how to achieve results in that cultural context. (p. 121)

Professional employee organizations Organizations that offer employee management services to other companies. (p. 132)

Regional trading zones Zones established through trade agreements among several countries in which trade barriers are reduced or eliminated for member countries. (p. 119)

Social integration The degree to which individuals in a group share and collaborate based on their unique perspective. (p. 133)

Strategic partnership An agreement between two or more or- ganizations to share complementary resources to develop and sell products and services. (p. 119)

Surface-level diversity The degree to which individuals in a group represent differences based on visual cues, such as age, ethnicity, and gender. (p. 125)

World Trade Organization (WTO) The organization respon- sible for global trade rules between countries. (p. 119)

ADDITIONAL RESOURCES

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139Additional Resources

IN REVIEW W 5.1 | Understand how managers organize international businesses.

Many international businesses are organized as either global companies , which have operations in more than one country and senior management decision making centrally located in one country, or multi-domestic companies , with operations in mul- tiple countries and senior management decision making distrib- uted across the countries in which it operates. Companies may also form strategic partnerships with other companies to share complementary resources.

5.2 | Explain the challenges and opportunities of working with cultural diff erences.

When approaching cultural diff erences, managers can take one of three approaches: ethnocentric, polycentric, or geocentric. In an ethnocentric approach to international business, management believes that people who share their cultural values make the best managers. Managers with a polycentric attitude believe that managers from a particular country know best how to achieve results in that cultural context. In a geocentric business, manage- ment seeks talent and best practices from all around the world.

5.3 | Understand the legal requirements for respecting workforce diversity.

Federal legislation such as the Civil Rights Act of 1964 and the American with Disabilities Act of 1990 (ADA) make it illegal to discriminate against people based on factors like race, gender, ethnicity, age, sexual orientation, etc. Nevertheless, invisible barriers called glass ceilings often exist in organizations, which

prevent women and minorities from advancing to top-level po- sitions. To address ongoing inequalities, successive presidents have issued executive orders requiring affi rmative action , proac- tive steps taken by organizations to counteract discrimination against minorities and women. Th e value of affi rmative action is passionately argued, with some believing that it provides more equal opportunities and others believing that it provides unfair advantages.

5.4 | Recognize and explain the implications of changing workforce demographics.

One of the primary concerns for managers in the 21st century is a rapidly aging workforce. As in the example from BMW, man- agers will have to seek feedback from employees about what changes can be made in systems originally designed for younger workers in order to continue to meet targets successfully. Man- agers also will see signifi cant growth in the number of Asian and Hispanic people in the U.S. workforce.

5.5 | Interpret the dimensions of diversity as a management strategy.

Deep-level diversity is the degree to which individuals in a group represent diff erences that cannot be seen, such as personali- ties, attitudes, values, and perspectives. Surface-level diversity is the degree to which individuals in a group represent diff erences based on visual cues, such as age, ethnicity, and gender. As in the case of IBM, proactively fostering diversity in the workplace is an eff ective way to develop internal talent and expand market opportunities.

SELF-TEST T 5.1 | Understand how managers organize international businesses.

1. What is the diff erence between a global company and a multi-domestic company?

2. What are regional trading zones?

3. Th e United States is NOT a member of which of the following: a. NAFTA b. UNASUR c. EURS d. APEC

5.2 | Explain the challenges and opportunities of working with cultural diff erences.

4. Lack of patience with communicating with people with cultural and language diff erences may lead to the implementation of an inferior solution simply due to initial conditions and not due to intrinsic merit. Th is is referred to as a(n) situation.

5. What is cultural intelligence?

6. Which of the following is NOT one of the fi ve cultural value dimensions identifi ed by the Dutch sociologist Geert Hofstede? a. Individualism versus Collectivism b. Initiative versus Compliance

c. Competition versus Cooperation d. Power Distance

7. Due to cultural diff erences, there are no universal attributes and traits that managers from across the world can agree are positive and negative. a. True b. False

5.3 | Understand the legal requirements for respecting workforce diversity.

8. is treating individuals or groups unfairly or negatively based on their diversity traits, including sexual orientation, age, ethnicity, gender, or disability.

9. What U.S. government agency is charged with “enforcing federal laws that make it illegal to discriminate against a job applicant or an employee because of the person ’s race, color, religion, sex (including pregnancy), national origin, age (40 or older), disability, or genetic information”?

5.4 | Recognize and explain the implications of changing workforce demographics.

10. When faced with the changing demographics of their workforce, a BMW plant in Lower Bavaria chose to implement

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140 Chapter Five Diversity in a Global Economy

a “top-down” program to seek a solution to possible decreased productivity in the future. a. True b. False

11. When an organization hires an outside company to fulfi ll one or more of its core functions, it is called . When a business process is moved to another country, it is called .

12. What are the benefi ts and challenges of the practices in Question 11?

5.5 | Interpret the dimensions of diversity as a management strategy to increase innovation,

creativity, and performance.

13. What are the four categories that summarize the dimensions of diversity discussed in this chapter?

14. Managers that foster teams with the requisite capacities to develop collectively the technical and cognitive skills to be competitive in the marketplace always benefi t from embracing cultural and demographic diff erences. a. True b. False

15. Cultural mishaps are prevented when a. managers understand the intended and unintended

consequences resulting from cultural dynamics and diversity dimensions

b. managers downplay cultural dynamics and diversity dimensions to build teamwork

c. managers ignore cultural dynamics such as power distance

d. managers mandate policies for all management teams regardless of cultural dynamics, thus creating unity

CHAPTER EXERCISEE Exploring Hofstede ’s Cultural Dimensions Th is exercise will help you explore intercultural diff erences by comparing your home country ’s culture to the culture of another country of interest to you. Based on his research with over 100,000 IBM employees in 40 diff erent countries, Geert Hofstede identifi ed fi ve value dimensions that varied among diff erent cultures: Individualism versus Collectivism (IDV); Power Distance (PDI); Uncertainty Avoidance (UAI); Masculinity versus Femininity (MAS); and Long-term versus Short-term Orientation (LTO).

Instructions: 1. Choose a country to compare to your home country. Th is

country could be the home country of an international student in your class, a country that you have visited or plan to visit, or just a country in which you are interested.

2. Visit the following website: www.geert-hofstede.com/countries .html.

3. Select your home country from the “Select a Country” pull- down menu at the top of the page. Once the page reloads with your home country ’s information, examine your countries ’

scores and the brief discussion of those scores on the site for each of the fi ve dimensions.

4. Now select your comparison country using the “Comparison Country” pull-down menu at the top of the page.

5. On which dimension is your home country most different from the comparison country? On which dimension is your home country most similar to the comparison country?

6. Now use the “Select a Country” pull-down menu to select your comparison country as the primary country and review the brief discussion on the site explaining your comparison country ’s scores on each of the fi ve dimensions.

7. Based on the information from the website and your own experiences with this country, give some specifi c examples of how these cultural diff erences manifest themselves in terms of behaviors in your home country and in the comparison country. If you chose the home country of an international student in your class as your comparison country, ask that person for details about his or her culture relative to the scores on the fi ve dimensions.

SELF-ASSESSMENTT Global Mindset* A global mindset refers to the extent to which a person is open to and appreciative of cross-cultural diversity. Th e following brief assessment will help you to determine if you have a global mindset.

For each statement, circle the number that best describes you based

on the following scale:

Not at all Accurate

Somewhat Accurate

A little Accurate

Mostly Accurate

Completely Accurate

1 2 3 4 5

1. When I interact with others, national origin never has an impact on how I view their status relative to me.

1 2 3 4 5

2. I consider myself to be as open to ideas from other countries and cultures as I am to ideas from my own country and culture.

1 2 3 4 5

3. When I fi nd myself in a new cultural setting, I experience excitement rather than fear and anxiety.

1 2 3 4 5

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141Additional Resources

SELF-TEST ANSWER KEYY 1. A global company is an organization with operations

in more than one country and its senior management decision making centrally located in one country. A multi- domestic company is an organization with operations in more than one country and senior management deci- sion making distributed across the countries in which it operates.

2. Regional trading zones are established through trade agree- ments among several countries in which trade barriers are reduced or eliminated for member countries.

3. c.

4. “Success to the Successful”

5. the ability to understand and make eff ective decisions based on cultural diff erences

6. b.

7. b. False. Th e GLOBE research program found several uni- versal cultural perspectives. See Table 5-2 earlier in this

chapter for the leadership traits found to be universally positive and negative.

8. Discrimination

9. Th e U.S. Equal Employment Opportunity Commission (EEOC)

10. b. False. Th e company discovered that bringing together a diversity of ideas from top management, middle manage- ment, and line workers allowed them to achieve their goals.

11. outsourcing/off shoring

12. Both outsourcing and off shoring can benefi t a company greatly by reducing costs and improving effi ciency. How- ever, it can have dramatic eff ects on the surrounding com- munities and possibly lead to incompatibilities between the diff erent companies.

13. cultural, demographic, technical, and cognitive

14. True

15. a.

4. When I am in another culture, I am sensitive to the cultural diff erences without becoming a prisoner of these diff erences.

1 2 3 4 5

5. When I interact with people from other cultures, it is more important to understanding them as individuals rather than viewing them as representatives of their national cultures.

1 2 3 4 5

6. I see my values as a hybrid of values acquired from multiple cultures as opposed to just one culture.

1 2 3 4 5

Scoring:

Add the numbers circled above: __________

Interpretation:

23 and above = You have a strong and well-developed global mindset. You are likely to view cultural diversity as an opportunity.

16 – 22 = You have a moderately developed global mindset. You appreciate cultural diff erences to some extent, but your vision may still be limited by some of your own cultural norms and values.

15 and below = You have an underdeveloped global mind- set. Your perspective is dominated by the values and norms of your own dominant culture, and you may fi nd cultural diversity threatening or intimidating.

*Adapted from Anil K. Gupta, and Vijay Govindarajan, “Cultivating a global mindset,” Academy of Management Executive 16, no. 1 (February 2002): 116–126.

Notes

c05Diversityinaglobaleconomy.indd 141 20/08/13 6:37 PM

142

Ethics and Social Responsibili

ty

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Learning Objectives

143143

C H A P T E R O U T L I N E

6.1 | What Are Ethics? Individuals Organizations Stakeholders

APPLYING CRITICAL THINKING: Escalation Governments Th e Globe

6.1 | Explain ethics as they relate to the fi ve domains of individuals, organizations, stakeholders, government, and the global community.

6.2 | Making Ethical Decisions Principles of Ethics Codes of Conduct

VOICES OF MANAGEMENT: Lonnie J. Williams

6.2 | Demonstrate processes and practices for managing organizational ethics.

6.3 | Social Responsibility Corporate Social Responsibility

RESEARCH @ WORK: Internal Transparency

6.3 | Describe how businesses approach social responsibility.

6.4 | How Does Social Responsibility Pay Off? Social Investing

6.4 | Explain how organizations seek to prosper through social responsibility.

6.5 | Managing Responsibly Today Internalizing Externalities Building an Ethical Culture Ethics Training In the Interests of Self or Others?

6.5 | Summarize management’s role in building responsible businesses based on ethical decision making.

By the end of the chapter, you will be able to:

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responsible businesses based on ethical decision making.

Key Terms

In Review

Self-Test

Chapter Exe rcise

Self-Assess ment

Self-Test

Answer Key

ADDITIONAL RESOURCES

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Chapter Six Ethics and Social Responsibility144

6.1 | WHAT ARE ETHICS?

6.1 | Explain ethics as they relate to the fi ve domains of individuals, organizations, stakeholders, government, and the global community.

Going into the national championship tournament, the Oxford University basketball team was undefeated. Clayton M. Christensen played center, which some argue is the most important position on the team. With each game the team won, he faced a growing pre- dicament. Christensen had made the personal decision to never play basketball on Sundays for religious reasons. Looking at the schedule, he realized that if the team made it to the national championship they would play on—you guessed it—a Sunday. When Christensen mentioned his predicament to his coach, he was told that if the team made it to the cham- pionships and he didn ’t play, he would be letting his whole team down. And then, during the semifi nals, Christensen ’s backup dislocated his shoulder. But the team pulled together and won the game. Th e pressure for Christensen to play in the upcoming national champi- onship game on Sunday was immense. Th e team had worked all season in preparation for the chance to win the title, and they relied on Christensen. What do you think Christensen should do? Should he keep his promise to himself ? Or should he play the championship game for his team and coach—“just this once?”1

Ethics are the moral principles, values, and beliefs that govern group or individual behav- ior according to what is right or wrong and what contributes to the balanced good of all stakeholders. Are ethics as simple as “doing the right thing”? Not always. With his commit- ment to his religion at odds with his commitment to his team, Christensen faced an ethical

dilemma —a situation in which no choice is entirely right. Managers face small and large ethical dilemmas regularly. An example of a small dilemma would be whether or not to accept a lavish corporate gift from a client. By accepting it, you could be breaching a client/company code, and it also might be perceived as favoritism. On the other hand, rejecting it might off end the client, who may have wanted to show his gratitude for your hard work. Consider a more diffi cult ethical dilemma that a manager could face:

“You are a senior executive in the sales department of a large manufacturing company. A competitor ’s technological innovation has disrupted your compa- ny ’s production and has plunged profi ts into the red for the last three quarters. Your boss has made it very clear that if you do not make your profi t projections for this quarter, you will be out of a job. One of your staff members makes a sug- gestion to you about investing in new equipment to monitor and service clients better. After some research, you realize that this investment, if enacted quickly, could increase sales and help the overall health of the company. Each quarter that you wait to implement this equipment will reduce its positive impact, but investing now will cause you to miss your profi t projections and lose your job.”2

As a manager, how might you approach an ethical dilemma like this? What questions could you ask to ensure that you make a well-considered decision? What factors might aff ect your decision?3

Ethics The moral principles, values, and beliefs that govern group or individual behavior according to what is right or wrong and what contributes to the balanced good of all stakeholders.

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6.1 | WHAT ARE ETTTTHHHHIIIICCCCS

6.1 | Explain ethics as they relate organizations, stakeholders, govern

Going into the national championship tour was undefeated. Clayton M. Christensen important position on the team. With each dicament. Christensen had made the person for religious reasons. Looking at the sched national championship they would play on mentioned his predicament to his coach, he pionships and he didn ’t play, he would be l the semifi nals, Christensen ’s backup disloca

d th Th f Ch i t Ethics The moral principles,

Ethical dilemma A situation in which no choice is entirely right.

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6.1 | What Are Ethics? 145

In this section, we will explore how ethical decisions are made and assess which factors determine those decisions. Additionally, we will explore a framework that managers can rely on to optimize principle-based decision making. Where do ethics originate? As shown in Figure 6-1, there are fi ve domains where ethical behavior is defi ned: individuals, organiza- tions, stakeholders, governments, and the global community.

In each of these domains, individuals or groups articulate their expectations regarding principles, values, and beliefs that support their perception of what is good for themselves and others. How managers make decisions related to these fi ve domains can ultimately lead to positive or destructive consequences for an organization.

Individuals In 2000, Enron appeared to be a wildly successful energy trading company, claiming rev- enues of nearly $101 billion.4 For six consecutive years, Fortune magazine named Enron “America ’s Most Innovative Company.”5 Kenneth Lay, founder and CEO of Enron Corpora- tion, was said to be “articulate, sophisticated, [and] astute about people” and “nothing less than a corporate visionary.”6 He was even-tempered, could bring confl icted parties together to seek resolution, and contributed to community causes. By all measures, Lay was a leader that captured the hearts and minds of employees and investors. But Lay also led his team to commit one of the largest cor- porate fraud cases in U. S. history. Using unethical accounting practices, Enron hid billions of dollars in debt from investors while paying its executives extraordinary salaries and valu- able stock options (at least, they were valuable for a while). Th e most insidious accusatio ns were that at some point, top executives knew that the company would soon be exposed for wrongdoing and sold their stock. At the same time, they encouraged employees to continue buying company stock for their retirement funds and to invest in the company ’s pension fund. Shareholders lost $74 billion, and over 20,000 employ- ees lost $20 billion in their pension fund. Lay personally liq- uidated more than $300 million of his personal stocks, while thousands of families lost their entire retirement savings. Why are some people ethical and others not? Why are some businesses ethical and others not? As described by psychologist Lawrence Kohlberg (1927—1987), individuals go through “stages of moral development” in their lives . His research, outlined in Figure 6-2, suggests that as individuals

Individuals

Organizations

Stakeholders Government

Global

Ethical Behavior

Individuals

Organizationsrr

Stakeholders Government

Global

Ethical Behavior

Figure 6-1 Domains of Ethical Decision Making Managers need to consider the effects of their decision making based on the fi ve domains of ethical behavior.

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Chapter Six Ethics and Social Responsibility146

progress through these stages, their decisions become more independent of external forces and more broadly in the interest of others. Th erefore, these stages can be seen as a progression from the interests of self to the interests of others . In the fi rst stage of moral development, called preconventional , an individual ’s moral decisions are based primarily on self-protection or self- interest. In the second stage, called conventional , an individual ’s moral decisions are based primarily on societal norms. Societal norms are society ’s expectations about how people (and organizations) should behave. Th ose who meet those expectations are generally rewarded with social acceptance, while those who don ’t may be punished by being treated as outsiders. In the fi nal stage of moral development, called postconventional , an individual ’s moral decisions are based primarily on what he or she believes is good for society as a whole. Let ’s go back to our original example. When Kenneth Lay, CEO of Enron, publicly encour- aged employees to buy company stock, it had the eff ect of increasing the company ’s stock value. During this time, Lay sold part of his stock for $300 million. Which of Kohlberg ’s stages of moral development best describe these decisions? What is the role of an organization to support moral development for managers and employees?

Organizations In 1968, good friends Ben Cohen and Jerry Greenfi eld saw an opportunity in Burlington, home of the University of Vermont, to open an ice cream shop. With $12,000 and a corre- spondence course on how to make ice cream, they opened their fi rst Ben & Jerry ’s Ice Cream shop in a renovated gas station. From the start, Ben & Jerry ’s built a corporate culture that was focused on the community: from Free Cone Days and Summer Movie Festivals to politi- cal activism and the founding of nonprofi t organizations. Th e old gas station was demolished by the land owner in 1982, but at that point Ben & Jerry ’s was well on its way to becoming one of the leading brands of specialty ice cream

in the country. Recognizing the threat to their own mar- ket share, Pillsbury, owner of Häagen-Dazs ice cream, attempted to limit the distribution of Ben & Jerry ’s ice cream. Ben & Jerry ’s responded by suing Pillsbury and launching the famous marketing campaign, “What ’s the Doughboy Afraid Of ?” Ben & Jerry ’s won the case. Th e company ’s focus on community and a willingness to address big challenges began to defi ne the organiza- tion. In 1985, Cohen and Greenfi eld established the Ben & Jerry ’s Foundation to support community-oriented projects, funded by 7.5 percent of Ben & Jerry ’s pretax profi ts. Th eir focus did not stop at their local commu- nity. In 1988, they helped found 1% For Peace, whose goal was to redirect 1 percent of the national defense budget to peace-promoting projects.7 Th at same year, the com- pany launched its three-part mission statement shown in Figure 6-3 , consisting of a Product Mission, a Social Mis- sion, and an Economic Mission. Ben & Jerry ’s company culture was now “offi cial.”

Figure 6-2 Kohlberg ’s Stages of Moral Development Kohlberg proposes that moral development is a continuous process that takes place throughout our lives.

Preconventional motivated by self- interest

Conventional motivated by societal norms

Postconventional motivated by what’s good for society

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Conventional motivated by societal norms

PostconvPP entionalvv motivated by what’s good fd or soff cietyt

Postconventional stage In Kohlberg ’s model, the stage of moral development in which an individual ’s moral decisions are based primarily on what he or she believes is good for society as a whole.

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Preconventional stage In Kohlberg ’s model, the stage of moral development in which an individual ’s moral decisions are based primarily on self-protection or self-interest.

Conventional stage In Kohlberg ’s model, the stage of moral development in which the individual ’s moral decisions are based primarily on societal norms.

Societal norms Society ’s expectations about how people (and organizations) should behave.

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6.1 | What Are Ethics? 147

What eff ect did this have on the company? One year after Ben & Jerry ’s unveiled the com- pany mission, an important change happened inside the company: employees began to orga- nize eff orts to make a diff erence consistent with the company ’s mission statements, some of which are detailed in Figure 6-4 . In 1989, employees organized a program called “Green Teams,” whose “primary goal is to foster environmental awareness, education, and action throughout the company.”8 Th e company ’s employees had embraced its culture, and Ben & Jerry ’s subsequent social impact was, and continues to be, both diverse and substantial. Th is is an example of values-based management , where the company ’s culture aff ects employee behavior in ways that are consistent with the organization ’s mission and values.

Stakeholders Th e eff ect of Ben & Jerry ’s focus on their Social, Product, and Economic Missions was felt by a variety of individuals, organizations, and communities around the world. For example, if you

S O C I A L Mission

To operate the company in a way that actively

recognizes the central role that business plays

in society by initiating innovative ways to

improve the quality of life locally, nationally, and internationally.

E C O N O M I C Mission

To operate the company on a sustainable financial

basis of profitable growth, increasing value for

our stakeholders and expanding opportunities

for development and career growth for our

employees.

Ben and Jerry’s Mission

P R O D U C T Mission

To make, distribute, and sell the finest-quality,

all-natural ice cream and euphoric concoctions with

a continued commitment to incorporating wholesome,

natural ingredients and promoting business practices

that respect the earth and the environment.

Figure 6-3 Ben & Jerry ’s Three-Part Company Mission Ben and Jerry’s company mission had a great impact on the company culture.

Source: http://www.benjerry.com/activism/mission-statement/

Values-based management A management style in which the company ’s culture affects employee behavior in ways that are consistent with the organization ’s mission and values.

Figure 6-4 Ben & Jerry ’s Mission Actions Ben and Jerry’s social, product, and economic missions had a global infl uence on stakeholders.

Social Mission

Environmental

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Introduces the EcoPint, an ice cream

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Offers frozen yogurt and

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Introduces compostable dishes

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Uses only Fair Trade certified

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Source: Adapted from “History,” Ben & Jerry's , http://www.benjerry.com/company/history/

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Chapter Six Ethics and Social Responsibility148

were a supplier of vanilla beans to the company, your organization was expected to “respect the earth and the environment.” Th e company promoted “Farm Aid,” in 1990 a campaign to support and encourage family farms, by printing “Support Farm Aid” on 8 million cups, along with a toll-free phone number to call to off er support and donations. Th is had consequences for customers, suppliers, communities, and government. All of these constituencies are called stakeholders , because they have a direct interest in the organization ’s behavior and experi- ence the eff ects of the company ’s management decisions.9 Some stakeholders, like managers, employees, and owners, are internal to the organization. Th at is, they are a part of it. Other stakeholders, such as suppliers, customers, shareholders, the media, creditors, and local and global communities, are external to the organization, but they are still aff ected by the organiza- tion ’s management decisions. Th e stakeholder model is shown in Figure 6-5 . Let ’s assume that all internal and external stakeholders have ethical expectations of the organization. Does a manager ’s responsibility cease once the interests of all internal and exter- nal stakeholders have been addressed suffi ciently? From a legal perspective, yes. Yet, organiza- tions have an impact on their stakeholders and society, beyond their stakeholders ’ interests. An externality is a cost (negative) or benefi t (positive) that occurs beyond the direct exchange between an organization and its stakeholders. A classic example of a positive external- ity comes from beekeeping. Although a beekeeper may be in the business of raising bees to sell honey and wax, the bees ’ natural pollinating activities also provides a direct benefi t to farmers and gardeners in the entire area. Extractive industries such as mining often externalize many of the environmental costs of their processes, leaving the government and local communities to deal with negative externalities such as polluted drinking water and increased fl ooding. Such industries may also create a positive externality by fostering new local businesses that provide support services for the mining company. What are managers ’ ethical responsibilities when it

comes to recognizing and responding to externalities? Sometimes that question is decided by the government through new regula- tions that force businesses to internalize their negative externalities (that is, to reduce or pay for the negative eff ects of their processes). Pollution regulations, workers ’ compensation, and zoning laws are all examples of the government intervening to hold companies accountable for the negative side eff ects of their businesses. Govern- ment intervention isn ’t always required, however. Many businesses take the initiative to internalize externalities.10

Let ’s look at the fast food industry, which has had a mixed response to the most visible negative externality of their business— poor health. Now, fast food cannot be held solely responsible for increased rates of heart attacks and obesity in the United States, of course, but it is fair to say that its prominence in the American diet is one of many contributing factors. Th ere has been a dramatic increase in fat, salt, and calories in fast food in the past 50 years. McDonald ’s, for example, has increased its largest serving of French fries from 2.4 ounces to 6 ounces, an increase of 250 percent; and its largest ham- burger off ering from 1.6 ounces to 8 ounces, a 500 percent increase.11

We can imagine how this happened. As companies like Wendy ’s and Burger King began competing for customers, product and marketing

Stakeholders Individuals or groups who have a direct interest in an organization ’s behavior and experience the effects of the company ’s management decisions.

Internal Stakeholders

External Stakeholders

Employees Managers Owners

Suppliers Society Government Creditors Shareholders Customers

Company

Internal Stakeholders

External Stakeholders

Employees Managers Owners

Suppliers Societytt Government Creditors Shareholders Customers

Company

Figure 6-5 Stakeholder Model Model showing a company’s internal and external stakeholders.

Externality A cost (negative) or benefi t (positive) that occurs beyond the direct exchange between an organization and its stakeholders.

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6.1 | What Are Ethics? 149

managers expanded meal sizes to increase value. What happened? It worked—but over time, this competition escalated off erings with the unintended externality of serving loyal customers lots of unhealthy food. How long do you imagine such escalation can continue? In 2004, Morgan Spurlock drew attention to the negative externalities of fast food in his documentary Super Size Me. Th e movie graphically demonstrated the horrid eff ects of a one-month, all-McDonald ’s diet on Spurlock ’s health and well-being.12 Although it denied that the movie was an infl uence on this decision,13 McDonald ’s chose to discontinue its Super Size off erings soon after the release of Super Size Me.14 On the fl ip side, more and more fast food restaurants are changing the oils used in fryers to reduce the amount of saturated and trans fats in their foods, and there has been an increase in off erings like salads and grilled, rather than fried, chicken.15 In fact, the more healthy options that one fast food chain off ers, the more healthy options other fast food chains choose to off er. Both of these are examples of systems behavior called escalation , where there is an increase in an organizational behavior as a direct response to a competitor ’s behavior.

Governments What role should the government play in establishing rules and regulations to guide busi- ness ethics?16 Between 2000 and 2010, the U. S. government faced two major disruptions in the business world based on ethical dilemmas: 1) the fall of Enron in 2001, followed soon after by the collapse of WorldCom; and 2) the banking failures of 2008. Th ese two events negatively aff ected economic markets around the world. Th is left some wondering, “Is there a fundamental ethical problem that persists in corporate America?”17 Let ’s look at these ethical breakdowns and the U. S. government ’s responses. Enron fell because of poor ethical decisions made by top managers. Under pressure to show ever-increasing revenues and profi ts, managers exploited loopholes in accounting requirements, infl ating expected revenues and hiding billions of dollars in debt. Such prac- tices made Enron look like a much healthier company than it actually was, which in turn artifi cially infl ated its stock prices. In the end, Enron went bankrupt, its stockholders lost millions of dollars, its employees lost their jobs and much of their retirement savings, and top executives were sentenced with hefty fi nes and prison terms.18 Th e same kinds of poor ethical decisions were also being made in other organizations, with top executives from companies like Tyco and WorldCom being criminally convicted.19 With such a widespread failure in accounting practices, the U.S. government enacted stricter legal requirements to prevent similar unethical behavior in the future. In 2002, Congress passed the Sarbanes-Oxley Act, co-sponsored by Sen. Paul Sarbanes (D-MD) and Rep. Michael Oxley (R-OH). Th e act requires much greater transparency of corporate accounting practices and, perhaps most importantly, holds the chief executive offi cer (CEO) and chief fi nancial offi cer (CFO) responsible for the accuracy of their com- pany ’s fi nancial reporting. No longer can top management claim that they didn ’t know what

Escalation An increase in an organizational behavior as a direct response to a competitor ’s behavior.

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Wendy’s Results

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Share

Wendy’s Increases Portion

Size

Threat of Losing Customers

Threat of Losing Customers

B1 B2

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Chapter Six Ethics and Social Responsibility150

was going on. With the Sarbanes-Oxley Act, they are legally obligated to understand and approve their organization ’s fi nancial practices. Let ’s revisit our original inquiry—Is there a fundamental ethical problem that persists in corporate America? Mark Roe of Harvard Law School argues that these ethical breakdowns result from two “core instabilities” in how American business is established: 1) the separa- tion of ownership and control in large companies and 2) a decentralized regulation system. Because of these two factors, Roe suggests, the government has faced a “fundamental large- fi rm problem” every decade since World War II. So, while regulation such as Sarbanes-Oxley addresses one ethical dilemma, “sometime later, somewhere else, another piece of the cor- porate apparatus will fail.”20

The Globe Is there a set of ethical standards that we can all agree upon? Th e global level of ethics refers to the principles, values, and beliefs that are widely considered universal. After World War II, 51 nations came together to form the United Nations (UN), which is the international organization that supersedes any one country ’s agenda and serves four purposes: “1) to keep peace throughout the world, 2) to develop friendly relations among nations, 3) to help nations work together to improve the lives of poor people, to conquer hunger, disease, and

illiteracy, and to encourage respect for each other ’s rights and free- doms, and 4) to be a centre for harmonizing the actions of nations to achieve these goals.”21

In 2010, UN secretary-general Ban Ki-moon noted, “Businesses and global corporations were stepping up their eff orts to become more ethical, sustainable, and responsible at just the right moment . . . [H]ailing good corporate citizenship [is] one of the keys to over- coming complex and interlinked crisis—from fi nancial market meltdown to environmental degradation—and to unlocking long- term growth and development for all of the United Nations.”22

What is “good corporate citizenship,” and what are the stan- dards that managers and organizations can adhere to? Th e United Nations established the “Global Compact” for businesses, which “is a strategic policy initiative for businesses that are committed to aligning their operations and strategies with ten universally accepted principles in the areas of human rights, labor, envi- ronment, and anti-corruption.”23 As outlined in Table 6-1 , these

Global level of ethics The principles, values, and beliefs that are widely considered universal.

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Source: United Nations, United Nations Global Compact, http://www.unglobalcompact.org/aboutthegc/thetenprinciples/index.html.

Table 6-1 10 Principles of the United Nations

Human Rights Principle 1: Businesses should support and respect the protection of internationally proclaimed human rights; and

Principle 2: make sure that they are not complicit in human rights abuses.

Labor Principle 3: Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining;

Principle 4: the elimination of all forms of forced and compulsory labor;

Principle 5: the effective abolition of child labor; and

Principle 6: the elimination of discrimination in respect of employment and occupation.

Environment Principle 7: Businesses should support a precautionary approach to environmental challenges;

Principle 8: undertake initiatives to promote greater environmental responsibility; and

Principle 9: encourage the development and diffusion of environmentally friendly technologies.

Anti-Corruption Principle 10: Businesses should work against corruption in all its forms, including extortion and bribery.

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1516.2 | MAKING ETHICAL DECISIONS

principles are intended to guide decision making when it comes to answering the question: do my actions respect the rights and legitimate expectations of others?

6.2 | MAKING ETHICAL DECISIONS

6.2 | Demonstrate processes and practices for managing organizational ethics.

Jan Wilson was recently hired as the food services director for a professional services com- pany that manages school cafeterias in Nebraska. Young, energetic, and full of new ideas, Wilson ’s management experience includes coordinating a regional food cooperative, where local organic farmers (including her family) share resources to attract more customers, and managing a commercial kitchen at a conference center. In this new position, Wilson is responsible for all the operating activity associated with over 60 schools across multiple counties, including dozens of suppliers, hundreds of employees, and many active Parent- Teacher Associations (PTAs). Senior management is excited by Wilson ’s ideas and passion for including healthy menu options for the students and has given her a lot of fl exibility in creating new off erings. Th at said, Wilson vividly remembers that one executive remarked, “I don ’t care what you do, as long as you increase this region ’s profi t margin.” During the fi rst few months in her new position, Wilson added a “fresh bite” daily meal, which was made with organic local vegetables and meat. School administrators, PTA board members, organic farmers, and senior management noticed these eff orts, but their reactions were not all positive. PTA board members liked the “fresh bite” option and wanted the entire menu to be healthier. Organic farmers agreed with the PTA and believed that having an organic menu would be both good for students and the local economy. Th e school system and Wilson ’s company shared profi ts, so administra- tors and senior management were not impressed because her initial eff orts actually decreased profi tability. Wilson began to wonder if the “old way” of managing food service was the best way, where unhealthy foods were simply more profi table.

Wanting to get more ideas from staff , Wilson decided to work lunch shifts at the company ’s best- and worst-perform- ing kitchens for one week. Working at the best-performing kitchen was easy; managers had very detailed systems and provided support during the busy service times. Halfway through the fi rst shift at the company ’s worst-performing kitchen, however, Wilson was overwhelmed—the line of hungry students was getting longer and longer. Th en the kitchen ran out of French fries, with about 250 more students to feed. Fearing a student revolt, Wil- son had to be creative. Out of the corner of her eye, she noticed a large pile of carrot sticks toward the end of the food off erings. She quickly moved the carrots to where the French fries normally were placed, found a marker, and made a sign that said, “Fresh Fries!” Not all the students were amused, but something interesting happened after the meal. During a discus- sion with the kitchen manager about the lunch service, he laughed and said, “Th at ’s a record! We have never sold so many carrot sticks in one day.” Th is was the idea that Wilson had been looking for. She looked at the kitchen manager with a smile and asked, “Are you ready for a little experiment?” During the following month, working with a few of the company ’s kitchen managers, Wilson led a series of experiments to see if there was connection between where food was placed on the serving line and sales. For example, if a large bowl of apples was the fi rst item students encountered, would more students buy apples? Or, if carrot sticks were presented at eye-level and toward the beginning of the off erings, would more students choose “Fresh Fries” over the French fries sold at the end of the off erings? After a month of experiments, Wil- son was convinced that the results clearly showed that by placing foods at certain locations,

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she could dramatically aff ect the foods that students purchased. As Wilson designed a plan for how to reorganize where food was placed, she was faced with an ethical dilemma defi ned by the following options:

● Arrange the food randomly. ● Arrange the food to ensure that students choose healthy food. ● Arrange the food to encourage students to select organic, local off erings, thus support-

ing her former colleagues and family in the community. ● Arrange the food to generate more profi ts for the company. ● Arrange the food consistent with how students already eat, supporting their individual

rights.

In this case, where there is no right choice, which decision would you make? When faced with an ethical dilemma, how do managers consider all the variables necessary to ensure the “right decision” is made?24 In the next two sections, we will consider Wilson ’s ethical dilemma through a variety of contexts and approaches. By the end of this investigation, see if your original decision has changed.

Principles of Ethics Where should managers begin when considering an ethical dilemma? In Table 6-2 , we out- line four questions that you could ask yourself to begin the decision-making process. Ethical dilemmas exist when the answers to these questions further complicate the decision. Let ’s explore these questions for Wilson ’s case and discover if there is a clear, obvious decision to be made. One apparent confl ict is the fact that the best practice for the organization (high- profi t, yet unhealthy food) competes with legitimate expectations of others (parents seeking healthier food for students). How do managers reconcile this impasse? When there is no clearly correct course of action, managers are required to make deci- sions based on one or more of the following principles: legal, individual, virtuous, long-term self-interest, community, utilitarian, and distributed justice.25

● Legal principle Making decisions that follow both the letter and the spirit of the law ● Individual rights principle Making decisions that do not infringe upon the rights of

other people ● Virtuous principle Making decisions that you would be publicly proud of ● Long-term principle Making decisions that support the long-term interests of your-

self and your organization ● Community principle Making decisions that contribute to the strength and well-be-

ing of the community ● Utilitarian principle Making decisions that provide the greatest good to the greatest

number (or the least harm to the fewest number) ● Distributed justice principle Making decisions that do not harm those who are al-

ready disadvantaged

Applying these principles of ethical decision making, if you were Wilson, which choice would you make? Do you choose the principle of virtue over long-term company principle of profi t and risk losing your job, where you could presumably continue to have positive

1. Is this action consistent with my role and responsibilities?

2. Does my action respect the rights and legitimate expectations of others?

3. Will this decision refl ect a best practice for myself and the organization?

4. Is this action compatible with my own deeply held principles?

Source: Adapted from L. Paine, R. Deshpande, J. D. Margolis, and K. E. Bettcher, “Up to Code: Does Your Company’s Conduct Meet World-Class Standards?” Harvard Business Review, December 2005, 122–133.

Table 6-2 Preliminary Questions for Ethical Decision Making

Legal principle Making decisions that follow both the letter and the spirit of the law.

Individual rights principle Making decisions that do not infringe upon the rights of other people.

Virtuous principle Making decisions that you would be publicly proud of.

Long-term principle Making decisions that support the long- term interests of yourself and your organization.

Community principle Making decisions that contribute to the strength and well-being of the community.

Utilitarian principle Making decisions that provide the greatest good to the greatest number (or the least harm to the fewest number).

Distributed justice principle Making decisions that do not harm those who are already disadvantaged.

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153

impact? Do you choose community and utilitarian principles and increase local, organic food off erings, where the greatest number of stakeholders realize positive eff ects? Once you have made your decision, does it refl ect a particular stage of Kohlberg ’s moral development? We have explored how an individual makes an ethical decision, but how do companies frame these principles so that all managers and employees know the company ’s expecta- tions of ethical decision making?26

Codes of Conduct Two diff erent organizations may have similar or even identically stated values and beliefs, such as a franchise company, yet employees can make very diff erent ethical choices. Val- ues and beliefs are translated into behaviors based on the principles by which decisions are made. Eff ective organizations and their managers take a principle-based approach to translating their values and beliefs into standards for behaviors. So that all employees have a consistent set of ethical behavior expectations, organizations publish guidelines called codes of conduct .27 Th e standards outlined in codes of conduct clearly state behavioral requirements and prohibitions. Table 6-3 shows eight broad categories of ethical standards that most Codes of Conduct address.

Principle-based Management Principle-based management is when an organization proactively connects values and beliefs to behavior expectations, where all stakeholders are continuously made aware of these standards. Refl ecting on this section ’s case, we can see that the choice that Wilson makes will have an impact on the organization. We assumed that she was not given a set of expectations with which to make a decision consistent with the company ’s values and beliefs. Th e only guidance she was off ered from senior manage- ment was to increase profi ts, which is not unethical. One could argue that ensuring profi ts allows an organization to retain employees over the long term, which leads to benefi ts for many stakeholders. How would Wilson ’s dilemma be diff erent with a clearly stated code of conduct? By removing the guessing associated with Wilson ’s original dilemma, what is the role of her personal principles? When organizations support a principle-based management approach, stakeholders become a vital component to decision making. Th is approach requires that management make decisions regarding the organization ’s responsibility for each stakeholder. In the next section, we will explore how diff erent organizations interpret their responsibility to external stakeholders.

Code of conduct An organization ’s guidelines for ethical behavior, also called a “code of ethics.”

Voices ofManagement Lonnie J. Williams, Owner, LJ Building Maintenance, LLC28

W hy is it important to study management? For Lonnie Williams, the answer is simple: “[I]f you can man- age, you can do any business.” Williams owns LJ Building Maintenance, LLC a small company of about 50 people. His managerial style is reminiscent of his previous careers in the military and as director of youth services in Topeka, KS. “I expect you to do something, and I follow up on those ex- pectations,” explains Williams. “I know none of us are . . . fl awless. We all have good and bad days, and I tell my man- agers, ‘If you ’re having a bad day, just admit you ’re having a bad day. ’” Williams expects his employees to be as honest with him as he is with them, and he makes a point of understanding where they ’re coming from, what ’s happening in both their

work and personal lives. “I know more about some of my employees ’ day-to-day living than some of my friends,” he says. “When they have hardships, I try to be a part of that. When they have fi nancial situations, I try to make that a teaching mechanism.” And he understands fi rsthand what kind of work he is asking for. “I don ’t ask anyone to do anything I haven ’t done or can ’t do. I think most people know that because they ’ve seen me work. I ’ve worked beside just about anybody in any building, just to let them know that I still know the business inside and out.” Williams ’s caring but no-nonsense style has earned him dedicated employees, whose quality of work has helped grow LJ Building Maintenance, LLC, into an award-winning company serving customers in six states. ■

Principle-based management A management style in which an organization proactively connects values and beliefs to behavior expectations, where all stakeholders are continuously made aware of these standards.

6.2 | MAKING ETHICAL DECISIONS

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Chapter Six Ethics and Social Responsibility154

Source: Adapted from L. Paine, R. Deshpande, J. D. Margolis, and K. E. Bettcher, “Up to Code: Does Your Company’s Conduct Meet World-Class Standards?” Harvard Business Review, December 2005, 122–133.

Table 6-3 Codes of Conduct Standards

Standard Required Behaviors Prohibited Behaviors

Fiduciary • Show diligence, candor, loyalty to company • Disclose confl icts of interest • Demonstrate prudence, intelligence, best

efforts • Maintain the company’s fi nancial health

• Engage in unauthorized self-dealing • Seek self-benefi t at expense of company • Demonstrate negligence, carelessness, half-

hearted efforts • Accept or offer bribes

Dignity • Protect human health, safety, privacy, dignity • Respect human rights • Support affi rmative action to develop human

capacities • Show special concern for the vulnerable

• Engage in coercion, humiliation, invasion of privacy

• Cause injury or threaten safety • Use force or violence • Violate human rights

Property • Respect others’ property • Safeguard the company’s property • Use the company’s property responsibly

• Steal or embezzle • Misappropriate intellectual property • Waste resources • Infringe on others’ property

Transparency • Be accurate, truthful, honest • Present information accurately • Disclose material information in a timely manner • Correct misinformation promptly

• Engage in fraud or deceit • Misrepresent information or intent • Delay presentation of information

Reliability • Fulfi ll commitments, promises, contracts, agreements

• Commit only to what can be delivered

• Break promises or contracts • Go back on one’s word • Make false or misleading promises

Fairness • Deal fairly in all exchanges • Treat all stakeholders fairly • Offer due process to all stakeholders • Engage in fair competition

• Show preferential or arbitrary treatment • Discriminate unfairly • Use an unfair competitive advantage • Suppress competition

Citizenship • Respect laws and regulations • Share in maintaining the commons • Cooperate with public offi cials • Contribute to the civic good • Recognize and respect government’s jurisdiction

• Violate the letter or the spirit of the law • Freeload • Cause injury or damage to society or the

environment • Improperly participate in politics or government

Responsiveness • Listen • Respond promptly and fairly to complaints and

suggestions • Address the legitimate concerns of others in a

timely manner

• Show indifference to legitimate claims and claimants

• Neglect serious concerns

6.3 | SOCIAL RESPONSIBILITY

6.3 | Describe how businesses approach social responsibility.

Gary Erickson likes to call it his “epiphany ride.” He and his riding partner, Jay, were nearing the end of a 12-hour, 175-mile bike ride. Th ey ’d been sustaining themselves on energy bars, but as Erickson faced energy bar number six, he just couldn ’t bring himself to eat it. He was exhausted, his body desperate for calories, and yet he couldn ’t choke down one more

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1556.3 | SOCIAL RESPONSIBILITY

sawdust-fl avored energy bar. He threw it away and downed a six-pack of doughnuts at the fi rst convenience store they came to. Erickson decided right then that there had to be a better option and that he was going to make it. By 1991, he was ready to launch his new product, an energy bar that he named after his father, Clif. For the CLIF Bar ’s debut, Erickson chose a large bike show, hoping to convince a few bike shops to carry his product. Within just a few months, seven hundred bike shops were carrying CLIF Bars. Th e company had $700,000 in revenues the fi rst year, $1.2 million the next, and continued growing at a rate of 50 to 100 percent each year for the next several years. Erickson had an opportunity to sell the com- pany for $120 million, but CLIF Bar would be moved from California to the headquarters of Quaker Oats, in the Midwest. Th e minute Erickson decided not to sell, he knew he ’d made the right choice. He asked his staff to help him create CLIF Bar as the kind of company they wanted to work for, the kind of company they could be even more proud of. Th at feedback, in conjunction with Erickson ’s own values, led the organization to com- mit to fi ve sustainability aspirations that would support the long-term health not only of CLIF Bar, but also of the surrounding communities and the environment.29

CLIF Bar is organized around five sustainability aspirations: “sus- taining our brands, sustaining our business, sustaining our people, sustaining our com- munity, and sustaining the planet.”30 Those objectives translate into the practices of listening and responding to consumers with new products; controlling growth; paying employees fair wages and providing opportunities to learn and advance; donating time, money, and products to the community; and continually working to reduce their eco- logical footprint. These proactive behaviors for the benefit of society are referred to as social responsibility . 31

In the upcoming sections, we will explore the following questions: Why would a compa- ny ’s management choose to allocate resources to support these behaviors? Are there social responsibility standards that managers can use to measure their organizations ’ behaviors? How do diff erent organizations approach social responsibility? Do these activities generate value for investors and shareholders?

Corporate Social Responsibility Many organizations today have corporate social responsibility (CSR) programs that coordi- nate the company ’s eff orts to address societal and community challenges as they emerge. Corporations like CLIF Bar actually have social responsibility as a part of the organization ’s values and mission, but most organizations isolate this function. Because managers and stakeholders are still debating the appropriate role for corporations to take in address- ing societal issues, governments and some organizations are beginning to formalize what defi nes a socially responsible company.32 So, what is the diff erence between a for-profi t com- pany that is focused on community needs, and nonprofi t companies? How do for-profi t companies approach social responsibility?

Approaches to Social Responsibility Generally speaking, for-profi t companies have the access and fl exibility to generate more money. Companies like CLIF Bar and Patago- nia, as we discussed in Chapter 1 , have concluded that focusing on stakeholders in the decision-making process creates more value for shareholders; therefore, they take a proac- tive approach , where the organization goes beyond industry norms to solve and prevent problems. As a manager, how do you know what is right for your company? To answer this question, shareholders and managers fi rst analyze the company ’s articles of incorpora- tion , which is the legal agreement between shareholders and management that determines the fi duciary duty of management in operating the organization. Most modern corporations make it optional for management to consider the interests of all stakeholders beyond just the shareholder. For Leslie Christian, co-founder of Upstream 21, optional was not enough. “Th ere ’s a provision that says the company may consider the interests of the community

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Social responsibility Proactive behavior by an organization for the benefi t of society.

Proactive approach An approach to social responsibility in which an organization goes beyond industry norms to solve and prevent problems.

Articles of incorporation The legal agreement between shareholders and management that determines the fi duciary duty of management in operating the organization.

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Chapter Six Ethics and Social Responsibility156

and of the employees and the eff ect on the local economy. We simply changed that require- ment from ‘may ’ to ‘shall. ’ It ’s not enough to say you can consider these interests—you must consider them.”33 Upstream 21 acquires small, privately owned businesses in the Pacifi c Northwest and operates them as wholly owned subsidiaries. Th eir mission is to help these companies grow in ways that are socially and environmentally responsible by providing fi - nancial and knowledge resources.34

Th is model for changing the legal structure of an organization to recognize formally the social responsibility of a corporation appealed to the founders of the nonprofi t organization B Lab, which certifi es socially responsible companies. “Certifi ed B Corporations are a new type of corporation which uses the power of business to solve social and environmental problems.”35 Organizations that pass a certifi cation test by “[setting] a benchmark for social and environmental impact for good companies” legally change their articles of incorpora- tion to require consideration of all stakeholders.36

It is not always easy to determine if an organization is socially responsible as organi- zations may accept social responsibility to varying degrees. In addition to the proactive approac h organizations may also take an accommodative, defensive, or reactive approach. Th e accommodative approach is when an organization accepts responsibility and takes action in response to societal pressures. Th e defensive approach is when an organiza- tion accepts responsibility but does only the minimum required. Th e reactive approach is when an organization denies responsibility for social problems and responds only when legally required. With all these approaches to social responsibility, does it pay for businesses to be nice?

Internal Transparency37 Transparency. You hear the word everywhere these days. Politicians and CEOs alike promise greater transparency in response to the many fi nancial scandals of recent years. But what does transparency really mean? In the fi eld of management studies, the term refers to the free fl ow of information within and between an organization and its stakeholders. In a democratic society, the “free fl ow of information” sounds like an inherently good thing. It is easy to see how transparency with its customers and shareholders can build trust with an organization, but what about internal transparency? In Transparency: How Leaders Create a Culture of Candor, Bennis, Goleman, and O ’Toole explain that the free fl ow of information doesn ’t mean that all information is accessible by anyone, any time. It makes sense to keep proprietary processes and designs secret, but not to “hoard” information without good reason. But it does mean that “critical information gets to the right person at the right time and for the right reason” (p. 4). For managers, that doesn ’t just mean sharing information with others. It also means listening carefully and asking the right questions. Subordinates are understandably reluctant to share bad news with their supervisors. But good managers will cultivate a culture in which

employees feel safe speaking freely so that they will have the information they need, when they need it, so they can manage effectively.

Professor ’s Response What this work does is to expand upon the defi nition of transparency to show that the “free fl ow of information”:

a. Involves both a top-down and down-to-top process (whereas traditional views imply a top-down fl ow of information)

b. Does NOT mean free fl ow of ALL information, ANY TIME

Manager ’s Response What I fi nd most compelling here is the reminder that the free fl ow of information isn ’t just about making sure you get the right information to other people. It ’s also about making sure that people feel comfortable getting the right information to you, so that you can make well- informed decisions.

Critical Thinking in the Classroom As a manager, how would you cultivate a trusting relationship with your teams to encourage the free fl ow of information?

Research@Work

Accommodative approach An approach to social responsibility in which an organization accepts responsibility and takes action in response to societal pressures.

Defensive approach An approach to social responsibility in which an organization accepts responsibility but does only the minimum required.

Reactive approach A response to social responsibility in which an organization denies responsibility for social problems and responds only when legally required.

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1576.4 | HOW DOES SOCIAL RESPONSIBILITY PAY OFF?

6.4 | HOW DOES SOCIAL RESPONSIBILITY PAY OFF?

6.4 | Explain how organizations seek to prosper through social responsibility.

Th e founders of Pura Vida, John Sage and Chris Dearnley, are social entrepreneurs —people who start a business for the dual purpose of profi t and societal benefi t. Th e idea for Pura Vida began in 1997, when John Sage met his Harvard classmate Chris Dearnley for their annual golfi ng reunion. Chris had been telling John about his work with homeless children in Costa Rica and his diffi culties in sustaining the funding that he needed to continue that work. John was impressed by the positive changes that Chris was making in these children ’s lives, and when Chris gave him a bag of coff ee that he had bought in Costa Rica for a third of what it would cost in the United States, John had a fl ash of insight. Why not use the ter- rifi c profi ts that could be realized in the U.S. coff ee market to fund the kind of social justice work that Chris was doing in South America? On a handful of paper napkins, John and Chris started sketching a business plan for what would become Pura Vida—a phrase that trans- lates literally as “pure life,” but also means “way cool” on the streets of Costa Rica. Pura Vida ’s mission “is to create good by using capitalism to empower producers, motivate consumers, inspire business leaders, and ultimately serve the poor.”

Pura Vida purchases only Fair Trade, organic, shade-grown coff ee. Th eir packaging is made from 100 percent recycled and recyclable materials, and their profi ts go directly to supporting social justice programs in the areas where the coff ee that they buy is grown. All these practices appeal directly to Pura Vida ’s target market of “values-driven, socially conscious consum- ers.” Pura Vida ’s big market break came when several colleges expressed interest in their products. Th e company ’s management immediately rec- ognized the potential of university contracts and began marketing to col- leges. It now has over 70 contracts with universities and colleges across the country and is earning multimillion-dollar revenues. As communities benefi t more from social entrepreneurship, consumers and investors are becoming more active in supporting and investing in companies that are socially responsible.38

Social Investing Wayne Silby was attending a retreat on the principle of “right living.” Partici- pants were asked, “How can you live your life in a way that is consistent with your values on a day-to-day basis?” Th at question got Silby thinking: he and his business partner John Guff ey had started an investment fund, First Vari- able Rate Fund, which was doing very well, but their investment strategies were not guided by the same values that guided the rest of Silby ’s life. Issues like social justice, human rights, and environmentalism were not common topics in investment circles in 1979. But Silby wondered if he could combine successful investment practices with his social values. What would happen if he started a fund that invested solely in companies that had good track records in racial and gender equality, in labor rights, and in environmentalism?39

To answer that question, Silby and Guff ey joined with Bob Zevin in 1982 to start the Calvert Social Investment Fund. Over the years, it became a highly successful socially respon- sible investment company that has earned steady returns and infl uenced many companies to make their business practices more socially responsible. In addition to evaluating com- panies ’ fi nancial performance, Calvert screens companies based on seven criteria: “environ- ment; workplace; human rights; Indigenous Peoples ’ rights; community relations; product safety and impact; and governance/business ethics.” Calvert Funds is a for-profi t company, but it also founded the Calvert Foundation, a 501(c)(3) nonprofi t organization that works on community investment. Th e investment products off ered by the organization generally pay a relatively low rate of interest (between 0 and 3 percent in 2013, compared with the historic

Social entrepreneur Someone who starts a business for the dual purpose of profi t and societal benefi t.

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average of about 9 to 10 percent for the stock market in the United States). People may pur- chase a Calvert Community Investment Note and select a return rate up to the maximum of 3 percent. When the note matures, the investor receives the amount invested plus interest. Meanwhile, the Calvert Foundation shows that the investment provides a “social return.” For example, $10,000 invested at 2 percent over three years yields about $600 (the fi nancial return), but it also “can fi nance 36 microenterprises creating 50 jobs abroad, or two aff ord- able housing units for low-income families in the U.S.”

6.5 | MANAGING RESPONSIBLY TODAY

6.5 | Summarize management ’s role in building responsible businesses based on ethical decision making.

Managing responsibly in today ’s business environment requires that managers make principle-based decisions informed by industry and societal standards. As illustrated throughout this chapter, these decisions have intended and unintended consequences that lead to positive and negative externalities. Th e role of all managers is to behave ethically and responsibly and to build an organizational culture that supports and expects those behav- iors for all employees. As a manager, you will be in a unique position to understand the impact that decisions made by your organization and its employees have on all stakehold- ers.40 What do you do with this knowledge?

Internalizing Externalities With a 16 percent share of the grocery market41 and as much as 40 percent in some metropolitan areas,42 Wal- Mart ’s product off erings can have a signifi cant eff ect on the diets of its customers. With encouragement from First Lady Michelle Obama, Wal-Mart ’s management rec- ognized that if a high percentage of its grocery off erings were high-profi t, low-nutrition products, it was external- izing the health costs of such products onto its customers. Working with Obama, Wal-Mart announced that it would “reformulate thousands of [ food] products to make them healthier and push its suppliers to do the same, [in an] eff ort to combat childhood obesity.”43 Th is is an example of “internalizing an externality,” when management pro- actively addresses a negative externality for the benefi t of its stakeholders.

Building an Ethical Culture Let ’s go back to the case of Jan Wilson, discussed earlier in the chapter. We examined that case as an ethical dilemma, but how might the Wal-Mart example help us further understand Wilson ’s challenge? Was her dilemma just about making the right ethical decision? One can reasonably conclude that Wilson ’s ethical and social responsibility begins inter- nally within the organization. How might Wilson work with senior management to build an ethical culture for her organization? Managers defi ne and foster ethical organizational cultures in two ways: 1) applying a framework for ethical decision making and 2) ethics training. A framework for ethics provides managers with the organizational rituals, stories, and symbols necessary to communicate ethical ideals and expectations.

Ethical Decision Making Framework Organizations with cultures that specifi cally communicate standards for ethical behavior have more engaged employees and better

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1596.5 | MANAGING RESPONSIBLY TODAY

performance results than their counterparts. Th e Wilson case is an appropriate example of this dynamic, where time must be spent considering dilemmas that could be spent fo- cusing on producing results. What makes an organization ethical? Ethical organizations consciously apply a framework through which behavior expectations are continuously com- municated and monitored. An ethical framework has four primary components: 1) duties, 2) rights, 3) standards of excellence, and 4) commitments. Duties can be perfect or imperfect. Perfect duties are moral obligations that are clearly articulated, such as a contract or verbal agreement (a “promise”). Imperfect duties are moral obligations that can be interpreted in diff erent ways. For example, whether an organization chooses to be more or less socially responsible and to include externalities. While duties defi ne your moral obligations, rights are the behaviors you can expect from others based on their duties. For example, if an organization signs a contract (a duty) to purchase a fl eet of used cars from a rental car company, the rental car company has the right to expect payment. Stan- dards of excellence are an organization ’s highest expectations of behavior for all employees, including required and prohibited behaviors. Finally, commitments are self-defi ned princi- ples unique to an organization or individual. Commitments are not mandatory behavior or externally expected, yet not fulfi lling on these principles can damage one ’s reputation.

Applying the Framework Eff ective and higher-performing organizations continuously com- municate and apply their ethical framework for legal and performance obligations. Th ere are three progressive steps for this application: 1) understanding the situation, 2) connecting behaviors to standards, and 3) impartial analysis. Let ’s say that you are in the accounting department for an Internet advertising company. One of the sales managers brings you a $200 restaurant and bar bill from last evening, with the explanation of the expense, “Sales meeting for important client.” Later in the day, you overhear one of your colleagues talking about having dinner and drinks with this sales manager last night. What do you do? To apply the framework, you must fi rst understand the situation. Immediately reporting the apparently dishonest behavior could be needlessly damaging to many people because there is not yet enough information to determine the expense ’s legitimacy. You fi nd out that the sales manager invited your coworker to dinner and drinks because she has family connec- tions with a Fortune 500 company. Once you fi nd out the exact details, it could turn out to be a valid expense. Next, you connect behaviors to standards . Reviewing the company ’s Code of Behavior Standards, you discover that hosting colleagues to discuss sales leads is a legitimate expense. Th at said, you also note that the company has a policy prohibiting employees from soliciting family members for personal benefi t. Now what do you do? Clearly this is an ethical dilemma, because the expense was valid, but the intent of the expense was not. Finally, you are responsible for conducting an impartial analysis of the situation, which has three factors— visibility, generality, and legacy. Visibility is sometimes referred to as the “newspaper test”—would you feel comfortable if your decision to approve this expense was printed on the front page of tomorrow ’s newspaper? Also, would you feel comfortable if everyone in the organi- zation made decisions like this? Th is is the generality factor. And fi nally, legacy —if you approved this expense, would you feel comfortable with people remembering you for this decision?44

Ethics Training Th e examples of behavior that we have discussed so far in this chapter relate to actions that have already occurred. Successful organizations prevent unethical behavior from occurring by eff ectively training all employees. Management researchers have identifi ed four facets of successful ethics training programs: 1) trainee characteristics, 2) needs assessment, 3) train- ing transfer, and 4) evaluation.45 Figure 6-6 shows a diagram of the Integrative Framework. When structuring a training program, the fi rst step is to understand the audience. Before you begin to design a training experience, successful facilitators document the following characteristics about trainees:

Training Characteristics ● What are the trainees ’ current moral profi les? Where do they reside on Kohlberg ’s

moral development scale? To what degree do they behave with integrity? Are they hon- est with themselves and others? Are their personalities predisposed to impulsive or deviant behaviors?

Perfect duties Moral obligations that are clearly articulated, such as a contract or verbal agreement.

Imperfect duties Moral obligations that can be interpreted in different ways.

Rights The behaviors you can expect from others based on their duties.

Standards of excellence An organization ’s highest expectations of behavior for all employees, including required and prohibited behaviors.

Commitments Self-defi ned principles unique to an organization or individual.

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Chapter Six Ethics and Social Responsibility160

● How assertive is the audience? More assertive personality traits are linked positively to ethical behavior.

● What is the audience ’s overall cognitive ability or intelligence level? ● What previous experiences have formed their perspectives on ethical behavior? People

exposed to unethical behavior, or victims of it, tend to be more receptive to training programs.

● What are their general demographics, such as age, gender, ethnicity, and personality profi les?

Needs Assessment ● Th e following assets can be helpful in assessing the audience ’s need for ethics training:

“employee surveys, advisory committees, assessment centers, management requests, exit interviews, and group discussions.”46

● Conduct an Ethics Climate Survey to determine “the prevailing perceptions of typical organizational practices and procedures that have ethical content.”47

● Clarify program expectations—trainers should clearly state the codes of conduct, standards of excellence, behavioral expectations, and the organizational goal for the training.

● Content should include topics on the fundamentals of ethics knowledge, assertiveness, productivity, and self-leadership.

● Senior management should have access to content that is meaningful and relevant to their roles in the organization.

● Th e following teaching strategies are eff ective in ethics training: discussions on dilem- mas, personal growth, role-playing, scenario-based games, and interactive simulations.

Training Transfer ● Reinforce that trainees were selected because of their potential to have a positive im-

pact on organizational performance, not as punishment. ● Provide trainees with a pretraining packet that introduces them to the concepts

covered.

Needs Assessment

Trainee Characteristics

Increased Cognitive Moral

Development

Individual Ethical Behavior

Evaluation (Reactions)

Evaluation (Learning)

Content Pedagogy

Evaluation (Behaviors)

Organization- Level Performance

Improvements

Training Transfer

Ethics Training Program

Evaluation (Outcomes)

Needs Assessment

Traineerr Characteristicsrr

Increased Cognitive Moral

Development

Individual Ethical Behavior

Evaluation (Reactions)

Evaluation (Learning)

CCoontent P oedagoPP gy

Evaluation (Behaviors)

Organization-rr Level PerfPP ormanceff

Improvements

Trainingrr Transfrr erff

Ethics Trainingrr Program

Evaluation (Outcomes)

Figure 6-6 An Integrative Framework The Integrative Framework is often used as a model for ethical training programs to assess and evaluate the behaviors and characteristics of the trainees. Source: Adapted from D. Wells and M. Schminke, “Ethical Development and Human Resources Training: An Integrative Framework,” Human Resource Man- agement Review 11 (2001): 135–158.

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161

● Encourage trainees to state clearly what they would like to achieve as a result of the training—a goal for increasing a specifi c competency.

● Ensure training is similar to the activities and tasks that the audience experiences dur- ing a normal workday.

● Performance and ethical behavior increases commensurate to the support and rein- forcement of training topics once the trainees return to the workplace.

● When employees return to an ethical environment, training is more likely to lead to behavior change successfully.

Evaluation ● Training evaluation should include four levels: trainee reactions, knowledge/skill tests,

positive change in workplace behavior, and organizational performance results.48

In the Interests of Self or Others? What is the risk of managers not acting responsibly or ethically? Is there a dilemma between serving self-defi ned principles and the interests of others? To answer this question, let ’s look back at a discussion we began in Chapter 3 on the rapidly growing economies of Brazil, Rus- sia, India, and China. Because the world has limited quantities of food, energy, and water, if all these countries had the same quality of life and consumed these limited resources at the same rate as Americans, how long would it be before these limited resources are depleted? In systems thinking, this “all for one; none for all” behavior pattern is referred to as “Tragedy of the Commons” as shown in Figure 6-7. In the 17th century, immigrants in New England formed communities that had both private land and shared pastures where cattle could graze, known as commons. Over time, these commons were badly maintained and overused, resulting in a useless piece of land for everybody.49 Th is became known as the tragedy of the commons , which is a common pattern identifi ed in economics and systems thinking. In this behavior pattern, two or more entities “pursue actions which are individually benefi cial,”50 where resources supporting these actions are limited. If entities pursuing individually benefi cial actions do not under- stand the impact of their actions, the system risks breaking down or losing its value for all involved. Any person living close to a big city understands the consequences of the tragedy of the commons. Organizations that operate on “traditional business hours” expect employees to be in the offi ce from 9 a.m. to 5 p.m., Monday through Friday. For many reasons, this makes a lot of sense: other companies that we work with are open during those times, we all get to spend time with our families at night, and so forth. Th e problem comes when most compa- nies pursue this action; driving to and from work in bumper-to-bumper traffi c can become a nightmare. Like the pasture for raising cattle, the roads are a place to which all commu- nity members share access. Yet, if we all expect to use roads at the same time of day, traffi c becomes so bad that the system becomes useless. In business, this example translates to any situation where competitors pursue self-serving actions based on limited resources; eventu- ally, all competitors will lose.

Ethical Dilemma Revisited Does this mean that serving the interests of others is manag- ing responsibly? Not necessarily. Based on everything we discussed in this chapter, do you think Clayton Christensen should have played in the championship game? Th e decision to play in the game would have served the interests of others. Would a decision not to play in the game be principled or selfi sh? Once he became the captain of the team, didn ’t he have an obligation to serve the team and organization ’s interests over his own personal principles? Let ’s fi nd out what decision Christensen made, why, and if he regretted it. “I ’m a deeply religious man, so I went away and prayed about what I should do. And I got a very clear feeling that I shouldn ’t break my commitment—so I didn ’t play in the championship game. In many ways that was a small decision—involving one of several thousand Sundays in my life. In theory, surely I could have crossed over the line just that one time and then not done it again. But looking back on it, resisting the temptation whose logic was ‘In this extenuating circumstance, just this once, it ’s OK ’ has proven to be one of the most important decisions of my life. Why? My life has been one unending stream of

6.5 | MANAGING RESPONSIBLY TODAY

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Chapter Six Ethics and Social Responsibility162

Net Gains for A

A’s Activity

Delay

B’s Activity

Net Gains for B

Total Activity

Gain per Individual Activity

Resource Limit

R1

R2

R3

R4

B5

B6

Net Gains for A

A’s Activity

Delay

B’s Activityt

Net Gains for B

Total Activityt

Gain per Individual Activityt

Resource Limit

R1

R2

R3

R4

B5

B6

Figure 6-7 Tragedy of the Commons Systems Archetype Individuals over-use resources for individual gain, until the resource is depleted.

Source: D. Kim, Systems Archetypes II (Waltham, MA: Pegasus Communications, Inc., 1994).

extenuating circumstances. Had I crossed the line that one time, I would have done it over and over in the years that followed. Th e lesson I learned from this is that it ’s easier to hold to your principles 100 percent of the time than it is to hold to them 98 percent of the time. If you give in to ‘just this once, ’ . . . , you ’ll regret where you end up. You ’ve got to defi ne for yourself what you stand for and draw the line in a safe place.”

CaseSnapshot Chapter 6 Case: Ethics and Social Responsibility:

Chipotle can be found on pg. 468

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163Additional Resources

ADDITIONAL RESOURCES

Key Termss Accommodative approach An approach to social responsibility in which an organization accepts responsibility and takes action in response to societal pressures. (p. 156) Articles of incorporation The legal agreement between share- holders and management that determines the fi duciary duty of management in operating the organization. (p. 155) Codes of conduct An organization’s guidelines for ethical be- havior, also called a “code of ethics.” (p. 153) Commitments Self-defi ned principles unique to an organization or individual. (p. 159) Community principle Making decisions that contribute to the strength and well-being of the community. (p. 152) Conventional stage In Kohlberg’s model, the stage of moral development in which the individual’s moral decisions are based primarily on societal norms. (p. 146) Defensive approach An approach to social responsibility in which an organization accepts responsibility but does only the minimum required. (p. 156) Distributed justice principle Making decisions that do not harm those who are already disadvantaged. (p. 152) Escalation An increase in an organizational behavior as a direct response to a competitor’s behavior. (p. 149) Ethics The moral principles, values, and beliefs that govern group or individual behavior according to what is right or wrong and what contributes to the balanced good of all stakeholders. (p. 144) Ethical dilemma A situation in which no choice is entirely right. (p. 144) Externality A cost (negative) or benefi t (positive) that occurs be- yond the direct exchange between an organization and its stake- holders. (p. 148) Global level of ethics The principles, values, and beliefs that are widely considered universal. (p. 150) Imperfect duties Moral obligations that can be interpreted in different ways. (p. 159) Individual rights principle Making decisions that do not in- fringe upon the rights of other people. (p. 152) Legal principle Making decisions that follow both the letter and the spirit of the law. (p. 152) Long-term principle Making decisions that support the long- term interests of yourself and your organization. (p. 152)

Perfect duties Moral obligations that are clearly articulated, such as a contract or verbal agreement. (p. 159) Postconventional stage In Kohlberg’s model, the stage of moral development in which an individual’s moral decisions are based primarily on what he or she believes is good for society as a whole. (p. 146) Preconventional stage In Kohlberg’s model, the stage of moral development in which an individual’s moral decisions are based primarily on self-protection or self-interest. (p. 146) Principle-based management A management style in which an organization proactively connects values and beliefs to behav- ior expectations, where all stakeholders are continuously made aware of these standards. (p. 153) Proactive approach An approach to social responsibility in which an organization goes beyond industry norms to solve and prevent problems. (p. 155) Reactive approach A response to social responsibility in which an organization denies responsibility for social problems and re- sponds only when legally required. (p. 156) Rights The behaviors you can expect from others based on their duties. (p. 159) Social entrepreneurs Someone who starts a business for the dual purpose of profi t and societal benefi t. (p. 157) Social responsibility Proactive behavior by an organization for the benefi t of society. (p. 155) Societal norms Society’s expectations about how people (and organizations) should behave. (p. 146) Stakeholders Individuals or groups who have a direct interest in an organization’s behavior and experience the effects of the company’s management decisions. (p. 148) Standards of excellence An organization’s highest expectations of behavior for all employees, including required and prohibited behaviors. (p. 159) Utilitarian principle Making decisions that provide the greatest good to the greatest number (or the least harm to the fewest number). (p. 152) Values-based management A management style in which the company’s culture affects employee behavior in ways that are consistent with the organization’s mission and values. (p. 147) Virtuous principle Making decisions that you would be publicly proud of. (p. 152)

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164 Chapter Six Ethics and Social Responsibility

IN REVIEW W 6.1 | Explain ethics as they relate to the fi ve domains of individuals, organizations, stakeholders,

government, and the global community.

As described by psychologist Lawrence Kohlberg (1927– 1987), individuals go through three “stages of moral devel- opment” in their lives (preconventional, conventional, and postconventional), in which the individual transitions from acting in the interest of the self to acting in the interest of others. An example of ethics in the organizational domain is the case of Ben & Jerry ’s, which has been giving back to the community since its inception. Ethical behavior towards stakeholders means taking into consideration everyone who will be affected by the organization ’s behavior. When organizations do not behave ethically, governments must sometimes step in with new regulations. Global ethics are the principles, values, and beliefs that are widely considered universal, such as those upon which the United Nations is founded.

6.2 | Demonstrate processes and practices for managing organizational ethics.

When there is no clearly correct course of action, managers are required to make decisions based on one or more of the follow- ing principles: legal, individual, virtuous, long-term self-interest, community, utilitarian, and distributed justice. To assist with ethical decision making, many organizations publish ethical guidelines called codes of conduct .

6.3 | Describe how businesses approach social responsibility.

Social responsibility means acting proactively for the ben- efi t of society. Many organizations today have corporate social

responsibility (CSR) programs that coordinate the company ’s eff orts to address societal and community challenges as they emerge. In a proactive approach , the organization goes beyond industry norms to solve and prevent problems. Th e accommoda- tive approach is when an organization accepts responsibility and takes action in response to societal pressures. Th e defensive ap- proach is when an organization accepts responsibility but does only the minimum required. Th e reactive approach is when an organization denies responsibility for social problems and re- sponds only when legally required.

6.4 | Explain how organizations seek to prosper through social responsibility.

As communities benefi t more and more from social entrepre- neurship, consumers and investors are becoming more active in supporting and investing in companies that are socially respon- sible. Socially responsible companies can fi ll niche markets, as in the case of Pura Vida. Social investment fi rms like the Calvert Community Investment Fund can make money because of their strict criteria for investment opportunities and their unique ap- peal to customers.

6.5 | Summarize management ’s role in building responsible businesses based on ethical decision making.

Managing responsibly in today ’s business environment requires that managers make principle-based decisions informed by industry and societal standards. In some cases, organizations may decide to address a negative externality proactively by internalizing it, thus benefi ting stakeholders. Managers defi ne and foster ethical organizational cultures in two ways: 1) applying a framework for ethical decision making and 2) ethics training.

SELF-TEST T 6.1 | Explain ethics as they relate to the fi ve domains of individuals, organizations, stakeholders,

government, and the global community.

1. A situation in which no choice is entirely right is called a. situational ethics b. an ethical dilemma c. morality d. escalation

2. Name and describe the three stages of individual moral development.

3. An externality is a cost (negative) or benefi t (positive) that occurs within the direct exchange between an organization and its stakeholders. a. True b. False

4. With the Act, top management is legally obligated to understand and approve their organization ’s fi nancial practices.

5. What is the the “Global Compact,” established by the United Nations?

6.2 | Demonstrate processes and practices for managing organizational ethics.

6. Which of the following is NOT one of the principles used to make principle-based decisions? a. individual rights principle b. long-term principle c. global principle d. community principle

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165Additional Resources

7. A consistent set of ethical behavior expectations, published by organizations and clearly stating behavioral requirements and prohibitions, is called .

8. Name two of the eight broad categories of ethical standards that can be addressed by the above.

9. Explain principle-based management.

6.3 | Describe how businesses approach social responsibility.

10. Which of the following is NOT an approach to social responsibility? a. accommodative b. defensive c. transparent d. reactive

11. How did Upstream 21 implement a proactive approach to social responsibility?

6.4 | Explain how organizations seek to prosper through social responsibility.

12. As communities benefi t more from social entrepreneurship, consumers and investors are becoming more active in supporting and investing in companies that are socially responsible. a. True b. False

6.5 | Summarize management ’s role in building responsible businesses based on ethical decision

making.

13. What does “internalizing an externality” mean?

14. What are the two ways that managers defi ne and foster ethical organizational cultures?

15. What are the four primary components to an ethical framework?

16. What is the tragedy of the commons?

CHAPTER EXERCISEE Backovers and Backup Cameras: Worth the Cost? Two-year-old Cameron Gulbransen was fast asleep on a Saturday night when his parents returned home from a dinner with friends. While Cameron ’s mom, Leslie, was paying the babysitter, Cameron ’s dad, respected pediatrician Dr. Greg Gulbransen, went back outside to move the family SUV into the driveway. No one realized that Cameron, who had awakened upon hearing his parents ’ voices, had followed his dad out the front door, dressed in his pajamas and dragging his blue blanket. Cameron walked to the end of the driveway just as Dr. Gulbransen was backing in. “I felt a bump. I didn ’t know what it was,” Dr. Gulbransen later recalled, “Quickly I jumped from the vehicle and saw the most devastating scene of my life. My little Cameron was lying down with his blanket in his hand while bleeding profusely from his head. As a physician, I knew it was the end. I did everything I could do and so did the paramedics. Cameron had died a sudden and horrible death because he was too small for me to see him behind my vehicle.” Sadly, Cameron Gulbransen ’s story is not uncommon enough. According to KidsandCars.org, approximately 50  children are backed over by vehicles every week in the United States. Of those children, 48 are treated in hospital emergency rooms, while at least 2 children are fatally injured every week. More than 100  children age 5 or younger die from backover deaths each year, according to the National Highway Traffi c Safety Administration (NHTSA). Tragically, in most of these cases, parents or grandparents are behind the wheel. Many of these backover deaths could be prevented through the use of backup cameras and/or other technologies that could warn drivers of potential dangers. In fact, the NHTSA is currently

in the process of fi nalizing legislation that will require backup cameras in all cars and trucks sold in the United States. Th e backup camera technology will increase the price of new cars and trucks by around $200 per vehicle. Th e NHTSA calculates that the rearview camera proposal will cost consumers between $11.8 million and $19.7 million per life saved.

Instructions: Pair up with someone else in your class. Choose one of the following positions. Have your partner take the opposite position and debate the issue.

Position 1. Th e U.S. government and the automobile manufacturers have a corporate social responsibility to provide vehicles to consumers that are as safe as possible. Backup cameras should be mandatory because they save lives. All consumers should be willing to pay extra for new vehicles to save lives. You can ’t place a value on a human life.

Position 2. Backup cameras should not be mandatory. Cor- porate social responsibility is one thing, but the government and automobile manufacturers can ’t be expected to mitigate every possible danger associated with vehicles. Cameras should remain optional for those people who have small children, but people who do not have children should not be forced to pay extra for something they don ’t need. Human life is precious, but $11.8 million and $19.7 million per life saved is an exorbitant cost for consumers to bear. Besides, parents should keep better track of where their children are at all times.

Having debated the issue, which position do you now believe is the most valid? Why? What arguments would you use to con- vince someone else of your position?

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166 Chapter Six Ethics and Social Responsibility

SELF-ASSESSMENTT How Ethical Am I?*

For each statement, circle the number that best describes you

based on the following scale:

Not at all Accurate

Somewhat Accurate

A little Accurate

Mostly Accurate

Completely Accurate

1 2 3 4 5

1. I consistently work the hours I ’m paid for and avoid using sick leave unless I ’m really sick.

1 2 3 4 5

2. I take full responsibility for my actions, behaviors, and attitudes. I avoid “passing the buck” or blaming others for my problems and mistakes.

1 2 3 4 5

3. I know and follow all of the rules established by my organization.

1 2 3 4 5

4. When given a task or assignment, I regularly try to do more than is expected of me.

1 2 3 4 5

5. When I see things that need to be done, I do them without waiting for others to take the lead.

1 2 3 4 5

6. I ’m a considerate coworker. I regularly clean up after myself and avoid behaviors that may disturb others or cause them additional work.

1 2 3 4 5

7. I remember my promises and commitments, and I keep them.

1 2 3 4 5

8. When I ’m down, I avoid whining, complaining, or otherwise spreading negative feelings to my coworkers.

1 2 3 4 5

9. I look for (and seize) opportunities to help my coworkers be successful rather than just “being in it for myself.”

1 2 3 4 5

10. I make an eff ort to be patient with everyone I work with (and for)—cutting them the same “slack” that I wish for in return.

1 2 3 4 5

11. I respect and protect my organization ’s equipment, re- sources, and facilities—just as if I owned the business and had my personal fi nances at stake.

1 2 3 4 5

12. It ’s critically important for me to always perform with ethics and integrity . . . and I do it!

1 2 3 4 5

Scoring:

Add the numbers circled above: __________

Interpretation

48 and above 5 You are a highly ethical person who rarely com- promises your ethical standards.

25—47 5 You are a moderately ethical person, but you are likely inconsistent in your application of your ethical standards and values.

24 and below 5 You need to make some substantial improve- ments in establishing and consistently adhering to your ethical standards and behaviors.

*Adapted from a “Walk the Talk” resource, available at http://www.walkthetalk.com/media/solution_fi nder/pdf/ how_ethical_am_i.pdf.

SELF-TEST ANSWER KEYY 1. b.

2. preconventional —moral decisions motivated by self- interest; conventional— moral decisions motivated by societal norms; postconventional —moral decisions are motivated by what ’s good for society as a whole

3. b. False; this occurs beyond the direct exchange.

4. Sarbanes-Oxley

5. a strategic policy initiative for businesses that are commit- ted to aligning their operations and strategies with 10 uni- versally accepted principles in the areas of human rights, labor, environment, and anti-corruption

6. c.

7. a code of conduct

8. Fiduciary, Dignity, Property, Transparency, Reliability, Fair- ness, Citizenship, Responsiveness (See Table 6-3 for more information.)

9. When an organization proactively connects values and beliefs to behavior expectations, where all stakeholders are continuously made aware of these standards.

10. c.

11. Th ey made consideration of the interests of all stakehold- ers, including the community and the local economy, a requirement in their organization instead of an optional consideration.

12. a. True

13. When management proactively addresses a negative exter- nality for the benefi t of its stakeholders.

14. applying a framework for ethical decision making, and eth- ics training

15. duties, rights, standards of excellence, and commitments

16. Two or more entities pursue individually benefi cial actions where resources supporting these actions are limited, re- sulting in possible system breakdown or devaluation for all.

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Part

Chapter 7 | Making Better Decisions

Chapter 8 | Setting Goals

Chapter 9 | Designing Strategies

Planning

167

three

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C H A P T E R O U T L I N EC H A P T E R O U T L I N E

169169

I N S I D E T H I S C H A P T E R

ManagementStory: Featuring Chris Heppler

Learning Objectives

7.1 | Decisions That Make a Difference

MANAGER PROFILE: David J. Makarsky Types of Decision Making

7.1 | Describe the seven steps of the decision-making process.

7.2 | Identifying and Understanding the Problem

Symptomatic Eff ects

VOICES OF MANAGEMENT: Bob Adler Underlying Causes

RESEARCH @ WORK: Effective Intuition

7.2 | Identify problems by analyzing causes and eff ects.

7.3 | Generating Alternatives 7.3 | Describe how managers generate alternatives.

7.4 | Evaluating Alternatives 7.4 | Predict possible consequences of alternatives.

7.5 | Path Selection 7.5 | Demonstrate how managers select the most desirable alternative.

7.6 | Implementation 7.6 | Describe the manager’s role in implementing alternatives.

7.7 | Feedback and Results 7.7 | Explain the patterns of behavior and delayed results for decisions made.

By the end of this chapter, you will be able to:

7.7 | Explain the patterns of behavior and delayed results for decisions made.

Key Terms

In Review

Self-Test

Chapter Exe rcise

Self-Assess ment

Self-Test

Answer Key

Additional Resources

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Chapter Seven Making Better Decisions170

7.1 | DECISIONS THAT MAKE A DIFFERENCE

7.1 | Describe the seven steps of the decision-making process.

“The human being striving for rationality and restricted within the limits of his knowledge has developed some working procedures that partially overcome these diffi culties. These procedures consist in assuming that he can isolate from the rest of the world a closed system containing a limited number of variables and a limited range of consequences.” 1

— Herbert Simon, management theorist (1947)

Decisions are not events. If people in organizations could make the absolute “right” choice every time, the role of a manager would be greatly reduced. Decisions are processes, with a beginning, middle, and end. Earlier in this book, we discussed the diff erent dynamics and variables, from internal to external forces, that continuously change the situations that managers and organizations face. 2 To help prepare you for making better decisions inside an organization, we will explore how managers make decisions through in-depth stories inspired by real life events. Real-life management decisions are much more complicated than books often make them seem. So what will we off er you here? We will present you with a reliable seven-step

7.1 | DECISIONS TTTHHHHATTTT

7.1 | Describe the seven steps of t

“The human being striving forr rarattion knowledge has developed someme wwork diffi culties. These procedures ccononsist of the world a closed system coontainin range of consequences.” 1

—

Decisions are not events. If people in organ every time, the role of a manager would be beginning, middle, and end. Earlier in this variables, from internal to external forces

ManagerProfi le David J. Makarsky Senior Vice President of Operations, B. F. Saul Hospitality Group

D ave leads the operations team, with the goal of achiev-ing excellence in guest, team member, and owner sat- isfaction at all of B. F. Saul ’s properties, which include 14 hotels in the metropolitan Washington, D.C. area as well as three hotels in Florida and one in Michigan. Working with him on the operations team are the regional directors, the corporate director of human resources, the corporate direc- tor of food and beverage, and the fi nancial, development, and operations analyst. Dave joined the B. F. Saul Hospitality Group in 1998 as a regional director for four hotels. Six years into his tenure, he assumed the position of vice president of human resources. Dave ’s success during his three years in this role yielded a more strategic role for human resources within the organization and ultimately led to his promotion to vice president of operations in 2007. His prior experience

included positions as general manager, regional food and beverage director, regional director of hotel operations, and free-standing restaurant manager. Dave holds a B.S. degree from the Cornell University School of Hotel Administration. Dave serves on the board of directors for the Dulles Regional Chamber of Commerce. He has served as an “Executive in Residence” for a graduate level Human Resource course in the Department of Hospitality and Tourism at Virginia Tech. For the past two years, Dave has spoken at the HR in Hospitality Conference, which is co- sponsored by Human Resource Executive magazine and Cornell University ’s Schools of Hotel Administration and Industrial and Labor Relations. He has also addressed numerous gatherings of human resource and hospitality professionals in the metropolitan Washington, D.C. region. ■

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1717.1 | DECISIONS THAT MAKE A DIFFERENCE

decision-making process to make better decisions—but they may not always be the “right” decisions. We will show you how a real team made decisions to recover from poor fi nancial and quality performance. We will give you ways of thinking through complex situations and the opportu- nity to practice making the well-considered choices required of a man- ager. Making decisions is the real art of management—probably the one element of a manager ’s job that can clearly determine success or failure.

Why is decision making an art? It is the act of balance. Spend too little time, and decisions often lead to undesirable outcomes; spend too much time, and you can become paralyzed, resulting in lost opportunity and reduced team motivation. If you spend just two minutes choosing classes for next semester, for example, you ’ll likely end up with classes that don ’t really fi t your needs and schedule. On the other hand, if you spend days ago- nizing over the decision, the classes you want might fi ll up and your current schoolwork will suff er from lack of attention.

Managers today have the added benefi t (and sometimes liability) of much more data, computers to handle complex sets of variables, and a communication infrastructure to explore thoroughly a vast array of con- sequences associated with each decision. Th is often comes at the cost of overanalyzing a situation. In reality, it is impossible to know all the vari- ables. All decisions are necessarily based on incomplete analysis, which is why managers will continue to be responsible for making many judg- ment calls. Let ’s look at how a real-world case presented a manager with an array of choices, but not much time to make a diff erence.

Types of Decision Making Th e following case study is inspired by the real management events of David J. Makarsky , Senior VP of Operations for the B.F. Saul Hospitality Group, discussed in the Manager Profi le on the previous page.

In the following case study, we follow fi ctional character Chris Heppler (based on Dave Makarsky) and his goal to achieve excellence at a hotel based on a small island off the coast of South Carolina. Th e Hilton Head Dolphin Resort & Hotel is a unique property on Hilton Head Island, and it ’s the only hotel with access to the public beach. Herb Cork became the general manager of the Hilton Head Dolphin Resort in 2008, vowing to increase profi tability by raising the average daily rate that guests pay for their rooms. Cork was a quiet manager who was fond of fi nancials and the quantitative responsibilities of management. Despite his detailed man- agement style and fondness for numbers, the hotel ’s profi t over the past decade had steadily declined even though there had been an increase in revenue. Kathy Osborne, the owner of the hotel, decided that a change was required. In 2014, she hired a new general manager. When Kathy Osborne interviewed Chris Heppler, she showed him the resort ’s revenue and profi t numbers for the past fi ve years (see Figure 7-1 ) and told him that his goal would

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Profitability Revenue

Figure 7-1 Hilton Head Dolphin Resort & Hotel Financials   Revenue and profi t numbers for the Dolphin Resort over fi ve years.

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Chapter Seven Making Better Decisions172

be to increase the hotel ’s profi t by $500,000 for the following year. As the two of them discussed the graph, Kathy asked Chris how he would explain an increase in revenue over time, coupled with a decrease in profi t. Chris indicated that he didn ’t have an answer, but that he loved the challenge of solving diffi cult problems. He only had one request: “If I take this position, I want fl exibility and your support to make the deci- sions required to achieve your goal.” Kathy agreed, and Chris was hired. In this chapter, we will explore the process through which manag- ers make decisions with teams and the impact that those decisions can have over time. Th ere are two types of decisions that managers make: programmed and nonprogrammed . Programmed decision are based on preestablished rules in response to a recurring situation. 3 For example, as Chris would discover, the restaurant manager at the Dol- phin Resort automatically orders more soda when inventory declines to a predetermined level. So what type of decision did Chris face after

Kathy Osborne off ered him the position as general manager? As they consider all the alter- natives involved in making this underperforming organization successful, Chris and the team at the Dolphin Resort will make a series of nonprogrammed decision based on reason and/or intuition in response to a unique situation that requires a tailored decision. 4

Th ese decisions will include refocusing eff orts, such as service behaviors—some hotels off er freshly baked cookies for arriving guests—or changing the inventory of the gift shop to appeal to a diff erent demographic. What process should Chris implement with his team to make more successful decisions than his predecessor?

The classical model of decision making is a normative model of decision making that leads to an optimum decision, assuming full availability of information, sufficient time, and rationality of the decision maker. An optimum decision is the best possible decision given all the needed information. The classical model as shown in Figure 7-2, describes a linear process and assumes that managers will make the “right decisions.”

As Herbert Simon suggested in 1947, the assumption that you can isolate “a closed sys- tem” from the rest of the world is a faulty theory. As we have explored in previous chapters, systems are open and continuously dynamic; therefore, the decisions that managers make are processes, not events. Th is is why in a systems approach to critical thinking, we look at diagrams that show interconnected variables and behavior over time. We will discuss a seven-step process to make better decisions as a manager as illustrated in Figure 7-3 : 1) identify the problem, 2) analyze the problem and its causes, 3) generate alternatives, 4) evaluate alternatives, 5) choose a path, 6) implement a choice, 7) solicit feed- back and analyze results. 5

Classical model A normative model of decision making that leads to an optimal decision, assuming full availability of information, suffi cient time, and rationality of the decision maker.

Optimum decision The best possible decision given all the needed information.

List all alternatives and their consequences

Assumes complete information about

alternatives is available

Assumes mental capacity to accurately

process this information

Assumes the best future consequence for the

organization can be known

Rank alternatives

Select alternative with optimum

future consequence

Figure 7-2 Classical Model of Decision Making   A decision-making model that tells managers how to make a decision based on a variety of assumptions.

© M

ar tin

S ie

p m

an n/

im ag

eb ro

ke r/

C o

rb is

Programmed decision A decision based on preestablished rules in response to a recurring situation.

Nonprogrammed decision A decision based on reason and/or intuition in response to a unique situation that requires a tailored decision.

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1737.2 | IDENTIFYING AND UNDERSTANDING THE PROBLEM

Many companies create policies and rules to maximize the number of programmed decisions that managers make in order to reduce the likelihood of error. In a rapidly chang- ing business environment, more businesses are implementing adaptive management philosophies for decision making, which require managers to use critical thinking, col- laboration, and refl ection skills to make nonprogrammed decisions. 6 Let ’s explore how Chris followed these steps to become more adaptive to systemic forces and to make better decisions.

7.2 | IDENTIFYING AND UNDERSTANDING THE PROBLEM

7.2 | Identify problems by analyzing causes and eff ects.

When Chris arrived at the Dolphin Resort & Hotel, it was a blustery January morning, with howling winds and freezing rain. Th e hotel was empty. When he walked into the lobby, he saw no one standing behind the front desk, no one in the gift shop, no one in the restaurant. Chris thought, “Are we closed and somebody forgot to lock the doors?” As he approached the front desk to fi nd a phone, he saw a large bell, with a sign that read, “Ring Bell LOUDLY For Service . . . Th anks!” Chris rang the bell, and Ken Gold, the resort ’s director of sales, emerged from a hallway that connected the front-desk area to the management offi ces. “Hey! What can I do for you?” Ken seemed impatient for a response. “Hi, I ’m Chris Heppler, the new general manager.” Ken looked surprised. “Oh! I ’m Ken Gold, director of sales. We thought you were coming next week. Kathy told us to have the place super clean for your arrival. Sorry things are a little messy—this is the time of year we all catch up on our sleep!” “Where is everybody?” “Oh, it ’s just me, and Zoey Zhang, one of the kitchen staff .” Chris laughed. “You are joking, right?”

Figure 7-3 Seven Steps to Better Decision Making   A seven-step process to making better decisions.

Identify the Problem

Choose Path

Evaluate Alternatives

Generate Alternatives

Solicit and Analyze Feedback

and Results

Analyze the Problem and its Causes

Implement Choice

Decision-Making Process

Identify the Problem

Choose PathPP

Evaluate Alternatives

Generate Alternatives

Solicit and Analyze FeedbacFF k

and Results

Analyze the Problem and its Causes

Implement Choice

Decision-Making Process

Adaptive management An approach to decision making that requires managers to use critical thinking, collaboration, and refl ection skills to make nonprogrammed decisions.

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Chapter Seven Making Better Decisions174

“No—we really cut back this time of year. With only a few guests in the hotel, we only clean their rooms every other day, and Zoey and I can handle all of the other service requests.” “Could you please call everybody and schedule a staff meeting for Friday? Th is will give me some time to look through the fi nancials and performance reports. In the meantime, I would appreciate a tour of the property.” Ken looked back at the offi ce, as if he had more important things to do. “Is now not a good time for you?” Chris asked. “Probably not . . . I have a couple of calls I wanted to make. How about I meet you here at 8 a.m. tomorrow? I can show you around then.” Realizing that Ken was serious, Chris obliged. “Th at will be fi ne.” Chris did not have to look long before he noticed some major problems. From the moment he walked into the resort, he noticed that service was nonexistent, and he felt like he was bothering Ken by asking him for a tour. At this point, Chris faced a lot of ambiguity , where information about the situation, goals, or criteria is incomplete or can be interpreted in multiple ways. Ambiguity is common. Managers rarely have all the information they need to make the best possible decision. 7 Th en how do managers eff ectively approach ambiguity? A common mistake managers make is to confuse identifying undesirable symptoms with the actual problem. Appropriately identifying and understanding problems allows manag- ers to more eff ectively change behavior. In this case, Kathy had already identifi ed the problem facing the Dolphin Resort as poor fi nancial performance. Using Chris ’s experience as an example, we will examine how manag- ers eff ectively understand problems based on four steps: 1) observe undesirable symptoms, 2)  acknowledge all underlying causes that could create undesirable symptomatic eff ects, 3) qualify the systemic problem based on causes and eff ects, and 4) identify root problems with controllable behaviors that can be readily addressed.

Symptomatic Effects After walking around the hotel property for a while, Chris went into the restaurant ’s kitchen and introduced himself to Zoey Zhang. Warm and friendly, her personality was everything you could hope for in a hotel employee. Chris is confi dent that with 20 more employees like Zoey, the Hilton Head Dolphin Resort & Hotel is sure to be a success once more. Friday was Chris ’s fi rst team meeting with the employees at the resort. After introduc- tions and conversations during a continental breakfast, he started by asking the team a question: “Can anyone tell me how many times in the past fi ve years the hotel has achieved

Bob Adler 8 Senior Vice President, Terrapin Management Corporation

Bob Adler 8 Senior Vice President, Terrapin Management Corporation

Voices ofManagement

B ob Adler found his career path early. When he was 20 years old, he worked for a ski lodge in Big Sky, Montana, and knew immediately that he wanted to work in the hotel industry. He ’s now senior vice president of hotel operations at Terrapin Management Corporation, in Albu- querque, New Mexico, and has never regretted his early career decision for an instant. But not all choices are so clear. When faced with ambiguity, says Adler, it ’s best “not to resist change and unfamiliar circumstances, but rather embrace them for the rich opportunities and experiences that unfold when we simply say yes. One of the things I ’m most proud of is the choice to accept new challenges and increasing responsibilities whenever presented to me, even

if it felt uncomfortable and included some fear of the un- known.” With that attitude, Adler has made a successful career that is still as exciting today as it was when he began 20 years ago.

Adler's advice to students? “Lead with your head and your heart, and always be true to yourself and your values, even when you face resistance. Do the right things and everything will work out well.”

Critical Thinking in the Classroom

As a manager, how would you apply Adler ’s ethos of embracing change while maintaining your own values in the workplace? ■

Ambiguity Information about the situation, goals, or criteria that is incomplete or can be interpreted in multiple ways.

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1757.2 | IDENTIFYING AND UNDERSTANDING THE PROBLEM

its quality goal?” A few hands were raised—“Sure. We ’ve achieved that goal every single year. I know that because achieving our quality goal is tied to our annual bonus,” said John John- son, the resort ’s food and beverage director. “Th at ’s correct,” Chris said. He paused to draw a graph on a whiteboard (as shown in Figure 7-4 ) . “Now, can anyone help me understand why the quality goal has decreased every year for the past six years?” Once again, a few hands were raised—“We had a really diffi cult few years fi nancially, and to keep our profi t up, Mr. Cork decided not to make capital improvements, like new carpet or dishware. He said it was only fair that we adjust our quality goals for things that we cannot control—like worn carpet,” Johnson continued. Clearly, service quality and its goals are a problem at the Dolphin Resort. Th at might be the entirety of the problem, requiring a very straightforward solution. Assuming this, Chris could simply raise the quality goals, implement service training programs, and hope that these decisions would solve the problem. Yet in this situation, service quality results and gradually declining quality goals are just symptomatic eff ects , or observable behaviors related to underlying causal variables. If Chris stopped his analysis of the problem here, what else might he miss?

Underlying Causes Problems are undesirable behaviors. We notice problems by recognizing symptomatic eff ects . To understand the origins of these symptoms, we must then explore and understand the underlying causes , the behaviors that lead to a desired or undesired symptomatic eff ect. Th ere are two ways of understanding and analyzing underlying causes: systemic and policy-based analysis. According to systems engineer and consultant Jack Harich, “Th e important thing is to not stop at intermediate causes. Th ese are plausible and easily found. Working on resolving them looks productive and feels productive. Intermediate cause solutions may even work for awhile. But until the true root cause is resolved, the system will invariably fi nd a way to circumvent or thwart these solutions, because intermediate causes are symptoms of deeper causes. One must strike at the root.” 9 Systemic and policy-based analyses provide managers with a thorough process to discover and “strike at the root.”

Systemic-Based Analysis: To be sure that they ask the right questions and consider the most relevant variables, managers who make better decisions begin understanding a problem through systemic-based analysis , which takes into account the array of all known variables associated with a problem and its symptoms, including behavior over time. A com- mon example is gaining and losing body weight. Let ’s say a person is behaving in all the ways that would logically lead to losing weight, yet is still gaining weight. In seeking help, doctors may run a series of blood tests to measure a broad array of causal variables and analyze an individual ’s metabolism and health as a systemic problem, which can be a complicated interconnection of variables such as genetic coding, enzymes, disease, thyroid levels, and

Figure 7-4 Dolphin Resort: Guest Satisfaction Goal The hotel has suffered a decrease in guest satifaction over the last fi ve years.

90% 88% 86% 83% 80%

2010 2011 2012 Year

G ue

st S

at is

fa ct

io n

G oa

l

2013 2014

Symptomatic effects Observable behaviors related to underlying causal variables.

Underlying causes The behaviors that lead to a desired or undesired symptomatic effect

Systemic-based analysis A method of analyzing a problem that takes into account the array of all known variables associated with a problem and its symptoms, including behavior over time.

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Chapter Seven Making Better Decisions176

so forth (like the one shown in Figure 7-5 ) As you can imagine, it would require a doctor to analyze this data and suggest a solution based on a variety of alternatives—herbal remedies, medication, exercise, and/or dietary changes. Luckily for most of us, we don ’t need to understand the complicated image in Figure 7-5. Th at said, managers, like doctors, also have tools to analyze situations systemically to make better decisions. Th ese decisions and consequential behavior can be expressed and under- stood as an interconnected system of variables. As we discussed briefl y in Chapter 3, manag- ers can use systems thinking to analyze the interconnection of variables in order to better predict behaviors and consequences over time. Management theorists and researchers have identifi ed common patterns of behaviors and consequences that managers face, such as customer satisfaction. Figure 7-6 is a systems diagram depicting the major causal variables for customer satisfaction. Th is diagram provides a holistic view, but it lacks the specifi city that would allow a manager to predict a behavior. Th ese frequently occurring patterns that are deemed predictable are referred to as systems archetypes . For instance, over the past several years, the Dolphin Resort ’s management focused on fi nancial savings and largely ignored service quality. Chris ’s predecessor, Herb Cork, addressed the issue by incrementally lowering guest satisfaction standards without the owner being aware—unfortunately, a commonly observed pattern of behavior in organizations. Th is is a classic example of the “Drifting Goals” system archetype, also known as the “Boiled Frog Syn- drome” (see Figure 7-7 ). Boiled Frog Syndrome is often used to describe people who don ’t react quickly enough or are unaware of the changes going on around them. For example, if a frog is put into hot water, he will jump out, but if he is placed in cold water that is gradually heated up, he will not notice and will end up being boiled to death. Th is metaphor is often used in businesses that are slow to see the “writing on the wall” and fail to adapt accordingly. In this systems archetype, the gap between “guest satisfaction goal” and “actual guest satisfaction” is shown. At the Dolphin Resort & Hotel, one of the employees suggested that every year there was pressure to lower the quality goal for two reasons: 1) annual bonuses depended on achieving the goal, 2) lack of capital improvements were blamed for declining service quality or “guest satisfaction.” Th is pressure resulted in the previous general manager lowering the goal, which instigated a downward trend in actual guest satisfaction. Th is is an example of a systemic-based analysis.

Figure 7-5 A Thaliana Metabolic Network An organism with an interconnected network of variables.

Source: http://en.wikipedia.org/wiki/File:A_thaliana_metabolic_network.png.

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1777.2 | IDENTIFYING AND UNDERSTANDING THE PROBLEM

Figure 7-7 Drifting Goals Systems Archetype The “Drifting Goals” system archetype, showing that a short- term solution leads to the erosion of a long-term goal. B, balancing loop.

Gap

Guest Satisfaction Goal

Pressure to Lower Goal

Actual Guest Satisfaction

B1

B2

Lower Guest Satisfaction Goal

Delay

Source: D. Kim, Systems Archetypes I (Waltham, MA: Pegasus Communications, 1994).

Figure 7-6 Customer Satisfaction A systems archetype diagram showing the causal variables for customer satisfaction.

Customer Retention

Number of Complaints

Service Improvements

Time to Deal with Complaint

Quality of Service

Improvement

Customer Satisfaction

Customer Expectations

Quality of Administration

Process

Ease of Complaining

Source: M. J. Schroek, “The Next Generation of Balanced Scorecards,” Information Management Magazine , December 2001; http://www.information-management.com/issues/20011201/4337-1.html.

Policy-Based Analysis Once managers have a systemic understanding of a situation, they can begin to look at specifi c policies that could be contributing to undesirable eff ects. Let ’s return to the weight gain and loss example to explore further how managers get a full understanding of the underlying causes of a problem beyond the full array of variables displayed in a systemic analysis. In the case of weight loss or gain, two primary underlying

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Chapter Seven Making Better Decisions178

Metabolism

DietExercise

Figure 7-8 Policy-based Analysis Using “Stock-and-Flow” Diagram Both exercise and diet have an effect on metabolism, leading to weight loss or weight gain.

causes are often diet and exercise, which aff ect metabolism as outlined in Figure 7-8. By identifying these underlying causes, individuals can choose to focus on behavior changes that will produce more desirable eff ects. But sometimes there are variables, some of which cannot be changed. Upon conclusion of your blood work, what if your doctor explained that the underlying cause was genetic? Th is variable is very much out of your control. Managers also encounter

Effective Intuition 10 Researchers have repeatedly shown that managers rely on intuition when they need to make a fast decision in a complex situation, and that intuitive decision making is a crucial skill for upper management. But intuition isn ’t always reliable. In their award-winning article titled “Exploring Intuition and Its Role in Managerial Decision Making,” Dane and Pratt (2007) propose some organizational conditions that they believe enable managers to develop effective intuition. Intuitive decisions, say Dane and Pratt, are fast, nonconscious, and involve both emotions and pattern recognition (p. 40). We store patterns in our minds as schemas, mental models of how the world works. When we make intuitive decisions, we are drawing, nonconsciously, on our own schemas. The more complex and domain- specifi c (i.e., expert knowledge about a certain aspect of our own environment) our schemas are, the more effective our intuitive decisions because we have more relevant information at our disposal. As an example, Dane and Pratt cite Carly Fiorina ’s ousting from Hewlett-Packard (HP) in 2005. They suggest that although Fiorina had plenty of experience and expertise, it was not domain-specifi c to HP ’s organization, so her intuitive decisions were not as effective as they could have been. So how can organizations develop intuitive decision- making skills in their managers? Dane and Pratt suggest two methods: First, organizations can foster “kind” learning environments, in which feedback is prompt, accurate, and exacting, thus facilitating the development of complex

schemas. Second, organizations can commit to strategies to retain managers for longer periods of time, thus facilitating the development of domain-specifi c schemas. Together, these two methods will help managers form the foundation from which to make effective intuitive decisions.

Professor ’s Response What Dane and Pratt contribute here is a deeper understanding of how intuition works by identifying some of the individual and organizational variables that contribute to effective intuitive decisions (namely, the mental models of the managers and organizations can help cultivate conditions necessary for reliable mental models within managers). It suggests that organizations would benefi t from developing policies to retain managers for longer periods of time.

Manager ’s Response There ’s a real challenge here to fi nd a balance between the benefi ts of retaining managers who have developed “domain-specifi c” knowledge and the benefi ts of bringing in new managers who have fresh ideas and different experiences to draw from. I ’d like to see some research on how different companies have managed this balance and what the effects have been.

Critical Thinking in the Classroom As a manager, what do you think is the best approach to developing effective intuitive decision making within an organization?

Research@Work

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1797.2 | IDENTIFYING AND UNDERSTANDING THE PROBLEM

variables that are out of their control. For example, the Windy City Salt Supply Company manufactures and packages road salt for the state of Illinois and other localities. A total of 90 percent of their revenue comes in when bad weather is predicted; therefore, each year, their business depends on the weather, which is 100 percent out of their control. It would not be a productive decision-making exercise for managers at Windy City Salt Supply Company to think through alternatives for changing the weather. To focus managers on productive decision-making activities, policy-based analysis isolates the variables in a system that can truly be addressed through management intervention. Managers use stock- and-fl ow diagrams to better understand policy-based decisions. As shown in Figure  7-8, someone who wanted the eff ect of weight loss might identify a lack of exercise as an under- lying cause and choose to walk a mile every day and decrease their caloric intake by 20 per- cent. Managers would love for their problems to be so easily defi ned! So how do managers know when they have identifi ed the controllable variables that, through intervention, will most likely lead to desirable behaviors? To answer this question, let ’s return to the Dolphin Resort & Hotel case. When discuss- ing underlying causes with the team, Chris had only cited two variables—service quality results and quality goals—both of which were appropriate for a systems archetype/systemic analysis. Is it possible that there are more causes that led to poor fi nancial results at the Dolphin Resort? Let ’s reconsider the systemic view of “customer satisfaction,” where the big- gest problem of concern (the primary eff ect here) would be “customer retention” as shown previously in Figure 7-6 . Th ere are three primary underlying causes noted here as well—customer expectations, quality of administration process, and ease of complaining. What could be causing such poor fi nancial results? “Quality of administration processes” and “ease of complaining” can both be addressed through training and new procedures, but Chris doubts that this could be contributing to the entire profi t decline. Th at leaves “customer expectations” for the team to consider. Chris asks the group, “You all know the Dolphin Resort a lot better than I do. What do you think could be causing a guest expectation problem, if there is one?” Wendy, the resort ’s front-desk manager, walks to a fl ipchart (see Figure 7-9 ) in the front of the room, draws a couple of lines, and suggests, “We have been steadily charging guests more and more over the past few years. It seems logical that the more a customer pays, the higher the quality they will expect. If our quality is steadily declining, there is our problem.” Th e team had spent Friday morning discussing the quality issues at the resort, with everyone agreeing that the most likely cause was “guest expectations.” Sensing that the team was exhausted, Chris suggested that the managers consider the team ’s insights and recon- vene on Monday to conclude their policy-based analysis. Chris ’s biggest challenge was to balance effi ciency and eff ectiveness—spending enough time, but not too much, making a better decision. Let ’s see how Chris framed this process for his management team. On Monday, the management team came together in a small meeting room. Chris arrived early and redrew the “guest expectation gap” that Wendy had presented on the fl ipchart. Beside the diagram, he wrote, “Agreed! But, what does this tell us?”

Price

Quality

Expectation Gap

X-axis

Y- ax

is

Figure 7-9 Front Desk Manager ’s “Guest Expectation Gap” Explanation The guest expectation gap between increasing prices and decreasing quality.

Policy-based analysis A method of problem analysis that isolates the variables in a system that can truly be addressed through management intervention

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Chapter Seven Making Better Decisions180

John Johnson spoke up, “Is this why you called me in on my day off ? You want us to do your job? Mr. Cork was the best manager of money that I have ever worked with—he counted every cent. When he came to this hotel fi ve years ago, our average daily rate was $70 a night, and now it is almost $100. Th at is over $20 more than our competitors! No off ense, Chris, but you look like you are 18 years old and have no chance of getting better results than an industry veteran like Mr. Cork.” Chris was startled by the outburst. “No off ense taken, John. From what I have seen, Mr. Cork was very thorough with the fi nances here and really watched costs. I admire him for that. But we still have a problem with declining fi nancial performance. Here are a few questions, which I would like to work with you all to fi gure out . . . If we keep rais- ing our rates, why is our profi t decreasing? If our revenue is steadily going up, why is RevPAR * remaining stagnant?” He turns to draw more images on the fl ipchart as shown in Figures 7-10 and 7-11. Th e team agreed that they needed to understand the answers to Chris ’s questions before they could generate alternatives. After a lively conversation, the group concluded that the major factors associated with the expectation gap were room rate and service quality, which was having an impact on the occupancy percentage. When the room rate and occupancy numbers where collected and drawn on the board (as shown in Figures 7-12 and 7-13 ), the management team had a lot of questions and comments: “Now I know why our RevPAR has not increased—our occupancy dropped.” “Wow, we really dropped our occupancy when we raised our rates.” “It seems like we need to go back to 2012—that was a pretty good year.”

* (Explanation: RevPAR is a way of measuring performance within the hotel industry. It is an acronym for “revenue per available room,” which is a calculation of total revenue divided by all available room nights. For example, if a hotel has 100 rooms available every night of the year, they have 36,500 room nights available. If their RevPAR is $110, the hotel ’s total revenue would be $4,015,000.)

$1.8

$4.7

$1.6

$4.7

$2.2

$5.8

$2.1

$5.9

$2.0

$6.0

2010 2011 2012 Year

Va ria

bl e,

in m

ill io

ns

2013 2014

Profitability Revenue

Figure 7-10 Dolphin Resort: Annualized Revenue and Profi t This graph shows increase in revenue versus decrease in profi t over fi ve years.

Figure 7-11 Dolphin: RevPAR   Revenue per available room for the Dolphin Resort over fi ve years.

$105 $104 $110 $109 $110

2010 2011 2012 Year

2013 2014

R ev

PA R

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1817.2 | IDENTIFYING AND UNDERSTANDING THE PROBLEM

Th e management team began to see that the relationship between the variables of room rate, guest satisfaction, and occupancy was the primary (or root) cause of the problem (as shown in Figure 7-14 ). Chris and his team needed to understand further how this created an undesirable guest expectation gap and then generate alternatives to intervene. In the next section, we will explore how managers work with their teams to generate alternatives in preparation for selecting a path.

Figure 7-12 Dolphin Resort: Annualized Room Rate Increase in annual room rate over fi ve years.

$71 $72 $74

$91 $97

2010 2011 2012 Year

R oo

m R

at e

2013 2014

Figure 7-14 Dolphin Resort: Guest Expectation Variables This graph illustrates the relationships among different variables over fi ve years.

Room Rate, $ Guest Satisfaction, % Occupancy, %

2010 2011 2012 Year

Va ria

bl e

2013 2014

Behavior over Time

Room Rate, $ Guest Satisfaction, % Occupancy, yy %

2010 2011 2012 YearYY

Va ria

bl e

VV

2013 2014

Behavior over Time

Figure 7-13 Dolphin Resort: Annualized Occupancy Percentage Percentage of rooms occupied over fi ve years.

59% 55%

64% 57% 56%

2010 2011 2012 Year

Oc cu

pa nc

y

2013 2014

(Explanation: Occupancy is the percentage of all room nights available that were sold and occupied by guests.)

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Chapter Seven Making Better Decisions182

7.3 | Generating Alternatives

7.3 | Describe how managers generate alternatives.

Knowing the cause of a situation is diff erent than understanding the variety of alternatives available to change behavior. Certainty is a situation in which a decision maker knows all alternatives and their outcomes. 11 Because Chris asked for all the managers to attend Mon- day ’s meeting to help generate alternatives for possible solutions, we can assume that he is in a state of uncertainty , which is a situation in which a decision maker does not know all the alternatives and their outcomes. Th ree factors determine a situation ’s level of cer- tainty: time, cognitive abilities, and information. 12 Typically, the greater each of these factors, the more likely a group or individual will make rational decisions. Does the ability to make “rational decisions” always correlate to success? Th e Dolphin Resort ’s & Hotel management team does not have a “life-or-death” set of decisions to make, as did the National Aeronautics and Space Administration (NASA) when, on January 28, 1986, the organization decided to launch the space shuttle Challenger, carry- ing six astronauts and teacher Christa McAuliff e. Th e shuttle disintegrated 73 seconds after takeoff , killing the entire crew. Subsequent investigations determined that a faulty O-ring seal caused the tragic accident. In an organization known for its extraordinary technical expertise, how could such a thing happen?

Some researchers believe that, ironically, NASA ’s extraordinary technical expertise contributed to the failure. 13 Because of a history of repeated tech- nological successes, NASA ’s culture had developed a sense of complacency and overconfi dence. When that cultural sense of complacency was combined with political and budgetary pressures to adhere to launch schedules, the teams responsible for approv- ing the shuttle ’s launch succumbed to groupthink , an unconscious mode of group decision making in which individuals prioritize agreement over analy- sis. 14 So when engineers raised concerns about the O-ring ’s ability to seal properly in the cold tempera- tures of that January day, they were asked to reassess their analysis, which they did. Th e group agreed with the desired alternative that it was safe to launch. Th e decision was rationalized by the entire team based on NASA ’s impressive success record of solving tech- nical problems quickly and effi ciently and for hav-

ing launched successfully in similar temperatures 15 and perhaps the resort going out of business? While the Dolphin Resort ’s management team ’s decisions are not as grave as NASA ’s, their team faces what many organizations face—declining quality, resulting in declining rev- enue, culminating in poor fi nancial performance—ultimately, at the cost of jobs and stake- holder value. In the Dolphin Resort case, Chris chose to employ group decision making, rather than making an individual decision himself. Group decision making off ers many benefi ts, includ- ing better quality decisions resulting from a greater diversity of ideas and perspectives, and better employee buy-in. However, making a group decision can be a slow process, and its eff ectiveness is limited by groupthink and production blocking , which can result in a loss of productivity during a brainstorming session because individuals are overwhelmed by the number of possibilities being generated. 16

Managers or groups sometimes use heuristics , a set of informal rules used to sim- plify and expedite the decision-making process—also referred to as “rules of thumb.” 17 In the Dolphin Resort case, the management team could decide quickly that the situation required reducing staff , establishing new service standards, and training staff to increase fi nancial performance. Would this heuristic be an eff ective decision? In some cases, yes. In

Certainty A situation in which a decision maker knows all the alternatives and their outcomes.

Uncertainty A situation in which a decision maker does not know all the alternatives and their outcomes.

Groupthink An unconscious mode of group decision making in which individuals prioritize agreement over analysis.

N A

SA

Production blocking A loss in productivity during a brainstorming session because individuals are overwhelmed by the number of possibilities being generated.

Heuristics A set of informal rules used to simplify and expedite the decision-making process.

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1837.3 | Generating Alternatives

this particular case, no, because it would probably be based on the fear of losing additional time and resources through overanalyzing the problem, creating pressure for everyone to agree quickly to a certain path. Production blocking and groupthink are fear-based dynam- ics that generally escalate one another—“Why do we have to waste so much time in meet- ings discussing the problem, instead of solving the issue? We could all be working now!” and “Wendy ’s comment on ‘guest expectations ’ sounds good to me. Let ’s just go work on that.” Th e management team at the Dolphin Resort concluded that the relationship between the variables of room rate, guest satisfaction, and occupancy was the primary (or root) cause of the problem—a negative gap in guests ’ service expectations. Chris referred the team back to Wendy ’s original insight that “when you increase price, guests ’ expectations increase.” Chris erased the whiteboard and redrew the diagram, depicting the three expectation gap variables with actual data from the hotel ’s performance. First, he added a dotted line through “room rate” for “guest expectation,” and then a dotted line through “guest satisfaction” and “occupancy” for “drifting goals” (see Figure 7-15 ). “Ladies and gentlemen, we need to close this gap.” Chris then recommended that the group generate as many alternatives as possible to solve the primary cause of the resort ’s problem, which they have identifi ed as “the gap.” He suggested that the team start with a brainstorming session, creating as many alternatives as possible, without making value judgments about any idea. A model of the brainstorming process is shown in Figure 7-16 . When managers don ’t generate and evaluate multiple alternatives, they often end up mak- ing poor decisions. 18 As he passed out dry-erase markers to all the managers, Chris explained how the team would conduct their brainstorming—“First, let ’s create as many possible solu- tions to closing this gap, and don ’t worry if the ideas are right or wrong, doable or undoable,

Figure 7-15 Expectation Gap Between Price and Drifting Goals Expectation gap variables over fi ve years.

2010 2011 2012 Year

Va ria

bl e

2013

The Gap

2014

Behavior over Time

Room Rate, $ Guest Satisfaction, % Occupancy, %

Customer Expectation Drifting Goals

Brainstorming Creating as many alternatives as possible, without making value judgments about any idea.

Figure 7-16 Brainstorming Model This brainstorming model is used to generate ideas.

Generate as Many Ideas as Possible Narrow Down Ideas Best Idea Is Chosen

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Chapter Seven Making Better Decisions184

silly or otherwise. Th e more ideas we have, the better. We will then go through a process of selecting the best possibilities.” Group brainstorming techniques, where everybody contributes ideas simultaneously, can be very eff ective in producing high quality solutions. Researchers Kavadias and Som- mer found that in some situations, individual brainstorming is a better choice. If a problem is very specialized, a single individual with expertise in that area will be much more eff ec- tive than a group of people with an array of backgrounds. On the other hand, a diversity of expertise, skills, and perspectives is benefi cial when dealing with a more complex, “cross- functional” problem. 19 Service quality is defi nitely categorized as a “cross-functional” prob- lem, so Chris made a good process choice here. After a few minutes of silence, with all the managers staring blurry-eyed at the white- board fi lled with alternatives, it was time to evaluate the merit of each alterative. Within 20 minutes, the management team dismissed 80 percent of the alternatives generated based on relevance or resource restrictions. How do managers eff ectively sort through a series of viable alternatives to make the best possible decision?

7.4 | Evaluating Alternatives

7.4 | Predict possible consequences of alternatives.

Evaluating alternatives requires managers to predict and assess the outcomes of each alter- native. 20 Th e degree to which the outcomes of an alternative can be predicted is referred to as risk . High-risk environments can lead to anxiety in the decision-making process. Th e management team at the Dolphin Resort felt the need to make the “right decision,” mainly because choosing the wrong alternative could lead to a loss of jobs, including their own. John Johnson, the food and beverage manager, seemed to become even more frustrated as the discussion continued, fi nally saying, “What if none of these options work? I don ’t know which path we should take. Am I going to be held responsible for the decisions made here today? Chris decided to refocus the conversation. “Let ’s not start talking about problems that don ’t even exist yet. We don ’t know what decisions we are all comfortable making. Our fi rst task is to take this array of options and select the best small group of options—let ’s say fi ve to seven options to choose from.” Chris presented two methods for evaluating the merit of the alternatives that the group had generated. With the fi rst method, called nominal group technique (NGT) , individuals rate proposed solutions and the total tally determines the fi nal decision. 21 Wendy thought this was a good idea, but she suggested that they invite some of the line-level managers to participate in the process. Th e second method, called Delphi technique , is a method of decision making in which a group of experts propose and question ideas until a consensus is reached. 22 Chris suggested that the team might gain a lot of insights by including a few outside consultants that specialize in service quality. John, still not in a very good mood, suggested that the team had all the knowledge necessary to operate a successful hotel, and that bringing consultants to the table would be insulting. After listening to the team ’s perspectives, Chris requested that the team reconvene on Tuesday afternoon with the line-level managers and apply NGT to choose the best path for- ward. Why did Chris choose NGT instead of one of the other group decision-making tech- niques? Research suggests that they are all eff ective in producing high-quality decisions. But Chris recognized that what ’s important is that the more people participate in the decision- making process, the more satisfi ed they are with the decision. 23 In Chris ’s case, it made sense to use NGT since there was already interest from the team in using it. Chris also made another important decision by choosing to use group brainstorming methods. Even though evidence suggests that the most eff ective method of generating and choosing alternatives is to have people brainstorm individually and then evaluate those ideas as a group, people feel more eff ective when they brainstorm together. Th e choice to use individual or group brain- storming methods thus requires balancing the quality of ideas against team buy-in. 24

Th e next day, Chris invited all the managers, including line-level managers, to discuss the results of the brainstorming session to address the expectation gap problem the resort

Risk The degree to which the outcomes of an alternative can be predicted.

Nominal group technique (NGT) A group decision-making process in which individuals rate proposed solutions and the total tally determines the fi nal decision.

Delphi technique A method of decision making in which a group of experts propose and question ideas until a consensus is reached.

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1857.4 | Evaluating Alternatives

was facing. Chris began by sharing the results and passing around a piece of paper with a list of all the possible decisions that the team was considering like the one shown in Figure 7-17 . Chris asked each manager to rank 18 possible alternatives from 1 (best) to 18 (worst). He explained that he would add up the results, with the lowest scores indicating the group ’s collective recommendations. First, Chris compiled everybody ’s feedback into a table (Figure 7-18 ). In order to calculate the results, Chris added up each row and divided that by the number of responses, so for the example of Alternative A, this calculation would be (3 + 1 + 3 + 5 + 8 + 3 + 3)�7 = 3.714 .

Figure 7-17 Template for NGT Rating Sheet An NGT sheet to be completed, with 18 alternatives and their rankings.

Ranking (1–18) Alternative

Path A Path B Path C Path D Path E Path F Path G Path H Path I Path J Path K Path L Path M Path N Path O Path P Path Q Path R

Figure 7-18 Data from NGT Process Data showing the results of the NGT process.

Manager # 1Alternative

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Path A Path B Path C Path D Path E Path F Path G Path H Path I Path J Path K Path L Path M Path N Path O Path P Path Q Path R

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Manager # 2 Manager # 3 Manager # 4 Manager # 5 Manager # 6 Manager # 7Manager # 1Alternative

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Path PP A PathPP B Path PP C Path PP D Path PP E Path PP F Path PP G PathPP H Path PP I PathPP J Path PP K Path PP L PathPP M Path PP N Path PP O Path PP P Path PP Q Path PP R

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Manager # 2 Manager # 3 Manager # 4 Manager # 5 Manager # 6 Manager # 7

Fi 7 18

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Chapter Seven Making Better Decisions186

Once Chris made these calculations, he compiled the results for the team to review (see Figure 7-19 ). When John saw the results, he grumbled, “Th at is the exact opposite of what I thought we should do. Th ese exercises are ridiculous. Alternative B is okay, but there is no way we should do E—that has never worked for me in the past.” John ’s attitude is less than helpful. In addition to ego and pride, what other reasons might managers have for dismissing alternatives in the evaluation process? Prior-hypothesis bias is when a decision is made based on beliefs or assumptions despite evidence to the contrary—a process that sometimes happens unconsciously. 25 To prevent these decisions, which can perpetuate undesirable eff ects, managers can apply a third evaluation method called dialectical inquiry , in which a proposal and a confl icting counterproposal are given equal consideration. 26 Sensing that the conversation could become unproductive, given John ’s negative attitude, Chris applied this method and suggested he propose both alterna- tives to Kathy Osborne for her input. “Given the importance of these top two decisions, and the philosophical and cultural shifts required, I will sit down with Kathy and make these recommendations on the group ’s behalf and ask her for her insights.” So what decisions did the group want to make?

7.5 | PATH SELECTION

7.5 | Demonstrate how managers select the most desirable alternative.

Th ere are three kinds of decision making: intuitive, optimum, and satisfi cing . Intuitive (also known as, “gut”) decisions are based on feelings, previous experience, and existing knowl- edge. 27 It is typical for managers to encounter situations where there is a limit to the amount of information, time, or resources available—good intuition can be an eff ective capacity for a manager to possess, but it can be a dangerous quality. 28 If managers rely too much on personal intuition, they risk alienating the team and making mistakes that could have easily been avoided. A traditional approach to decision making suggested that an optimum path was available for each situation. In reality, managers never have all the information needed to make the “best decision.” Acknowledging that we live in an imperfect world, how do man- agers consistently make better decisions? Successful managers consistently choose an acceptable solution, rather than the perceived “optimal solution”—a process called satisfi cing . Th is process balances time,

Figure 7-19 Results of NGT Process Data showing the actual result and its corresponding alternative.

Ranking# (Actual Result) Alternative

Path A Path B Path C Path D Path E Path F Path G Path H Path I Path J Path K Path L Path M Path N Path O Path P Path Q Path R

(3.714) (10.143) (14.001) (13.000)

(2.714) (5.571)

(14.000) (7.714) (6.857)

(16.429) (15.142) (13.428)

(3.713) (4.142)

(15.285) (7.715) (9.286) (9.571)

3 11 15 12

1 5

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18 16 13

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10

Prior-hypothesis bias Basing decisions on beliefs or assumptions despite evidence to the contrary.

Dialectical inquiry A method of decision making in which a proposal and a confl icting counterproposal are given equal consideration.

Intuitive decision A decision based on feelings, previous experience, and existing knowledge.

Satisfi cing Choosing an acceptable solution rather than an optimal solution.

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1877.5 | PATH SELECTION

information, and the team ’s ability to consider and implement alternatives. 29 Th e decisions that managers make are a product of the process models employed. Here, we will discuss two primary decision-making models used by managers. Th e classical model of decision making is a normative model that leads to an optimal decision, assuming full availability of information, suffi cient time, and rationality of decision makers. Th is model presumes that a manager can make a reasoned judgment —a decision based on extensive informa- tion gathering, careful analysis, and generation of alternatives—which they can, to a limited degree. 30 Th e positive consequences of this model, obviously, are well-informed decisions. What are the potential negative outcomes of this model? Managers can become stuck in “analysis paralysis,” which is jargon for spending too much time analyzing the problem and not selecting a path, or fool themselves into believing that a “right” path is available in a situ- ation where only satisfi cing paths exist. Th e administrative model of decision making recognizes the limits of information, time, and individuals and seeks a satisfi cing rather than an optimum solution. 31 By restrain- ing the available time to “one year to produce results,” Kathy has forced an administrative model of decision making, for no other reason than time. Th e Dolphin Resort team is in a state of bounded rationality , rational decision making that is limited by time, cognitive abilities, and available information. Th e negative consequences of this model obviously are not having enough time to gather and analyze information, resulting in making uninformed decisions. A common mistake under these circumstances is representative bias , which means generalizing from too small a sample size. 32 Th e benefi ts of the administrative model are that it encourages organizations to minimize production loss, be creative and fl exible, and continuously change and improve. By seeking a series of small incremental improve- ments, managers establish change over time, giving all stakeholders time to adapt accord- ingly. So let ’s reconvene with Chris and his team to see what paths they are presenting to Kathy. Kathy seemed more serious than during their previous meetings. “Well, Chris, you have made quite an impression during your brief time at the Dolphin!” Chris nervously interjected, “I hope that is a good thing.” “Let ’s just say that it has been like the beginning of A Tale of Two Cities with all the calls I have been getting on a daily basis—the best of times; the worst of times. How can I help you today?” Chris began, “Th e Dolphin Resort is an amazing property, with a terrifi c location and great potential. A fundamental change in management philosophy needs to occur before we can be successful here. Here are the top fi ve paths that the team, with my full support, would like to present to you for approval:

● “Focus equally on employee satisfaction, guest satisfaction, owner return on invest- ment, and the environment.

● “Make employee satisfaction our most important priority— Invest in capital improve- ments: complete a cosmetic renovation before the summer season—primarily painting, carpet, mattresses, linens, and HDTVs.

● “Raise occupancy by approaching the local time-share companies to see if they are interested in purchasing a fi xed number of rooms at a lower daily rate. In general, lower the rates at the hotel. Th e team believes that with a great restaurant, upscale gift shop, and fun activities for the family, the hotel can make even more money. We might even set up a homemade ice cream cart by the pool and walkway to the beach.”

“Here is the rationale: the operation was too focused on trying to increase revenue by cutting costs and increas- ing room rates. Previous management did not spend the resources necessary to continuously make capital improve- ments and chose not to focus on service quality. With the increased room rates and declining service quality, this cre- ated an ‘expectation gap, ’ which had a negative eff ect on

Reasoned judgment A decision based on extensive information gathering, careful analysis, and generation of alternatives.

Administrative model A model of decision making that recognizes the limits of information, time, and individuals and seeks a satisfi cing rather than an optimum solution.

Bounded rationality Rational decision making that is limited by time, cognitive abilities, and available information.

Representative bias Generalizing from too small a sample size.

Pe tr

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Chapter Seven Making Better Decisions188

profi tability. To systemically address these causes, the team believes the previously stated paths will close this gap and increase the resort ’s profi tability. I would like your support.” After a long pause, Kathy spoke. “Chris, I have defended the decision to hire you on more than one occasion this past week. Th is is your fi rst general manager position, and I hope you know what you are doing. You have my support, but fair warning—I think your biggest chal- lenge is going to be ‘employee satisfaction, ’ because there are quite a few unhappy people at Th e Dolphin Resort today.”

7.6 | IMPLEMENTATION

7.6 | Describe the manager ’s role in implementing alternatives.

On the drive back to the Dolphin Resort, Chris began thinking about how to get his manage- ment team involved in the implementation of the selected alternative. How do managers eff ectively and effi ciently implement a chosen alternative? Do managers need an emotional commitment from others, or should managers expect employees to perform because they are paid to do so? Despite the positive outcome, Chris was a little disturbed by the meeting with Kathy. He appreciated her support, but he realized that there were probably more than a few managers and employees complaining about him, and he had been on the job less than a month. Th at could not leave a good impression on Kathy; she was obviously wondering if she had made the right choice in hiring Chris. As he walked back into the lobby, Chris took a deep breath and reminded himself that this was “not about him. And, if these decisions were going to be successful, he would need everyone ’s full commitment—even those who were against him at this moment. Slowly and surely, all illusion of control dissipated from Chris ’s mind—this is overestimating one ’s ability to control events and activities—and he thought about Kathy ’s fi nal suggestion to focus on employee satisfaction. 33

Managers succeed at implementation when they connect strategy, people, and opera- tions. 34 In the planning section of this book, we thoroughly discuss how managers make decisions about goals, which lead to strategies that are well considered and doable. Having the “right people in the right positions” with well-crafted strategies contributes to employee engagement, and the more engaged people are at work, the better they perform. 35, 36 Th e following sections, including organizing , leading , and controlling , outline management prac- tices relating to people and operations. After Chris announced that Kathy supported the paths selected by the team, he recommended a course of action to secure the overall team ’s commitment and get all the staff refocused on service quality and growth.

7.7 | FEEDBACK AND RESULTS

7.7 | Explain the patterns of behavior and delayed results for decisions made.

Th ings are getting done. Th e painters have arrived, new HDTVs are being installed, and each day a diff erent section of the lobby is closed so the new carpet can be installed. Th e man- agement and staff at the Dolphin Resort are starting to see results. Now that the team has initiated the implementation of the selected paths, how should the managers ensure that the implementation is yielding the expected results? How much time is reasonable before managers can expect to see results in the operation? What if the alternative paths selected do not eff ectively address the problem identifi ed by management? Gathering and analyzing feedback and results is the last step in the decision-making pro- cess, but as we have discussed, this process never ends—it is not a single event. What you learn from an honest evaluation of feedback and results tells you if you ’ve actually solved the original problem or created or discovered new ones, and it also suggests ways for continued improvement. To do so, managers must establish clear feedback criteria, gather feedback

Illusion of control Overestimating one ’s ability to control events and activities.

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1897.7 | FEEDBACK AND RESULTS

on an ongoing basis, measure the results, assess gaps in expected outcomes, and determine next actions—and then reinitiate implementation and begin the process all over again as outlined in Figure 7-20. Managers who do not consistently gather and evaluate feedback often repeat the same mistakes. 37 In systems thinking analysis, managers track patterns of behavior associated with vari- ables and understand that there is a delay in altering behavior after decisions have been made. To explain these phenomena, we will revisit the case of a person ’s weight-loss eff orts. Let ’s say that a person makes a New Year ’s resolution to eat healthy and to exercise (behav- iors associated with the cause), in order to lose 50 pounds (symptomatic eff ect). When would this person realistically expect to lose 50 pounds? It might take a full year. Th ere is a delay associated with the behaviors of dieting and exercising, and how they change a person ’s metabolism. In Figure 7-21, we show a person starting an exercise routine one day and consistently maintaining that over time. In addition, this person gradually decreases his caloric intake over time and maintains this intake at a desirable level. We show that this person ’s weight does not dramatically decrease right away; instead, it decreases over time and then fi nds equilibrium. Th is is another example of a reinforcing loop, which we

Figure 7-20 Dolphin Resort & Hotel: Process for Feedback & Measuring Results The process of gathering feedback and analyzing results.

DOLPHIN RESORT & HOTEL

Process for Feedback & Measuring

Results

Establish Feedback

Implementation

Assess Gaps

Measure Results

Gather Feedback

Criteria

Determine Next Actions

Figure 7-21 Behavior over Time Graph for Weight-Loss Variables The effect of weight-loss variables over time.

Weight Amount of Exercise Reduced Caloric Intake

Time

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Chapter Seven Making Better Decisions190

discussed in Chapter 3, where the more a person eats in a healthy way and exercises, the more an individual ’s metabolism is increased, within physical limitations. Th e body has a balancing loop, which creates equilibrium for an individual ’s metabolism. Success could end up being the Dolphin Resort ’s biggest problem, if it is not anticipated and preemptively addressed. Ironically, there are circum- stances where success can be more dangerous than underperforming. In particular, the historical hiring practices at the Dolphin Resort were focused on minimizing the number of employees working at all times, which led to poor service quality and frustrated employees. We know that success can become a systemic problem because of two factors: patterns of behavior and delay. Let ’s examine how these factors could contribute to negative out- comes at the Dolphin Resort, if Chris and his team don ’t continuously gather feedback and plan for results.

Based on the consequences associated with reinforcing loops and balancing loops, underlying patterns of behavior are related to growth or short-term fi xes, respectively. Managers face two primary patterns of behavior that create problems in organizations. Th e fi rst pattern of behavior is called a reinforcing engine , which is a system behav- ior indicative of growth coupled with an unintended consequence in another part of the system. An example of a reinforcing engine at work is when America Online (AOL) began pro- moting its Internet service in the 1990s. Th e company mailed CDs to millions of potential customers to make signing up for their service easy. Th is campaign was very successful—in fact, it was too successful. Soon AOL ’s computer systems could not handle all the demand, causing new and existing clients to abandon the service. Th e lesson? Too much of a good thing can be very bad indeed. A possible delayed result is something that Chris and his team need to pay attention to. By lowering rates and raising service quality (eff orts), they should expect to increase occupancy dramatically (performance). Without commensurately expanding their service capacity (limiting action and constraint), the Dolphin Resort man- agement team could fi nd themselves in the same negative situation as AOL. Th is example of a reinforcing engine is based on the systems thinking archetype referred to as “Limits to Success,” shown in Figure 7-22. We can also review this behavioral dynamic in the same way as our earlier “delayed behavior” weight-loss example. In Figure 7-23, we show an example of a hotel that increases service quality and lowers rates, resulting in a greater number of reservations. Here, we show what happens when management fails to expand the operation ’s capacity to serve the new guests and accommodate the greater occupancy, which leads to declining service quality and reservations—they are all interconnected, yet the eff ects happen at diff erent times. Th is pattern of behavior shows us that the Dolphin Resort will need a well-trained staff before it sees an increase in revenue and reservations.

© R

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Reinforcing engine A system behavior indicative of growth coupled with an unintended consequence in another part of the system.

Figure 7-22 Systems Archetype—“Limits to Success” B, balancing loop; R, reinforcing loop.

R1 B2PerformanceEfforts Limiting Action

Constraint

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191

The second pattern of behavior that creates problems in organizations is called a balancing correction which is a system behavior in which long-term problems are created through short-term fixes. Let ’s say that a manufacturing facility has quality prob- lems associated with a complex packaging process (see the B1 section of Figure 7-24). To solve the problem, senior managers continuously ask outside consultants to inter- vene and provide solutions for the undesirable symptoms that periodically arise. Over time, the line-level managers are not being trained to assess the underlying causes effectively, and they feel like their authority is being undermined. This results in line- level managers and talented employees quitting the company, which compounds the long-term quality issues that the company faces (see the R2 section of Figure 7-24). This example of a balancing correction is based on the systems thinking archetype referred to as “Fixes That Fail.” Th e Dolphin Resort could also experience the balancing correction pattern of behavior, where a manager applies a short-term fi x with long-term unintended consequences. Let ’s say that Chris applied a short-term fi x to the symptom of quality scores by mandating that managers personally address each guest complaint. Th is might improve service quality in the short term, but the hotel would be at serious risk of losing some of its most talented service staff as they might be frustrated because their days were being occupied with tasks far below their level of expertise and experience, rather than more important matters. In addition, new hotel employees would not have the opportunity to gain the valuable experi- ence associated with serving guests through challenging situations. Over time, this would produce a negative and predictable pattern of behavior, resulting in greater employee turn- over and decreased satisfaction, as shown in Figure 7-25.

Figure 7-23 Delayed Behavior over Time—“Limits to Success”  

Quality Reservation Rates

X-axis

Y- ax

is

Balancing correction A system behavior in which long-term problems are created through short-term fi xes.

Figure 7-24 Systems Archetype—“Fixes That Fail” B, balancing loop; R, reinforcing loop.

Unintended Consequence

B1

R2

Problem Symptom

Fix

Delay

7.7 | FEEDBACK AND RESULTS

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Chapter Seven Making Better Decisions192

How might these two common types of behavior patterns enable management to iden- tify systemic problems? Both of these patterns of behavior explain a real problem that Chris and his management team might face—service capacity, where growth in occupancy is overtaking the service staff ’s ability to handle it. Within a couple of months of implementing lower rates, capital improvements and renovations, service training, and a renewed focus on employee satisfaction, both quality scores and reservations at the Dolphin Resort dramati- cally increased, but the fi nancial results had yet to be realized. As we discussed earlier in the chapter, managers are at particularly high risk for prior- hypothesis bias when the information they need to make a decision is ambiguous. In such situations, it is very easy for a manager to focus unconsciously on those pieces of informa- tion that confi rm their prior beliefs—for instance, managers not in full support of a deci- sion may begin resisting the change, claiming that the “old way of doing things” produced better results. Th e Dolphin Resort team will need the discipline to avoid short-term fi xes that could also create a service capacity problem through unwanted employee turnover and engagement problems. Th ese eff ective managers see systematic behavior and can predict the consequences and patterns of behavior of their decisions. Not being able to analyze problems systemically can lead to unintended consequences, which we will continue to explore with Chris and his management team. Th is raises a new set of questions for us to explore. What were the goals and strategies that led to the situation at the Dolphin Resort? How do these factors aff ect the problems and challenges that managers face? In the next two chapters, we will explore how Chris and the management team established the company ’s goals and the strategies that led to their success, but not without encountering a series of problems that need to be solved along the way. Th roughout this book, we will explore the common patterns of behav- ior that occur in organizations, ways that successful managers intervene and make eff ective decisions, and delays in seeing results that managers can expect to experience.

Figure 7-25 Delayed Behavior over Time— “Fixes That Fail”  

Service Quality Employee Turnover

X-axis

Y- ax

is

CaseSnapshot Chapter 7 Case: Making Better Decisions: Ticketmaster

can be found on pg. 469

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Additional Resources 193

ADDITIONAL RESOURCES

KEY TERMSS Adaptive management An approach to decision making that requires managers to use critical thinking, collaboration, and refl ection skills to make nonprogrammed decisions. (p.173)

Administrative model A model of decision making that recog- nizes the limits of information, time, and individuals and seeks a satisfi cing rather than an optimum solution. (p.187)

Ambiguity Information about the situation, goals, or criteria that is incomplete or can be interpreted in multiple ways. (p.174)

Balancing correction A system behavior in which long-term problems are created through short-term fi xes. (p.191)

Bounded rationality Rational decision making that is limited by time, cognitive abilities, and available information. (p.187)

Brainstorming Creating as many alternatives as possible, with- out making value judgments about any idea. (p.183)

Certainty A situation in which a decision maker knows all the alternatives and their outcomes. (p.182)

Classical model A normative model of decision making that leads to an optimal decision, assuming full availability of informa- tion, suffi cient time, and rationality of the decision maker. (p.172)

Delphi technique A method of decision making in which a group of experts propose and question ideas until a consensus is reached. (p.184)

Dialectical inquiry A method of decision making in which a pro- posal and a confl icting counterproposal are given equal consid- eration. (p.186)

Groupthink A usually unconscious mode of group decision making in which individuals prioritize agreement over analysis. (p.182)

Heuristics A set of informal rules used to simplify and expedite the decision-making process. (p.182)

Illusion of control Overestimating one’s ability to control events and activities. (p.188)

Intuitive decision A decision based on feelings, previous expe- rience, and existing knowledge. (p.186)

Nominal group technique (NGT) A group decision-making process in which individuals rate proposed solutions and the total tally determines the fi nal decision. (p.184)

Nonprogrammed decision A decision based on reason and/or intuition in response to a unique situation that requires a tailored decision. (p.172)

Optimum decision The best possible decision given all the needed information. (p.172)

Policy-based analysis A method of problem analysis that iso- lates the variables in a system that can truly be addressed through management intervention (p.179)

Prior-hypothesis bias Basing decisions on beliefs or assump- tions despite evidence to the contrary. (p.186)

Production blocking A loss in productivity during a brainstorm- ing session because individuals are overwhelmed by the number of possibilities being generated. (p.182)

Programmed decision A decision based on preestablished rules in response to a recurring situation. (p.172)

Reasoned judgment A decision based on extensive informa- tion gathering, careful analysis, and generation of alternatives. (p.187)

Reinforcing engine A system behavior indicative of growth coupled with an unintended consequence in another part of the system. (p.190)

Representative bias Generalizing from too small a sample size. (p.187)

Risk The degree to which the outcomes of an alternative can be predicted. (p.184)

Satisfi cing Choosing an acceptable solution rather than an opti- mal solution. (p.186)

Symptomatic effects Observable behaviors related to underly- ing causal variables. (p.175)

Systemic-based analysis A method of analyzing a problem that takes into account the array of all known variables associated with a problem and its symptoms, including behavior over time. (p.175)

Uncertainty A situation in which a decision maker does not know all the alternatives and their outcomes. (p.182)

Underlying causes The behaviors that lead to a desired or undesired symptomatic effect (p.175)

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194 Chapter seven Making Better Decisions

IN REVIEW W 7.1 | Describe the seven steps of the decision-making process.

Th ere are two types of decisions that managers make: pro- grammed and nonprogrammed. Programmed decisions are based on preestablished rules in response to a recurring situa- tion, and nonprogrammed decisions are based on reason and/or intuition in response to a unique situation that requires tailored actions. Th ere is a recommended seven-step process to make better decisions as a manager: 1) identify the problem, 2) analyze the problem and its causes, 3) generate alternatives, 4) evaluate alternatives, 5) choose a path, 6) implement a choice, 7) solicit feedback and analyze results.

7.2 | Identify problems by analyzing causes and eff ects.

Managers eff ectively understand problems based on four steps: 1) observe undesirable symptoms, 2) acknowledge all primary causes that could create undesirable symptomatic eff ects, 3) qualify the systemic problem based on causes and eff ects, and 4) identify root problems with controllable behaviors that can be readily addressed. Th ere are two ways of understanding and analyzing underly- ing causes: systemic and policy-based. Systemic-based analysis takes into account the array of all known variables associated with a problem and its symptoms, taking into account behavior over time. Managers use causal loop diagrams and systems ar- chetypes to better understand the behavior of variables. To focus managers on productive decision-making activities, policy-based analysis isolates the variables in a system that can truly be ad- dressed through management intervention. Managers use stock- and-fl ow diagrams to better understand policy-based decisions.

7.3 | Describe how managers generate alternatives. In generating alternative paths to address identifi ed problems, managers should be aware of the negative eff ects caused by pro- duction blocking and groupthink. Yet, when managers don ’t gen- erate and evaluate alternatives, they often end up making poor decisions. In our scenario, the Dolphin Resort & Hotel manage- ment team started with a brainstorming session, creating as many alternatives as possible without making value judgments about any idea.

7.4 | Predict possible consequences of alternatives. Th ere are two methods for evaluating alternatives. In nominal group technique (NGT), individuals rate proposed solutions and the total tally determines the fi nal decision. Th is means that ev- eryone ’s opinions are taken into account, rather than the usual “majority rules” technique which is usually applied to voting. Th e second method, called the Delphi technique, is a method of deci- sion making in which a group of experts propose and question ideas until a consensus is reached. Th e case team decided to conduct their evaluation of alternatives using the NGT method, where alternatives were individually ranked, tallied, and collec- tively ranked by a simple calculation. Sensing some resistance, the general manager must recon- cile what other reasons might managers have for dismissing

alternatives in the evaluation process. To prevent these deci- sions, where negative behaviors can perpetuate, managers can apply a third evaluation method called dialectical inquiry, in which a proposal and a confl icting counterproposal are given equal consideration.

7.5 | Demonstrate how managers select the most desirable alternative.

Th ere are three ways to select a path: intuitive, optimum, and satisfi cing. An intuitive decision is based on previous experience, feelings, and previous knowledge. An optimum decision is the best possible decision given all the needed information. Success- ful managers consistently adhere to a process in order to choose an acceptable solution, rather than the perceived “optimal solu- tion”—this is called satisfi cing. In reality, managers never have all the needed information to make the “best decision.” Th is process balances time, information, and the ability of the team to con- sider and implement alternatives. Th e decisions that managers make are a product of the pro- cess models employed. Th e two primary decision-making mod- els used by managers include the classical model of decision making, which leads to an optimal decision, and the administra- tive model of decision making, which seeks a satisfi cing rather than an optimal solution.

7.6 | Describe the manager ’s role in implementing an intervening decision.

Managers succeed at implementation when they connect strat- egy, people, and operations. Th ey make decisions about goals, resulting in carefully considered and achievable strategies. Th is must be supported by placing the right people in the right jobs and getting them engaged to enhance their performance.

7.7 | Explain the patterns of behavior and delayed results for decisions made.

Gathering and analyzing feedback and results is the last step in the decision-making process; this process never ends—it is not a single event. What you learn from an honest evalua- tion of feedback and results tells you if you ’ve actually solved the original problem or created or discovered new ones, and it also suggests ways for continued improvement. Managers must establish clear feedback criteria, gather feedback on an ongoing basis, measure the results, assess gaps in expected outcomes, and determine next actions—and then reinitiate implementation and begin again. Managers that do not con- sistently gather and evaluate feedback typically repeat the same mistakes. Managers face two primary patterns of behavior that cre- ate problems in organizations. Based on the consequences as- sociated with reinforcing loops and balancing loops, underlying patterns of behavior are related to growth or short-term fi xes, respectively. First, a reinforcing engine is a system behavior in- dicative of growth coupled with an unintended consequence in another part of the system. Next, a balancing correction is a sys- tem behavior in which long-term problems are created through “short-term fi xes.”

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Additional Resources 195

SELF-TEST T 7.1 | Describe the seven steps of the decision-making process.

1. The typical type of decision for managers to make is a programmed decision. a. True b. False

2. Which of the following statements best describes decision making? a. Decision making is more science than art. b. Decision making focuses on a specifi c outcome. c. Managers make optimum decisions through a detailed,

thorough analysis of all data. d. Decision making is a process, not an event. e. None of the above

3. Diagram the seven steps of decision making.

7.2 | Identify problems by analyzing causes and eff ects.

4. Contrast the diff erences between systemic analysis and policy-based analysis.

5. As described in the chapter, what would be a common example of a “root cause” of a problem? a. Customer retention b. Body metabolism c. Feedback response rate d. Prior hypothesis e. None of the above

6. For the following systems archetype diagram, what negative behavior eff ect would a manager expect?

Gap

Guest Satisfaction Goal

Pressure to Lower Goal

Actual Guest Satisfaction

B1

B2

Lower Guest Satisfaction Goal

Delay

a. Employee turnover b. Declining guest satisfaction c. Guest expectation gap d. Employee satisfaction e. All of the above

7. Summarize the two primary causal factors of the “guest expectation gap” and the negative consequences that the Dolphin Resort and Hotel experienced because of this gap.

8. Explain why the Dolphin Resort and Hotel experienced a decline in guest satisfaction.

7.3 | Describe how managers generate alternatives. 9. Which of the following describes an important component

of brainstorming? a. An answer to a question is needed quickly. b. Lots of ideas are generated, without judgment of merit. c. Group consensus is needed. d. All of the above

10. Groupthink is the ability for a team to synthesize their thoughts into a more eff ective alternative path. a. True b. False

7.4 | Predict possible consequences of alternatives. 11. Ranking feedback results is a critical step when applying the

Delphi technique. a. True b. False

12. Choose the situation where a dialectical inquiry would be most eff ective. a. A team cannot decide between two choices. b. A manager seeks to understand two positions. c. A manager asks questions of team members to anticipate

consequences. d. None of the above.

13. Describe the three major steps that managers use when they apply the nominal group technique (NGT).

7.5 | Demonstrate how managers select the most desirable alternative.

14. Which of the following situations best explains when managers make optimum decisions? a. When a thorough process of analysis has been conducted. b. As a result of systems-based computer models. c. It is not possible to make an optimum decision. d. None of the above

15. Defend which model of decision making is best suited for a longstanding, multinational corporation: classical model or administrative model.

16. Argue Chris Heppler ’s rationale for proposing the five alternative paths for Kathy ’s approval.

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196 Chapter seven Making Better Decisions

7.6 | Describe the manager's role in implementing an intervening decision.

17. Which of the three following factors should managers connect to successfully implement a selected path? a. People, profi t, planet b. Resources, strategy, goals c. Strategy, people, operations d. Leading, organizing, controlling

7.7 | Explain the patterns of behavior and delayed results for decisions made.

18. Reconstruct a process for feedback and measuring results.

19. Compare and contrast the two primary patterns of behavior that create problems in organizations.

20. Summarize the relevance of the following behavior over time graph.

Weight Amount of Exercise Reduced Caloric Intake

Time

Va ria

bl es

CHAPTER EXERCISEE Individual vs. Group Decision Making: Jamestown 1607* You are a passenger on one of the three small, English sailing ships captained by Christopher Newport in the spring of 1607. You are approaching the coast of Virginia after a long, wintry voyage across the Atlantic Ocean. After reaching the coast, you explore up and down the James River in a shallop, or small boat. You had been directed by the Virginia Company of London to fi nd “the true, most wholesome and fertile place” to settle. Finally, you pick the site of Jamestown because it appears defensible, has a deep harbor close to shore, and is covered with walnut, beech, oak, and hickory trees. On May 13, 1607, you are one of 104 weary people to step off the cramped quarters of the three ships onto the swampy lowland. Fear of a massive attack by the Powhatan Indians makes the immediate construction of James Fort more important than building structures for housing. Soon, a triangular wooden wall, or palisade, is built to protect you and the other settlers against future attacks. By the end of June, when Captain Newport returns to England for new supplies, your settlement seems to be well established. Suddenly, conditions in Jamestown change. Supplies begin to run low and food is spoiling. Th e weather is turning hot and conditions are very dry. Little or no rain has fallen in weeks, no wells have been dug, and you are forced to drink water from the swamps or river. Th is water not only carries diseases but is brackish, containing about fi ve times the normal salt that a person should consume. As conditions worsen, men are dying daily. By autumn, disease reduces the number of survivors to fewer than 60. Imagine that you are one of these survivors. You must make some hard decisions in order to survive. Like all living things, you must have food, shelter, and water. You are challenged to choose items that will help you survive. Below you will fi nd a list of 15 items that may have been used in Jamestown during this time. Some of the artifacts have been found in recent archaeological digs. Rank these items from 1 to 15 according to their importance to you and the other settlers. Beside each choice, explain why you gave each item the rank it received and

how you plan to use the item to help you survive. Once you ’ve made your own choices, work with your team of settlers to come to consensus. It is a desperate time, and everyone living in Jamestown must agree, not only about the value of these items, but about how to use them as well.

Items that may help you survive in Jamestown:

1. Flint and striker A hard gray stone ( fl int) and a small piece of steel (striker)

2. Salted pork and hard tack Meat preserved by salting, and biscuits baked until all moisture is removed

3. Candlestick holder A nonfl ammable base for candles

4. Musket A common gun of the time

5. Sword A weapon with a long metal blade

6. Ax A tool with a handle and a heavy sharp blade

7. Bleeding bowl A common medical item

8. Beads Glass trinkets or jewelry

9. Money

10. 15 meters (about 50 feet) of hemp rope Rope made of natural fi ber

11. Astrolabe A tool to measure the altitude of the Sun

12. Magnetic compass A tool that uses a magnetic fi eld to determine direction

13. Bartman jar A pottery jar commonly used in the 17th century

14. Case bottle A dark-green, square, glass bottle

15. Hammock A swinging couch or bed, usually made of netting or canvas

Instructions:

Step 1: Write your own ranking of the items in the column labeled “Indiv Ranking.”

Step 2: Write your team ’s ranking of the items in the column labeled “Team Ranking.”

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Additional Resources 197

Step 3: Write the expert ’s ranking (provided by your instructor) of the items in the column labeled “Expert Ranking.”

Step 4: Calculate the absolute value diff erence between your individual ranking and the expert ’s ranking and write that number in the column labeled “Diff erence Ranking [1–3].”

Step 5: Calculate the absolute value diff erence between your team ranking and the expert ’s ranking and write that number in the column labeled “Diff erence Ranking [2–3].”

*Adapted from an exercise available at http://www.nasa.gov/ pdf/166504main_Survival.pdf

Items

Step 1 Indiv

Ranking

Step 2 Team

Ranking

Step 3 Expert

Ranking

Step 4 Diff erence

Ranking [1–3]

Step 5 Diff erence

Ranking [2–3]

Flint and striker

Salted pork and hard tack

Candlestick holder

Musket

Sword

Ax

Bleeding bowl

Beads

Money

15 meters (about 50 feet) of hemp rope

Astrolabe

Magnetic compass

Bartman jar

Case bottle

Hammock

Total the absolute diff erences of Steps 4 and 5 → (the lower the score, the better) Your Score Team Score

Did you score higher as an individual or as a team? Why?

What are some of the advantages of individual decision making?

What are some of the advantages of team decision making?

SELF-ASSESSMENTT Decision-Making Style* For each statement, circle the number that best describes you based

on the following scale:

Not at all Accurate

Somewhat Accurate

A little Accurate

Mostly Accurate

Completely Accurate

1 2 3 4 5

1. I make decisions in a logical and systematic way.

1 2 3 4 5

2. When making decisions, I rely upon my instincts.

1 2 3 4 5

3. I often need the assistance of other people when making important decisions.

1 2 3 4 5

4. I avoid important decisions until the pressure is on.

1 2 3 4 5

5. I generally make snap decisions.

1 2 3 4 5

6. My decision making requires careful thought.

1 2 3 4 5

7. I generally make decisions that feel right to me.

1 2 3 4 5

8. I rarely make important decisions without consulting other people.

1 2 3 4 5

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198 Chapter seven Making Better Decisions

9. I postpone decision making whenever possible.

1 2 3 4 5

10. I often make decisions on the spur of the moment.

1 2 3 4 5

11. When making decisions, I consider various options in terms of a specifi c goal.

1 2 3 4 5

12. When I make decisions, I trust my inner feelings and reactions.

1 2 3 4 5

13. I use the advice of other people when making decisions.

1 2 3 4 5

14. I generally make important decisions at the last minute.

1 2 3 4 5

15. I make quick decisions.

1 2 3 4 5

Scoring:

Rational Style (add items 1, 6, and 11 and write your score in the blank) __________ Th e extent to which you search for and logically evaluate alternatives

Intuitive Style (add items 2, 7, and 12 and write your score in the blank) __________ Th e extent to which you rely on hunches and feelings

Dependent Style (add items 3, 8, and 13 and write your score in the blank) __________ Th e extent to which you search for advice and direction from others

Avoidant Style (add items 4, 9, and 14 and write your score in the blank) __________ Th e extent to which you attempt to avoid decision making

Spontaneous Style (add items 5, 10, and 15 and write score in the blank) __________ Th e extent to which you make decisions quickly

What was your strongest decision-making style? What are the advantages and disadvantages of this style?

What was your weakest decision-making style? What are the ad- vantages and disadvantages of this style?

*Adapted from Susanne G. Scott and Reginald A. Bruce. “Decision-making style: Th e development and assessment of a new measure,” Educational & Psychological Measurement 55, no. 5 (October 1995): 818.

SELF-TEST ANSWER KEYY 1. b. False.

2. d.

3.

Identify the Problem

Choose Path

Evaluate Alternatives

Generate Alternatives

Solicit and Analyze Feedback

and Results

Analyze the Problem and its Causes

Implement Choice

Decision-Making Process

4. Systemic-based analysis accounts for all the known vari- ables and causes related to a problem, where policy-based analysis focuses only on the relevant variables that are controllable.

5. b.

6. b.

7. Th e primary causal factors are price and quality—the higher the price, the higher the guest will expect the quality to be. When this gap between high price and lower qual- ity increased, the Dolphin Resort and Hotel ’s occupancy percentage.

8. Management gradually decreased the guest satisfaction goal, which allowed the actual satisfaction to decline un- noticed over time.

9. b.

10. b; False.

11. b; False.

12. a.

13. 1) Individuals rank paths, 2) all individual ranking averaged, 3) the average rankings are then organized into a group ranking.

14. d.

15. Th e administrative model for decision making is the under- stood preferred model for modern corporations because it recognizes the limitations of known variables, yet seeks to apply a reliable process consistently.

16. Here is the rationale: the operation was too focused on trying to increase revenue by cutting costs and increas- ing room rates. Previous management did not spend the

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Additional Resources 199

resources necessary to make capital improvements con- tinuously and chose not to focus on service quality. With the increased room rates and declining service quality, this created an “expectation gap” that had a negative eff ect on profi tability. To systemically address these causes, the team believes the previously stated paths will close this gap and increase the resort ’s profi tability.

17. c.

18.

Establish Feedback

Implementation

Assess Gaps

Measure Results

Gather Feedback

Criteria

Determine Next Actions

19. First, a reinforcing engine is a system behavior indicative of growth coupled with an unintended consequence in another part of the system. Next, a balancing correction is a system behavior in which long-term problems are created through short-term fi xes. Th ese two patterns are diff erent because a reinforcing engine is based on exponential growth or decay behavior that has natural limits, and a balancing correction is based on behavior that homes into equilib- rium. Each of these patterns is similar in that unintended consequences are delayed.

20. When a person changes his or her exercise and dieting behaviors, a delay exists before results are experienced with regard to weight loss or gain.

Notes

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Setting Goals

eight Chapter

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I N S I D E T H I S C H A P T E R

ManagementStory: Featuring Chris Heppler

Learning Objectives

8.1 | Setting Goals that Make a Difference

APPLYING CRITICAL THINKING: S.M.A.R.T. Goals

RESEARCH @ WORK: Increasing Productivity When Goals Go Wrong

APPLYING CRITICAL THINKING: “The Boiled Frog”

8.1 | Describe the primary goals of an organization.

8.2 | Goal Plans Principles of Goal Setting Goal Plan Types and Components

8.2 | Explain the principles and diff erent types of goal plans in an organization.

8.3 | Effective Goals Types of Goals

8.3 | Outline diff erent types of goals and the characteristics that make them eff ective.

8.4 | Team Commitment Management by Objective (MBO)

8.4 | Illustrate how managers secure team-level commitment to goals.

8.5 | Individual Performance Action Plans

8.5 | Construct action plans consistent with goals to achieve individual-level performance.

8.6 | How Managers Track Progress Performance Dashboards

8.6 | Describe how managers track progress of goal plans through performance dashboards.

By the end of this chapter, you will be able to:

8.6 | Describe how managers track progress of goal plans through performance dashboards.

ADDITIONAL RESOURCES Key Terms

In Review

Self-Test

Chapter Exe rcise

Self-Assess ment

Self-Test

Answer Key

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202 Chapter eight Setting Goals

8.1 | SETTING GOALS THAT MAKE A DIFFERENCE

8.1 | Describe the primary goals of an organization.

Setting goals is an essential part of achieving personal and professional success. Yet no goal will succeed without individual or organizational support. Th is means that managers must believe in what the company is doing and where it is going in order to cement its success. Goals must be set within a strategic framework consisting of mission, vision, and values. So, why are goals so important? Th ey give us direction, a sense of purpose and achieve- ment, reinforce our beliefs, the ability to reach our full potential, and boost our self-esteem. Yet, like the art of decision making, goal setting is a balancing act. If we set the goal too high, we can fail; if it ’s too low, we don ’t achieve the same personal fulfi lment. For example, if you set a goal to be fl uent in French within a month, this is unlikely to happen, even if you have the greatest gift for languages. However, if you set a more realistic time frame, gather all the resources you will need, remain focused, and practice regularly, it is entirely possible that you will be able to achieve fl uency within a reasonable period of time. Th e theory of goal setting is arguably one of the most researched topics in management. 1

Hundreds of studies across many countries have taken place in order to examine the eff ects of goal setting on behavior and motivation. Setting goals is a relatively new concept. Frederick W. Taylor, who we met in Chapter 2, fi rst developed the theory of Scientifi c Management in the early twentieth century. By studying productivity and performance of the workers

through time and motion, Taylor defi ned the fi rst real goal- setting ideal: encouraging managers to specify tasks, outline the details of the job to the workers, and explain exactly how the task was to be achieved. As a result of this enhanced communication between managers and workers, productiv- ity rose and men began to work more effi ciently. However, as we know now, Taylor ’s plan had its own imperfections, and it caused much controversy at the time. Indeed, the theory of goal setting has come under much scrutiny ever since. Th e main debate focuses on “what really motivates people.” You might think the answer is obvious: Money! Yet, researchers have found that money alone is not enough to drive employees to achieve high performance. For example, as we discussed in Chapter 7, Chris Heppler, the general manager, found that although the Dolphin Resort & Hotel’s performance was tied to the staff annual bonus, the team wasn ’t particularly motivated to work toward helping save the hotel from potential bankruptcy. As we explored in Chapter 1, values, mission, and vision shape the beliefs of an organization and its culture. A strong,

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2038.1 | SETTING GOALS THAT MAKE A DIFFERENCE

powerful mission statement will be assimilated into the company culture, so that each employee is committed to putting the mission into action in order to ensure the success of the organization. For example, Disney ’s mission statement is “We create happiness by pro- viding the fi nest in entertainment for people of all ages, everywhere.” 2 Yet, as we have learned, no mission is complete without a clear vision and strong values. Every company must have a vision of what the organization wants to become in the future. An eff ective vision inspires and excites employees and makes them feel proud to work for a company. Many organizations translate their vision into a vision statement. For example, Westin Hotel ’s vision statement is: “Year after year, Westin and its people will be regarded as the best and most sought-after hotel and resort management group in North America.” 3

Managers setting goals must follow the organization ’s mission, have a clear vision of what they want to achieve, and ensure that the team embraces the core values of what the orga- nization represents. Fostering a strong corporate culture within this framework is the fi rst step toward goal success. In the previous chapter, we explored the concept of decision making and how managers work through complex situations by using diff erent decision-making models, processes, and systemic-based analysis in order to arrive at a solution they feel is best for the organiza- tion. Th rough a series of decision-making and systemic-based strategies with the hotel staff , Chris identifi ed the areas that he needed to improve in order to achieve the task set for him by Kathy Osborne, the hotel owner. By employing the group decision-making process, Chris and the hotel team produced a number of actions that they believed would help enhance the hotel ’s dwindling fi nancial performance. With the support of Osborne, as well as the rest of the staff , Chris began to implement those decisions by beginning the refurbishment of the property and focusing on ways to increase employee satisfaction and guest satisfaction. In this chapter, we will continue to follow Chris ’s journey in carrying out his assigned goal to save the declining Hilton Head Dolphin Resort & Hotel by increasing its profi t by $500,000 for the following year. In order to meet this challenge, Chris must devise a goal plan with his management team, secure staff commitment to the specifi ed goals, construct an action plan in line with them, and track its progress. As Chris knows, making decisions is just the fi rst step. After a decision has been made and clearly defi ned, the information has been gathered and analyzed, and the best course of action has been agreed upon, it is time to start the goal-setting process. In order to get the ball rolling, Chris decides to have one-to-one meetings with each of the staff to assess their commitment to the hotel. He begins with John Johnson, the hotel ’s food and beverage director (as well as the biggest dissenter to date). Johnson has already made his feelings about his new manager abundantly clear by disagreeing with his decision-making approaches and questioning Chris ’s judgments and managerial abilities. Chris knows that in order for a goal to succeed, the whole team must be fully committed to it. One weak link in the chain of commit- ment could set off a series of catastrophic events that would ensure the potential failure of the goal. Chris needs to make sure that John ’s attitude does not impede the progress at the hotel. In preparation for the meeting, Chris asks for John ’s previous year ’s goal plans for review. As the hotel ’s food and beverage director, John is responsible for the operation of the hotel restaurant, recruiting and monitoring kitchen and restaurant staff , controlling inventory, and managing revenues and expenses. In line with the attitude of the previous general man- ager, Herb Cork, John believes that making fi nancial savings is the most important goal. Stating that he “runs a tight ship,” John tells Chris that his management of the bottom line profi t is second-to-none, which he is certain is “great for the industry.” Chris then suggests that John bring him fi ve departmental goals, excluding John ’s appar- ently sole goal of focusing on the numbers. Th e following day, John enters the meeting room, looking pretty confi dent. He hands Chris a hastily scribbled piece of paper and sits down, reclining in his chair. Chris reads John ’s following fi ve goals:

1. To increase the RevPAR (revenue per available room) from $100 to $150 per night 2. Close the restaurant when the hotel has only a few guests 3. Reduce hours of the kitchen staff to save on wages. 4. Shut down hotel altogether outside the summer months 5. No outside involvement; the hotel has been running fi ne to date and doesn ’t need

outside interference

M anag

em entSto

ry: Featuring

C hris H

ep p

ler

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204 Chapter eight Setting Goals

When Chris fi nishes reading John ’s goals, he tries not to let his heart sink too much. It is clear that John has not taken on board any of the new ideas that Chris and the team came up with during the decision-making process. Instead, he has ignored Chris ’s decisions to focus on service quality and employee satisfaction, as well as investing in refurbishment and considering other partnerships. Furthermore, it is obvious that John is still highly unap- preciative of Chris ’s “outside interference.” In fact, most of the goals aren ’t even related to his own department! Still, he tries not to take John ’s criticisms personally and rereads his goals once more to see if he can salvage any of his ideas and make at least one of them “S.M.A.R.T.” So, what is a S.M.A.R.T. goal? (See the “S.M.A.R.T. Goals” box to fi nd out.) Popularly, goal setting has been defi ned as the establishment of specifi c, measurable , achievable, relevant and time-bound goals, also known as S.M.A.R.T goals . So, let ’s take John ’s fi rst goal: “To increase the RevPAR from $100 to $150 per night.” Aside from the fact that Chris and the team had agreed that charging guests more for less qual- ity was one of the major pitfalls of the hotel, is there a way for Chris to make John ’s goal S.M.A.R.T.? Chris decides to work through John ’s goal with him, using the S.M.A.R.T. technique. He explains to John that his goal needs to be specifi c . Without wanting to step on his toes too much, Chris suggests that perhaps John should focus on how his own department could contribute toward achieving the goal and how he himself and his staff could participate in the process. Chris starts by bringing John through some areas of improvement in his department. For example, John, who is in charge of inventory has a habit of ordering more sodas as soon as the inventory declines to a predetermined level, which led to over-ordering and unnecessary expenditure. John, visibly bristling, tells Chris, “I don ’t see the problem with that—better to have more than run out altogether.” Chris explains that there was simply too much soda in stock, and a large majority of it had expired. John says nothing, so Chris goes on to explain how with further analysis of soda consumption, John could easily correct this problem and order enough to cater for the needs of the guests without running out or losing money. Th en Chris asks John if he had any other ideas about how his department could help improve customer service. “Well, as I recall, you said something about baking cookies to wel- come guests, but personally I think that ’s a waste of time and money. I mean, who gives away

S.M.A.R.T goals Goals that are specifi c, measurable, achievable, relevant, and time-bound.

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S.M.A.R.T. Goals CT Specifi c: Goals need to be specifi c in order to help you focus on the task at hand. Clearly defi ned goals help you to decide what to do, why it is important, how it is going to be achieved, and what the result should be.

Measurable: How can you measure a goal if you don ’t manage it? If you don ’t set milestones along the way, you will never know if employees are fulfi lling their responsibilities in working toward achieving the goal. Conversely, the team will experience uncertainty about their own performance and lose motivation if they have no way of knowing the extent of their progress.

Achievable: Goals must be realistic and attainable. There is no point to setting goals that are too far out of reach or too high above standard performance. A good manager will assess the capability of his employees and set goals that cater to their skills, and perhaps even stretch them a bit, in order to accomplish the objective.

Relevant: Goals must be in line with the company ’s vision, mission, and values in order to succeed. Employees need to be made aware of their part in contributing to the overall strategy and objectives of the organization. A relevant goal will encourage employees to work toward the goal but not push themselves to the breaking point.

Time-bound: The crucial question to consider here is: When? Setting a time frame for the goal gives employees a fi rm target to work toward. If the goal is several months or even a year in the future, milestones must be set along the way to assess performance and allow room for feedback. Goals that are not “set in stone” tend to be neglected, as the team has no sense of urgency to complete them.

Critical Thinking in the Classroom: What do you think is the value of S.M.A.R.T. goals within an organization, and how would you apply them as a manager?

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2058.1 | SETTING GOALS THAT MAKE A DIFFERENCE

free cookies these days?” Patiently, Chris takes John through the concept of customer loyalty and guest expectations, and how making a guest feel valued was a sure-fi re way to secure a repeat visit, as well as generating positive word-of-mouth. “O.K., fi ne,” John says. “But how am I going to get my kitchen staff to bake cookies? Th ere is such a high turnover of staff ; I don ’t know who does what at this stage.” Chris replies, “I understand there is a problem with the lack of permanent staff , but we are in the process of addressing that. However, for a goal to succeed, it has to be measurable . Th is means that you will need to monitor your staff and set key milestones along the way to make sure you and the staff are certain about what goes on in the kitchen.” “But why should my staff go along with my goal?” John says. “Th ey do their job for four months, pick up a paycheck, and then they are gone. Why should they care?” Chris reminds John that he already had an excellent employee, Zoey Zhang, in the kitchen that cared about the future success of the hotel, and she was sure to help motivate the rest of the staff , given the right support. He also tells John that as a manager and a leader, he needs to emphasize that the goal is relevant to every single one of them, and assert that it is in line with the hotel ’s vision, mission, and val- ues. Furthermore, his staff must be assured that although the goal seems to be challenging at present, it will certainly be achievable if everyone works hard and pulls together to make it succeed. Chris then adds that John would need to set key milestones for his employees over a cer- tain period of time, right up until the goal deadline ( time-bound ), and provide support and feedback along the way. When Chris fi nishes taking John through his goal, they both agree that it seems a bit more realistic than it had before. However, John still does not seem convinced that it is actu- ally achievable. Although exasperated with John ’s reluctance to commit fully to the hotel ’s goals, Chris is determined to fi nd out how he can motivate him and get him to work as a team player. To start the process, Chris needs to fi nd out more about John as a person, rather than as just a prickly food and beverage manager who is entirely resistant to change. After a few gentle opening questions about his professional background, John explodes, “Why do you want to know what I ’ve done in the past? I ’m sure Kathy Osborne gave you a full summary of my career to date. Again, this is just time wasting. I ’ll tell you, in my father ’s day, there wouldn ’t be any time dedicated to sitting around in meeting rooms for hours talking fl uff . He would be out there getting the job done, no questions asked.” Calmly, Chris ventures another question, and asks John what his father does for a living. John replied stiffl y, “He started off as a logger when he was only in his teens and then became senior manager of a furniture manufacturer. He was extremely successful.” Chris can ’t believe his luck. His background research on goal setting highlighted stud- ies and their fi ndings from the logging industry in particular. He feels that, fi nally, he can relate to John on some level, and hopes that John will reciprocate. So, Chris begins to tell John about the series of studies on goal setting and motivation carried out over the last four decades by Professors Gary Latham and Edwin Locke. He tells him that they had arrived at the conclusion that rather than just using money as an incentive, people were more moti- vated by challenging, clear goals and achieved more personal satisfaction by overcoming diffi cult obstacles than doing easier tasks. Apparently, people who were told to “do their best” performed less well than those who were given specifi c targets. John listens to Chris without interruption, but he still looks a bit skeptical. So, Chris decides to tell John about a case study that focuses on the wood products industry con- ducted in the South in the 1960s and 1970s. (See the “Research at Work” box for more details.) As soon as Chris fi nishes, John sits straight up in his chair and snaps his fi ngers. “My father was like one of those workers; he liked a challenge and always wanted to fi nd new ways to improve things. Th at ’s why he was so successful.” Delighted with John ’s newfound

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Increasing Productivity4 In 1968, the American Pulpwood Association wanted to increase the productivity among the loggers but wasn ’t quite sure how to go about it. At the time, companies were dependent on loggers who were mostly self-employed. This meant they could work as often or as little as they wished, and often it was the latter. Although companies had tried to invest in machinery that would reduce their dependency on the loggers, many found they could not afford the expense.

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In response, researchers carried out an experiment: they put three types of groups of logging supervisors in place; one stayed on site with the loggers but did not set specifi c goals; the second did not stay on site but did lay out specifi c goals; and the third both stayed on site and gave specifi c production goals. The researchers found that the third group had the greatest increase in productivity. Why? Because the workers knew exactly what to do and the target that needed to be reached, and they benefi ted from the presence of a supervisor who provided feedback and supported them in their achievement of the goal. As workers became more engaged with the task, absenteeism dropped and the rate of injuries decreased. By attaining a goal that was both challenging and diffi cult, the workers experienced a sense of great achievement and accomplishment. The experiment proved that workers were more motivated

by the presence of an on-site supervisor, as well as being assigned specifi c production goals. Next, the researchers addressed the problem of under loading trucks. Loggers tended to limit the amount of logs in each truck, as there were fi nes imposed if trucks were overloaded. A goal was set to fi ll the trucks at 94 percent capacity (up from the former average of 60 percent), which was perceived as a “diffi cult yet attainable goal.” The experiment involved six company logging operations in Oklahoma, whose truck drivers belonged to a union and were paid by the hour. Six trucks and six drivers were assigned to each logging operation. The drivers were responsible for ensuring that the trucks were loaded to the maximum legal weight. The net weight of the 36 trucks in the fl eet would be collected over a 12-month period. No incentives such as money were promised to the workers, nor were they given any additional training. They were told that if they failed to attain the goal, they would not get any repercussions. Production increased to such a degree that the company saved almost $250,000 over a nine-month period, money that would have been spent on extra trucks to carry the same number of logs to the mill. So, how did they do it? By being allocated a specifi c, challenging goal, each worker knew what was expected. Rather than “doing their best,” the workers were aware exactly how much each one needed to achieve each day. When the workers reached their targets, they experienced a measure of pride and satisfaction in their work. This, as well as being assured that they would not be punished if they failed to reach the goal, motivated them to carry out the task to its completion. Time and again, research has proved that the setting of specifi c and challenging goals led to enhanced work performance, as well as increased job satisfaction for the worker.

Critical Thinking in the Classroom Imagine that you are the manager of a team of loggers. What approach would you take to boost productivity?

Research@Work

enthusiasm, Chris says, “So do you understand what I am trying to achieve for the hotel? By setting challenging but not impossible team goals, I believe that each of you has the skill and the capability to make this hotel a success once more. But it is not enough for me to believe in this vision; every team member, including you, John, must be a part of it too.” John nods his head briefl y, as if deep in thought. Chris feels this was a good point to end the meeting, and he leaves feeling a little more optimistic about John ’s attitude going forward.

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2078.1 | SETTING GOALS THAT MAKE A DIFFERENCE

When Goals Go Wrong We have discussed the conditions and dimensions that lead to successful goal achievement, but there are a number of reasons that goals will fail. In the early 1990s, Sears set a goal for their repair team to charge $147 per hour. Th is led to the staff overcharging and making unnecessary repairs in order to meet their target. Companies such as Enron and Ford also made similar errors in goal setting. For example, Enron awarded bonuses based on revenue rather than profi t, lead- ing the company to its eventual collapse. In the case of Ford, employees were asked to make a new car in an unrealistic deadline, resulting in neglected safety checks and subsequent lawsuits. 5 Researchers Locke and Latham outline the pitfalls of goal setting to which individuals and organizations commonly fall prey, including “excessive risk-taking, increases in stress, feel- ings of failure, using goals as a ceiling for performance, ignoring non-goal areas, short-range thinking, and dishonesty/cheat- ing.” 6 Based on this theory, we might conclude that the three companies cited above had fallen prey to some of these pitfalls. Similarly, Chris had fi rst-hand experience of the departmental pitfalls of the Dolphin Resort & Hotel. Th e former general manager, Herb Cork, had set a goal to keep profi ts stable by focusing on fi nancial savings, to the detriment of service quality. So long as he maintained the bottom line, Cork was satisfi ed with the hotel performance. Similar to the decisions made at Enron, he was more inclined to focus on revenue than profi t. Unfortunately, his short-range thinking led to a decline in guest satisfaction and a decrease in profi t. Th e hotel had also fallen prey to excessive risk taking by being fully operational for only four months of the year. As a result, there were very few permanent staff members, which aff ected any kind of team loyalty or commitment to the hotel. Furthermore, the skeleton staff was expected to multitask and fi ll a number of roles. For example, Chris was greeted by sales director Ken Gold, who as acting receptionist did not provide the best fi rst impression. John Johnson could also be accused of using goals as a ceiling for performance and ignor- ing non-goal areas. So far as he was concerned, he was doing his job just as he was told, by focusing on the fi nancials and performing well enough to pick up his bonus at the end of the year. However, was John entirely to blame for his attitude? After all, Herb Cork tended to micromanage the fi nancials of every department, emphasizing that maintaining the bottom line was the most important function of their roles. With such a narrow view, it appears as if Cork left no room for creativity or change. Chris was especially impressed by one of the kitchen staff , Zoey Zhang, but it does not seem that her manager nurtured her enthusiasm. It is little wonder that Chris had a challenge on his hands: the management team had never been asked what they thought and how they could contribute to the running of the hotel. But what about the hotel ’s owner, Kathy Osborne? Over the course of six years, she had watched the hotel profi t steadily decline under the helm of Cork. It is clear that Kathy should have stepped in earlier to address Cork ’s management technique, yet she had let the situa- tion drift on, presumably in the hope that the hotel would pick up pace again without any intervention. In this sense, we could say that Kathy also suff ered from the pitfall of short- range thinking. Like all aspects of management, goal setting is a people business. Th e success of the goal depends on the people carrying it out. As we have learned, managers must have commit- ment from their employees, match skill set to performance, give productive feedback, and strive to make the goal clear and challenging. All these principles stem from a belief in the goal itself. If there is any doubt that the goal will succeed, then it is more likely that it will fail. For example, in organizations, the manager might not buy in fully to the goals of the company, leading to confl ict. 7

Similarly, employees who feel that they simply don ’t have the ability or skill set to over- come the obstacles and challenges of reaching the goal can also cloud their focus on the

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208 Chapter eight Setting Goals

desired outcome. 8 If goal setting is a people business, how will Chris manage the pitfalls at the Dolphin Resort? He has already made a start in securing the commitment from John Johnson, discovered the reasons behind many of the mistakes made by his incumbent, and received full buy-in from Kathy. Yet, his abilities as a manager will be put to a continual test. However, the application of Positive Psychology and a systems approach to critical think- ing can help Chris in setting and completing his goals. Systems theory holds that people who concentrate on the vision of the goal and what it would mean to achieve the result help

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g “The Boiled Frog” CT Kathy Osborne, the owner of the Dolphin Resort & Hotel, wants to understand how the team came to be so dissatisfi ed. She felt that employee satisfaction used to be a cornerstone of the Dolphin and kept ask- ing Chris Heppler, “How did we get here?” Finally, he responded “So gradually, that no one ever noticed.” Little by little, employee satisfaction expectations eroded over time, without being noticed on a daily basis, until turnover started to skyrocket, ac- cident reports tripled, and the company faced two ha- rassment lawsuits. In Systems Thinking, this challenge is the “Drifting Goals” archetype, also known as “The Boiled Frog,” illustrated in the graphic shown here. Why a frog? As we mentioned in Chapter 7, if you throw a frog into a boiling pot of water, it will jump out. Yet, if you place that frog in cold water and gradually turn up the heat, it will swim around and not notice until it is too late. (Note: the authors are a bit disturbed by this metaphor, so please don ’t try this at home!)

Gap

Guest Satisfaction Goal

Pressure to Lower Goal

Actual Guest Satisfaction

B1

B2

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Delay

The Boiled Frog

Because the Dolphin Resort & Hotel had not been tracking employee satisfaction, Chris demonstrates his point to Kathy by showing her that it was following the same trend that guest satisfaction had experienced. He noted that as the goals were lowered, so were re- sults, as seen here.

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So what is the recommended intervention that a manager should take when a “boiling frog” has been identifi ed? The solution here is straightforward: reset the goal to the highest desirable standard.

Critical Thinking in the Classroom: As a manager, how would you avoid “The Boiled Frog” syndrome taking place within your organization?

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2098.2 | GOAL PLANS

give clarity to the process. On the other hand, as our fi rst instinct is to look for all the prob- lems that could occur on our journey to completing a task, it is not an easy skill to simply put these concerns aside to focus on the outcome. It is up to Chris to hold onto the vision, no matter how frustrated he might feel at times, to keep the staff inspired and motivated. By using Positive Psychology, Chris could also assess the skills of the employees, match them to the organizational objec- tives, share his passion for the goal with them, and help direct their focus on the vision itself.

8.2 | GOAL PLANS

8.2 | Explain the principles and diff erent types of goal plans in an organization.

Principles of Goal Setting Th e previous example from the logging industry comes from pioneering research carried out by Latham and Locke on goal setting and motivation. Th eir goal-setting theory also subscribes to the S.M.A.R.T. approach. In their 1990 book A Th eory of Goal Setting and Task Performance, the authors outline fi ve main principles of goal setting to motivate workers: Clarity, Challenge, Commitment, Feedback, and Task Complexity. 9

Clarity Goals must be clear, specifi c, unambiguous, measurable, and set with a specifi c time frame for completion. Which is the clearer goal? “I want to write a thesis about sports”; or “I want to write a thesis about the impact of goal setting on sports that will be 100 pages long and completed within three months. Every weekday, I will write at least 3 pages per day until the thesis is fi nished.” Th e fi rst example is vague and unclear; there are no timelines set, no specifi c goals to aspire to, and the topic is ambiguous to say the least. In fact, if you told a friend or a profes- sor that you wanted to write a thesis on sports, they wouldn ’t understand what you wanted to achieve. However, by clearly defi ning your goals, as described in the second example, nobody is left in any doubt as to what you are striving to achieve, including yourself. When Chris redefi ned John ’s goal to increase room rates, it didn ’t seem as far-fetched; in fact, it seemed entirely achievable. Clearly defi ned goals motivate us—knowing that you have a set task to achieve every day, such as writing at least 3 pages, helps you to engage with the task in order to meet the set deadline. Th is is why managers set clear goals for their teams: to improve performance and motivate their employees.

Challenge As researchers have discovered through a number of experiments, people are more motivated by challenging goals. In the trucking story from earlier in this chapter, the workers achieved great satisfaction in fulfi lling the assigned “diffi cult, yet attainable” goal. 10

One of the most important characteristics of goals is the level of challenge. As people are often motivated by achievement, they ’ll judge a goal based on the signifi cance of the anticipated accomplishment. When you know that what you do will be well received, there ’s a natural motivation to do a good job. For example, although the workers in the logging case study were not promised any additional monetary compensation for their goal achievement, they were compensated verbally and given positive feedback at regular intervals. Having a supervisor on site who believed in the signifi cance of the goal and conveyed this confi dence and feedback to the workers made an enormous diff erence when it came to achieving the logging challenge. Indeed, in some cases, workers became so excited by the goal that they started to come up with creative ways to improve the logging system. In this case, we could say that goal setting, presented in the right way, spawns creativity. Th is was the part of the case study that really inspired John at the Dolphin Resort & Hotel. As he told Chris, his father loved a

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challenge, and he had lots of ideas about how to overcome certain obstacles. John believed that this was the main reason for his father ’s success.

Commitment: Managers often use the term buy-in when it comes to goal setting. Th is means that in order for goals to be achieved, the manager must have full commitment, or buy-in, from everyone on the team. Typically, people will be more committed to a goal if the task itself is important to them, as well as the outcome, and if they truly believe they can achieve the goal. 11 Chris set up that meeting with John fi rst, as he knew that he would be the toughest person on the team to buy in to his goal. Employees are much more likely to engage in the goal if they feel they were a part of creating it in the fi rst place. By participating in the goal-setting process, employees have a personal interest in the task and are more willing to work toward achieving it. Giving an order to an employee to “do something,” without giving any further explanation, might get the task done, but it is doubtful that the worker will have any personal interest in the task itself or even feel motivated enough to do it repeatedly. Th is is why it is so important for managers and employees to interact regularly. Goals have a better chance of being achieved if the employees are involved in the decision-making and the planning processes. However, not everyone on the team might agree with the goal, even if they have been involved from the outset; indeed, it can be diffi cult to get everyone ’s buy-in at once. Th is is why it is essential that the manager is passionate about the goal and communicates with the team in a way that assures them that the goal is in line with organizational values and vision. Employees need to believe that the goal is worthwhile and feel that their contribution will truly make a diff erence.

Feedback: “So how are we doing?” is a commonly asked question by team members when it comes to measuring goal performance. For instance, if the goal was to make 1,000 auto parts in a week, how would the team know whether they were achieving the objective unless someone else was monitoring their progress and informing them about it? In addition to planning goals, managers must include feedback, which can be a motivator in and of itself. Th rough progress reports, managers can clarify expectations, assess the pro- cess, adjust it if necessary, and recognize and award good work. As a result, team members will have more incentive to achieve the goals set for them. Th is is especially important for a long-term plan , which is a plan that covers time peri- ods of a year or more and is used to achieve future goals. In many cases, goals that are set quite far in the future can lose momentum. Employees might either put off their allocated tasks, telling themselves they will return to it “closer to the deadline,” or simply lose interest altogether. By giving timely feedback, managers can monitor progress, as well as address any signs of lapsed enthusiasm or motivation. Th rough progress reports, team members will be able to assess for themselves how they are doing and where they might need to improve performance. However, managers must also take into account the way they distribute feedback. If Chris told John: “You haven ’t managed to reach your target this week; you are doing a ter- rible job. If your poor work continues, you won ’t have a job soon,” it is likely that John would just get up and walk out. For most of us, our work performance is also tied to our self-worth, or self-effi cacy. 12 If we are given negative feedback, we might feel upset, angry, discouraged, and disillusioned, which will in turn aff ect our work performance. Indeed, being consistently critiqued or threatened by a manager will aff ect any desire to complete future goals and may result in us leaving the company altogether.

Task Complexity: Although Locke and Latham found that people excelled when they were given more challenging tasks, they were careful to advise against allocating tasks that could be too overwhelming. Th is is particularly relevant to tasks of high complexity, which demand an elevated level of skills. People who work in a complex environment generally possess the skill set and motiva- tion necessary to carry out their roles. However, if the goal does not account for the com- plexity of the task, and appropriate measures are not put in place at the beginning to address it, then people might become overworked, pushing themselves to meet the expectations of the goal. Pressure to perform beyond the limits of our ability can really impede performance, leading to a lapse in commitment.

Long-term plan A plan that covers time periods of a year or more and is used to achieve future goals.

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When setting complex tasks, managers must account for the diffi culty of the goal by ensuring that workers are given enough time to complete the task or, if they lack the neces- sary skills, provide them with the appropriate resources to show them how to build a strat- egy to complete the goal. Without any clarifi cation or defi nition, John ’s goal to charge more for rooms is in itself a complex (if not an apparently impossible) task, as it is unlikely that guests will be happy to pay more for a subpar hotel experience. As S.M.A.R.T. dictates, goals must be achievable from the outset in order to be successful.

Goal Plan Types and Components Now that Chris has made a connection, albeit a fragile one, with John Johnson, he is eager to nurture the relationship further. John is a strong personality and something of a leader among the staff . Chris knows that if he can get John fully committed to the goal, then he will be a signifi cant force in persuading the rest of the team to get involved. In light of the off -the-mark goals set by John previously, Chris felt it was important to reiterate the hotel ’s strategy to inform John fully as to what had been decided in terms of improving the hotel ’s performance. He also hopes that by fully involving John in the plan, he will be more moti- vated to working toward the goal. As a result, Chris informs John of the hotel ’s business plan , which is a plan that inter- prets an organizational strategy into a market- or community-based opportunity for divi- sion or departmental managers. In particular, the hotel ’s plan sets the following goals:

● Focus equally on employee satisfaction, guest satisfaction, owner return on investment, and the environment

● Make employee satisfaction the most important priority ● Invest in capital improvements: complete a cosmetic renovation before the summer

season ● Raise occupancy by approaching the local time-share companies to see if they are inter-

ested in purchasing a fi xed number of rooms at a lower daily rate ● In general, lower the rates at the hotel and increase revenue through an upgraded gift

shop and activities

Silently, John looked through the list, and then said, “How can we aff ord all these refur- bishments to the hotel? Fancy TVs and new carpets and linens . . . Sounds like you are tak- ing money and throwing it down the river.” Chris explained to John that he had received full support from Kathy Osborne to carry out the renovations, and that they had worked out a budget , which is the quantitative part of a plan that allocates available fi nancial resources, to cover all the improvements. John went back to the list. “OK, so we have a budget in place. What I want to know is how you are going to get this time-share idea past company policy. Herb Cork made it very clear that the Dolphin Resort would never be affi liated with other partners.” Chris had already been through the company policy , which is a standing plan that describes how an organization and its members should respond to recurring or anticipated situations. He knew that there was nothing in there about the hotel engaging in partner- ships, and suspected that this was just Cork ’s personal opinion. Chris handed a copy of the company policy guidelines to John, who grudgingly conceded that there was nothing to stop the hotel from forming new business relationships. “I still don ’t think it ’s a good idea, though,” he added. Chris thought that it would be a good idea to bring John through the policy and proce- dures of the company so he was absolutely clear on the rules and regulations , which are formal descriptions of how specifi c actions must be carried out. He explained that a policy is a standing plan , which is a plan designed for repeated use in response to commonly occurring events. A procedure is another example of a standing plan that provides specifi c steps to be taken as part of a recurring process or in response to a recurring situation. For example, the hotel ’s policy dictates that employees are to gather at a certain assembly area during a fi re drill or in the event of a fi re. Managers and employees are expected to carry out the terms of the policy by behaving according to the instructions outlined in the procedure.

Business plan Plans that interpret an organizational strategy into a market- or community-based opportunity for division or departmental managers.

Budget The quantitative part of a plan that allocates available fi nancial resources.

Policy A standing plan that describes how an organization and its members should respond to recurring or anticipated situations.

Rules and regulations Formal descriptions of how specifi c actions are to be carried out.

Standing plan Plans designed for repeated use in response to commonly occurring events.

Procedure A standing plan that provides the specifi c steps to be taken as part of a recurring process or in response to a recurring situation.

8.2 | GOAL PLANS

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When John and Chris fi nish going through the business plan and hotel policy, Chris is pleased to hear that John is becoming a little more interested in the goal-setting process for the hotel. For example, when he grumbled about lowering the hotel rates, Chris thought he detected some passion and felt satisfi ed that John was slowly coming on board. Th e next step is to devise a goal plan. Goal plans are an essential way of committing department, resources, and individuals to a future goal. Once the business plan is in place, managers then identify the appropriate goal plans to best achieve the objectives of the organization. Chris begins with a directional plan , which is a general, fl exible plan that provides guidelines for an organization ’s long-term goals. Directional plans provide focus but they do not include specifi c objectives or allocate responsibility. Th ey are used to educate employees as to where the organization is going and what it hopes to achieve in the future. Once again, Chris outlines the main objectives of the goal to John, how they want the hotel to perform, and when they expect the goal to be achieved. Confi dent that John is starting to share the vision, Chris begins to break down the goal plan into specifi c segments. Chris said, “First, we need to fi gure out how we are going to put our goals into action and who is going to help us achieve our objectives. I have devised a tactical plan, which I think will give us a better idea of roles and responsibilities when it comes to carrying out some of our short-term goals.”

Tactical plans are plans that cover an intermediate time scale and enact divisional strat- egies by allocating people and resources. Th ey are directly related to organizational goals. Th e tactical plan ensures adequate resources and assigns responsibility to each division and individuals involved in the strategy. Tactical plans are usually short-term plans , plans that cover one year or less and are used to achieve short-term goals. Chris and John decide that some of the areas that they can address immediately in the food and beverage division are coming up with a unique recipe for the “Dolphin Cookie,” which they can off er to guests on arrival once the hotel has been refurbished and is fully open for business in a few weeks ’ time. Th ey assign Zoey Zhang and the kitchen staff to this goal plan, thinking that her enthusiasm is sure to be refl ected in the cookie itself. It is also agreed that Zoey will coordinate with Wendy at the front desk to discuss how the cookies are going to be presented to the guests. Chris also suggests that sales and marketing could begin researching their competition and assessing potential partnerships with time-share companies, and other related activi- ties. “Maybe you should have a chat with the director of sales, Ken Gold, about that,” John off ered. Chris tried to hide his surprise at John ’s suggestion; he had expected another lit- any of reasons why partnerships were a bad idea. Th ey made a note to assign Ken and his department to the goal of seeking new business relationships. Next on the list are operational plans , which guide the day-to-day production or delivery of an organization ’s goods and services, and which enact a functional strategy. For example, a sales manager might be instructed to increase the sales of his department by 10 percent by the end of the year. In order to accomplish this task, the manager of that department would assign each individual a goal to meet this requirement. Operational plans can be single-use , where a plan developed to achieve a particular goal or in response to an event that is not expected to be repeated. For example, the goal assigned to the sales team described above might be a one-time event—a grand reopening weekend, for example—that probably will not happen again. Chris assigns John the operational goal of reviewing his inventory, especially the issue of over-ordering soda, and states that he wants to see a 20 percent reduction in beverage expenditure by the end of the year. John agrees to rework the daily checklists for his staff to manage the inventory better. Between them, Chris and John decide that the food and beverage team will revisit and rewrite the inventory policy for each of the storage areas within the next 30 days. Once they implement the process, they will check back with the cost of goods sold (COGS) every 15 days over the next three quarters and adjust their procedures as necessary. John also suggests rotating the person(s) responsible for the physical inventory count at least twice a week for more accuracy and accountability. Both Chris and John feel that this internal adjustment to the day-to-day operations will allow input from everyone, as well as over- all accountability and better control of expenses, which will help increase potential profi t. Chris also advises John to check out some diff erent suppliers to see which ones off er the

Tactical plans Plans that cover an intermediate time scale and enact divisional strategies by allocating people and resources.

Directional plan A general, fl exible plan that provides guidelines for an organization ’s long-term goals.

Short-term plan A plan that covers one year or less and is used to achieve short-term goals.

Operational plans Plans that guide the day-to-day production or delivery of an organization ’s goods and services, and which enact a functional strategy.

Single-use A plan developed to achieve a particular goal or in response to an event that is not expected to be repeated.

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2138.3 | EFFECTIVE GOALS

better rates. John agrees to involve his kitchen staff in his decisions and to seek their advice about local suppliers. Finally, Chris brings John through options-based planning , which is a method of plan- ning that preserves fl exibility in contexts of uncertainty by investing in several alternatives. For example, a health organization may devise a number of response options and solutions to a pandemic, involving media and other health departments and professionals, so it can be resolved as quickly as possible. Chris and John agree that certain contingencies should be put in place in case anything goes awry at the hotel. Th ey go through the hotel ’s policies on emergencies, security, and other potential hazards and plan alternatives to ensure their guests and employees are fully supported in the event of an unusual occurrence. When the goal plans are fi nished, both Chris and John feel like a break, so they both head off to lunch and agree to resume their discussion later that day.

Different Types of Plans

Plan Types Aim Targeted Focus

Business Plan Organizational Focused

Standby Plan Common Occurrences Focused

Procedure Plan Step-by-step Focused

Goal Plan Future Objective Focused

Directional Plan More Flexible Long-term Focused

Tactical Plan More Short-term Focused

Operational Plan Day-to-day Operations Focused

Options-based Plan Alternative Flexible Plans Focused

Directional Plan

Business Plan

Goal Plan

Procedure Plan

Standby Plan

Operational Plan

Options- based Plan

Tactical Plan

8.3 | EFFECTIVE GOALS

8.3 | Outline diff erent types of goals and the characteristics that make them eff ective.

Types of Goals Satisfi ed with the work that he and John have done on the goal plans, Chris feels it is a good time to address the type of goals that he needs to consider when putting a goal plan into action. As mentioned in section 8.1, goals must be S.M.A.R.T. (specifi c, measurable,

Options-based planning A method of planning that preserves fl exibility in contexts of uncertainty by investing in several alternative plans.

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214 Chapter eight Setting Goals

achievable, relevant, and time-bound) to be eff ective. Most companies adhere to the S.M.A.R.T. principle, including the goal-setting pioneers Locke and Latham. To recap what they have discussed, Chris begins by describing the hotel ’s distal goals , which are primary or long-term goals. Again, setting distal goals is a balancing act, and Chris knows that goals set too far in the future have a tendency to lose momentum. To counteract this eff ect, managers set proximal goals , or short-term goals, that increase individuals ’ abil- ity to reach distal goals by providing motivation and feedback. 13 Looking at the staff roster and attendance over the four-month peak period of the hotel ’s occupancy, Chris notices that John has been absent more than any of the other managers. His absences, not to mention his prior displays of lack of team spirit, have been putting a strain on the rest of the team. He is constantly late, he is absent at least three times a month, and he rarely makes team meetings. Although Chris feels more confi dent that John will per- form better in his role in the future, he needs to set a distal goal for John to adhere to. He takes a deep breath and brings John through the staff attendance records, pointing out that his absences exceed the others by a large margin. Going distinctly red in the face, John says, “I have a life outside this place, you know. I only take time off when the hotel is dead and there is nothing to do.” Chris reiterates that things are only going to get busier at the hotel, and year-round, not just for four months; and the staff will need to be committed to the hotel for the goal to succeed. Th en Chris breaks down the distal goal into manageable, specifi c steps and sets some proximal goals. For example, he tells John that every two weeks, they will meet to assess his absenteeism and lateness. He goes on to say that John should come to him if he is experienc- ing issues in his personal life that are having an eff ect on his work attendance and perfor- mance. Chris knows that managers who make an eff ort to uncover the underlying issues of a situation will have a better chance of improving performance in the long term. John crosses his arms, but makes no attempt to argue. Chris feels it is a good idea to move on to the next type of goal. Chris is a big believer in the stretch goal , which is a goal that is almost unattainable and requires the full capacity of an individual, manager, team, or organization to accomplish. 14 One of Chris ’s favorite examples of a stretch goal is President John F. Kennedy ’s announce- ment in 1961 to achieve the fi rst human moon landing by the end of the decade. It seemed impossible, and required a whole new way of creative thinking, but the goal was achieved, and the whole country basked in the accomplishment. Stretch goals begin with a vision, one that must be shared by the team. If the team is com- mitted, is willing to embrace change and a new way of thinking, and thinks that the goal is as important as you do, there is more chance of the goal being achieved. In short, the team must believe that the seemingly impossible is indeed possible. However, Chris knows that stretch goals must be set in the right way to be successful. Th ey must be attainable, broken down into specifi c steps and targets, and have their per-

formance reviewed at regular intervals. Chris decides to set a stretch goal of achieving 100 percent employee satisfac- tion for the hotel staff for at least two years. In fact, even if the hotel loses a team member to another opportunity, the Dolphin Resort & Hotel will always be their home away from home—guests for life. If they reach their goal after two years, Chris decides they will have a big party, complete with food, games, raffl es, prizes, and certifi cates of recognition to celebrate the achievement, which he hopes will incentiv- ize employees to commit to further diffi cult challenges. He decides to announce this stretch goal to the team at their next staff meeting.

Let ’s step away from the Dolphin Resort & Hotel briefl y to consider the example of Ryan Hall, a known expert at achieving goals. Hailed as the fastest American-born long- distance runner of all time, Ryan ’s accomplishments include the fastest half-marathon (59:43 in Houston in 2007) and the fastest marathon (2:04:58 in Boston in 2011) fi nishes ever achieved by a U.S. runner. Like most distance runners, Ryan

Distal goals Primary or long-term goals.

Proximal goals Short-term goals that increase individuals ’ ability to reach distal goals by providing motivation and feedback.

Stretch goal A goal that is almost unattainable and requires the full capacity of an individual, manager, team, or organization to accomplish.

Th o

m as

B . S

he a/

G et

ty Im

ag es

In c

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2158.4 | TEAM COMMITMENT

uses a means-end chain to help him prepare for and complete his races. A means-end chain is an integrated series of goals in which the accomplishment of lower-level goals contributes to the achievement of higher-level goals. 15 Runners preparing for a marathon usually follow a training schedule involving daily runs of specifi ed times and distances, cross-training, and days of rest. Th is integrated series of lower-level, short-term goals pro- vide the foundation and motivation for ultimately achieving the higher goal of completing the marathon within a targeted time. In his book Running with Joy: My Daily Journey to the Marathon , Ryan chronicles his 14-week preparation for the 2010 Boston Marathon, provid- ing specifi c insights into the daily training regimen and means-end chain of this world- class marathoner. 16

8.4 | TEAM COMMITMENT

8.4 | Illustrate how managers secure team-level commitment to goals.

In Chapter 7, Kathy Osborne warned Chris that the biggest challenge that he might face when trying to achieve his objectives was dissatisfi ed employees. After his fi rst encounter with John Johnson, Chris was only too aware of this issue, but he felt a bit more optimistic after their succession of one-to-one meetings. Now, he needed to tackle the staff as a whole and ensure that they could commit and work as a team. It was clear that the staff had enjoyed a relaxed environment under the charge of Chris ’s predecessor, Herb Cork, and was unsettled by this recent change in management. However, Chris had been given the goal of saving the hotel from bankruptcy, and it was his vision that the hotel become successful once more. Chris knew that the team needed to share in this vision and believe in the importance of achieving the goal. He needed full goal commitment , which is the motivation and determination needed to achieve a goal. 17 With summer only a few months away, Chris needed to engage the team quickly. For Chris ’s new eff orts to work, he fi rst would have to ensure that all the team members were collectively excited and energized about the transformation of the Dolphin Resort. Chris had been the new general manager for one week when he asked to meet with the entire staff of the Hilton Head Dolphin Resort & Hotel. Th e meeting took place in the resort ’s restaurant, with coff ee and pastries served. When everyone sat down, he asked, “Are you proud to work here?” Th e restaurant was silent for a full minute, which seemed like an eternity. Finally, Suzanne, a server in the restaurant, spoke. “I am proud of my friends here. We have a great time together. After work, we all spend time together, and that makes coming into work a lot easier. Serving people all day is tiring. Guests complaining can really ruin a good day, so having coworkers that are fun is something to be proud of.” Many voices echoed her sentiments. At that moment, Chris knew the challenges he faced were more than he had originally imagined. In order to achieve his goal, he had to get full commitment or buy-in from the staff , and persuade them to share his vision; otherwise, the goal would fail. Luckily, the hotel owner, Kathy Osborne, had promised to give him her full commitment and support, but without the staff on his side, he wouldn ’t get anywhere. In short, he needed to give the employees at the resort something to believe in. “Okay, let me ask this another way— what do you like or dislike about the resort ’s mission statement?” Silence. “Does anyone know the mission statement?” Silence. “I have been here for a week and have yet to fi nd one. Let ’s start by building a mission together. Listen, if we want to achieve Kathy ’s goal of increasing the hotel ’s profi t by $500,000, we will need to believe in what we are doing together!” From experience, Chris knew that employees who embraced a company ’s mission state- ment were more likely to believe in the goals of the company and actively participate in bringing those goals to fruition. Having talked it through with the staff , Chris continued to work with Kathy, the team, and hotel stakeholders to defi ne the new “Mission, Vision, and Values of the Dolphin

Means-ends chain An integrated series of goals in which the accomplishment of lower- level goals contributes to the achievement of higher-level goals.

Goal commitment The motivation and determination needed to achieve a goal.

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216 Chapter eight Setting Goals

Resort & Hotel” shown in Figure 8-1 . To show their commitment and enthusiasm for this change, Chris and the management team revealed the resort ’s new mission statement and Big Hairy Audacious Goal (BHAG) at a party for all the company ’s stakeholders. BHAG is a term coined by management expert Jim Collins, and it refers to an organization ’s grand- est aspiration for the future, one that diff erentiates it from all its competitors. Th e mission statement and BHAG will provide the Dolphin Resort ’s management team a litmus test for all decisions made in the goal-setting process. During the party, after Chris announced the mission statement and company BHAG, he spoke with jubilation, “Today is a special day, and I want to introduce you to one more team member! Her name is Dolly, and she is the reason we all have a job here.” At that moment, music started playing and a dancing dolphin erupted through the doors to a cheering crowd. Okay, in reality, some of the people didn ’t cheer—they were surprised and confused. John Johnson looked especially perplexed. After the commotion subsided, Dolly the Dolphin stood at the front of the room with Chris as he explained: “When I came here a month ago, I asked the team why they were proud to work here. No one could give me a real answer. So here is our answer—Dolly. She stands for everything we want to be—Dolly is kind, thoughtful, playful, professional, eager to please, and well-trained. Most of all she is proud of what she does—Dolly performs for the sole purpose of bringing happiness to everyone.” Over time, most of the staff became enthusiastic about Dolly, who became their company’s mascot. Dolly was a symbol of what they needed to work toward to fulfi l the

Figure 8-1 Dolphin Resort & Hotel’s Mission and Vision The mission and BHAG of the Dolphin Resort & Hotel.

Mission:

Mission and

BHAG

BHAG:

DOLPHIN RESORT & HOTEL

The Dolphin Resort & Hotel is a place where families relax and build lifelong traditions and memories. We pledge to provide our family guests with the best value for location and service on the East Coast.

To be the premier hotel on Hilton Head Island for employee satisfaction, vowing never to lose an employee partner to controllable circumstances.

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2178.5 | INDIVIDUAL PERFORMANCE

hotel ’s mission. Th e slogan “Do it for Dolly” was coined by employees as a form of motivation whenever they encountered an obstacle during their workday.

Management by Objectives (MBO) Chris was empowered with Kathy ’s approval and support of the initiatives for the hotel. Now it was up to him to make the team aware of the goal plans and the types of goals that had been set for them in order for the initiatives to be fulfi lled. Chris decided to employ a Management by Objectives (MBO) technique, which is a method of management in which management and employees agree to specifi c goals that are then used to evaluate individual performance. 18 Chris felt that the MBO technique would be appropriate to use in this instance, and at the next team meeting, he outlined the hotel ’s strategy. Confident that he now had the team ’s full commitment and buy-in, he made the following motivational speech: “We know what we have to do in order to make the Dolphin Resort & Hotel the best it can be. Now, we have to put those goals into action. Each of you will be assigned a task, deadline, and clear targets to reach along the way. I will be providing you with support and feedback at every step, and of course, I will be here for you should you have any questions or new ideas you feel would enhance our mission.” With the support and positive energy of the team and stakeholders, Chris began to work with the department managers and their diff erent approaches to goal setting. Over the course of many meetings, Chris and the team standardize the goal-designing process to ensure consistency. Th is includes a standard in which all departments and team members establish S.M.A.R.T. goals and one stretch goal. Once this process is completed, the depart- mental managers work with team members to begin executing the plan, which includes strategies that will be discussed in the next chapter. Chris presents this new approach to departmental managers in order to design a pro- cess intended to secure the team ’s commitment and alignment to the resort ’s new mission, BHAG, S.M.A.R.T. goals, and stretch goals.

8.5 | INDIVIDUAL PERFORMANCE

8.5 | Construct action plans consistent with goals to achieve individual-level performance.

Action Plans Chris is excited to see how well the plans are coming together. Th e staff seemed genuinely motivated, and Dolly the Dolphin is becoming a big hit! When Ken Gold, the director of sales, approached him one day and told him how unhappy he was with one of the goals that had been assigned to him and his team, Chris was surprised. In line with the goal plans devised with John Johnson, Chris had asked the sales and management team to research the possibility of partnering with a time-share company in the interests of raising occupancy at the hotel. Th e team had been making progress and had found a local time-share company who was interested in purchasing a fi xed number of rooms every night for a daily rate of $45. Th e next step was for Ken and the team to close the deal and sign a contract with the time-share company. Yet, a couple of weeks had gone by, and the deal had not progressed. When Chris asked the reasons for the delay, he was told that the other company was waiting for their legal department to sign off on the contract. It turns out that this was not the case at all. Ken told Chris, “Look, we appreciate what you are trying to do here, but I need to do what ’s best for my team, and I don ’t think giving rooms away is the way to do it.” Chris gestured for him to continue. “As you know, Herb Cork linked our bonuses to our fi nancial performance. Whenever we raised the room rate and met our sales goals, we received a

Management by Objectives (MBO) A method of management in which management and employees agree to specifi c goals that are then used to evaluate individual peformance.

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218 Chapter eight Setting Goals

commission. Now, as the room rates for the time-share company have been set at $45, we have no way of increasing our earning potential. We also have received a request for a wed- ding party that could book out the hotel for an entire weekend in June, but we can ’t do that if some of the rooms are going to the time-share.” While Chris understood Ken and the team ’s concerns, he knew he had to address the issue there and then; otherwise, he would have a mutiny on his hands. So he decided to cre- ate an action plan , which is the specifi c action, people, and resources needed to accomplish a goal First, Chris addressed the issue of RevPAR. “Ken, I understand that you and the team have less rooms to sell on a daily basis as a result of some of the rooms going to the time-share company at a set price. However, that just means we need to be more cre- ative with the rooms we already have. I think it is key that we start looking at the days of the week where we can enhance our daily rate to make up the commissions for your team.” Ken replied, “I see what you ’re saying, Chris, but that doesn ’t make up for the fact that we are selling less rooms than before.” Chris said, “You may have less rooms to sell on a daily basis, but there is also a higher possibility of fi lling them at a higher rate per night once the hotel is up and running. I would suggest looking into our corporate clients that use the hotel on prime-time nights at higher rates. It might also be a good idea to research our competi- tion and see what they charge for accommodation during festivals, celebrations, and other occasions. Often, the daily rate doubles during peak periods.” Ken nodded slowly, “I guess I could get the team to look at our reports on LNR (local negotiated rates) to help zero in on possible client accounts, and carry out research on our competition.” Chris was relieved when it seemed like Ken was coming around to his ideas. Ken was a valuable member of the staff , and the last thing he wanted was to lose his support. Chris added, “Great idea, Ken! You could also work with other account managers, which should help provide links to corporate clients for social gatherings.” “Yes, that would really help, too!” Ken replied. “But for this to work, Chris, I need the sales team fully on board. We don ’t hold regular meetings, and morale is low at the moment. Do you think I should set up a weekly meeting to assess the progress of this latest plan?” Chris said, “Absolutely! Perhaps the fi rst meeting could be a brainstorming session with the entire sales team, where you could devise a sales forecast fl ow, which will help determine clear opportunities to fi ll the hotel during premium-price days. Th en you could start assign- ing goals. For example, your account manager could start looking into the LNR accounts for gap weekends that need to be fi lled and then post package pricing to LNR accounts to fi ll gap openings; your sales manager can chase leads that have not responded, or check lost business reports to fi nd the reasons why some clients have turned down the Dolphin Resort & Hotel in the past.” After a few more minutes of discussion, Ken decided to set a team meeting for the very next day. Th ey shook hands, and Ken agreed to let Chris know the outcome of the meeting. Chris went away satisfi ed with how his conversation with Ken had gone. He just hoped that the rest of the sales team would also come around to his and Ken ’s new approach.

8.6 | HOW MANAGERS TRACK PROGRESS

8.6 | Describe how managers track progress of goal plans through performance dashboards.

Performance Dashboards If you spend enough time on any management team, you will most likely hear a couple of old adages: “Th e numbers don ’t lie” and “What gets measured gets done.” Most contem- porary managers use performance dashboards to provide a visual representation of an

Action plan The specifi c actions, people, and resources needed to accomplish a goal.

Performance dashboard A visual representation of an organization ’s strategies and goals, which allow managers to track progress toward metrics and goals immediately.

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2198.6 | HOW MANAGERS TRACK PROGRESS

organization ’s strategies and goals, which allow managers to track progress toward metrics and goals immediately. 19 Researchers Robert Kaplan and David Norton designed the enduring “Balanced Score- card” model shown in Figure 8-2 , which has given managers and information system design- ers a balanced approach to developing performance dashboards. “A balanced scorecard augments traditional fi nancial measures with benchmarks for performance in three key nonfi nancial areas: 1) a company ’s relationship with its customers, 2) its key internal pro- cesses, and 3) its learning and growth.” 20

Th is balanced approach starts with continuously and clearly communicating the team ’s progress. Chris and his management team worked with a local technology company to cen- tralize their performance eff orts into a dashboard in a way that was authentic to their mis- sion and goals. Th is requires measuring diff erent areas of the operation. Key performance indicators (KPIs) are measurements that managers identify as vital to the company ’s per- formance with regard to fi nancials, internal processes, customers, and learning/growth. By doing this, Chris sought to connect the Dolphin Resort & Hotel ’s mission and vision into a management practice. Th is process is called strategy , which we will discuss in the next chapter. Chris and his management team worked with a local technology development company to design and build the Dolphin Resort & Hotel ’s performance dashboard illustrated in Figure 8-3 .

Key performance indicators (KPIs) Measurements that managers identify as vital to the company ’s performance.

Mission and

Vision Customers

Financial

Learning and

Growth

Internal Processes

Mission and

Vision Customers

Financial

Learning and

Growth

Internal Processes

Figure 8-2 A Balanced Scorecard Balanced scorecards include top-line sales (fi nancial), both internal and external (customers), systems and processes (internal processes), and continued development (growth) with continued profi t. Each should be included in the overall mission and vision for an organization.

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220 Chapter eight Setting Goals

DOLPHIN RESORT & HOTEL

PERFORMANCE DASHBOARD

Guests

RevPAR $ Room Rate, $ Occupancy, % Guest Satisfaction, %

2010 2011 2012 2013 2014 2015 2016

2016 Goals

Year

Key Metrics

Va ria

bl e

Employee Owner

Community

2010 2011 2012 2013 2014 2015 2016 Year

Save the Turtles

Tu rt

le s

to S

ea

250 225

261 235 229

286 312

86% 2015

100% 2016

To Date

Employee Satisfaction Hot Reported Years 2010–2014

$1.8

$4.7 $4.7

$2.2

$5.8

$2.1

$5.9

$2.0

$6.0

$2.6

$7.0

$2.9

$7.75

$1.6

2010 2011 2012 Year

Profitability + Revenue

Va ria

bl e,

in m

ill io

ns

2013 2014 2015 2016

Profitability Revenue

DOLPHIN RESORT & HOTEL

PERFORMANCE DASHBOARD

Guests

RevPAR PP $ Room Rate, $ Occupancy, % Guest Satisfaction, %

2010 2011 2012 2013 2014 2015 2016

2016 Goals

YearYY

Key Metrics

Va ria

bl e

Employee Owner

Communityt

2010 2011 2012 2013 2014 2015 2016 Year

Save the Turtles

Tu rt

le s

to S

ea

250 225

261 235 229

286 312

86% 2015

100% 2016

To Date

Employee Satisfactionp y Hot Reported Years 2010–2014YY

$1.8

$4.7 $4.7

$2.2

$5.8

$2.1

$5.9

$2.0

$6.0

$2.6

$7.0

$2.9

$7.75

$1.6

2010 2011 2012 Year

Profitability + Revenue

Va ria

bl e,

in m

ill io

ns

2013 2014 2015 2016

Profitabilityt Revenue

Figure 8-3 Dolphin Resort & Hotel Performance Dashboard The dashboard includes a graphic matrix for the Dolphin ’s scorecard of guests, community, employee, and owner.

CaseSnapshot Chapter 8 Case: Setting Goals:

Spirit Airlines can be found on pg. 470

In this chapter ’s exercises, you will explore how well this dashboard addresses the frame- work that Kaplan and Norton provide and analyze where the Dolphin Resort ’s performance system is likely to succeed and face challenges. Th roughout the remainder of the book, we will use performance dashboards to give a high-level view of diff erent companies ’ perfor- mance statuses and metrics.

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221Additional Resources

KEY TERMSS Action plan The specifi c actions, people, and resources needed to accomplish a goal. (p. 218)

Budget The quantitative part of a plan that allocates available fi nancial resources. (p. 211)

Business plans Plans that interpret an organizational strategy into a market- or community-based opportunity for division or departmental managers. (p. 211)

Directional plan A general, fl exible plan that provides guide- lines for an organization’s long-term goals. (p. 212)

Distal goals Primary or long-term goals. (p. 214) Goal commitment The motivation and determination needed to achieve a goal. (p. 215)

Key performance indicators (KPIs) Measurements that man- agers identify as vital to the company’s performance. (p. 219)

Long-term plan A plan that covers time periods of a year or more and is used to achieve future goals. (p. 210)

Management by Objectives (MBO) A method of management in which management and employees agree to specifi c goals that are then used to evaluate individual peformance. (p. 217)

Means-ends chain An integrated series of goals in which the accomplishment of lower-level goals contributes to the achieve- ment of higher-level goals. (p. 215)

Operational plans Plans that guide the day-to-day production or delivery of an organization’s goods and services, and which enact a functional strategy. (p. 212)

Options-based planning A method of planning that preserves fl exibility in contexts of uncertainty by investing in several alterna- tive plans. (p. 213)

Performance dashboard A visual representation of an organiza- tion’s strategies and goals, which allow managers to track prog- ress toward metrics and goals immediately. (p. 218)

Policy A standing plan that describes how an organization and its members should respond to recurring or anticipated situa- tions. (p. 211)

Procedure A standing plan that provides the specifi c steps to be taken as part of a recurring process or in response to a recurring situation. (p. 211)

Proximal goals Short-term goals that increase individuals’ abil- ity to reach distal goals by providing motivation and feedback. (p. 214)

Rules and regulations Formal descriptions of how specifi c actions are to be carried out. (p. 211)

Short-term plan A plan that covers one year or less and is used to achieve short-term goals. (p. 212)

Single-use plan A plan developed to achieve a particular goal or in response to an event that is not expected to be repeated. (p. 212)

S.M.A.R.T. goals Goals that are specifi c, measurable, achiev- able, relevant, and time-bound. (p. 204)

Standing plans Plans designed for repeated use in response to commonly occurring events. (p. 211)

Stretch goal A goal that is almost unattainable and requires the full capacity of an individual, manager, team, or organization to accomplish. (p. 214)

Tactical plans Plans that cover an intermediate time scale and enact divisional strategies by allocating people and resources. (p. 212)

ADDITIONAL RESOURCES

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222 Chapter eight Setting Goals

IN REVIEW W 8.1 | Describe the primary goals of an organization. To maximize eff ectiveness and effi ciency, goals must be set within a strategic framework consisting of mission, vision, and values. A strong, powerful mission statement will be assimilated into the company culture, so that each employee is committed to putting the mission into action to ensure the success of the organization. Managers setting goals must follow the organization ’s mis- sion, have a clear vision of what they want to achieve, and ensure that the team embraces the core values of what the organization represents. Goal setting has been defi ned as the establishment of specifi c, measurable , achievable, relevant and time-bound goals, also known as “S.M.A.R.T goals.”

8.2 | Explain the principles and diff erent types of goal plans in an organization.

Th e core principles of eff ective goal setting to motivate workers can be defi ned into fi ve dimensions: Clarity, Challenge, Commit- ment, Feedback, and Task Complexity. Th e framework of these core principles is shaped into diff erent kinds of goal plans to achieve certain objectives. A business plan interprets an organizational strategy into a market or community-based opportunity for division or depart- mental managers. Th is business plan then gets translated into many subparts. A standing plan is a designed for repeated use in response to commonly occurring events. Goal plans are an essential way of committing department, resources, and individ- uals to a future goal. Once the business plan is in place, manag- ers then identify the appropriate goal plans to best achieve the objectives of the organization. A directional plan is a general, fl exible plan that provides guidelines for an organization ’s long-term goals. Directional plans provide focus but they do not include specifi c objectives or allocate responsibility. Tactical plans then cover an interme- diate time scale and enact divisional strategies by allocating people and resources. Th ey are directly related to organizational goals. Th e tactical plan ensures adequate resources, and assigns responsibility to each division and individuals involved in the strategy. Tactical plans are usually short-term plans, which are plans that cover one year or less and are used to achieve short- term goals. Day-to-day production or delivery of an organization ’s goods and services are formalized by operational plans. Managers use options-based planning, which preserves fl exibility in contexts of uncertainty by investing in several alternatives.

8.3 | Outline diff erent types of goals and the characteristics that make them eff ective.

Most companies adhere to the S.M.A.R.T. principle. Chris begins by describing the hotel ’s distal goals, which are primary or

long-term goals. Setting distal goals is a balancing act, and goals set too far in the future have a tendency to lose momentum. To counteract this aff ect, managers set proximal goals , or short- term goals that increase individuals ’ ability to reach distal goals by providing motivation and feedback. A stretch goal is a goal that is almost unattainable and requires the full capacity of an individual, manager, team, or organization to accomplish. A method for helping individuals and teams to achieve such large aspirations is called means-end chain, an integrated series of goals in which the accomplish- ment of lower-level goals contributes to the achievement of higher-level goals.

8.4 | Illustrate how managers secure team-level commitment to goals.

Full goal commitment is the motivation and determination needed to achieve the goal.

BHAG is an acronym (spelled out as “Big Hairy Audacious Goal”) that refers to an organization ’s grandest aspiration for the future that diff erentiates it from all of its competitors. An orga- nization ’s mission statement and BHAG can provide its manage- ment team a litmus test for all decisions made in the goal-setting process. To ensure accountability, the Management by Objectives (MBO) technique is a method of management in which manage- ment and employees agree to specifi c goals that are then used to evaluate individual performance.

8.5 | Construct action plans consistent with goals to achieve individual-level performance.

Chris ’s change in the eff orts on the sales team led to signifi cant team disagreement. While Chris understood the concerns of the sales manager, Ken Gold, and his team, he knew he had to address the issue. He decided to create an action plan, which includes the specifi c action, people, and resources needed to accomplish a goal.

8.6 | Describe how managers track progress of goal plans through performance dashboards.

Managers use performance dashboards to provide a visual repre- sentation of an organization ’s strategies and goals, which allow managers to track progress toward metrics and goals immedi- ately. A balanced scorecard focuses on three key nonfi nancial areas: 1) relationships with customers, 2) key internal processes, and 3) learning and growth.

Key performance indicators (KPIs) are measurements that managers identify as vital to the company ’s performance with regard to fi nancials, internal processes, customers, and learning/ growth.

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223Additional Resources

SELF-TEST T 8.1 | Describe the primary goals of an organization. 1. Explain the acronym in the term S.M.A.R.T goals.

2. People who were told to “do their best” performed better than those who were given specifi c targets. a. True b. False

3. Name two of the common goal-setting pitfalls outlined by Locke and Latham.

8.2 | Explain the principles and diff erent types of goal plans in an organization.

4. What are the fi ve main principles of goal setting in order to motivate workers outlined by Locke and Latham?

5. Th e plan that interprets an organizational strategy into a market or community-based opportunity for division or departmental managers is called a . a. directional plan b. transitional plan c. business plan d. tactical plan

6. Plans that guide the day-to-day production or delivery of an organization ’s goods and services, and that enact a functional strategy are known as . a. operational b. standby c. options-based d. transitional

8.3 | Outline diff erent types of goals and the characteristics that make them eff ective.

7. What ’s the diff erence between distal goals and proximal goals?

8. A goal is an almost unattainable goal that requires the full capacity of an individual, manager, team, or organization to accomplish.

9. What type of goal is a marathon runner ’s daily schedule of training, an integrated series of goals in which the accomplishment of lower-level goals contributes to the achievement of higher goals?

8.4 | Illustrate how managers secure team-level commitment to goals.

10. Employees who embraced a company ’s were more likely to believe in the goals of the company and actively participate in bringing those goals to fruition.

11. Describe the Management by Objectives (MBO) technique.

8.5 | Construct action plans consistent with goals to achieve individual-level performance.

12. What steps did Chris and his director of sales, Ken, follow to create an action plan for the sales team?

8.6 | Describe how managers track progress of goal plans through performance dashboards.

13. What do performance dashboards provide to an organization?

14. Dashboards include measurements that managers identify as vital to the company ’s performance with regard to fi nancials, internal processes, customers, and learning/ growth. Th ese are known as: a. RPMs b. KPIs c. MPHs d. PPIs

CHAPTER EXERCISEE Long-Term and Short-Term Goal Setting

Part 1. Write Your Own Obituary

Imagine that you have died. Your obituary is appearing in the local newspaper. What will you have done in your life? What will you have accomplished? How will you be remembered? How will you have aff ected others? In the space provided here, write your own obituary, focusing on your personal and career accomplishments. You may be as creative and imaginative as you want.

Part 2. Five Years from Now

Where do you see yourself fi ve years from now? What job will you have? What will your salary be? Where will you be living? What hobbies will you have? Will you have a signifi cant other? What new skills or interests will you have developed? In the

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224 Chapter eight Setting Goals

space provided here, briefl y describe how you foresee your situation fi ve years from now.

Writing your own obituary helps you to determine your long- term goals and objectives in life—those things that you would like to do or become. Th inking about where you will be fi ve years from now helps you to consider your short-term goals, those things that will help you progress toward accomplishing your long-term goals.

SELF-ASSESSMENTT Goal Orientation* For each of the following paired statements, circle the letter next to the statement that best describes you.

1. A. I prefer to do things that I can do well rather than things that I do poorly.

B. Th e opportunity to do challenging work is important to me.

2. A. I ’m happiest at work when I perform tasks on which I know that I won ’t make any errors.

B. When I fail to complete a diffi cult task, I plan to try harder the next time I work on it.

3. A. Th e things I enjoy the most are the things I do the best.

B. I prefer to work on tasks that force me to learn new things.

4. A. Th e opinions that others have about how well I can do certain things are important to me.

B. Th e opportunity to learn new things is important to me.

5. A. I feel smart when I do something without making any mistakes.

B. I do my best when I ’m working on a fairly diffi cult task.

6. A. I like to be fairly confi dent that I can successfully perform a task before I attempt it.

B. I try hard to improve on my past performance.

7. A. I like to work on tasks that I have done well on in the past.

B. Th e opportunity to extend the range of my abilities is important to me.

8. A. I feel smart when I can do something better than most other people.

B. When I have diffi culty solving a problem, I enjoy trying diff erent approaches to see which one will work.

Scoring:

Performance Goal Orientation

(Add up the total number of “As” circled above and write that number in the blank.) __________

Individuals with a performance goal orientation strive to dem- onstrate their competence via their task performance.

Learning Goal Orientation

(Add up the total number of “Bs” circled above and write that number in the blank.) __________

Individuals with a learning goal orientation strive to understand something new or to increase their level of competence in a given activity.

Which goal orientation was dominant for you? How can you use your goal orientation to your advantage to help you accomplish your goals?

*Adapted from Scott B. Button, John E. Mathieu, and Dennis M. Zajac, “Goal Orientation in Organizational Research: A Conceptual and Empirical Foundation,” Organizational Behavior & Human Decision Processes 67, no. 1 ( July 1996): 26–48.

SELF-TEST ANSWER KEYY 1. Popularly, goal setting has been defi ned as the establish-

ment of specifi c, measurable , achievable, relevant and time- bound goals, also known as S.M.A.R.T goals.

2. b. False. People performed less well without a list of specifi c targets. According to Latham and Locke, people are more motivated by challenging, clear goals and achieve more

personal satisfaction by overcoming more diffi cult obsta- cles than performing easier tasks.

3. Answers include excessive risk taking, increases in stress, feelings of failure, using goals as a ceiling for perfor- mance, ignoring non-goal areas, short-range thinking, and dishonesty/cheating.

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225Additional Resources

4. Clarity, Challenge, Commitment, Feedback, and Task Complexity

5. c.

6. a.

7. Distal goals are primary or long-term goals. Proximal goals are short-term goals that increase individuals ’ ability to reach distal goals by providing motivation and feedback.

8. stretch

9. means-end chain

10. mission statement

11. Management by Objectives (MBO) is a method of man- agement in which management and employees agree to

specifi c goals that are then used to evaluate individual performance.

12. Chris made sure that action was taken immediately instead of waiting for the problem to fester. He helped Ken fi nd some specifi c steps that he could take to resolve the prob- lem. In addition, they agreed to get input from all the staff during weekly meetings that could help increase buy-in and morale.

13. A visual representation of an organization ’s strategies and goals, which allow managers to track progress toward met- rics and goals immediately.

14. b. KPIs

Notes

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ManagementStory: Featuring Chris Heppler

Learning Objectives

9.1 | How Managers Plan to Make a Difference

9.1 | Explain how businesses use planning to solve problems and make a diff erence.

9.2 | Different Levels of Strategy 9.2 | Distinguish how planning is diff erent at the organizational, divisional, and functional levels of a business.

9.3 | Organizational Strategies 9.3 | Explain how senior managers develop organizational strategies and business plans.

9.4 | Industry and Competitive Analysis

VOICES OF MANAGEMENT: Akhil Jain Five Forces Model

9.4 | Outline methods that managers use to understand their industries and competitors.

9.5 | Organizational Position and Capacity Company Position Capabilities and Resources

9.5 | Describe how managers assess the organization ’s capacity to execute proposed business plans.

9.6 | Divisional and Functional Strategies

RESEARCH @ WORK: Seeing the Balanced Scorecard

9.6 | Demonstrate how managers develop divisional strategies and tactical plans.

9.7 | Strategies for Performance 9.7 | Compare traditional strategic planning models to an event-based approach.

By the end of this chapter, you will be able to:

9.7 | Compare traditional strategic planning models an event-based approach.

ADDITIONAL RESOURCES Key Terms

In Review

Self-Test

Chapter Exe rcises

Self-Assess ment

Self-Test

Answer Key

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228 Chapter nine Designing Strategies

9.1 | HOW MANAGERS PLAN TO MAKE A DIFFERENCE

9.1 | Explain how businesses use planning to solve problems and make a diff erence.

“Strategy is about making choices, trade-offs; it's about deliberately choosing to be different.” — Michael E. Porter

Designing and defi ning strategies is a continuous process that helps organizations deter- mine what they do, why they should be in business, how they can win and sustain market share, and how they can continually innovate in order to keep ahead of the competition. One of the main responsibilities of managers is to create, present, and implement strat- egies that will defend the company against the threat of competition, ascertain the best market position, and determine the weaknesses that might make its position vulnerable in the industry. In order to design a successful strategy, managers must use critical thinking to understand the full nature of the competitive forces that are present, and take a holistic, systemic view of the industry structure. Over the years, we have seen many organizations burst onto the market as a result of their exacting and well-researched strategies; namely, Apple, Microsoft, and other innova- tive companies saw an opportunity, designed a strategy, and dived in, fully committed to achieving their goals. Being able to diversify in a competitive industry, seeing an opening in the market and continuously staying ahead of the competition would not be possible with- out a clearly defi ned, skillfully designed strategy. In Chapter 8, we explored how general manager Chris Heppler successfully set goals by gaining the support of his team at the Dolphin Resort & Hotel, allocating S.M.A.R.T.

and stretch goals to each department, creating a new Big Hairy Audacious Goal (BHAG) and mission statement, and setting a new idea about time-shares in motion. He also had to over- come a number of stumbling blocks in order to achieve his vision, such as dealing with adversaries like John Johnson and getting Ken Gold and the rest of the sales team on board with the time-share partnership. It had been a busy year, yet a fulfill- ing one. On the anniversary of his first day as general manager of the Dolphin Resort & Hotel, Chris was making his usual rounds of the hotel grounds. As he walked, memories of the past year swirled through his mind. He remembered how shocked Kathy Osborne, the owner, was when he told her that the Dolphin Resort needed to lower its rates to increase profitability, but the tactic had paid off. Following Chris ’s conversation with Ken,

9.1 | HOW MANAGEEEERRRRSSSS A DIFFERENCEEEE

9.1 | Explain how businesses use make a diff erence.

“Strategy is about making chhoiicces, trad different.”

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2299.1 | HOW MANAGERS PLAN TO MAKE A DIFFERENCE

the sales manager at the resort, the sales team had done a fantastic job in closing the deal with a local time-share company, the largest one on Hilton Head Island. Yes, Chris felt very lucky about the way things had worked out; yet his achievements had been more than just luck; he recalled Thomas Jefferson ’s saying: “I ’m a great believer in luck, and I find the harder I work, the more I have of it.” By working hard, committing to his vision and goals, and motivating and supporting hotel staff, Chris ’s efforts to transform the Dolphin Resort have really paid off. A month later, the contract was signed with the time- share company, which was headed by Paul Reynolds, a local businessman. The Dolphin sales team was delighted with the business arrangement. They agreed that the time-share company would prepurchase 50 rooms, at $45 per room, from the Dolphin Resort every day of the year, and it would be determined each morning that if the time-share company was not going to use the rooms for that day, the hotel could potentially sell the rooms to other guests, with a percentage of the RevPar (revenue per available room) going to the time-share company. Th rough the partnership with the time-share company, the number of guests increased. Th e Dolphin team was delighted with this boost to their customer base, but they also knew that to maintain momentum, they would need to treat these guests so well that they would never want to leave. Initiatives such as welcoming the guests with delicious home-baked cookies, nightly entertainment, a new menu in the refurbished restaurant, free WiFi, new corporate facilities, and a renovated gift shop selling high- quality and quirky Dolphin Resort & Hotel memorabilia had already attracted a large number of new and repeat guests. Chris ’s ideas were paying off , and the resort was having its most successful year in a long time. When he walked into the lobby, Chris was surprised when he turned the corner and saw Kathy Osborne sitting in the reception area. Th is was only the second time he had seen her at the resort in the past year. She was the type of boss who was hands off and did not like to distract the team members or undermine Chris ’s authority, which he appreciated. At this moment, he could only think about all of the loose tree limbs and trash that she must have seen in the parking lot. Kathy was carrying a bouquet of fl owers, with a card addressed to Chris and the entire staff at the Dolphin Resort & Hotel. Th e fl owers and card were a “thank-you” for the goals reached and outstanding profi ts achieved during the past year. Th is was a thoughtful addition to the end-of-year bonuses that she had already approved for every team mem- ber, which had been very well received. “Well, are you ready for a new challenge?” Kathy asked as she grinned broadly at Chris. “Are you referring to all of the branches in the park- ing lot?” In the newly refurbished lobby of the hotel, Kathy outlined her ideas to Chris. She started off by voicing her concerns about the downturn in the economy; real estate prices had declined sharply on the island. Even with the decline in prices, many investors were hesitant to purchase properties for fear that the economy might not recover for several more years. A year ago, Kathy thought that she would have to get out of the hotel business altogether, but with the Dolphin Resort ’s stellar performance this past year, her enthusiasm for the business had been renewed. When the president of Hilton Head National Bank and Trust called her in early Janu- ary, she was intrigued to learn that the Porpoise Inn, located less than a mile from the Dolphin Resort & Hotel, was going into foreclosure. Th is was a surprise, as the Porpoise Inn was well equipped with conference facilities, including meeting rooms and private dining rooms, and it had a great reputation. In fact, before the Dolphin Resort had added its own corporate facilities during the refurbishment, it had lost business to the Por- poise Inn when it came to corporate events. Kathy didn ’t know why the Porpoise Inn

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was experiencing fi nancial diffi culties, but she was interested in fi nding out how the Dolphin could take advantage of this situation. It was then that she revealed Chris ’s new challenge. “Because we are ‘such good customers and because of our great performance this past year, ’ the bank president has agreed to let us make the first offer to purchase the Porpoise Inn and seems willing to accept any fair deal. Chris, I know that we can get this property at a good price, but can we make money? In this uncertain climate, I ’m not sure if we can take such a huge risk. It ’s great that the Dolphin Resort is doing so well, but we are running out of space. Maybe purchasing the Porpoise Inn is a way to address capacity issues. Do you think you could meet with the general manager at the Porpoise Inn and find out why the hotel went into foreclosure and assess whether there is potential for us there?” Chris had a lot of questions. If Kathy was talking about an acquisition , when an organi- zation purchases another organization or business in order to grow, he needed to carry out extensive due diligence to see if this was a viable opportunity for the Dolphin Resort. So, he agreed to spend the upcoming week putting together an analysis and recommendation for Kathy ’s review.

9.2 | DIFFERENT LEVELS OF STRATEGY

9.2 | Distinguish how planning is diff erent at the organizational, divisional, and functional levels of a business.

Chris spends the next week working on a new strategy —a plan of action for achieving goals—in preparation for the resort ’s next phase, and he relished the new challenge. As we have seen, Chris enjoys the planning process, which involves setting goals for the future, designing strategies, and deciding on the actions and resources needed to achieve success. As a result of the planning process, Chris needs to document decisions regard- ing the required goals, strategies, resource allocation, and actions; these are called stra- tegic plans . Th ere are three levels of strategy: organizational, divisional, and functional. 1 Organiza- tional strategy is a corporate-level strategy that addresses the question “What business are we in?” and unites all parts of the organization . As the Dolphin Resort & Hotel is a fam- ily business, Chris has to make sure that the new acquisition is in line with Kathy ’s vision for future success, as well as maintaining the mission to ensure customer and employee satisfaction. He also needs to assess whether the expansion will sustain their strong posi- tion in the marketplace. Next, Chris has to look at divisional strategy , which determines how a business will compete in a particular industry or market. He will need to assess each division of the hotel, ensure that it is in line with the hotel ’s vision, and decide which measures will need to be put in place in order to provide for the new acquisition. Finally, Chris designs a functional strategy , which determines how employees will implement and achieve a tactical plan. He needs to defi ne a set of rules for the hotel staff in each func- tional area. With the philosophical foundation of an organization ’s mission, vision, and val- ues, organizational, divisional, and functional strategies are documented using business, tactical, and operational plans, respectively. See Figure 9-1 for an illustration of how all this is interrelated. Here, we can defi ne a business plan as the stated actions and goals that support orga- nizational strategy, and tactical and operational plans as the stated actions and goals that support achieving the divisional strategy. But it isn ’t enough to simply refl ect on the three levels of strategy; Chris has to take an in-depth look at the hotel industry as a whole, assess the competition, and decide whether or not the acquisition of the Porpoise Inn would be a good move for the Dolphin Resort & Hotel in such a tough economic climate. Following Kathy ’s advice, he picks up the phone and arranges a meeting with Lisa Reynolds, the general manager of the Por- poise Inn.

Acquisition When an organization purchases another organization or business in order to grow.

Strategy A plan of action for achieving goals.

Organizational strategy A corporate-level strategy that addresses the question “What business are we in?” and unites all parts of the organization.

Divisional strategy A strategy that determines how a business will compete in a particular industry or market.

Functional strategy A strategy that determines how employees will implement and achieve a tactical plan.

Business plan The stated actions and goals that support the organizational strategy.

Tactical plan The stated actions and goals that support achieving the divisional strategy.

Operational plan The stated actions and goals that support achieving the functional strategy.

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2319.3 | ORGANIZATIONAL STRATEGIES

Figure 9-1 Connecting “Mission, Vision, and Values” to Strategies and Plans Vision, mission, and values stem from plans and strategies.

Organizational Strategies

Divisional Strategies

Functional Strategies

Operational Plans

Tactical Plans

Business Plans

Vision, Mission, and Values

9.3 | ORGANIZATIONAL STRATEGIES

9.3 | Explain how senior managers develop organizational strategies and business plans.

Organizations are defi ned by the types of strategies that they apply to their business. Business strategies can be classifi ed in many ways, but all of them seek to gain competitive advantage , the characteristics of an organization ’s products or services that distinguish it from competi- tors and provide an advantage in the marketplace. 2 By following certain types of strategies, companies can be categorized as fi rst movers , reactors , prospectors , defenders , or analyzers . Now, let ’s take a look at how the Dolphin Resort & Hotel has evolved strategically over the past fi ve years. Under Herb Cork ’s management, we could defi ne the hotel as a reactor , which is a company that does not follow a consistent strategy, but just responds to changes in the environment. Th is is the least eff ective of all the strategies, and in the case of the Dol- phin Resort & Hotel, its lack of progression nearly resulted in bankruptcy. When Chris joined as general manager of the Dolphin Resort & Hotel, he created a new mission statement and BHAG, which were the foundations of a new strategy. Under his management, the Dolphin Resort started as an analyzer , which is a company whose strate- gies seek to maintain existing products and services while pursuing limited innovation. 3 As we explored in Chapter 8, Chris based many of his suggestions for the Dolphin Resort on his experience in the hotel industry and introduced several measures that had already proved to be successful in other hotels, such as welcoming guests with cookies, arranging a part- nership with a local time-share company, and managing cost-eff ective improvements and renovations to the hotel ’s divisions. Th anks to the implementation of goal plans and decision making, the hotel has success- fully made the transition from analyzer to defender , which is a company whose strategies support stable growth and continual improvement of existing products and services. 4 It is a requirement of the division-level managers to pursue certain strategies consistent with being a defender company.

Competitive advantage The characteristics of an organization’s products or services that distinguish it from competitors and provide an advantage in the marketplace.

Reactor A company that does not follow a consistent strategy but just responds to changes in the environment.

Analyzer A company whose strategies seek to maintain existing products and services while pursuing limited innovation. They often imitate or follow the proven success of prospector organizations.

Defender A company whose strategies support stable growth and continual improvement of existing products and services.

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232 Chapter nine Designing Strategies

Th ere are two strategies that are consistent with a defender company: stability and cost leadership. Stability strategy is when an organization focuses on processes, prod- ucts, and services that will sustain it over the long term. 5 Th e refurbishment, new partner- ship with the time-share company, improved customer service, and focus on employee satisfaction are all examples of stability strategy at the Dolphin Resort. Cost leadership strategy is when an organization seeks competitive advantage by reducing production costs and therefore consumer prices, as demonstrated when Chris made a decision to lower the room rates and address the inventory problems experienced by the food and beverage department. 6 However, with Kathy ’s new idea to take over the Porpoise Inn, the Dolphin Resort could evolve further into a prospector , which is a company that uses strategies for high-risk and fast growth through product and market innovation. 7 If the acquisition goes ahead, then the hotel could be classifi ed as a fi rst mover on the island, or a company that gains competitive advantage by being the fi rst to off er a new product or service or to use a new cost-saving technology. 8 Chris was excited that the Dolphin Resort could become a fi rst mover on the island—the fi rst hotel to expand quickly by acquiring another business. Yet before he got too carried away, he needed to sit down with Lisa Reynolds and identify the reasons why things had gone downhill at the Porpoise Inn. Chris liked Lisa the minute he met her: she seemed intelligent, competent, passionate, and genuinely distressed that the Porpoise Inn was going into foreclosure. “So, what hap- pened to the Porpoise Inn?” Chris asked, simply.

Lisa seemed lost for an answer. “Honestly, I ’m not sure. Our main market is business travelers and corporate events, and in the past we had a steady stream of both, but suddenly the bookings stopped coming in. Our mar- keting and sales team worked day and night to chase down our previously loyal guests and attract new visitors, but nothing seemed to work. Eventually the number of empty rooms grew and our profi ts sank.”

As Chris talked through the fi gures with Lisa, he was not encouraged by the hotel ’s performance. How could you have such a great manager and staff and still suff er such a steady decline? Although Chris had experienced a number of obstacles during his time at the Dolphin Resort, he had remained confi dent that he could get things back on track. Not wanting to write the opportunity off too soon, Chris forged ahead with assessing the situation to see if acquiring the Porpoise Inn was a viable option.

9.4 | INDUSTRY AND COMPETITIVE ANALYSIS

9.4 | Outline methods that managers use to understand their industries and competition.

Over the next few days, Chris continues to work on the analysis for Kathy. He knows the hotel industry well but realizes that he needs to know it inside out in order to assess the level of risk involved in the acquisition. After his preliminary conversation with Lisa at the Porpoise Inn, Chris conducts an industry and competitive analysis , which is the process of assessing and monitoring the competition in order to design more eff ective strategies. During the review, he is reminded of the multiple levels of systemic change experienced by the hotel industry, including the impacts from terrorism, pandemics, third-party dis- tributors on the Internet, oversupply developed in an infl ated real estate market, shift in business and leisure consumer travel habits, and expanded effi ciencies through technology. Th e most noticeable trend was a steadily declining market for business travel, brought on by technology advances in communication; business meetings all over the world could now be

Stability strategy A strategy in which an organization focuses on processes, products, and services that will sustain it over the long term.

Cost leadership strategy A strategy in which an organization seeks competitive advantage by reducing production costs and therefore consumer prices.

Prospector A company that uses strategies for high-risk, fast growth through product and market innovation.

First mover A company that gains competitive advantage by being the fi rst to offer a new product or service, or to use a new cost-saving technology.

Competitive analysis The process of assessing and monitoring the competition in order to design more effective strategies.

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2339.4 | INDUSTRY AND COMPETITIVE ANALYSIS

Voices ofManagement Akhil Jain 9

President, Landmark Hotel Group

You must start with a perpetual desire to learn, innovate, and be the best in your fi eld. Once armed with that drive, I believe resources to better understand your industry and com- petition will become self-evident because one cannot be suc- cessful in a vacuum; to be successful, we must have intimate knowledge of our industry and the competition around us. As president of a growing hotel management company, I keep tabs on my industry by religiously reading industry trade magazines, journals, blogs, and websites. I also make it a point to attend annual industry conferences to network with colleagues and gain new perspectives from experts in fi elds relevant to me. To truly understand one ’s competition, there is no substitute for physically touring the competition ’s facilities and getting to know their people, systems, and processes. I make it a point to personally experience my competitor ’s hotels in order to understand their strengths and weaknesses. This knowledge becomes critical when developing an effective SWOT analysis for our company and its hotels—an integral component of our strategic planning process.”

Company Profi le

Name: Landmark Hotel Group

Founded: 1983 in North Carolina

Owner/Founder: Raj Jain

President: Akhil Jain

Company Story: Landmark Hotel Group is a hospital- ity management company that owns, operates, and develops hotels along the East Coast. The company is founded on the knowledge and understanding that ex- cellent service and a quality product is key to achieving the highest level of performance.

Critical Thinking in the Classroom

What are your views on Akhil Jain ’s approach to management? What methods would you use to research and better understand your competition? ■

conducted virtually. Rising fuel costs were also aff ecting air travel, making it too expensive for some organizations to justify face-to-face business meetings.

Five Forces Model To put all of these factors into a clear illustration for Kathy, Chris applies the Five Forces Model outlined in Figure 9-2, that were developed by Harvard University professor and researcher Michael Porter. 10 Th is analytical model allows managers to assess the major threats that an organization can expect to encounter in an industry. By outlining and pro- actively responding to these threats, Porter suggests that managers can defi ne more clearly their opportunity to be successful. Th e Five Forces Model outlines fi ve forces that determine what managers should expect when competing in an industry: power of suppliers, power of buyers, substitute products and services, new entrants, and rivalry. As Chris goes through all of the collected data, he is lacking reasons as to why the Dolphin Resort & Hotel should buy the Porpoise Inn. Th e Five Forces Model illustrates the following threats facing the hotel industry:

● Power of suppliers ● Power of buyers (customers) ● Substitute products and services ● New entrants ● Rivalry

Power of Suppliers Chris starts by assessing the ability of their suppliers to increase prices. In Chapter 8, Chris set a goal for John Johnson, the Dolphin ’s food and beverage di- rector, to check out other suppliers on the island and to see what the cost would be if they switched from one to the other. He notices that the Porpoise Inn uses some of the same sup- pliers as the Dolphin Resort & Hotel. Th e acquisition should put them in a good bargaining position with the suppliers, who would, most likely, be eager to retain their contracts with both hotels.

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Power of Buyers (Customers) In the hotel business, customers have all the power. If a hotel has only a few guests at a time, then they drive prices down, as the hotel might need to reduce rates in order to compete. It is also easy for customers to switch from one hotel to the other. Chris knows that guest retention is key when running a hotel business, but they are running out of space at the Dolphin Inn. Here, he concludes that an acquisition of another hotel property will give the Dolphin Inn an opportunity to expand and take in more guests, while maintaining their room rate.

Substitute Products and Services Chris realizes the importance of maintaining a unique range of products and services for his customers. One of the main problems aff ect- ing the hotel industry is that videoconferencing has become a substitute for business travel. Corporate clients can now network virtually, substituting a hotel stay with videoconferences held between offi ces. However, although there is less business travel than before, Chris knows there are still a number of well-attended corporate events that are held every year. By off er- ing WiFi, a state-of-the-art conference room and business center, and a refurbished hotel that off ered gourmet food, all in a beautiful setting, Chris feels that the Dolphin Resort & Hotel is taking the right steps toward attracting and retaining their corporate client base. Having reviewed the services off ered at the Porpoise Inn, Chris realizes that the Dolphin Re- sort does not off er a van service for their clients. He makes a note to address this point with Kathy. Chris knows they will have to be continually innovative to maintain this segment of the market.

New Entrants Chris also has to consider the threat of new competitors entering the mar- ket. He recently discovered that developers are planning to build a new hotel, the Fisher- man ’s Hotel, about two miles from the Dolphin Resort. Th e sign on the building site notes a grand opening for the following summer. He has yet to fi nd out the details, but if it matches or even exceeds the services off ered by the Dolphin Resort and off ers a competitive rate, the new hotel ’s arrival could weaken their position.

Seven Barriers to Entry Chris makes a note to keep an eye on the potential competitor and stay one step ahead of it wherever possible. Chris also has to consider the seriousness of the threat of entry and how the new hotel might aff ect the Dolphin Resort & Hotel, as well as the Porpoise Inn, and what they could do to retaliate if it posed a signifi cant threat to their business.

Figure 9-2 The Five Forces That Shape Industry Competition Continued reinvention and the shaping of a business can be an ongoing process that includes market condition changes, including the competition, economic changes, and changes in the customer base.

Threat of New

Entrants

Rivalry Among

Existing Competitors

Threat of Substitute Products or

Services

Bargaining Power of Buyers

Bargaining Power of

Suppliers

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2359.4 | INDUSTRY AND COMPETITIVE ANALYSIS

Chris decides to do an assessment of the Fisherman ’s Hotel by considering seven possible barriers to entry. A barrier to entry is an obstacle that makes it diffi cult for an organization to enter a particular market or replicate a competitor ’s service and product off erings. 11

● Supply-side economies of scale

Chris asks around and learns that the Fisherman ’s Hotel is privately owned, it is not part of a chain, and at least so far, it didn ’t seem to have any plans to expand once it gets established in the area. If the Dolphin Resort and the Porpoise Inn were to merge, it would give them a competitive advantage over the Fisherman ’s Hotel, as their econo- mies of scale, or cost advantages resulting from the expansion, would potentially be lower. For example, the merged properties would require double the supplies, which could be bought at a lower bulk rate if they can negotiate better terms from suppliers (which they might be in a better position to do). Th ey would also have more staff in research, marketing, and sales than the Fisherman ’s Hotel, which would enable them to be more aggressive when it came to attracting new business and retaining customers. Chris concluded that the potential competitor would have to enter the market on a very large scale to be considered a threat to the Dolphin Resort and Porpoise Inn.

● Demand-side benefi ts of scale

Chris was confi dent that the Dolphin and the Porpoise Inn were market leaders on the island when it came to off ering unique products. Th eir increasing customer base at the Dolphin Resort was buying items from the gift shop, indulging in the homemade ice cream, and paying higher prices at their much-improved restaurant. As word of mouth spread, Chris was delighted to fi nd the numbers of guests rising every week. He knew that the Dolphin still needed to implement a van service and keep pushing new initia- tives to make sure that it maintained its status as one of the island ’s top hotels. If the merger was to take place, it would also need to invest heavily on branding to let its customers know that the Dolphin and the Porpoise were part of the same hotel group. Chris needed to fi nd out how the Fisherman ’s Hotel intended to advertise and brand itself in preparation for the big opening next summer.

● Customer switching costs

Often, competition will be reduced if there is a higher cost to switching from one prod- uct or service to another. From experience, Chris knew that one of the main challenges facing the hotel industry was when customers went elsewhere because of cost. So far, the Dolphin Resort has competitive room rates, an Olympic-size pool, private beach ac- cess, refurbished rooms, free WiFi, complimentary afternoon tea and cookies on arrival, a unique gift shop, a reasonably priced restaurant off ering locally grown organic and gourmet food, and a state-of-the-art conference room and business center. Chris was confi dent that customers would not get the same value for their money if they went to any other hotel on the island. Still, he had to do his due diligence on the Fisherman ’s Hotel to make sure that it would not rival the Dolphin Resort on rates or amenities.

● Capital requirements

From his experience at other hotels that he had man- aged and, most recently at the Dolphin Resort, Chris knew how much investment was needed to maintain a hotel and its operation, particularly when much of the upfront capital was spent on advertising and marketing. He felt fortunate that the Dolphin Resort was in such a good fi nancial position that they were even able to con- sider a merger with another hotel. Chris wondered if the Fisherman ’s Hotel had the large fi nancial resources nec- essary to be serious competition for them.

● Incumbent advantages independent of size

Although Chris was beginning to realize how a merger with the Porpoise Inn could be a good strategic move, especially when it came to defending the organization against the competition, he also believed that the Dolphin

Barrier to entry An obstacle that makes it diffi cult for an organization to enter a particular market or replicate a competitor’s service and product offerings.

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236 Chapter nine Designing Strategies

Resort was strong standing on its own. Th e resort had capital investment, a healthy bank balance, an excellent rapport with the bank, access to the latest technology, loyal staff and customers, an excellent geographic location, and the potential to expand. “Even if we didn ’t merge with the Porpoise Inn, the Fisherman ’s Hotel would have to do a great deal to challenge our position,” Chris thought.

● Unequal access to distribution channels

Chris knew that the Fisherman ’s Hotel would need to secure distribution of its ser- vices. Th e previous year, Chris made a deal with several of the local travel agents and tourist offi ces to give the Dolphin Resort priority when it came to promoting proper- ties to walk-in customers. Th e marketing department had also succeeded in securing advertising space in local magazines and newspapers and on online travel sites. Th e Fisherman ’s Hotel could easily use these forms of distribution to attract new customers, however, and Chris made a note for the marketing department to follow their advertis- ing and branding strategy closely.

● Restrictive government policy

Every industry, big or small, is subject to government policies. Typically, the hotel indus- try is aff ected by restrictions regarding licensing, foreign investment, and fairly recent restrictive immigration laws, the latter of which have aff ected the tourist industry. Chris relied on the legal team to make sure that they were kept fully appraised of all existing and potential government policies, and wondered if the Fisherman ’s Hotel had done the same.

Expected Retaliation To consider the idea of possible retaliation, Chris put himself in the other owner ’s shoes: if he were building a new hotel and knew that his property was going to have to face serious competition, what kind of reaction might he expect from the incumbent hotel? Concerns would include:

● Whether the incumbent has a large amount of fi nancial resources to fi ght back, a loyal customer base, and infl uence over distribution channels

● Whether the incumbent can aff ord to slash prices to compete with the new hotel and to keep its share of the market

● Whether industry growth is slow, meaning that the only way that the new hotel could attract customers would be by luring them away from the incumbent

As Chris assessed these points, he realized that if he were in the other owner ’s shoes, he would be pretty worried about the Dolphin Resort and the competition that it would pose. Still, this was not a time to be complacent. Chris needed to brief Kathy and the team about the new hotel and outline a strategy that would keep them ahead of the game whether the Dolphin Resort bought the Porpoise Inn or not.

Rivalry An increase in competitors that offer the same products and services can spell trouble for a business unless it finds some way of differentiating its offerings. While Chris is confident that the Dolphin Resort has a unique selling point in providing pri- vate beach access to its guests, he is well aware that in the future, this might not be enough. Th is competitive analysis gave Chris new insights into the challenges that the industry must address. He picked up the phone and arranged another meeting with the Porpoise Inn ’s general manager, Lisa Reynolds, for the next morning. Chris was impressed by Lisa, and he wanted to forge a business relationship with her. After all, even if they didn ’t acquire the Porpoise Inn, he may be able to find a place for her at the Dolphin Resort. But first, he had to establish the reasons why such a once-profitable business was close to going under. So he pursued that line of inquiry at their next meeting. “Your main market was business visitors,” Chris recapped. “But as we know, business travel has slowed down due to technological innovation and budget constraints. In light of this, did you ever consider going after a different segment of the market?” “Yes,” Lisa said, nodding. “Very recently, we launched a campaign to attract families with children, but it didn ’t work. In hindsight, we should have carried out the campaign much earlier.”

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2379.5 | ORGANIZATIONAL POSITION AND CAPACITY

A light bulb went off in Chris ’s head. He now knew why the Porpoise Inn had gone down- hill. For too long, it had focused on its steady fl ow of business travelers while neglecting other areas of the market. Th e inn had suff ered from competitive inertia , which is a ten- dency to continue competitive practices that had been successful in the past, even if they are less eff ective in the present. 12 Lisa agreed with this assumption, telling Chris that she regretted not taking action earlier to keep the hotel profi table. After a pause, Chris asked, “So, why do you think your plan to attract families failed?” Lisa said, “Th e feedback we received was that families coming to a coastal town expect beach access, which we don ’t have.” Chris replied, “So, if you only had access to a private beach like the Dolphin Resort, you and your team would probably be doing better!” Chris did a quick analysis in his head: for the Porpoise Inn, inaccessibility to the beach was a barrier to entry. Chris stopped himself. “Wait a minute . . . Maybe we are looking at this opportunity all wrong. Okay, Lisa, are you willing to be really creative in order to make Porpoise Inn a success?” She nodded enthusiastically. “I am willing to try anything that will keep us in business, and keep my team members employed.”

9.5 | ORGANIZATIONAL POSITION AND CAPACITY

9.5 | Describe how managers assess the organization ’s capacity to execute proposed business plans.

Chris and Lisa spent the next several days traveling back and forth between the Porpoise Inn and Dolphin Resort exchanging thoughts and ideas. Although he had gained a new under- standing of the hotel industry and the local competitors, there were still many questions to be answered: What level of resources —the assets, people, processes, and capabilities of an organization13—could the Dolphin aff ord to allocate if they acquired the Porpoise? Would there be enough money to make capital improvements to the property once it was purchased? How would the stakeholders react to such a big venture? Overall, what are the strengths and weaknesses of the Dolphin Resort & Hotel and the Porpoise Inn, and could the organization sustain immediate growth if the two were merged? To answer these questions eff ectively, Chris needed to assess the position of the orga- nization and its capacity to move to a more desirable position. An organization ’s market position is an honest assessment about how the company competes in its industry. An organization ’s capacity refers to the fi nancial and human resources available to the com- pany, which will enable or hinder it to achieve goals. In this section, we will explore how managers assess the organization ’s market position and capacity to execute proposed business plans.

Company Position Th e BCG Matrix , illustrated in Figure 9-3, is a framework developed by the Boston Consult- ing Group for evaluating business units according to growth and market share. 14 Th is tool and process was designed so that managers could quickly categorize their company ’s posi- tion in the industry where it competes, enabling management to assess quickly the validity of its strategies and where to invest resources. Th e BCG Matrix is largely based on market share. Th e higher percentage of the market an organization holds, the higher proportion of the market controlled by that organization. It stands to reason that companies with a high market share make more money than those that have a smaller segment of the market. Chris knew that the Dolphin Resort & Hotel had almost regained its status as the most desirable hotel on the island, and concluded that it had the greatest market share when it came to the hotel industry in the area. However, did this mean that they should be investing in another venture just because they were profi table?

Competitive inertia A tendency to continue with competitive practices that had been successful in the past, even if they are less effective in the present.

Resources The assets, people, processes, and capabilities of an organization.

Market position An honest assessment about how the company competes in its industry.

Capacity refers to the fi nancial and human resources available to the company, which will enable or hinder it to achieve goals.

BCG Matrix A framework developed by the Boston Consulting Group for evaluating business units according to growth and market share.

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238 Chapter nine Designing Strategies

To fi gure this out, Chris needed to take a look at growth strategy , which is a strategy for increasing revenue, profi ts, market share, or territories. 15 In a high-growth market, where the total business is expanding, it is easier for companies in that realm to build their profi ts even if their market share remains the same. Th ere is less competition in a high-growth market, as there is enough business for everyone to enjoy. In short, everyone gets a slice of the pie. However, as Chris knows from his study of the Five Forces model, the hotel industry has suf- fered a number of blows over the past few years, which means it is currently categorized as a low-growth market. Competition is tougher; there is not enough pie to go around, and every- body is fi ghting for the last slice. Even if companies have high market share, they might end up losing a portion of it through discounting and other competitive measures. Chris needed to work through the matrix to fi nd out which area was most relevant to the Dolphin Resort. Managers plot market share and growth potential on a 2 × 2 matrix, and the business ’s position in the matrix determines a strategic recommendation. On the x-axis, a manager plots market share, from low to high, and on the y-axis, growth potential from low to high. Th ere are four quadrants defi ned in the matrix:

● Dogs ● Cash Cows ● Stars ● Question Marks

Dogs (Low Market Share/Low Market Growth) Dogs are organizations that have very little market presence and barely register on other companies ’ radars. Unless some- thing major happens in the industry, there is very little chance that Dogs will ever develop into a real competitor, and some might be better off cutting their losses. Companies classi- fi ed as Dogs must work very hard in order to establish higher growth and to be considered a serious player in the industry.

Cash Cows (High Market Share/Low Market Growth) Cash-cow companies that have high market share also have a high profi le, which gives them the fl exibility to take ad- vantage of new opportunities. However, if the market isn ’t growing, the company might be limited in how much it can actually expand. Many cash-cow organizations use this time of low growth to save money in anticipation of the market picking up in the future.

Stars (High Market Share/High Market Growth) Being a Star is probably the op- timal position to be in for any organization. With high market share and growth comes

Growth strategy A strategy for increasing revenue, profi ts, market share, or territories.

Figure 9-3 BCG Matrix The four quadrants defi ned in the matrix include Star, Question Mark, Cash Cow, and Dog.

High LowMarket Share

Lo w

H ig

h M

ar ke

t G

ro w

th

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2399.5 | ORGANIZATIONAL POSITION AND CAPACITY

signifi cant investment and return. Not only is the company well established, with a high profi le and a growing market, it has potential to invest in the future.

Question Marks (Low Market Share/High Market Growth) Question Marks are companies that generate the most questions as to where they going in the future; they have low market share, but they are in the right industry for growth, so they have the potential to make money. Usually, Question Marks will invest heavily in order to achieve Star status. Only time will tell if the Question Marks will become Cash Cows and eventually Stars. How do managers know where to plot their organization, other than simply guess- ing? Chris applied a SWOT analysis , which is a method of assessing an organization ’s strengths, weaknesses, opportunities, and threats (abbreviated as SWOT). 16 It is a useful way of defi ning business strategy and helping to make strategic insights and decisions. Table 9-1 outlines a general set of questions that Chris applied to the Dolphin Resort to complete an honest assessment of the organization ’s position, and Table 9-2 shows the answers to those questions. As Chris reviews both tables, he realizes that they provide a useful reminder of some of the areas that he has considered; namely, that they needed a van service in order to compete

SWOT analysis A method of assessing an organization’s strengths, weaknesses, opportunities, and threats (abbreviated as SWOT).

Table 9-1 Dolphin Resort SWOT Analysis Questions

Strengths vs. Competitors (internal)

Weaknesses vs. Competitors (internal)

Opportunities (internal and external) Threats (can’t control)

What does our hotel (department) do well?

What could we improve? What market trends can we take advantage of?

Are there any threatening weather events that could potentially hurt our business?

How is our physical building a strength?

Building maintenance? Are there new companies moving in the market?

What is going on in the market that may harm us?

Is our location a strength?

Landscaping? Is there a company with growth happening?

Which weaknesses can harm us further?

Is our service a strength?

Location? Is there a hotel undergoing renovations, and therefore fewer rooms in the market?

Do we have a renovation scheduled or any amenity changes coming?

What do our customers say are our strengths?

Amenities? Are there special events scheduled?

What do our employees say are our strengths?

Service? Can any of our strengths better position us with a tough client?

What is unique about our hotel?

Competitive rates? Can we market our strengths?

Staff levels?

Training?

Development?

Recruitment?

On-boarding?

What do our customers and vendors say are our weaknesses?

What do our employees say?

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240 Chapter nine Designing Strategies

Strengths vs. Competitors (internal)

Weaknesses vs. Competitors (internal)

Opportunities (internal and external) Threats (can’t control)

Our location can easily be found vs. our competition.

Our menu selection, although much improved, could do with some refreshing.

Engage long-term employees in service training and becoming champions of our business.

There is a new enterprise, called the Fisherman’s Hotel, opening mid-year.

Our staffi ng levels are consistent; we have low turnover and easy recruitment.

Our customer service scores are improving but could be better.

Check which of our corporate accounts are requesting van service, and fi nd out the volume potential in revenue vs. van cost and staffi ng.

The hurricane season is supposed to be bad this year.

We just completed a soft- goods renovation (i.e., an upgrade to linens, carpets, draperies, etc.) in our rooms and public spaces.

We do not have the same capacity as some other local hotels.

There is a hotel nearby that is undergoing renovation and will have to close off part of its building. We could have the opportunity to take on the overfl ow and the ability to raise rates.

The highway department has scheduled roadwork in front of the hotel in the spring.

We have private access to the beach.

We do not have van service.

Employees need more training.

Table 9-2 Dolphin Resort Responses to SWOT Analysis Questions

with some of the other hotels in the area, and that road construction in the future months may aff ect business. It also did not escape him that the opportunity to take on the overfl ow of guests from the hotel that was undergoing refurbishment might not happen unless they deal with the capacity issue at the Dolphin Resort. Once Chris completes the SWOT analysis, he is ready to plot the Dolphin Resort on the BCG Matrix. As the Dolphin is the most profi table hotel on the island, Chris considers that it has a high share of the market, yet it is clear that the hotel industry is facing low growth potential. When Chris applies the BCG Matrix, the framework process affi rms the insights that he gained from the industry and competitive analysis, yet it also introduces new ques- tions that require further investigation. According to the matrix, the Dolphin Resort is a Cash Cow. It also determines that the Porpoise Inn is a Dog in its current state. Chris pon- ders the question: “Should Cash Cows invest in Dogs? If I propose a new strategy to Kathy to transform the Porpoise Inn into another potential Cash Cow by increasing its market share, does the Dolphin Resort have the resources and capabilities to execute the plan?”

Capabilities and Resources Chris knew that even the best plans fail if organizations are not capable of executing or committing the resources necessary to succeed. Th e core capabilities , of an organization, sometimes referred to as core competencies, refers to the activities and processes that an organization routinely does well in comparison to its competitors. 17, 18 To analyze the acqui- sition opportunity eff ectively, Chris completed a core capabilities and resource analysis for both the Dolphin Resort and the Porpoise Inn. Th is process is an extension of the SWOT analysis and was conducted using the questions outlined in Table 9-1 to investigate capabili- ties and resources, respectively. For each question, Chris worked with staff from both hotels to do due diligence and gather verifi able information. He worked with Lisa on the Porpoise Inn ’s past and present fi nancial statements, reviewed their management and operations, and requested that the Dolphin Resort ’s legal team carry out a legal compliance review to ensure that the hotel would be protected from any potential legal problems in the future. Litigation analysis is a particularly important part of the due diligence process; buyers need to be aware of any

Core capabilities Activities and processes that an organization routinely does well in comparison to its competitors; also known as core competencies.

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2419.5 | ORGANIZATIONAL POSITION AND CAPACITY

Questions Dolphin vs. Porpoise

What are the overall biggest expenses and differences in the hotels?

Labor—the organizational chart from fi xed expenses on top-line executive salary and structure is more streamlined at the Dolphin vs. at the Porpoise. Porpoise has a larger executive staff vs. line employees, costing more in fi xed labor costs in terms of percentage, therefore lowering profi t.

How does the Cost Per Occupied Room (CPOR) measure up at each location?

The Dolphin Resort maintains a consistent cost month to month, regardless of occupancy fl uctuations. The Porpoise Inn has a rollercoaster model, with month-to-month expenses per occupied room. This variance makes up approximately an additional 5 percent in profi t annually.

How do the CPOR and/or % to revenue measure up with regard to utility costs per hotel, as well as to the national average?

The Dolphin Resort ’s utility costs have increased with the national averages and local utility forecasted costs each year. The Porpoise Inn costs have spiked during the past 18 months. Further investigation is needed to review possible causes, including gas leaks and/or equipment draw on electricity. This equates another 3 percent in lost profi ts.

How do repairs and maintenance stack up at each location?

Overall, the Porpoise Inn has had several equipment failures and replacement the past 24 months—some items should have been capitalized vs. expensed on the profi t and loss statement. The preventative maintenance system (PMS) is far more consistent in the rooms, public space, and back of the house at the Dolphin Resort, requiring less cost on large repairs and items or rooms out of service over time.

Sales and marketing costs typically average at 10 percent of total revenue— how do the two locations compare?

In comparisons, both hotels spend equal dollars per location, but the values in terms of percentage of sales are different. The Porpoise Inn has experienced a decline in top-line revenue but maintained the sales staffi ng model and marketing plan. Reorganization, rebudgeting, and stronger accountability is needed for the return expected as per the expenses.

Turnover in line employees, training, and development comparisons.

The inconsistent occupancy trends at the Porpoise Inn have made it diffi cult to staff and train employees properly. The ongoing costs to run ads for placement, along with training fees, have dramatically increased the cost of labor for both the front-of-house and back-of-house employees.

Table 9-3 Capabilities and Resources Analysis: Dolphin Hotel & Resort vs. Porpoise Inn

dispute in the past from suppliers, customers, employees, or shareholders that may aff ect the hotel in the future. 19 Th e information that Chris gathered is included in Table 9-3 . Once Chris had completed the due diligence process, he put together a strategic plan and was ready to make his formal recommendation to Kathy and the stakeholders to acquire the Porpoise Inn. Th e major premise of the strategy that he presented was a need to invest, so that the company could continue to grow its profi ts. During the presentation, Chris talked through the discoveries that he had made through the Five Forces Model, the BCG Matrix, and his analysis of the Porpoise Inn ’s potential. He told Kathy that the Dolphin Resort ’s major challenge to increasing its performance was capacity (segment B3 in Figure 9-4 ). Th e hotel was running out of space. With lower rates and higher quality, the resort was now operating at a very high occupancy level, which would likely increase. In order to grow, Chris concluded that the resort needed to invest in more accommodations for their ever-growing client base. Kathy, who had been silent throughout the presentation, suddenly interjected, “I can see where this is going, Chris. I know our hotel is becoming popular, but our success has been relatively recent. You need to convince me we should spend our hard-earned profi ts on buying another hotel that has had such poor fi nancial performance. Don ’t you think this is too much of a risk?” Chris nodded. “I agree that this acquisition could be perceived as a risk, but it might be more of a risk to adopt a ‘wait and see ’ approach.” To illustrate his point, Chris put up the systems archetype “Growth and Underinvestment,” as illustrated in Figure 9-4, on the screen. Th is archetype is similar in concept to the Limits to Growth archetype that we explored in Chapter 3. Th e theory holds that companies that experience rapid growth within a small

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242 Chapter nine Designing Strategies

Figure 9-4 Growth and Underinvestment Archetype   Companies that underinvest remain in their current state, leading to stagnation and unfulfi lled goals. B, balancing loop; R, reinforcing loop. Source: D. Kim, Systems Archetypes I (Waltham, MA: Pegasus Communications, 1994).

Performance

R1 B2

Perceived Need to Invest

Performance Standard

Capacity

Delay

Investment in Capacity

B3

Delay

DemandGrowth Effort

time period have a tendency to come to a rapid halt, without any clear explanation. Chris said, “Kathy, this archetype is to show you the threat of not investing when the time is right. As you can see, our performance is top-notch; we are almost fi lled to capacity, and demand is the high- est it ’s ever been. Yes, all our achievements look great on paper, but if we delay with moving forward, we will end up running out of rooms, turning guests away, and losing the profi t we have fought so hard for. In short, we will have become victims of our own success. All investment is risky, but I passionately believe that this is the right time for the Dolphin Resort & Hotel to expand.” Chris stopped to catch his breath, and wondered if he had got a bit carried away with his motivational speech.

Kathy suggested to the stakeholders that they take some time to digest the information, reconvene the following day, and let Chris know the deci- sion they had made. As the boardroom fi lled up the next morning, Chris couldn ’t remember a time that he had felt so nervous. Kathy spoke, “OK, Chris, you ’ve convinced me and the rest of the shareholders. Let ’s do it. Let ’s buy the Porpoise Inn!” Chris let out a “Whoop!” His well-researched presentation had paid off . He and the team had convinced top manage- ment that the acquisition was a good idea. Now all they had to do was make their goal a reality—and then make the reality work.

A few months and a ton of paperwork later, the Dolphin Resort for- mally acquired the Porpoise Inn, which was subsequently renamed the Dolphin Resort and Porpoise Inn—“the best-valued hotel on Hilton Head Island, with trolley access to our private beach.” Th e “Dolly Trolley” ran ©

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2439.6 | DIVISIONAL AND FUNCTIONAL STRATEGIES

continuously from sunrise to 10 p.m. during the busy months of the year, and by request all other times. Th e newly implemented van service, which transported guests to and from the airport, was also a big hit with the guests. Soon, both hotels were thriving. Paul Reynolds, head of the time-share company, agreed to let the Dolphin Resort place time-share pros- pects stay at either hotel during the busy season, which allowed the resort and inn to both benefi t from this unique arrangement.

9.6 | DIVISIONAL AND FUNCTIONAL STRATEGIES

9.6 | Demonstrate how managers develop divisional strategies and tactical plans.

It is a year later, and the transition process has been both exciting and diffi cult. With Chris managing the process, the Porpoise Inn has been fully transitioned into the Dolphin Resort & Hotel ’s operating policies and procedures. Applying the balanced scorecard approach has allowed the management team to “augment traditional fi nancial measures with benchmarks for performance in three key nonfi nancial areas: 1) a company ’s relationship with its custom- ers, 2) its key internal processes, and 3) its learning and growth.”20 Th e framework intends to ensure that managers translate vision into strategy and execution of the strategy, both of which are critical to success. (See Research at Work: Seeing the Balanced Scorecard on page 244) Team members from both hotels have been working well together, and morale is high. In the last year, Chris has only to make one staffi ng decision. Th e food and beverage division was doing well, and although John Johnson had come around to the transition, he was still the voice of dissent and tended to debate even the smallest of changes in his area. Chris worried that John ’s pessimistic nature was having a negative eff ect on the kitchen and res- taurant staff ; he also felt that he was spending more time managing John than anybody else. A change had to be made, especially in light of a promotion he was planning for one of the employees. Chris had been thinking about the positive and creative contributions that Zoey Zhang had made since Chris arrived at the Dolphin Resort & Hotel, and he decided that it was the right time to increase her responsibilities. So he approached her one day and said, “Zoey, how would you like to be joint food and beverage director with John Johnson?” Zoey was taken aback. Chris went on, “We need someone with your passion and ideas in there, and I think you are the perfect choice.” Zoey replied, “I would be delighted, but how does John feel about it?” Chris paused. He had not cleared it with John—or Kathy yet, for that matter. It had just seemed like the perfect time to propose the idea. “I ’ll talk to John; it will be fi ne,” Chris said. How could it not be fi ne? With John ’s expertise and Zoey Zhang ’s enthusiasm, they were the perfect partnership. He just hoped that Kathy and John would see it that way. Th at same day, he set up a meeting with Kathy. He told her the staffi ng decision he had made, albeit without her consent. “In theory, it ’s a good idea,” Kathy said, “But knowing John for all these years, I ’m not sure if he is going to take it well. He is a prideful man, and he may consider this a demotion.” Sure enough, John was not pleased about the idea of sharing his directorship with Zoey Zhang. “What have I been doing wrong?” he asked Chris. “Everyone in the division is doing a great job; we have implemented all your suggestions and cost-cutting measures, and every- thing is going smoothly. Why are you weakening my position by assigning someone to share my job?” Chris explained that rather than taking away from the role, Zoey would enhance it by helping John manage the staff and implement new initiatives. Th e meeting had been a long one, but eventually John begrudgingly assented. He ’ll come around, Chris thought, as he walked out of the meeting. He just needs time to get used to the idea. Over the following months, however, John started to become a smaller presence at weekly team meetings, and eventually he stopped going altogether. Chris noticed his absences, but things were going so well in the food and beverage division that he didn ’t think much about it. Besides, he had a million other areas to tend to.

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Seeing the Balanced Scorecard As we explored in Chapter 8, researchers Robert Kaplan and David Norton have provided managers a bal- anced approach to planning through their balanced

scorecard. 21 This framework, shown in the illustration, provides managers with a visual tool to translate vision into strategy.

Research@Work

A Balanced Scorecard—Managing Strategy: Four Processes

“To succeed financially, how should we appear to our shareholders?”

Objectives InitiativesMeasures Targets Financial

“To achieve our vision, how will we sustain our ability to change and improve?”

Objectives InitiativesMeasures Targets Learning and Growth

“To satisfy our shareholders and customers, what business processes must we excel at?”

Objectives InitiativesMeasures Targets Internal Business Process

“To achieve our vision, how should we appear to our customers?”

Objectives InitiativesMeasures Targets Customer

Vision and Strategy

A Balanced Scorecard—Translating Vision into Strategy: Four Perspectives

Once managers have turned their company ’s mission and vision into a strategy, Kaplan and Norton recommend using this exact framework as a tool for achieving results.

Critical Thinking in the Classroom As a manager, how would you use the balanced scorecard to translate your vision into strategy?

Translating The Vision

• Clarifying the vision • Gaining consensus

• Setting targets • Aligning strategic initiatives • Allocating resources • Establishing milestones

Business Planning

Balanced Scorecard

• Communicating and educating • Setting goals • Linking rewards to performance measures

Communicating and Linking

Feedback and Learning

• Articulating the shared vision • Supplying strategic feedback • Facilitating strategy review and learning

Source: Robert S. Kaplan and David P. Norton, “Using the Balanced Scorecard as a Strategic Management System,” Harvard Business Review (July 2007): 150–161.

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2459.7 | STRATEGIES FOR PERFORMANCE

On the one-year anniversary of the acquisition, John Johnson announced his resigna- tion. Chris was disappointed. Th is was the fi rst employee he had lost under his manage- ment, and he immediately blamed himself. Furthermore, John ’s resignation upset Chris ’s goal plan for 100 percent employee retention. Th e rest of the staff at both hotels seemed to be content and were working hard, united in their mission to achieve guest satisfaction and stellar customer service. Yet, he knew the resignation of any longstanding staff mem- ber was sure to cause ripples among the staff . Much as he tried, he couldn ’t persuade John to stay. “Th ings have changed too much for me here,” John explained sadly. “As much as I respect Zoey, I feel I have been replaced.” Following an exhausting two hours of conversation, Chris had to admit defeat and accept that he had lost John Johnson. Not only was John a prideful man, but a stubborn one, and no argument from Chris could persuade him to stay. And Chris could not aff ord to dwell on the situation for too long. With their calendar full of corporate events coming up, he needed to sort out the staffi ng issue in the food and beverage division—and fast. Th at afternoon, Chris walked into Kathy ’s offi ce and said, “I have good news and bad news. Th e bad news is John Johnson has just resigned. Th e good news is that I think I have the perfect candidate to run the entire food and beverage division.” Kathy looked unsure. “First, I am very sad that John is leaving us; he has been with us from the beginning, and I really thought he was becoming more engaged with his new responsibilities.” After a short pause, she said, “What reason did he give for resigning?” Chris cleared his throat, “He felt that his position was threatened with the addition of a new partner.” Kathy didn ’t say anything—she didn ’t have to. Grateful for not receiving an “I told you so” from Kathy, Chris broke the silence. “I do think I have the answer to the staffi ng problem,” he said. Kathy replied, “Who do you have in mind to fi ll his shoes?” Chris smiled. “Zoey Zhang,” he replied. “She has performed exceptionally well during her time as John ’s partner, and I think she is more than ready to take over sole directorship.” Th ey both agreed that the hard- working and cheerful Zoey Zhang was the perfect candidate for the position. It was decided that Chris would tell her the good news. He would then make a tactical plan to accomplish all the tasks that needed to be done before corporate event season took off . Th e rest of the staff also needed to be notifi ed about the change in management and how they could work with Zoey to make the transition as smooth as possible.

9.7 | STRATEGIES FOR PERFORMANCE

9.7 | Compare traditional strategic planning models to an event-based approach.

Over the next year, the Dolphin Resort and the Porpoise Inn collaborated on a series of strat- egies to execute the company ’s goals more eff ectively and address operational challenges that they faced during implementation. Th e trolley access to the beach soon attracted more families to both hotels, and business was growing fast. However, Chris was noticing a trend: while they were attracting more leisure travelers and families, their corporate client base was declining. Th is was in spite of investing in a van service. Feedback confi rmed his fears: the recession had aff ected businesses ’ attitude about travel, and companies were paying for hotel accommodation only when absolutely necessary. Th is led Chris to believe that to com- pensate for a lack of corporate clients, they needed to attract more leisure travelers, families in particular, to book the resort for their summer vacation. Chris had an idea and hoped that Kathy would go for it. As they ran through the lat- est monthly fi gures, he pointed out to Kathy that some of their regular corporate clients had cancelled on several occasions. “So, what ’s the plan, Chris?” she said. Chris told her that while they couldn ’t do much to repair the eff ects of the economic recession—in the short term anyway—they could focus on the segment of the market that was bringing them the majority of their business. “I agree,” Kathy said. “But how do we increase our family and leisure base? Both the Dolphin Resort and the Porpoise Inn have access to the beach; we already have a gift shop that stocks lots of items for kids; and our menu

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246 Chapter nine Designing Strategies

is child-friendly and popular. What more can we do?” Chris replied, “I think we need more ideas, and I think we need to learn from the best.” Noting Kathy ’s look of puzzlement, he clarifi ed his latest idea, “I would like to bring the senior management team on a retreat to San Diego to stay at the world ’s biggest theme park, Adventure Quest, on a fact- fi nding expedition.”

Kathy took a deep breath and asked Chris his reasoning behind such an elaborate trip. He replied: “At the moment, both the Dolphin Resort and the Porpoise Inn have state-of-the-art meeting rooms and confer- ence facilities for business clients. Th ose rooms are standing empty for at least three days a week as a result of the slowdown in business travel. I believe we can build a sustainable competitive advantage if we reallocate the unused space in the hotels, thereby transforming them even further into leisure destinations. In order to achieve this, I believe that the team could really reap the benefi ts of understanding how Adventure Quest creates their guest experience.”

As Chris had anticipated, Kathy had lots of questions: Could they aff ord to fund the trip? How would the rest of the staff function without any senior management in place? Chris explained to her that it would only be a couple of days, and he had chosen a relatively quiet weekend for the retreat. All the departmental heads would have trusted staff mem- bers on site to act on their behalf in their absence. As for funding the trip, Chris convinced Kathy that it was a worthwhile investment of their earnings. “Well, you have certainly thought of everything!” Kathy said. “I guess if we want to attract leisure and family travelers, there is no better company to learn from than Adventure Quest.”

From the moment the management team walked off the airplane ramp in San Diego, they noticed that the Adventure Quest experience had already started. Th e airport was fi lled with murals and statues of Adventure Quest characters, and there were hosts available to help guests begin their vacation. Th e team was impressed by Adventure Quest ’s ability to create an immediate, all-encompassing experience for their guests. By the time they arrived at the Adventure Quest hotel, there was a sense of feeling transported to another world where the only rule was to have fun. Th e team decided to take a couple of hours to explore and then meet back for dinner at the hotel. As the team sat down, Ken Gold, director of sales and marketing, could not contain his enthusiasm for what he had witnessed in the past two hours. “I can ’t believe how dedicated Adventure Quest is in immersing their guests in the Adventure Quest world. Th ey seem to make and sell everything here. Th ey even grow their own produce and serve it in the restaurant. I would not be surprised if the fi sh I ate tonight was caught by a staff person in the lake outside the hotel. Th ey own everything in town. But that is not the most important point. Th ey own and do everything because no one else can do it better.” Without realizing it, Ken had summed up Adventure Quest ’s strategies in one state- ment. Adventure Quest focused on three types of strategies to run its business: focus, diff erentiation, and vertical integration. Focus strategy is when an organization con- centrates on a specifi c target market and may use cost leadership and/or diff erentiation strategies. 22 At Adventure Quest, the company focuses entirely on entertainment for fami- lies. With this singular focus, the company has the opportunity to cut expenses for lower consumer prices or higher profi ts. For example, Adventure Quest owns the rights to print all Adventure Quest characters on its merchandise, so it does not pay extra for using that image. Additionally, the company can sell its merchandise at a premium price. Th is is how cost leadership applies to a focus strategy. Diff erentiation strategy is when an organi- zation seeks competitive advantage by providing goods or services that are signifi cantly diff erent from the competition. 23 Th e Adventure Quest experience doesn ’t just begin at the gates of the theme park; it occurs the second that their guests step off the plane in San Diego. Th at ’s diff erent. Speaking of “diff erent,” why would Adventure Quest want to grow their own produce?

Focus strategy A strategy in which an organization concentrates on a specifi c target market and may use cost leadership and/or differentiation strategies.

Differentiation strategy A strategy in which an organization seeks competitive advantage by providing goods or services that are signifi cantly different from the competition.

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2479.7 | STRATEGIES FOR PERFORMANCE

As a result of focus, cost leadership, and diff erentiation strategies, companies will often seek to produce and distribute their supplies, called vertical integration . 24 Th e method of diversifi cation in which an organization begins producing its own supplies is referred to as backward integration . So, in the case of Adventure Quest, growing the produce used in its hotels is backward integration. We could also call this diversifi cation strategy , which is a risk-reduction strategy in which an organization adds new kinds of goods, services, or busi- ness units. 25 Th e method of diversifi cation in which an organization takes on the distribu- tion and selling of its products is referred to as forward integration . When Adventure Quest opened retail stores in shopping malls and on crowded city streets all over the country to sell movies, clothing, and toys, this is an example of forward integration . Th e conversation grew more animated, with lofty aspirations of obtaining more land to grow their own produce, and opening Dolphin and Porpoise gift shops and activity centers around the entire island. At this point, Chris needed to refocus the team: “I appreciate the positive energy and creativity of our conversation, but I would like to us to look what we can do today that will bring us closer to the vision fi rst, to fi nd innovative ways to attract more leisure travelers, and second, to maintain our business traveler occupancy. To that end, I would like to hear your opinions on what experience we are off ering our guests and how that will need to change in order to attract leisure travelers and their families.” To explain his point further, Chris brought the team through the concept of renewal strategy , which addresses declining performance through retrenchment and regrowth. 26 Lisa Reynolds, who had remained as senior manager of the Porpoise Inn, spoke up. “Before the Porpoise Inn was acquired by the Dolphin Resort, I had been working in the hotel industry for six years. For as much as the hotel industry talks about building relation- ships and a magical experience for guests, what we really want is loyalty on our terms—join our reward program, so that you will feel obligated to come back because of the points you earn. Th ere is nothing magical about that. Here at Adventure Quest, I feel inspired to play and explore, which is very diff erent from most of my family vacations. Our trips generally involve me getting maps from the concierge and a list of the “top 10 things to do with your family on vacation. ’ Next thing you know, we are running around trying to check off our list of things to do.” For the remainder of the dinner, the managers of Dolphin Resort and the Porpoise Inn discussed how staying at their hotels could be a more personal experience. Th e group brainstormed about what really set the Dolphin Resort and Porpoise Inn apart from other hotels and how they could create a unique experience for their guests, just as they themselves were experiencing at Adventure Quest. Eventually, they decided on one unique factor: Th e Dolphin Resort and Porpoise Inn was the only truly family-run hotel on the island. Over the next couple of days, the executive team worked together to design a new business model to increase the level of personal ser- vice that they provide to their guests to make them feel at home. In a world where technol- ogy connects people more than personal contact, the team feels that both business and leisure travelers will be attracted by the “family” approach to service. Five years later, the Dolphin Resort & Hotel and Porpoise Inn are thriving. By continu- ously assessing processes and looking for opportunities to improve business performance, Chris and the hotel team have managed to design new, successful strategies and fresh ini- tiatives to meet current trends, and cater for an increasingly demanding customer base. Th anks to Chris ’s management style, the commitment of the hotel staff , and the unfailing support of Kathy Osborne, the property remains at the top of its game.

Vertical integration A method of diversifi cation in which an organization begins producing its own supplies (backward integration) or takes on the distribution and selling of its products (forward integration).

Diversifi cation strategy A risk- reduction strategy in which an organization adds new kinds of goods, services, or business units.

Renewal strategy A strategy to address declining performance through retrenchment and regrowth.

CaseSnapshot Chapter 9 Case: Designing Strategies:

Big Bottom Market can be found on pg. 470

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248 Chapter nine Designing Strategies

KEY TERMSS Acquisition When an organization purchases another organiza- tion or business in order to grow. (p. 230)

Analyzer A company whose strategies seek to maintain exist- ing products and services while pursuing limited innovation. They often imitate or follow the proven success of prospector organi- zations. (p. 231)

Barrier to entry An obstacle that makes it diffi cult for an orga- nization to enter a particular market or replicate a competitor’s service and product offerings. (p. 235)

BCG Matrix A framework developed by the Boston Consult- ing Group for evaluating business units according to growth and market share. (p. 237)

Business plan The stated actions and goals that support the organizational strategy. (p. 230)

Capacity refers to the fi nancial and human resources available to the company, which will enable or hinder it to achieve goals. (p. 237)

Competitive advantage The characteristics of an organization’s products or services that distinguish it from competitors and pro- vide an advantage in the marketplace. (p. 231)

Competitive analysis The process of assessing and monitoring the competition in order to design more effective strategies. (p. 232)

Competitive inertia A tendency to continue with competitive practices that had been successful in the past, even if they are less effective in the present. (p. 237)

Core capabilities Activities and processes that an organization routinely does well in comparison to its competitors; also known as core competencies. (p. 240) Cost leadership strategy A strategy in which an organization seeks competitive advantage by reducing production costs and therefore consumer prices. (p. 232)

Defender A company whose strategies support stable growth and continual improvement of existing products and services. (p. 231)

Differentiation strategy A strategy in which an organization seeks competitive advantage by providing goods or services that are signifi cantly different from the competition. (p. 246)

Diversifi cation strategy A risk-reduction strategy in which an orga- nization adds new kinds of goods, services, or business units. (p. 247)

Divisional strategy A strategy that determines how a business will compete in a particular industry or market. (p.230)

First mover A company that gains competitive advantage by being the fi rst to offer a new product or service, or to use a new cost-saving technology. (p. 232)

Focus strategy A strategy in which an organization concen- trates on a specifi c target market and may use cost leadership and/or differentiation strategies. (p. 246)

Functional strategy A strategy that determines how employees will implement and achieve a tactical plan. (p. 230)

Growth strategy A strategy for increasing revenue, profi ts, mar- ket share, or territories. (p. 238)

Market position An honest assessment about how the com- pany competes in its industry. (p. 237)

Operational plan The stated actions and goals that support achieving the functional strategy. (p. 230)

Organizational strategy A corporate-level strategy that addresses the question “What business are we in?” and unites all parts of the organization. (p. 230)

Prospector A company that uses strategies for high-risk, fast growth through product and market innovation. (p. 232)

Reactor A company that does not follow a consistent strategy but just responds to changes in the environment. (p. 231)

Renewal strategy A strategy to address declining performance through retrenchment and regrowth. (p. 247)

Resources The assets, people, processes, and capabilities of an organization. (p. 237)

Stability strategy A strategy in which an organization focuses on processes, products, and services that will sustain it over the long term. (p. 232)

Strategy A plan of action for achieving goals. (p. 230) SWOT analysis A method of assessing an organization’s strengths, weaknesses, opportunities, and threats (abbreviated as SWOT). (p. 239)

Tactical plan The stated actions and goals that support achiev- ing the divisional strategy. (p. 230)

Vertical integration A method of diversifi cation in which an organization begins producing its own supplies (backward inte- gration) or takes on the distribution and selling of its products (forward integration). (p. 247)

ADDITIONAL RESOURCES

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249Additional Resources

IN REVIEW 9.1 | Explain how businesses use planning to solve problems and make a diff erence.

Designing and defi ning strategies is a continuous process that helps organizations determine what they do, why they should be in business, how they can win and sustain market share, and how they can innovate continually to keep ahead of the competition. To design a successful strategy, managers must understand the full nature of the competitive forces that are present and take a holistic, systemic view of the industry structure. Being able to diversify in a competitive industry, seeing an opening in the mar- ket, and continuously staying ahead of the competition would not be possible without a clearly defi ned, skillfully designed strategy.

9.2 | Distinguish how planning is diff erent at the organizational, divisional, and functional levels of a

business.

As a result of the planning process, Chris needs to document decisions regarding goals, strategies, resource allocation, and actions required; these are called strategic plans . Th ere are three levels of strategy: organizational, divisional, and functional. With the philosophical foundation of an organization ’s mis- sion, vision, and values, organizational, divisional, and func- tional strategies are documented with business, tactical, and operational plans, respectively.

9.3 | Explain how senior managers develop organizational strategies and business plans.

Business strategies can be classifi ed in many ways, but all of them seek to gain competitive advantage, which is the character- istic of an organization ’s products or services that distinguish it from competitors and provide an advantage in the marketplace. By following certain types of strategies, companies can be cat- egorized as fi rst movers, reactors, prospectors, defenders, or analyzers. A reactor is a company that does not follow a consistent strategy, but just responds to changes in the environment. An analyzer is a company whose strategies seek to maintain existing products and services while pursuing limited inno- vation. A defender is a company whose strategies support stable growth and continual improvement of existing prod- ucts and services. A prospector is a company that uses strate- gies for high-risk, fast growth through product and market innovation.

9.4 | Outline methods that managers use to understand their industries and competitors.

Th e Five Forces Model outlines fi ve forces that determine what managers should expect when competing in an industry: power of suppliers, power of buyers, substitute products and services, new entrants, and rivalry. Understanding and designing strate- gies to compete eff ectively should create a barrier to entry, an obstacle that makes it diffi cult for competing organizations to

enter a particular market or replicate a competitor ’s service and product off erings.

9.5 | Describe how managers assess the organization ’s capacity to execute proposed business

plans.

An organization ’s market position is an honest assessment about how the company competes in its industry. An organi- zation ’s capacity refers to the fi nancial and human resources available to the company, which will enable or hinder it to achieve goals. Th e BCG Matrix is a framework developed by the Boston Consulting Group for evaluating business units according to growth and market share, so that managers could quickly cat- egorize their company ’s position in the industry where it com- petes. Th is enables management to assess quickly the validity of its strategies and where to invest resources. How do managers know how to fi gure out their organiza- tion ’s future plans, other than simply guessing? Managers typi- cally apply a SWOT analysis , which assesses an organization ’s strengths, weaknesses, opportunities, and threats. It is a useful way of defi ning business strategy and helping to make strategic insights and decisions.

9.6 | Demonstrate how managers develop divisional strategies and tactical plans.

Applying the balanced scorecard approach allows the manage- ment team to “augment traditional fi nancial measures with benchmarks for performance in three key nonfi nancial areas: 1) a company ’s relationship with its customers, 2) its key inter- nal processes, and 3) its learning and growth.” Th e framework intends to ensure that managers translate vision into strat- egy and execution of the strategy, both of which are critical to success.

9.7 | Compare traditional strategic planning models to an event-based approach.

Managers typically use three types of strategies to run its busi- ness: focus, diff erentiation, and vertical integration. Focus strategy is when an organization concentrates on a specifi c target market and may use cost leadership and/or diff erentia- tion strategies. Diff erentiation strategy is when an organization seeks competitive advantage by providing goods or services, which are signifi cantly diff erent from the competition. As a result of focus, cost leadership, and diff erentiation strategies, companies will often seek to produce and distribute their sup- plies, called vertical integration. Th e method of diversifi cation in which an organization begins producing its own supplies is referred to as backward integration . Th is is also called diversifi - cation strategy, which is a risk-reduction strategy in which an organization adds new kinds of goods, services, or business units. Th e method of diversifi cation in which an organization takes on the distribution and selling of its products is referred to as forward integration .

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250 Chapter nine Designing Strategies

SELF-TESTT 9.1 | Explain how businesses use planning to solve problems and make a diff erence.

1. One of the main responsibilities of managers is to create, present, and implement that will defend the company against the threat of competition, ascertain the best market position, and determine the weaknesses that might make its position vulnerable in the industry.

2. When an organization purchases another organization or business in order to grow, that is called a(n) .

9.2 | Distinguish how planning is diff erent at the organizational, divisional, and functional levels of a

business.

3. Th e three levels of strategy include: a. organizational b. transitional c. functional d. (a) and (c)

4. Th e three levels are strategy are documented with which three types of plans?

9.3 | Explain how senior managers develop organizational strategies and business plans.

5. Strategically, organizations can be defi ned in three ways. Using those terms, describe the Dolphin Resort under Herb Cork and then how it changed under Chris Heppler.

6. Stability strategy is when an organization seeks competitive advantage by reducing production costs and therefore consumer price. a. True b. False

9.4 | Outline methods that managers use to understand their industries and competitors.

7. What is the Five Forces model?

8. What seven barriers did Chris explore to determine if the new Fisherman ’s Hotel would weaken the Dolphin Resort ’s position in the market?

9.5 | Describe how managers assess the organization,s capacity to execute proposed business

plans.

9. What is the BCG Matrix?

10. A(n) analysis is a method of assessing an organization ’s strengths, weaknesses, opportunities, and threats

9.6 | Demonstrate how managers develop divisional strategies and tactical plans.

11. Th e balanced scorecard framework intends to ensure that managers translate vision into strategy and execution of the strategy, both of which are critical to success. a. True b. False

9.7 | Compare traditional strategic planning models to an event-based approach.

12. When an organization seeks competitive advantage by providing goods or services, which are signifi cantly diff erent from the competition, it ’s called ______. a. vertical integration b. diversifi cation strategy c. diff erentiation strategy d. forward strategy

CHAPTER EXERCISESS Create a Mission Statement Instructions:

1. Working by yourself or in a team, choose one of the following companies (or your instructor may assign one to you or your team) and write a mission statement for that company.

a. FedEx

b. Google

c. Apple Computers

d. Starbucks

e. Wal-Mart

f. Ben & Jerry ’s

g. Your college or university

2. Compare the mission statement that you wrote with the actual mission statement for your company. Your

instructor may provide the actual mission statements to you, or you can find them online. Consider the following questions:

a. Was the mission statement that you wrote longer or shorter than the company ’s actual mission statement?

b. Was it more detailed or less detailed than the actual company mission statement?

c. In what ways did your mission statement diff er from the company ’s actual mission statement?

d. Did the mission statement that you wrote focus on the same or a diff erent target audience (e.g., employees, customers, shareholders, etc.)?

e. In what ways was your statement superior to the company ’s actual mission statement?

f. In what ways was it inferior?

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251Additional Resources

SELF-ASSESSMENT Strategic Leadership Skills*

For each statement, circle the number that best describes you based

on the following scale:

Not at all

Accurate

Somewhat

Accurate

A little

Accurate

Mostly

Accurate

Completely

Accurate 1 2 3 4 5

1. I try to anticipate problems before they actually occur. 1 2 3 4 5

2. I like to challenge the status quo.

1 2 3 4 5

3. I am good at synthesizing complex information in order to recognize patterns and obtain new insights.

1 2 3 4 5

4. I don ’t mind making diffi cult decisions, even when I don ’t have complete information.

1 2 3 4 5

5. I can eff ectively fi nd common ground and achieve buy-in from those around me, even those with diff ering perspectives and agendas.

1 2 3 4 5

6. I try to learn from the past successes and failures of myself and others.

1 2 3 4 5

7. I can often predict the actions or reactions of my allies and my competitors.

1 2 3 4 5

8. I enjoy questioning assumptions, both my own and others, and encourage diff ering perspectives.

1 2 3 4 5

9. I have an open mind and I am curious about the world around me.

1 2 3 4 5

10. I consider multiple options before making any important decision.

1 2 3 4 5

11. I use frequent communication to build trust in those around me.

1 2 3 4 5

12. I study failures, my own and those of others, in order to fi nd hidden lessons.

1 2 3 4 5

Scoring:

Add the numbers circled above and write your score in the blank.

Interpretation:

48 and above = You have excellent strategic leadership skills. You are eff ective at engaging in the key strategic leadership skills of an- ticipating, challenging, interpreting, deciding, aligning, and learning.

25–47 = You have a moderate level of strategic leadership skills and could work toward increasing your skills in this area.

24 and below = You have room to make some substantial im- provements in your strategic leadership skills.

*Th is self-assessment was created based on information presented in Paul J. H. Schoemaker, Steve Krupp, and Samantha Howland. “Strategic Leadership: Th e Essential Skills.” Harvard Business Review 91, no. 1 (January 2013): 131–134.

SELF-TEST ANSWER KEYY 1. strategies

2. acquisition

3. d.

4. Organizational, divisional, and functional strategies are documented with business, tactical, and operational plans, respectively.

5. Under Herb Cork ’s management, we could defi ne the hotel as a reactor, which is a company that does not follow a consistent strategy, but just responds to changes in the en- vironment. Under Chris ’s management, the Dolphin Resort started as an analyzer, which is a company whose strate- gies seek to maintain existing products and services while

pursuing limited innovation but then successfully made the transition from analyzer to defender, which is a company whose strategies support stable growth and continual im- provement of existing products and services.

6. b; False. Cost leadership strategy is when an organization seeks competitive advantage by reducing production costs and therefore consumer price. Stability strategy is when an organization focuses on processes, products, and services that will sustain it over the long term.

7. Th e Five Forces Model outlines fi ve forces that determine what managers should expect when competing in an industry: power of suppliers, power of buyers, substitute

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252 Chapter nine Designing Strategies

products and services, new entrants, and rivalry. Managers can then assess the major threats that an organization can expect to encounter in an industry. By outlining and pro- actively responding to these threats, managers can defi ne more clearly their opportunity to succeed.

8. Supply-side economies of scale, demand-side benefi ts of scale, customer switching costs, capital requirements, incumbent advantages independent of size, unequal ac- cess to distribution channels, and restrictive government policy.

9. Th e BCG Matrix is a framework developed by the Boston Consulting Group for evaluating business units according to growth and market share. It allows managers to catego- rize quickly their company ’s position in the industry where it competes, enabling management to assess the validity of its strategies and where to invest resources.

10. SWOT (Strengths, Weaknesses, Opportunities, Th reats)

11. a; True.

12. b.

Notes

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253

Chapter 10 | Structuring Organizations

Chapter 11 | The Human Side of Management

Chapter 12 | Managing Team Performance

Organizing

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ManagementStory: Featuring Robin Richardson

Learning Objectives

10.1 | The Basics Designing Performance Cultures

10.1 | Explain how diff erentiation and integration defi ne performance cultures.

10.2 | Vertical Approach Vertical Model at Work Changing Organizational Structure

10.2 | Describe how managers vertically organize processes and teams to centralize decision making.

10.3 | Horizontal Approach Researching Organizational Structures

10.3 | Describe how managers horizontally organize processes and teams to distribute decision making throughout the organization.

10.4 | Adaptive Approach 10.4 | Show how managers combine vertical and horizontal approaches to organizational design in order to be more adaptive.

10.5 | Beyond the Organization: Free Agents and Virtual Teams

VOICES OF MANAGEMENT: Ken Lancaster

10.5 | Identify additional resources that contemporary managers use to increase organizational adaptability.

By the end of this chapter, you will be able to:

10.5 | Identify additional resources that contempora managers use to increase organizational adaptability.

ADDITIONAL RESOURCES Key Terms

In Review

Self-Test

Chapter Exe rcises

Self-Assess ment

Self-Test

Answer K ey

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256 Chapter ten Structuring Organizations

10.1 | THE BASICS

10.1 | Explain how diff erentiation and integration defi ne performance cultures.

“Every company has two organizational structures: The formal one is written on the charts; the other is the everyday relationship of the men and women in the organization.”

—Harold S. Geneen

Designing the perfect organizational structure has been the source of much discussion over the last 200 years. In Chapter 2, we learned about the early theorists of organizational structure, Frederick W. Taylor, Henri Fayol, and Max Weber, and their individual approaches to intro- ducing structural change within diff erent industries. Traditionally, industries were headed up by authoritarian fi gures that operated within a hierarchy , which is a vertically organized structure of power relationships where the top level holds the most power and resources. Figure  10-1 shows a range of hierarchies. Th ese managers issued commands without expect- ing anything but compliance from their employees. However, the work and studies carried out by the early theorists helped to give these “lowly” workers a voice, and for the fi rst time, the structure started to change from an autocratic environment to a more democratic one. 1 Although each theory has been widely contested ever since, most will agree that one point has become very clear; every single organization, no matter how big or small, needs some sort of organizational structure in place to be successful. Th is means having the right manager(s) in place to design a structure that is best suited to the organization and its cul- ture. Th erefore, it is essential that each company leader wholly embraces the purpose, val- ues, and vision of the organization and is representative of its cultural values and behaviors. With so many elements to consider, designing a structure for an organization can be one of the most challenging roles for managers, and there are disastrous consequences if they get it wrong. Poorly designed organizational structures can result in confusion among employees, slow decision making, and a lack of cohesiveness among diff erent departments, leading to reduced teamwork and stress and frustration for managers. So, why are organizational structures so important? A well-designed structure not only unites the diff erent units of a company but brings it in tune with its underlying principles, core purposes, goals, and objectives. Critical thinking helps managers achieve structural change within their organizations.

Designing Performance Cultures From the tiniest growth company to the largest fi nancial organization, there are many fac- tors to take into consideration when it comes to designing the appropriate structure. Envi- ronment, culture, strategy, technology, people, tasks, and processes must all be linked in a cohesive pattern to ensure that operations run smoothly. In Chapter 4, we looked at narratives, stories, artifacts, and rituals as symptoms, resi- dues, and tools that managers use to establish and perpetuate culture within the workplace.

Hierarchy A vertically organized structure of power relationships, where the top level holds the most power and resources.

10.1 | THE BASICS

10.1 | Explain how diff erentiation cultures.

“Every company has two organnizzatationa charts; the other is the everyday y rerelalations

Designing the perfect organizational structu the last 200 years. In Chapter 2, we learned ab Frederick W. Taylor, Henri Fayol, and Max W ducing structural change within diff erent i up by authoritarian fi gures that operated wi t t f l ti hi h th

Hierarchy A vertically organized structure of power relationships

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25710.1 | THE BASICS

As we learned, a good corporate culture can foster innovation and productivity and moti- vate employees to work as a team. But we can also argue that through the creation of an organizational structure, managers can also design a performance culture, consciously or unconsciously, depending on the intensity levels of diff erentiation , the process through which managers divide labor based on tasks and functions; and integration , the horizontal coordination between functions, departments, and organizational activities. 2 In this sense, the success of the organizational structure very much depends on the type of culture that has already been fostered by senior management. Furthermore, structures can be fl uid; as the business fl uctuates and develops over time, the culture is likely to change, which means that the structure will need to be modifi ed, or even revised altogether, to adapt to both the internal and external changes that are taking place. 3 But how does an organizational structure adapt to its environment? In order to be suc- cessful, organizations must strike a balance between diff erentiation and integration. Indeed, managers can create an organizational culture based on the intensity levels of how effi cient the structure is (diff erentiation), and how eff ective it is (integration). We could also argue that it is more important to diff erentiate by implementing certain structures or processes before initiating the integration process. Th e idea here is that once an organizational struc- ture is in place, the culture will be more easily determined, leading to a smoother integration of employees who are motivated to achieve the company ’s goals, vision, and mission. For example, say that you founded a small business selling novelty gift items. Initially, there are only a few people involved. As you all work together and swap ideas, there might seem little need to design a formal organizational structure; after all, everyone has been fully integrated into the strategy-planning, goal-setting, and decision-making processes ever since the company became operational. Th is sort of structure is called a horizontal or fl at organization, where there are few levels of hierarchy and everyone is directly involved in all corporate communications. 4 It could also be known as an organic organization , a highly adaptive structure defi ned by horizontal integration, distributed decision making, and employees with a high degree of generalization. 5

But what happens when the company starts to grow? You might need to take on more employees, deal with more consumer demands, and manage increased levels of inventory. It might become impossible to monitor every single employee and ensure that high standards are being met. As the founder of the organization, your span of control , or the number of employees that a person directly manages, 6 might become too much to handle; and you and the original partners might struggle to juggle so many balls in the air.

Differentiation The process through which managers divide labor based on tasks and functions.

Integration Horizontal coordination between functions, departments, and organizational activities.

Organic organization A highly adaptive structure defi ned by horizontal integration, distributed decision making, and employees with a high degree of generalization.

Span of control The optimum number of direct reports that a person can manage effectively.

Figure 10-1 Hierarchy Comes in Many States. Here are a few. . .   Organizations can have a range of hierarchical structures.

Fi 10 1

Horizontal equals One leader with many connected followers

Traditional positioning One overarching leader; more collaborative and seamless

One leader with split divisions connected

One leader with many non- connected followers

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258 Chapter ten Structuring Organizations

As the most senior manager and main founder, one of the major challenges facing you will be to design an organizational structure and workfl ow that takes into account the increase in employees, the range of activities and tasks, and the manner in which you del- egate responsibility and decision-making capabilities to others in the organization. In other words, the decisions that you make in designing the new structure will have a direct impact on the culture of the company. But what kind of structure should you choose? How will your partners react to such changes? How do you persuade your employees to fall in line with the new regime? You might begin to apply some diff erentiation techniques by dividing the company into subunits where each unit would be assigned a specifi c function and employees would perform diff erent tasks, and a manager or managers would be put in place to oversee the department. You also might focus a group or individual ’s activities based on strengths, apti- tudes, or skills, which is known as specialization . 7 As the methods of diff erentiation take hold, managers must consider the issues of integration. Although the company might now be split into diff erent units, they are still part of the larger organization and must be encouraged to work as a team across all the areas in the company, and not just within their own specifi c functions. In other words, a certain degree of coordination which is the synchronization of an organization ’s func- tions to ensure the effi cient use of resources in pursuit of goals and objectives, must take place to achieve the company ’s mission. For example, the marketing unit can work with the sales department to understand the client base; similarly, accounting can work with each of these departments to give them an idea of the budgeted amount that they have at their disposal. However, no transition is easy, and a number of issues can arise with this change in struc- ture. To help give clarity to the integration process, you may have implemented a level of standardization , a performance context where policies and procedures seek to create uni- form results; and formalization , the degree of which policies and procedures determine specifi c jobs and functions. 8 Despite these procedures, some employees may feel uneasy; the other partners may become resentful about the new approach to delegation , when a manager grants power and authority to another team member, 9 and perceive this as a loss of power; the new employees may not like being “pigeonholed” into specifi c units, even though they are encouraged to work with other teams; the original employees may be reluctant to integrate the new employees, and so on. In this chapter, we will look at the diff erent types of organizational structures, the role of managers in designing and adapting them, the challenges arising from implementing diff er- entiation and integration processes; and the factors that determine their ability to change from one structure to another.

Let ’s begin by looking at a Metropolitan Police Department (MPD) case study based on the real-life experiences of Washington MPD chief of police Cathy L. Lanier. Lanier ’s eff orts to revolutionize the police force are a powerful illustration of the real challenges of designing and changing organizational structures.

Cathy L. Lanier: Chief of Police, Metropolitan Police Department, Washing- ton, D.C.10 Cathy L. Lanier has spent her entire law enforcement career with the MPD. From the beginning of her career in 1990, Lanier has been in uniformed patrol, where she served as commander of the Fourth District, one of the largest and most diverse residential patrol districts in the city. She also served as the commanding offi cer of the department ’s Major Narcotics Branch and Vehicular Homicide Units. Chief Lanier was named commander of the Special Operations Division (SOD), where, for four years, she managed the Emergency Response Team, Aviation and Harbor Units, Horse Mounted and Canine Units, Special Events/Dignitary Protection Branch, and Civil Disturbance Units. During her tenure as SOD commander, she established the agency ’s fi rst Homeland Security/Counter-Terrorism Branch and created an agencywide chemical, bio- logical, and radiological response unit known as the Special Th reat Action Team. In 2006, the MPD ’s Offi ce of Homeland Security and Counter-Terrorism (OHSCT) was created, and Chief Lanier was tapped to be its fi rst commanding offi cer. A highly respected professional in the areas of homeland security and community policing, she took the lead

Specialization Focusing a group or individual’s activities based on strengths, aptitudes, or skills.

Coordination The synchronization of an organization’s functions to ensure effi cient use of resources in pursuit of goals and objectives.

Standardization A performance context where policies and procedures seek to create uniform results.

Formalization The degree of which policies and procedures determine specifi c jobs and functions.

Delegation When a manager grants power and authority to another team member.

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25910.2 | VERTICAL APPROACH

role in developing and implementing coordinated coun- terterrorism strategies for all units within the MPD and launched Operation TIPP (Terrorist Incident Prevention Program). After assuming the leadership of the MPD on January 2, 2007, Lanier was unanimously confi rmed as the chief of police by the Council of the District of Columbia on April 3, 2007. Chief Lanier is a graduate of the National Academy of the Federal Bureau of Investigation (FBI) and the federal Drug Enforcement Administration ’s Drug Unit Command- ers Academy. She holds bachelor ’s and master ’s degrees in management from Johns Hopkins University, and a master ’s degree in national security studies from the Naval Postgrad- uate School in Monterey, California. She is certifi ed at the technician level in hazardous materials operations. In the following case narrative, we will follow Robin Richardson (a fi ctional character inspired by Cathy L. Lanier) and the challenges that she faces on her quest to transform the MPD into an effi cient, technologically savvy, and com- passionate organization.

10.2 | VERTICAL APPROACH

10.2 | Describe how managers vertically organize processes and teams to centralize decision making.

When Robin Richardson fi rst joined the MPD, the chief of police was Troy Kimbell. Kimbell came from a long line of police offi cers: his grandfather, father, and brother were offi cers. In 1984, the whole family celebrated as Troy was appointed the MPD ’s chief of police in Washington, D.C. Th at day, Troy remembered his late father ’s advice: “Always protect the fellas in blue—without them, who ’s going to protect the community?” For the fi rst 10 years of Chief Kimbell ’s appointment, this advice defi ned his management style and provided him with several very loyal lieutenants who worked directly for him. Each offi cer was schooled in the history of the police force and was never left in any doubt about how much of an honor it was to be a part of one of the most storied institutions in the world. Th e chief and his team wore their badges with pride and regarded them as symbols of ethics and integrity. Kimbell was an advocate of the vertical organizational structure , 11 characterized by hierarchical authority and communication channels and had been in place within the MPD for over a century. Like many law enforcement agencies all over the world, the MPD was a centralized organization , a design structure that relies on senior-level managers to collect information broadly 12 in order to make decisions on behalf of the entire company. Within this MPD vertical structure, Kimbell was a commander who had sole authority , the implicit and explicit power that a manager or employee has to fulfi ll an organizational function or role, enabling that person to issue orders to subordinates and expect them to be carried out as quickly as possible. After all, most of the senior staff were ex-military men and ex- marines, and like Kimbell, well into their fi fties and sixties. Th ey were from a generation that expected to be given direct orders from their chief. Th e structure of the MPD is illustrated in Figure 10-2 . Kimbell was more than satisfi ed with his chain of command , a predefi ned structural order of authority that determines how decisions are made and communicated. 13 Each senior offi cer was appointed as manager of a team, and each team worked in isolation from the other departments. Each department was split off into separate functions, such as homicide, narcotics, and intelligence units. It was up to the senior managers to run their own teams, issue orders to their staff , solve any problems that arose, and keep the opera- tions running as smoothly as possible. Although he was the sole authority and decision

Vertical organizational structure A structure,characterized by hierarchical authority and communication channels.

Centralized organization A design structure that relies on senior-level managers to collect information broadly, in order to make decisions on behalf of the entire company.

Authority The implicit and explicit power that a manager or employee has to fulfi ll an organizational function or role.

Chain of command A predefi ned structural order of authority that determines how decisions are made and communicated.

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maker, everyone knew better than to approach the chief of police with any minor problems; he left those for the senior managers to resolve. Troy Kimbell could then focus his time on what he did best: giving speeches and making appearances at high-profi le events and press conferences to promote the police force and secure its position in the political circles of Washington, D.C. But in the late 1990s, things began to change. After fi ve years of tight budgets, the department began to hire more offi cers. By 1999, 200 new recruits had come on board.

Comprised mostly of younger offi cers, this new genera- tion had an attitude that did not make sense to Chief Kimbell. Th ey didn ’t seem to care about maintaining the status quo, taking orders without question, or following “how things are done around here.” In fact, one new offi - cer, Alfonso Diaz, had the audacity to try to schedule a meeting with the chief of police to pass on his ideas about how things could be improved. Kimbell couldn ’t fathom how the offi cer had the nerve to bypass his own manager and approach him directly. He never would have imag- ined subverting the chain of command when he had just joined the force.

It wasn ’t just Diaz that tried this approach. Soon Kimbell ’s secretary was inundated with requests from these new offi cers to set up a meeting with the chief. Eventually, this became such a major issue that Kimbell asked his lieutenants to establish a mentorship program for the new recruits to help acclimate this new generation

Figure 10-2 Vertical Organizational Model, MPD   Fig re 10 2

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Lieutenant "A" Team Lieutenant "B" Team Lieutenant "C" Team Lieutenant "D " Team

Sergeant Sergeant Sergeant Sergeant

Dispatcher Dispatcher Dispatcher Dispatcher

A/B Rotation C/D Rotation

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Records Clerk Training Officer

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26110.2 | VERTICAL APPROACH

and teach them a thing or two about the traditional vertical model and the strict chain of command that had existed since the 1800s. Th ese young offi cers also needed to be schooled in good corporate governance , which is a compendium of policies intended to ensure transparency and fulfi llment of duties to stakeholders. 14 Examples of stakeholders for the MPD include the mayor, city council, district attorney ’s offi ce, and some citizens of the community. Kimbell gathered his senior team to help choose somebody to lead the program and act as a broker , a trusted intermediary that facilitates mutually agreed-upon outcomes for two or more parties. After months of discussion, Kimbell ’s senior team recommended Robin Richardson, a fi eld commander four layers deep in the organizational chart , a visual document that communicates how a company is organized, 15 to lead this new mentorship program. Among themselves, the senior team would joke that what these kids needed was someone to pat them on the heads and congratulate them on their creativity while simultaneously putting an end to their newfangled and unrealistic ideas for change. At fi rst, Chief Kimbell questioned the selection of Robin Richardson, feeling that his senior team was not taking his recommendation for this program seriously. She was, after all, a woman working in a predominantly male environment, and he wasn ’t sure that the senior team would treat her or the program with enough respect. Although he hoped that the mentorship program would put an end to the continuous breach of the chain of com- mand, he was also curious to fi nd out why the new recruits were so desperate to talk to him. In the end, he fi nally conceded to the appointment of Field Commander Richardson, but he insisted that Richardson report to him directly and update him weekly regarding the progress of the initiative; he wanted to make sure that the senior team was supporting her enough to drive the program forward. Th ree weeks of meetings later, Chief Kimbell walked into his senior leadership meet- ing and pronounced, “Team, you better watch out—she is going to be your boss one day!” Over the next few years, Chief Kimbell was so impressed by Richardson ’s effi ciency and ability to handle the new recruits that he personally mentored her and encouraged her to continue her education, including sponsoring her to complete her graduate degree in management. In her position, she continued to share news from the fi eld (both good and bad) and make a series of recommendations on how to improve communications across the department. Often, Chief Kimbell would encourage Richardson to write up any new ideas in a report for senior leadership approval, out of respect for the chain of command. Resenting the implication that the “teacher ’s pet” was being pushed on them, the senior leadership team would always listen politely and simply never follow up on any of the proposals. In response to recommendations that had taken months for Richardson to prepare, inevitably a one- paragraph memo would be circulated, suggesting that “now just isn ’t the right time, but thank you very much for your interesting thoughts.”

Vertical Model at Work On September 11, 2001, when the Pentagon was attacked by terrorists, the police de- partment found themselves in the middle of a national security situation. During the crisis, and through the days and weeks that followed, Chief Kimbell ’s vertical organiza- tion stood strong. Th e police made sure that members of the community did not enter any dangerous areas, controlled traffi c so emer- gency services could get through quickly, and helped with the evacuation process. Kim- bell ’s orders were followed to the letter—and the department ’s reaction was an example of the effi ciency of the vertical organizational structure and the eff ectiveness of the chain of command. In the media, Kimbell was a hero;

Corporate governance A compendium of policies intended to ensure transparency and fulfi llment of duties to stakeholders.

Broker A trusted intermediary that facilitates mutually agreed-upon outcomes for two or more parties.

Organizational chart A visual document that communicates how a company is organized.

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his ability to remain calm and in control helped stabilize the emotions of the police depart- ment and community. Th e FBI and newly minted U.S. Department of Homeland Security, impressed by Kimbell ’s performance during the 9/11 Pentagon attacks, asked him to work with them to integrate functions and communications in preparation for possible future terrorist incidents. Kimbell liked the idea of working with the FBI, realizing it could lead to the setting up a type of network organization , a group of independent companies that organize themselves to appear as a larger entity. 16 When Chief Kimbell brought these recommendations to his senior leadership team, he was met with extraordinary resistance—“Hey, that ’s the Fed ’s job. Let them clean up their own mess.” With dissension in the ranks, it appeared that Chief Kimbell would need to rely on Commander Richardson to help integrate the department. Some members of the senior team were not pleased when Chief Kimbell announced that Commander Richardson would lead a task force to research and make recommendations for integrating the department with external agencies in order to increase national security. But Kimbell ’s days as chief of police were coming to an end. Over the previous decade, Washington, D.C., had slowly evolved into one of the most dangerous cities in the country, with the dubious honor of having the most murders per capita. Th is had attracted a huge amount of attention to the MPD and its leader. Th e mayoral election was coming up, and since the chief of police is an appointed position by the mayor, Troy Kimbell knew that he would most likely be replaced. Mayor Neil Strong thanked Chief Kimbell for his service and affi rmed that his replace- ment would be announced within one month. Kimbell was disappointed but not surprised; the signs had all been there. As the mayor went to the door, Kimbell, who was trying not to show how insulted he was that Strong was not asking him who he thought his successor should be, asked, “Who ’s your pick to fi ll my position?” Strong responded, “I don ’t know. I am going to work with your assistant and meet with 50 or so offi cers over next couple of weeks. I am sure they will tell me who should be their leader.”

Weeks later, the phone rang in her offi ce on a Friday afternoon, and Robin wondered who could be calling just before she left for the night. “Commander Richardson, this is Mayor Strong. Do you have a moment?” Robin ’s heart immediately sank, thinking that a crisis must be underway. “Yes, sir. How can I be of assistance?” Robin could hardly believe it when Mayor Strong told her she was one of the candidates to replace Kimbell as chief of police. But fi rst, he told her, she would need to go through a rigorous interviewing process to prove her ability to do the job. Th ree weeks of interviews followed before she heard the news. Th e fi rst call that she made was to her brother, a fellow offi cer and her confi dant—“Hi, Bobby—this is Robin. You won ’t believe this. Mayor Strong just called to off er me the chief of police position.” Bobby couldn ’t contain his excitement. “My little sister! Th e chief of police!” Robin replied, “No. I turned him down.” “You did what?” Bobby couldn ’t believe what he was hearing. Robin, trying to calm him down, said, “Well, he told me to think about it over the weekend, but swore me to confi dential- ity, with the exception of family members. I am just not ready. Bobby, I am not even on the senior team—those guys don ’t take me seriously. Being their boss will be pure hell.” After a moment, Bobby said, “Well, it defi nitely doesn ’t sound like my sister, letting those guys scare you away.” Robin had just returned from her night shift when the phone rang. She knew who it was, and she knew what she had to do. Bobby ’s words made her think twice about rejecting the off er. Perhaps it was time to face up to the challenge and introduce some changes that the MPD badly needed. And 30 days later, the MPD swore in the city ’s fi rst woman chief of police: Robin Richardson.

Changing Organizational Structure Respecting the chain of command, Robin had refrained from communicating with the department ’s senior leaders prior to her appointment. Th ree hours after the swearing-in cer- emony, Robin gathered with her senior team in the main boardroom. Walter “Mac” McNeil

Network organization A group of independent companies that organize themselves to appear as a larger entity.

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was the fi rst to speak. “Mayor Strong certainly didn ’t ask this group who should be the next chief. Clearly, this is just his way of showing the community that he is capable of making big changes. We know that things are going to change around here, and the writing is on the wall—do you want us to resign, or what?” Aware that all eyes were on her, Robin took a deep breath. “If that is an ultimatum, I guess the answer is “Or what. ’ Are things going to change at MPD? Yes. Are you all invited to be a part of that growth and solution? Yes. Are you expected to agree with me 100 percent of the time? No. Are you expected to respect this offi ce? Yes. If you don ’t respect the community, our police offi cers, or me, should you expect to be here much longer? No.” Robin raised her eyebrows and asked, “Are there any more questions?” After 30 seconds or so of silence, she continued, “All right—let ’s get to work.” Of the 12 senior team members in the room that day, 9 were still in their positions almost six months later. Of those managers, Robin believed around 7 of them were 100 per- cent committed to change, with the remaining people just staying around long enough to say, “I told you so!” So what did Robin do to cause almost half of the senior team to disagree with her? Th at fi rst day in the boardroom as chief, Robin had shown the senior team a 10-foot-long banner. Written on it were three words—Communication, Compassion, Computers. Over the course of her career to date, Robin noticed that the communication was poor or nonex- istent between the MPD staff and the community; that compassion was severely lacking for victims of crime; and that the MPD had an old-fashioned approach to technology compared to other organizations. It was time for the MPD to make signifi cant changes and catch up with the times. “We are facing one of the worst crime and murder rates in this country. Th e commu- nity has lost faith and trust in the MPD, as we are not doing enough to protect them. We don ’t communicate with the community, let alone each other; we show little compassion to victims or their family members when a crime has taken place; and our approach to technology is backward at best,” she told the MPD offi cers and staff at their fi rst offi cial meeting. Robin paused, trying to ignore the angry stares and folded arms in the room. Th ere was not one senior member who seemed to like what she was saying. Still, she knew that she had to drive her point home and leave them with no doubt as to the changes she intended to implement, and this was the time to do it. She cleared her throat. “Th e most important asset we have available to us is the community. Yet, we don ’t talk to them enough. We don ’t show them we care. And one of the most effi cient ways we can do that is with technology. If we have isolated internal systems that are incapable of communicating with each other, we are going to continue to be segregated from the community, which means we will be unable to be a part of the national security solution.” Robin held her iPhone in the air and declared, “From this moment on, every single person in this department and every single person in the community can email me directly and expect a response the same day. Community members will be notifi ed of this new initiative through our virtual noticeboard, and at community meetings, where I will be giving talks regarding the upcoming changes within the MPD. Within the MPD, I have set up an anonymous virtual suggestion box, where every single offi cer can email me ideas of how we can improve things around here.” Mac was the fi rst to speak. “All of this looks good on paper, but we already have leaders in the fi eld, and you are undermining their authority by encouraging every staff and community member to get involved. You are going to have nothing but chaos! Soldiers need sergeants—if you are not willing to command and control, you will put lives in dan- ger.” Several other heads in the room nodded in agreement. Robin had expected this response, and knew how impassioned the senior offi cers were about the Unity-of- Command principle , which is a philosophy that each employee reports to and is accountable to only one man- ager. 17 Still, she wanted to nip the argument in the bud as

Unity-of-Command principle A philosophy that each employee reports to and is accountable to only one manager.

10.2 | VERTICAL APPROACH

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soon as possible. “Mac, we will need to agree to disagree on this. I believe we need to evolve into an organization of ‘communication and collaboration, ’ not ‘command and control ’—we need to get out into the community.” Before the meeting came to an end, three senior offi cers had walked out, and by the next morning, they had quit the MPD.

10.3 | HORIZONTAL APPROACH

10.3 | Describe how managers horizontally organize processes and teams to distribute decision making throughout the organization.

Chief Richardson could not have anticipated the fl oodgate of communication and change that would incur over the next several months. She thought it would take much longer to engage the community ’s interest enough to encourage them to communicate directly with the MPD. Discovering that it was not realistic for her to be the sole responder to every single email from the community, she equipped all cops with an iPhone and instructions that they were to respond to community questions and requests in their district within 24 hours. Over 10,000 community members had joined a mailing list introduced by Robin, and it was prov- ing to be extraordinarily successful. Th e members would use the mailing list not only to air their grievances, but also to send information to the MPD relating to crimes in the commu- nity. Something profound was happening: when the police department was willing to listen, the community was more willing to talk.

To accommodate for this dramatic shift in performance culture, Robin decided to drop her next bombshell—the decision to change the traditional vertical organizational structure to a less hierarchical, more horizontal one. After all, the police were forming relationships with the community members, so why couldn ’t they form relationships with each other and traverse departmental boundaries when it came to solving crimes? With the existing struc- ture, this simply wasn ’t possible. Th e chain of command was too strong. Th e police department had always been a centralized organization, and Robin felt it was time to create a more decentralized structure and rely on all employees to collect and communicate information to make decisions and recommend changes. 18 Robin set up a meeting with the senior managers for the following week; but fi rst, she needed to prepare for this next big challenge.

Researching Organizational Structures To frame her argument, Robin headed to the library and read every single management textbook she could get her hands on. She then went online and studied the eff ects of moving from one structure to another. Next, she called some of her contacts in other MPDs around the country who had successfully restructured their organizations and asked them for feed- back. Finally, she contacted Troy Kimbell, the former chief of police and her mentor; she had made a point of staying in touch with him after he left the MPD and valued his advice. After she gathered all the information, she sat back and thought for a minute. Instinc- tively, she knew that suggesting a redesign in structure would mean a major upheaval for the MPD culture, and she wanted to have her facts straight. Th e way she saw it, the MPD had become strictly divided into individual departments that refused to have anything to do with each other. While she was earning her management degree, she had learned all about Systems Th eory and wholeheartedly agreed with the concept of seeing an organization as a system composed of many diff erent parts, all of which depend on each other. Now, all she had to do was persuade the senior team to look at these interconnected systems as a whole in order to understand the importance of each part and how all the departments could con- tribute to the organization if they cooperated with one another. In order to reengineer the MPD into a horizontal structure, Robin felt that by following a process of departmentalization , a design structure that groups together processes and jobs based on functions, products, or customers, she could get the units talking to each other again. Robin learned that there were three main approaches to departmentalization: Functional, divisional, and matrix. 19

Decentralized structure A design structure that relies on all employees to collect and communicate information, in order to make decisions and recommend changes.

Departmentalization A design structure that groups together processes and jobs based on functions, products, or customers.

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26510.3 | HORIZONTAL APPROACH

A functional organization is a hierarchical structure in which employees are managed through clear levels of authority. Although Robin agreed with some of the elements of this design, she felt that the departments were already too concerned with their own functions and had lost sight of the overall mission of the MPD. Rather than the existing vertical hierar- chy of authority, she wanted a structure where the employees were involved in the decision- making process and given a certain level of autonomy , the level of individual discretion that an employee has to make decisions. Next, she took a look at the divisional organization , a design structure that groups pro- cesses and jobs based on clearly defi ned market segments or geography. For the MPD, this meant that diff erent subunits could be set up under each division. Decision making could take place at the divisional level by managers, and diff erences of opinion would be resolved without depending on the chief. Robin felt that this design was leading more toward what she visualized for the MPD: a centralized, horizontal organization. Finally, she turned her attention to the matrix organization , a design structure that facilitates horizontal integration and collaboration. A matrix model combines elements of both the functional and the divisional organizations, has dual lines of authority, and is designed to encourage the sharing of information. Robin felt that by using this model, the reporting line would shift dramatically: each function and division would be assigned a manager. When a crime took place, there would be more collaboration between the dif- ferent departments, as they would be working more closely together. Th is is the type of organization that she thought would be best for the MPD. Robin was excited to present her thoughts to the senior team. Robin scheduled a meeting with the team to discuss the changes in the chain of com- mand. Aware that winning them over on this latest change was going to be her biggest chal- lenge to date, she made sure she began her presentation strongly and confi dently. “Over the past few months, we have seen many changes in the MPD. As we know, police offi cer community approval rates are at an all-time high, and crime and murder rates are beginning to fall. Th e community is starting to trust the MPD more, which has been pivotal in solving and reducing the amount of crime in our area. In light of this, I think it is time to formally redesign our structure from a vertical organizational structure to a more horizon- tal, fl at one. Personally, I do not believe that a senior title is enough to encourage teams to work together. We need to earn the trust of our staff so we can share ideas and implement new initiatives.” Robin unveiled a chart shown in Figure 10-3 that outlined the new structure. She paused for the fallout, and was not disappointed. “Hold on a second,” yelled Mac. ‘Yes, statistics prove that crime is on the decline, and the initiatives we have put in place are working, but why mess with the structure? After all, it has been the traditional police model for over 200 years. If it ain ’t broke, why fi x it?” Robin replied, “Th e new chart is not designed to take away power; it is merely a way of encouraging all the teams to work more closely together rather than in isolation. I don ’t believe there is a single person in this department that can work on their own in any func- tion. And I truly believe this is the best structure for the MPD to move us into the future.” She explained to the team the results of the research that she had done and why this structure would benefi t the MPD and the wider community. Yet Mac and some of the others weren ’t convinced about the new model. “What ’s the sense of having employees report to two bosses? Surely, that ’s a case of ‘too many cooks in the kitchen ’; you will have a mutiny on your hands,” he warned. Several other managers joined in, agreeing with Mac, and although Robin repeated her reasons for the structure change, she knew that it would take longer for them to accept the idea. As the meeting drew to a close, she decided to end things on a positive and confi dent note: “Extensive research shows that this change is the best thing we can do to ensure the success of the department. Let ’s give it a chance and see how it works out over time. In the meantime, if you have any other questions, I will be more than happy to discuss them with you.” As the team fi led out of the room, she couldn ’t help but note the number of dissatisfi ed faces; she knew that words weren ’t going to be enough. She needed to put her plan into action to prove to the disgruntled managers that a structural change was the right decision for the MPD.

Functional organization A hierarchal structure where employees are managed through clear levels of authority.

Autonomy The level of individual discretion that an employee has to make decisions.

Divisional organization A design structure that groups processes and jobs based on clearly defi ned market segments or geography.

Matrix organization A design structure that facilitates horizontal integration and collaboration.

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266 Chapter ten Structuring Organizations

Figure 10-3 Metropolitan Police Department Organizational Structure The new organizational structure for the Metropolitan Police Department.

Fi 10 3

Office of Communications

Executive Protection Unit

Agency Chief Fiscal Officer

Office of Community Services

Professional Development

Bureau

Corporate Support Bureau

Strategic Services Bureau

Investigative Services Bureau

Internal Affairs Bureau

Facilities Management

Division

Strategic Change Division

Criminal Investigation

Division

Internal Affairs Division

General Support Services Division

Research and Analytical

Services Division

Narcotics and Special

Investigation Division

MOA Compliance Monitoring Division

Police Business Services Division

Policy and Standards

Division

Forensic Science Services Division

EEOC Division

Evidence Control Division

Reserve Corps Division

Youth Investigations

Division

Court Liaison Division

Chief of Police

Office of Risk Management

Office of Resource Accountability

Patrol Support Division

Office of the Chief Technology Officer

Assistant Chief Executive Officer

Office of the General Counsel

Human Resource Management

Division

Metro Police Academy

Homeland Security

Bureau

Special Operations Division

Tactical Information

Division

Intelligence Fusion Division

Patrol Services and School

Security Bureau

First District

Second District

Third District

Fourth District

Fifth District

Sixth District

Seventh District

Community Services and Special

Projects Division

Special Liaison Division

Central Cellblock Division

School Security Division

Consolidated Forensic

Laboratory Division

Firearms and Tool Mark

Examination Division

Metropolitan Police Department Organizational Structure

(New Structure)

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26710.4 | ADAPTIVE APPROACH

10.4 | ADAPTIVE APPROACH

10.4 | Show how managers combine vertical and horizontal approaches to organizational design in order to be more adaptive.

It was February 2012, and most of the Occupy Wall Street protests related to the indiscretions on Wall Street and the widening gap between the “haves” and “have nots” had been confi ned to New York City. One Sunday morning, however, Chief Richardson learned that rallies to “Take Back Our Country” were being planned for Washington, D.C. 20 By mid-afternoon, the department ’s listserv was jammed with thousands of concerned emails. Washington, D.C. resi- dents were worried about the impact of the impending fl ood of protestors. Following the new departmental protocol and the formally announced matrix structure, every offi cer was told by his or her divisional and functional manager to respond to every email. Confi dent that the senior team had everything under control, Robin did not follow up on the number of cops on the street. Because of the new initiative to put more offi cers on the street, she was sure the community would be well protected against any kind of threat. Th en it happened. Within a matter of hours of the announcement to “Take Back our Country,” thousands of angry protestors poured into Washington, D.C., from all over the country. 21 Tents popped up . . . bonfi res began to blaze  .  .  .  and the crowd started to protest—calmly at fi rst, but then defi antly. In response to the protesters, many members of the community fl ooded into the city to hold a counterprotest. When one frustrated community member yelled: “Too bad those tents don ’t have showers! Maybe you could take a bath and get a job,” all hell broke loose. Th at comment sparked a riot that took the MPD, with military assistance, over six hours to contain. In retrospect, there had not been enough offi cers on the street to prevent this kind of crisis from occurring. Th at night, reporters began to ask Chief Richardson hard questions: “Where were all of the police offi cers?” Why did it take so long to restore order?” Why did you need to call in the military for help?” And the most diffi cult question of all: “Are we safe?” As chief of police, Robin knew she had to take full accountability , an expectation that team members are responsible for their activities and must report outcomes transparently, for the incident. With her head held high, she responded, “Last night was my responsibility, and over the next several days, we will be assessing what mistakes were made and how to ensure that we won ’t repeat them.” As she walked away from the press conference, she knew she needed to make sure that an incident like that never happened again. Th e fi rst phone call she made was to Troy Kimbell; she asked him, “Chief—where did I go wrong?” He replied, “Sometimes the new way of doing things seems so good that it ’s easy to forget the old way worked, too. Chief Richardson, you are in a unique position to be able to do both, almost simultaneously.” Robin understood Kimbell ’s advice. She had worked so hard to change from the vertical model that she had forgotten that it has its place, especially in crisis situations. As chief of police, she should have used her authority to issue direct orders to her offi cers, quickly get them equipped with riot gear, and send as many of them as possible to the scene of the protest. Th at would have defl ected aggravation between the two camps; she was sure of it. Instead, she had focused on the technology initiatives and had relied too heavily on the other managers to take control, with disastrous consequences. Furthermore, she hadn ’t yet fi lled the positions following the resignation of the three senior managers, which left some departments short-staff ed. She had taken her eye off the ball. She realized that she needed a more adaptive approach to the organizational structure that she implemented, where she could use the best aspects of the vertical and the horizon- tal models to deal with specifi c situations. To achieve this, she needed to hire more staff ,

Accountability An expectation that team members are responsible for their activities and must report outcomes transparently.

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268 Chapter ten Structuring Organizations

reinforce elements of the vertical model, and get buy-in from the senior team. It all sounded pretty daunting, and she knew that she had to prepare herself for the next challenge in the MPD: recruiting and building teams of excellence.

10.5 | BEYOND THE ORGANIZATION: FREE AGENTS AND VIRTUAL TEAMS

10.5 | Identify additional resources that contemporary managers use to increase organizational adaptability.

Free agents are independent workers that supply organizations with talent for projects or time-bound objectives. Free agents and freelancers are not the only ways that companies are saving money while providing fl exibility to their workers. Many companies are employ- ing other types of fl exible workforce arrangements, such as telecommuting and virtual teams. Telecommuting refers to a work arrangement in which an employee is given fl ex- ibility in terms of work location and often hours as well. Corporate leaders often identify telecommuting as a primary tool for attracting and retaining the best and the brightest

Free agents Independent workers that supply organizations with talent for projects or time-bound objectives.

Telecommuting A work arrangement in which an employee is given fl exibility in terms of work location, and often hours as well.

Voices ofManagement Ken Lancaster Owner, Lancaster Advertising

Lancaster Advertising, of Lewisville, Texas, has no full-time employees and no offi ces in which to operate. Sound strange? The company is actually part of a growing trend of staffi ng positions with “free agents” rather than with tradi- tional full-time workers. 22 The company used to have 15 full- time employees and two offi ce buildings, but today, owner Ken Lancaster contracts with freelancers worldwide and works from his home, boat, or at a coffee shop. “You don ’t have to worry about someone coming late to work, or if they can ’t stand you, or about all the payroll taxes and health insurance,” says Lancaster. 23 Bryce Davis, one of Lancaster ’s web designers, contracts with anywhere from 5 to 10 clients at a time and rel- ishes his free agent status: “I enjoy the change of pace. It gives you an opportunity to be creative. . .without stagnating.” 24 More and more companies are moving toward fl exible workforce arrangements based on engaging temporary workers, independent contractors, and freelancers in an effort to cut costs, respond more effi ciently to fl uctuating demands, or to engage workers with specialized skills for short-term projects. “The basic bargain at the center of work used to be, employees gave loyalty and the organization gave security—that bargain is kaput,” says Daniel Pink, the author of Free Agent Nation: The Future of Working for Yourself. 25 Although the number of contingent workers has risen sharply in recent years as workers have sought increased fl exibility and job security, traditional employees still comprise around 90 percent of the workforce. 26 Despite the freedom that supposedly comes with being a free agent, Stanford University professor Jeffrey Pfeffer

points out that some freelancers may feel less freedom due to the opportunity cost associated with time not worked. 27

As Pfeffer explains, people who decide to take contract work assignments to have more fl exibility often become obsessed with the “time is money” concept and have trouble taking time away from their jobs because they think about the income opportunities that they are passing up in terms of “billable hours.” A possible solution? Pfeffer observes that many individual contractors are asking to be paid by the job rather than by the hour to avoid this situation. 28

Company Profi le

Name: Lancaster Advertising

Owner: Ken Lancaster

Company Story: On Lancaster Advertising ’s website, they say, “You might say we have the idea of delivering big ideas for small (or medium) budgets built into our DNA. Most of the hundreds of clients we have served since then have been entrepreneur-lead organiza- tions with big ideas and usually less capital than their competition.”

Fun Fact: One of Lancaster Advertising ’s fi rst clients was a pizza parlor that sold all-you-can-eat pizza for $2.99.

Critical Thinking in the Classroom

How do you perceive Ken Lancaster ’s adoption of fl exible workforce arrangements? What would you envisage to be the benefi ts and pitfalls of this strategy? ■

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26910.5 | BEYOND THE ORGANIZATION: FREE AGENTS AND VIRTUAL TEAMS

employees; indeed, 82 of Fortune ’s “100 Best Companies to Work For” off er some form of telecommuting to their employees. 29 For example, nearly 20 percent of Delta Air Line ’s res- ervation agents now work from home full-time. 30 Delta spends approximately $2,500 to purchase each agent a computer as well as software licenses, but the employees pay for their own phone line. At-home Delta agents are paid less than their call-center counter- parts, but they save time and gasoline by not commuting to work, and they enjoy the con- venience of working from home. 31 As fl exible work options involving free agents and telecommuting continue to grow, the need to coordinate the eff orts of these physically dispersed workers has led to a new type of organizational structure, the virtual team. A virtual team refers to a group of employees who work across barriers consisting of time, distance, and organizational boundaries, while being linked together by information and communication technologies. Experts suggest that companies with virtual teams should provide space within the information technology systems for those teams to operate. Th is space can be used for sharing information about projects, but it should also have a social network component that can allow team members to share information about their personal lives, such as family news. As University of Central Florida professor Eduardo Salas notes, “Within an offi ce setting, co-workers swap stories, talk about their families and share vacation photos. It ’s being part of the organization and feeling connect with the people you work with. With virtual teams, employers need to pro- vide a way for team members to interact and encourage them to build that sense of com- munity and friendship.” 32 As technologies continue to evolve, organizations will likely fi nd new and even more eff ective ways to reap the benefi ts of fl exible work arrangements such as telecommuting and virtual teams. Whether employees work as free agents, in virtual teams, or in the offi ce, managers need to ensure that they hire the right people for the right job. In the next chapter, we will follow Robin as she seeks to identify and recruit new talent for the MPD.

Virtual team A group of employees who work across barriers consisting of time, distance, and organizational boundaries, while being linked together by information and communication technologies.

CaseSnapshot Chapter 10 Case: Structuring Organizations:

W.L. Gore & Associates can be found on pg. 472

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270 Chapter Ten Structuring Organizations

ADDITIONAL RESOURCES

KEY TERMSS Accountability An expectation that team members are respon- sible for their activities and must report outcomes transparently. (p. 267)

Authority The implicit and explicit power that a manager or employee has to fulfi ll an organizational function or role. (p. 259)

Autonomy The level of individual discretion that an employee has to make decisions. (p. 265)

Broker A trusted intermediary that facilitates mutually agreed- upon outcomes for two or more parties. (p. 261)

Centralized organization A design structure that relies on senior-level managers to collect information broadly, in order to make decisions on behalf of the entire company. (p. 259)

Chain of command A predefi ned structural order of authority that determines how decisions are made and communicated. (p. 259)

Coordination The synchronization of an organization’s functions to ensure effi cient use of resources in pursuit of goals and objec- tives. (p. 258)

Corporate governance A compendium of policies intended to ensure transparency and fulfi llment of duties to stakeholders. (p. 261)

Decentralized structure A design structure that relies on all employees to collect and communicate information, in order to make decisions and recommend changes. (p. 264)

Delegation When a manager grants power and authority to another team member. (p. 258)

Departmentalization A design structure that groups together processes and jobs based on functions, products, or customers. (p. 264)

Differentiation The process through which managers divide labor based on tasks and functions. (p. 257)

Divisional organization A design structure that groups pro- cesses and jobs based on clearly defi ned market segments or geography. (p. 265)

Formalization The degree of which policies and procedures determine specifi c jobs and functions. (p. 258)

Free agents Independent workers that supply organizations with talent for projects or time-bound objectives. (p. 268)

Functional organization A hierarchal structure where employ- ees are managed through clear levels of authority. (p. 265)

Hierarchy A vertically organized structure of power relation- ships, where the top level holds the most power and resources. (p. 256)

Integration Horizontal coordination between functions, depart- ments, and organizational activities. (p. 257)

Matrix organization A design structure that facilitates horizon- tal integration and collaboration. (p. 265)

Network organization A group of independent companies that organize themselves to appear as a larger entity. (p. 262)

Organizational chart A visual document that communicates how a company is organized. (p. 261)

Organic organization A highly adaptive structure defi ned by horizontal integration, distributed decision making, and employ- ees with a high degree of generalization. (p. 257)

Span of control The optimum number of direct reports that a person can manage effectively. (p. 257)

Specialization Focusing a group or individual’s activities based on strengths, aptitudes, or skills. (p. 258)

Standardization A performance context where policies and pro- cedures seek to create uniform results. (p. 258)

Telecommuting A work arrangement in which an employee is given fl exibility in terms of work location, and often hours as well. (p. 268)

Unity-of-Command principle A philosophy that each employee reports to and is accountable to only one manager. (p. 263)

Vertical organizational structure A structure,characterized by hierarchical authority and communication channels. (p. 259)

Virtual team A group of employees who work across barriers consisting of time, distance, and organizational boundaries, while being linked together by information and communication technologies. (p. 269)

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271Additional Resources

IN REVIEWW 10.1 | Explain how diff erentiation and integration defi ne performance cultures.

Managers can design a performance culture, consciously or unconsciously, depending on the intensity levels of diff erentia- tion and integration. Diff erentiation is the process through which managers divide labor based on tasks and functions, and integra- tion is the horizontal coordination between functions, depart- ments, and organizational activities.

10.2 | Describe how managers vertically organize processes and teams to centralize decision making.

Vertical organizational structures are characterized by hierarchi- cal authority and communication channels. Th is structure relies on senior-level managers to collect information broadly in order to make decisions on behalf of the entire company. Th e term chain of command, a predefi ned structural order of authority that determines how decisions are made and communicated, is com- monly associated with this type of structure.

10.3 | Describe how managers horizontally organize processes and teams to distribute decision making

throughout the organization.

Th e horizontal organizational structure is categorized as a decentralized structure, or one that relies on all employees to

collect and communicate information to make decisions and recommend changes.

10.4 | Show how managers combine vertical and horizontal approaches to organizational design in

order to be more adaptive.

When managers combine vertical and horizontal approaches, it is known as an adaptive approach. Th is approach takes the best aspects of the vertical and horizontal approaches, and uses them in specifi c situations.

10.5 | Identify additional resources that contemporary managers use to increase

organizational adaptability.

Free agents or freelancers, telecommuting, and virtual teams are all ways to increase an organization ’s adaptability. Free agents are independent workers that supply organizations with talent for projects or time-bound objectives. Telecommuting refers to a work arrangement in which an employee is given flexibility in terms of work location and hours. A virtual team refers to a group of employees who work across barriers consisting of time, distance, and organizational boundar- ies, while being linked by information and communication technologies.

SELF-TESTT 10.1 | Explain how diff erentiation and integration defi ne performance cultures.

1. A vertically organized structure of power relationships where the top level holds the most power and resources is referred to as: a. A hierarchy b. An oligarchy c. Decentralized d. An organic organization

2. A highly adaptive structure defi ned by horizontal integration, distributed decision making, and employees with a high degree of generalization is referred to as: a. A hierarchy b. An oligarchy c. Centralized d. An organic organization

3. Span of control refers to the maximum number of direct reports that a person can manage eff ectively. a. True. b. False.

10.2 | Describe how managers vertically organize processes and teams to centralize decision making.

4. A(n) organizational structure is characterized by hierarchical authority and communication channels.

5. A predefi ned structural order of authority that determines how decisions are made and communicated is called: a. A fl ow of authority b. A chain of command c. A chain of management d. A fl ow of power

6. A visual document that communicates how a company is organized is: a. An organizational map b. An organizational blueprint c. An organizational chart d. An organizational schematic

7. Th e Unity-of-Command principle is a philosophy that each manager should manage only one employee. a. True. b. False.

10.3 | Describe how managers horizontally organize processes and teams to distribute decision making

throughout the organization.

8. List and describe the three main approaches to depart- mentalization.

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272 Chapter ten Structuring Organizations

10.4 | Show how managers combine vertical and horizontal approaches to organizational design in

order to be more adaptive.

9. Using the best parts of the vertical and horizontal models to deal with specifi c situations may allow organizations to be more: a. Adaptive b. Constructive c. Aggressive d. Concentrated

10.5 | Identify additional resources that contemporary managers use to increase

organizational adaptability.

10. Independent workers that supply organizations with talent for projects or time-bound objectives are known as: a. Free thinkers b. Free agents c. Odd jobbers d. Executioners

11. refers to a work arrangement in which an employee is given fl exibility in terms of work location and hours.

12. A(n) refers to a group of employees who work across barriers consisting of time, distance, and organizational boundaries, while being linked together by information and communication technologies.

CHAPTER EXERCISESS Create an Organizational Structure Instructions:

1. Working by yourself or in a team, choose one of the following types of organizations (or your instructor may assign one to you or your team) and create an organizational structure for it. You may be as traditional or creative in your approach as you like.

a. Airline

b. Local fast food restaurant

c. National hotel chain

d. Professional football franchise

e. Local lawn care company

f. College or university

g. Movie production company

2. Briefl y describe your structure and why you chose to design it as you did.

3. Is your structure more centralized or decentralized?

4. Does your stucture have a narrow or wide span of control?

5. Is your structure more organic or more mechanistic?

SELF-ASSESSMENTT Organic vs. Mechanistic

For each of the following paired statements, circle the letter next to

the statement that best describes you:

1. A) I prefer organizations in which employees work separately and specialize on a single task.

B) I prefer organizations in which employees work together and coordinate tasks.

2. A) I prefer organizations in which the authority hierarchy is well defi ned.

B) I prefer organizations in which people from across the organization work together in teams and task forces.

3. A) I prefer organizations in which decision making is centralized at the top of the organizational structure.

B) I prefer organizations in which decision making is delegated to the lower levels of the organizational structure.

4. A) I prefer organizations in which there are extensive rules, standards, and procedures.

B) I prefer organizations in which work processes are informal and unpredictable.

5. A) I prefer organizations in which there is a lot of formal written communication.

B) I prefer organizations in which there is a lot of informal face-to-face communication.

6. A) I prefer organizations in which there are fi xed duties.

B) I prefer organizations in which there are adaptable duties.

7. A) I prefer organizations in which there are rigid, hierarchical relationships.

B) I prefer organizations in which there is both vertical and horizontal collaboration.

Scoring:

Preference for Mechanistic Organizations

(Add up the total number of “As” circled above and write that number in the blank.)

Mechanistic organizations tend to have a traditional, central- ized, hierarchical, and bureaucratic organizational structure. Mechanistic organizations are often found in industries in which there is little change and little competition.

Preference for Organic Organizations

(Add up the total number of “Bs” circled above and write that number in the blank.)

Organic organizations tend to have nontraditional, decentral- ized organizational structures. Organic organizations are often found in industries characterized by high growth, rapid change, and fi erce competition.

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273Additional Resources

SELF-TEST ANSWER KEYY 1. a.

2. d.

3. b; False. Span of control refers to the number of direct re- ports that a person manages.

4. Vertical

5. b.

6. c.

7. b; False. Th e Unity-of-Command principle is a philosophy that each employee reports to and is accountable to only one manager.

8. A functional organization is a hierarchical structure in which employees are managed through clear levels of

authority. Th e divisional organization involves a design structure that groups processes and jobs based on clearly defi ned market segments or geography. A matrix organiza- tion is a design structure that facilitates horizontal integra- tion and collaboration. It combines elements of both the functional and the divisional organizations, has dual lines of authority, and is designed to encourage the sharing of information.

9. a.

10. b.

11. Telecommuting

12. Virtual team

Notes

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274

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I N S I D E T H I S C H A P T E R

ManagementStory: Featuring Robin Richardson

Learning Objectives

11.1 | Human Resource Management Making the Human Side of Management Strategic

11.1 | Describe how managers make a signifi cant diff erence by attracting, selecting, and retaining the best available talent within legal requirements.

11.2 | Identifying Talent Defi ning and Planning Human Resource Needs Internal and External Recruiting Interviewing Potential Candidates Selecting Candidates

11.2 | Explain how managers assess human resource needs and select talent to meet demand.

11.3 | Training Talent Onboarding Programs Types of Training Strategies

11.3 | Discuss diff erent approaches to increasing organizational performance through the education of employees.

11.4 | Retaining Qualifi ed Talent Planned and Unplanned Turnover Pay and Benefi ts Employee Engagement

RESEARCH @ WORK: Engaging Employees

11.4 | Describe how managers retain employees and adjust to turnover.

11.5 | Performance Development Designing Appraisals Assessing Behaviors and Results

11.5 | Design a performance development process based on organizational needs.

By the end of the chapter, you will be able to:

11.5 | Design a performance development process based on organizational needs.

ADDITIONAL RESOURCES Key Terms

In Review

Self-Test

Chapter Exe rcise

Self-Assess ment

Self-Test

Answer Key

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276 Chapter Eleven The Human Side of Management

Collective bargaining The process of negotiation between employers and trade unions, usually with respect to pay, working hours, and working conditions.

Labor relations The relationship between management and the workforce.

11.1 | HUMAN RESOURCE MANAGEMENT

11.1 | Describe how managers make a signifi cant diff erence by attracting, selecting, and retaining the best available talent within legal requirements.

“The days of simply maintaining personnel fi les and advising on hiring, fi ring, and com- pensation are long gone for HR professionals. Today they fulfi ll a variety of roles that require knowledge and competencies in areas that were foreign to them in the past.”

—HR Magazine 1

Human resource management (HRM, or HR) is an organizational function that deals with people-related issues such as recruitment, performance management, benefi ts, train- ing, employee motivation, safety, and administration, while ensuring compliance with employment and labor laws. 2 In Chapter 2, we learned about the poor treatment of workers during the Industrial Revo- lution, a time when machines, production volumes, and consumer demands took prior- ity over the well-being of employees. Th is perception was further confi rmed by managers such as Frederick W. Taylor, who adopted a scientifi c approach to his workforce with the aim of making employees as effi cient as the machines they worked with. Although workers would become more eff ective, they were still subjected to low wages, long hours, and unsafe environments. Indeed, it was not until the late 1880s that management philosophy began to change. With such poor working conditions, employers were having diffi culties in hiring and retain- ing staff . Th is led them to believe that there was a direct link between employee satisfaction and productivity. Worker strikes, unions, and general unrest also motivated employers to implement processes that would protect their employees in the workplace. Th e government followed suit and introduced several laws designed to defend the workers against discrimi- nation and harassment, and introduced reforms to regulate working hours, compensation for injuries, and laws governing child labor. During the 1920s, a new focus on human relations was born. HR was no longer seen as merely a function of an organization, but a vital part to its commercial success. Time and again, research, such as the Hawthorne Studies, found that the feelings and emotions of the workers were central to their motivation and productivity. In short, it was how they were treated that really mattered. By the 1930s, workers were legally permitted to engage in collective bargaining , which is the process of negotiation between employers and trade unions, usually with respect to pay, working hours, and working conditions. 3 In time, labor relations , the relationship between management and the workforce, began to improve signifi cantly. 4 However, it was not until the 1960s and 1970s that the role of HR really took hold. In an era where civil rights took center stage, it became more important than ever for managers to ensure that their employees were treated fairly, equally, and with respect.

Human resource management (HRM, or HR) An organizational function that deals with people-related issues such as recruitment, performance management, benefi ts, training, employee motivation, safety, and administration, while ensuring compliance with employment and labor laws.

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27711.1 | HUMAN RESOURCE MANAGEMENT

More and more, the HR function is being woven into business practices across the board. HR professionals are expected to be well versed in economics, politics, technology, labor laws, health care, sociocultural trends, and many other issues aff ecting organizations today. In an increasingly com- plex legal environment, HR managers are challenged with maintaining ethical and fi nancial standards, which involve monitoring employees from the top down to ensure that they are in compliance with government laws and regulations. As the workforce becomes more diverse, companies must adhere to equal employment opportunity , a principle stat- ing that every employee has an equal right to advance in a company regardless of age, sex, race, disability, or color. 5 Table 11-1 summarizes some of the U.S equal employment laws that HR managers need to abide by. Over the last century, HR has evolved to such a degree that it seems impossible for an organization to succeed without an HR department. For instance, when you apply for a job, more often than not, your fi rst contact will be with some area of HR. Similarly, the fi nal stage of your interview process more than likely also will be with HR; and if you get the job, HR staff will be the ones that prepare your off er letter and contract. Th roughout your career, HR policies will aff ect every aspect of your role in an organization, including your salary, train- ing, behavioral conduct, promotions, performance reviews, compensation, and benefi ts. It is not only internal policies that are managed by HR, however; indeed, many senior managers consider HR to be an essential part of long-range strategic planning.

Making the Human Side of Management Strategic In Chapter 4, we explored the phenomenon of talent shortage despite unemployment records showing millions out of work. Th is means that organizations are struggling to fi ll positions because they cannot fi nd the right people to match the skills that they are looking for. As a result, competition for talent has become fi erce, giving rise to talent wars where companies compete for the most desirable employees. Many companies have adopted the process of talent management , a strategic, deliberate approach to attracting new, highly skilled workers and developing the abilities of existing employees to meet current and future organizational objectives. 6 Managers know that the success of an organization depends on the quality of their employees. Th ey also know that the right talent can give companies an enormous com- petitive and strategic advantage over rival institutions. More- over, there is an enormous generational shift taking place: 7

Th e baby boomers (born between 1945 and 1964) are close to retirement, and organizations need to fi nd the right tal- ent to replace them. However, Generation Y (born between 1981 and 2000) candidates do not necessarily subscribe to the same demands and values as their predecessors. For example, they prefer more fl exible working hours, collabo- ration, and the freedom to introduce new initiatives, and they are not as motivated by money and status. In this age of globalization and technological advancement, it has never been more important to diversify and ensure that businesses stand out from their competition in order to attract this new generation. As we learned in Chapter 1, critical thinking skills are very much in demand for com- panies considering new hires. Managers know that innovative, organized people with rare skill sets such as critical thinking add value to products and services and provide something unique that diff erentiates their company from the competition. As people are an organiza- tion ’s most valuable asset, companies have become more invested in human capital , the

Equal employment opportunity A principle stating that every employee has an equal right to advance in a company regardless of age, sex, race, disability, or color.

Talent management A strategic, deliberate approach to attracting new highly skilled workers and developing the abilities of existing employees to meet current and future organizational objectives.

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278 Chapter Eleven The Human Side of Management

Legislation Primary Purpose Impact on Managers President Signed

National Labor Relations Act/ Wagner Act (1935)

Legalized labor organizations, which permitted unions to bargain collectively for better labor conditions, such as improved working hours, health benefi ts, and higher wages. Created the National Labor Relations Board (NLRB)

Limits the power of employers to fi re workers who belong to certain unions, and the ability to put down strikes. Managers have to observe the rights of their employees.

Franklin D. Roosevelt (D)

National Labor Relations Board (NLRB) of 1935

Independent agency of the U.S. government. Set up to conduct unionized elections and investigate unfair business practices. Deals with private-sector businesses only.

Private-sector employers needed to respect the unions and make sure their workers are treated fairly.

Franklin D. Roosevelt (D) Board members are appointed by the president.

Labor- Management Relations Act/ Taft-Hartley Act (1947)

Amendment of National Labor Relations Act. Protected employers ’ rights to free speech, limited the power of unions to strike, prohibits unfair business practices by unions, and allows union members to reject radical leaders.

Employers do not have to engage in collective bargaining unless they want to. Managers needed to deal with the unrest that followed the act, which was denounced by Truman as the “slave-labor bill.”

Harry S. Truman (D) vetoed the act but was overridden by Congress.

Equal Pay Act of 1963

Amendment of Fair Labor Standards Act. Outlaws sex discrimination based on unequal pay for men and women doing similar work.

Managers have to ensure that both the male and female employees in similar roles are paid equally for their work.

John F. Kennedy (D)

Civil Rights Act of 1964

To outlaw discrimination based on race and gender in schools, housing, and hiring.

Managers had to ensure that their businesses did not discriminate in their hiring or in their service practices.

Lyndon B. Johnson (D)

Age Discrimination in Employment Act (ADEA) of 1967

Prohibits discrimination for employees over 40 years of age.

Managers need to ensure that hiring or fi ring decisions are not based on age.

Lyndon B. Johnson (D)

Occupational Safety and Health Act of 1970

To ensure that employees have safe conditions to work, free from hazards that are recognizable and addressable.

Identify areas of potential risk and take proactive steps to remove or minimize hazards.

Richard M. Nixon (R)

Consumer Product Safety Act of 1972

Established the Consumer Products Safety Commission (CPSC) to develop safety and product recall standards for consumer products.

Identify products and processes that will fall under CPSC regulations and address issues to minimize liability.

Richard M. Nixon (R)

Employee Retirement Income Security Act (ERISA) of 1974

Protects employees by ensuring that funds in their pension plans would still be there when they retired.

Monitors employee benefi ts and understands the organization ’s fi duciary responsibility for retirement plans.

Gerald Ford (R)

Americans with Disabilities Act (ADA) of 1990

Provides that persons with disabilities will not face discrimination in the workplace, are provided access to all public places, and have access to telecommunication services.

Issues concerning public access to disabled persons must be addressed, including physical structures and telecommunications services.

George H. W. Bush (R)

Civil Rights Act of 1991

Amendment of Civil Rights Act of 1964. To provide for damages in employment discrimination lawsuits. Shifts the burden of proof to the employer.

Ensures that employment decisions are not based on intentional discrimination such as sex, religion, and disabilities.

George H. W. Bush (R)

Family Medical Leave Act of 1993

Entitles employees up to 12 weeks of unpaid medical leave with fully covered health insurance and full job protection during their absence.

Managers need to ensure that employees are eligible for the leave of absence under the terms specifi ed by the act.

President Bill Clinton (D)

Table 11-1 Laws Governing Equal Employment in the United States

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27911.2 | IDENTIFYING TALENT

employees ’ skills and experience gained by education and training that increase the eco- nomic value for employers. 8 Th is is why HR has become so crucial to strategic planning. 9 Rather than simply hiring and fi ring, the role of the HR professional has evolved into analyzing information that helps them understand how to fi nd and keep talent, match people to jobs, optimize employee skills, and identify diff erent methods of training. Th e HR profession has come a long way since the dehumanizing days of the Indus- trial Revolution, where employees were treated as little more than cogs in the greasy wheel of production. With the rapid progress of technology and product innovation, it has never been more important for organizations to fi nd the right talent, nurture it, and allow it to fl ourish while operating within the framework of legal boundaries and equal opportunities.

Chapter 10 introduced us to Robin Richardson, the new chief of police who has been deter- mined to restructure the Metropolitan Police Department (MPD) and transform it into a more effi cient, technologically savvy, and compassionate organization. In doing so, she has faced many challenges, including protests from some of her senior staff regarding the changes that she intends to make. Furthermore, following the mishandling of the “Take Back Our Country” riot, Chief Richardson learned a valuable lesson in asserting her authority as a leader, as well as the importance of having the right people in the right place at the right time. In the next section, we will follow Chief Richardson as she addresses the weaknesses in the MPD by identifying and recruiting new talent.

11.2 | IDENTIFYING TALENT

11.2 | Explain how managers assess human resource needs and select talent to meet demand.

As Chief Richardson refl ects on the “Take Back Our Country” riot and everything that had gone wrong with the MPD ’s response to it, she knows that one of the glaring weaknesses in the department is the senior leadership team—mainly because she had not instructed the HR department to fi ll the positions as previous team members resigned. At the time, she had chosen to reinvest those resources into supporting offi cers in the fi eld with technology and tools so they were more equipped to deal with challenges as they emerged in the community. Th is decision had the unintended consequence of leaving the department vulnerable in times of crisis, just when the demands on senior leadership were dramatically increased. In the post-assessment report developed by the HR department for the mayor ’s offi ce, Chief Richardson and her team acknowledged that the riot could have been prevented. Averting this outcome in the future, the report stated, would require identifying and selecting senior leadership from within the department and targeting external candidates to join the police force as new recruits each year. Additionally, training and development would be essen- tial to enable the department to behave adaptively as it entered and exited cri- sis situations. Chief Richardson now faced the challenge of building a solid leadership team without creating the impression that she was distancing herself from the fi eld. In particular, by not fi lling the vacant positions, the chief now had a direct reporting line with 18 commanders, captains, and assistant chiefs. Th e report recommended that she select three of these internal candidates to replace the vacant director positions. Th is was diffi cult for Chief Richardson because it seemed to undermine her determination to restructure the chain of command. Now, she would have to select three leaders to recreate the hierarchy that she had worked so hard to dissolve. More important, she knew that she needed help identifying the talent within the police force to fi ll these positions. Making the wrong choices would cause even more waves within the police department.

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280 Chapter Eleven The Human Side of Management

Th ere ’s more to come on how this situation evolves, but fi rst, it ’s important to discuss HR needs in an organization.

Defi ning and Planning Human Resource Needs Th e HR planning processes of most organizations are essential when it comes to defi ning the numbers and types of human resources necessary to achieve business goals within a given time frame. Th e role of the HR manager is to analyze the needs of each department, and decide which type of employee would best fi t into the culture and possess the skills to enhance the performance of the organization. With every new hire, HR managers must take into account the law of employment-at-will , where employees can quit their jobs at any time without any reason, and employers can terminate employees at any time and without any reason. 10 Th ere are very few reasons why companies would want to enforce this law, as unhappy employees who quit suddenly or are terminated cost fi rms a great deal of money and inconvenience. It is imperative that HR matches the right people with the right role. As the hunt for talent becomes more competitive, companies are becoming even more specifi c when it comes to defi ning the type of employees they want working for them. In particular, there has been a renewed quest for knowledge workers , self-motivated work- ers who use a variety of skills to enhance their overall understanding of a particular subject or area. Th ese types of employees usually have an excellent educational background, a large amount of experience in a particular fi eld, and add value to the business by intro- ducing new business models, technologies, products, and services. Although knowledge workers tend to be self-motivated, managers still need to monitor their performance and ensure that they are being aff orded the same promotional opportunities as the rest of the workforce. HR managers might also look for independent contractors , self-employed individuals or outside businesses that provide services to another entity. 11 Hiring outside contractors can save money. Although their hourly rate tends to be higher than the pay of full-time employees, since contractors do not receive the same benefi ts, this presents signifi cant cost savings for an organization. In addition, there are not the same problems that might exist when hiring and fi ring decisions are made—contractors are hired for a specifi c length of time and for a particular project and then let go once the work is completed. Th ere are also drawbacks to hiring contractors, however. As they are usually short-term hires, they cannot strictly be considered as employees and therefore cannot be managed in the same way. Indeed, some contractors can become resentful if there is too much interference from management. Also, contractors come and go, which can be disruptive and unsettling for the company culture. Let ’s return to the MPD case narrative and see how the HR department defi nes and plans their HR needs. “Hi, Ken. When you have a few minutes, can you stop by my offi ce?” the chief asks as she pokes her head around the cubicle wall. MPD ’s assistant chief for HR, Ken Gilmore, nods and tells her he will meet her in her offi ce in a few minutes. Ken knocks on Chief Richardson ’s door, “Is now a good time?” Th e chief gets up from her chair and points to a sitting area in her offi ce. “Let ’s sit over here.” She begins, “Ken, how much of your time do you spend on solving problems that have already happened? Or, let me ask that another way, how much of your day is spent cleaning up messes?” Ken folds his hands and answers, “Probably 90 percent of my time, with the other 10 per- cent spent reminding people of the messes that were made in the past, so we don ’t repeat them.” Chief Richardson stands up and says, “Exactly! Th at ’s the problem—this department has evolved into a culture of solving problems instead of planning for the future.” He responds, “So, let me make sure I understand you correctly. Did you just say that our problem was that we solve problems? If so, you are going to have to help me understand that one.”

Employment-at-will The concept that employees can quit their jobs at any time without any reason, and employers can terminate employees at any time and without any reason.

Knowledge workers Self- motivated workers that use a variety of skills to enhance their overall understanding of a particular subject or area.

Independent contractors Self- employed individuals or independent businesses that provide services to another entity.

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28111.2 | IDENTIFYING TALENT

Chief Richardson laughs. “Okay, let me start over here. Ken, you just told me you spend 90 percent of your time ‘putting out fi res ’ and 10 percent of your time looking back at past mistakes to prevent fi res. Right?” Ken nods in agreement. Th e chief sits back down and begins to reframe her vision. “We need to shift our human resources eff orts from problem- based to possibility-based. Th is means that you are going to be the most strategic partner I have on my senior team. Why? Because I believe that with your extensive HR experience, the culture of this entire department has a chance of shifting it from problems to possibilities. Th at has to start with you and me. Agreed?” Ken thinks for a minute, and then says, “Traditionally, the MPD HR department has been more of a personnel and administrative function than anything else. We recruit, sort out compensation and benefi ts, and arrange training for new hires. We have never been asked to do anything more than that. And now you want the department to strategize and imple- ment a new culture of possibilities?” Chief Richardson asks, “How do you think the HR department is perceived within the MPD?” Ken laughs, ruefully. “We are known as ‘form-fi llers ’!” Chief Richardson knew that the HR department didn ’t get a lot of respect in the MPD, but to hear it from Ken reinforced her beliefs. “OK, so here ’s what I want to happen. Th e whole department is going through a cultural change, and that includes HR. I want your team to be part of the bigger picture. Th e people in the force are one of our most valuable assets and we have to make sure we get the right candidates who will fi t in and embrace the new culture,” Richardson explains. “I like what you are saying. How should we get started? To be quite honest, it does seem a little overwhelming,” Ken off ers. Chief Richardson interjects, “It starts with selection and recruitment. How does HR recruit at the moment?” Ken says, “We usually run an ad in the newspaper; sift through applications, and then conduct interviews. It ’s not as thorough as I would like it to be, but we have never had a problem with the labor pool.” Chief Richardson nods, “I agree. We’ve never been short of applicants, but it’s quality we need, not quantity. Half our police force will be retiring soon, and a whole new gen- eration is coming in with diff erent skills, attitudes, and expectations. My concern is that there will be a glaring imbalance between the number of experienced offi cers and new recruits. Working in the police force isn ’t as attractive as it used to be. Long, uncertain hours and average salaries don’t appeal to this current generation and we’ll be facing a labor shortage sooner than we think. What we need is change.” Ken says, “Sounds great to me. So, what do you have in mind?” Chief Richardson replies, “From my analysis, and keeping in mind our average turnover, we have three senior positions that need to be fi lled internally and 50 external new recruits to hire. I have to believe that if we have the right people in the right positions, 80 percent of our work to change the cul- ture will be done, because the new employees will be carry- ing forward the new beliefs.” Ken sits up in his seat, and leans forward. To Chief Richardson, it appeared as if Ken was experiencing an epiphany. “What are you thinking, Ken?” “Th at this is a great idea! Th e fi rst thing we should do is re-create our recruitment and selection process. If we do the same things, we are going to get the same results. Give me a week and I will present you with some formal recommenda- tions for recruiting and selecting new candidates.” Chief Richardson has never seen Ken this excited. On his way out of the offi ce, he turns and says enthusiastically, “Th is is really going to make a diff erence—I promise you!”

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282 Chapter Eleven The Human Side of Management

Internal and External Recruiting Th e following week, Ken returns to the chief ’s offi ce with a series of recommendations to reform their recruiting , the process of identifying the best applicants internally or exter- nally for specifi c roles; 12 and selection , the process that assesses the level of skills and abili- ties possessed by an individual to perform a specifi c role. 13

Internal Recruiting Ken begins by discussing the strategy for internal recruiting , the method of creating a pool of existing employees who may have the qualifi cations to fi ll re- quired job vacancies in an organization. 14 “Here ’s what I propose with regard to fi lling the three senior positions,” Ken begins. “I think we will need to fi ll these roles internally, as I don ’t think it ’s good for morale if we look outside for such high-profi le roles.” Chief Richardson nods as she imagines the fallout if she appointed three new directors from outside the organization. She was confi dent that she would fi nd the right people with the skills, talent, and experience to fi ll those roles, right there within the MPD. “So, who do you have in mind?” Chief Richardson asks Ken. Ken presents her with a list of names. “Th e recruitment team advertised the roles through a new job-posting system on the MPD intranet and the staff bulletin board. Th ese are the applicants we thought best fi t the roles.” After reviewing the recommendations, Chief Richardson asks, “Th ese are good choices in terms of experience, but I worry that a number of them won ’t embrace the new culture we are trying to implement. How will we know they are a cultural fi t?” Ken responds confi dently, “Th rough the interview process . . .” But the chief isn ’t sure about his answer. “We need something more dependable than a one- or two-hour interview to vet these candidates, even if they are internal staff . I also want some members of the senior team to interview the candidates for the three available director positions; these are important roles, and the senior team should be involved in the decision-making process.” Ken quickly says, “Got it—let me fi nd a couple of members of the senior team willing to interview the candidates. I will also come up with some options to create a more thorough recruitment process.”

External Recruitment Chief Richardson continues with the next point on the agenda: external recruiting , the process of creating a pool of qualifi ed applicants outside the organization. 15 “How are we progressing with the 50 new external recruits we need to breathe more life into this place?” Chief Richardson asked. “We have reformed our advertising methods signifi cantly,” Ken responds. “We have posted on Internet job boards, the MPD website, in the newspaper, through other state law enforcement agencies, and through career fairs. We are also looking into hiring an executive search fi rm to narrow down the pool of applicants.” Chief Richardson is impressed. “Great news, Ken! Let me know when you have selected the top 50 applicants and can provide some strategies on how we can reform our interview- ing process.” Th ey agree to meet the following week. A few days later, Ken recommends that the department adopt psychometric tools , questionnaires or tests that measure an individual ’s personality, intelligence, and aptitude. 16 He believes they would benefi t the interview process by off ering management a common understanding of styles and behaviors for existing and potential team members. “Ken, I ’m not a fan of Myers-Briggs type-testing,” Chief Richardson replies fi rmly. “I believe that everything you need to know can be learned by just listening to someone.” Ken off ers a few alternatives, shown in Table 11-2 . Using the new recruiting and selection system, over the next two weeks, Ken and Chief Richardson identify six internal candidates, two for each of the three available director positions, which included director of administration, special operations, and operations. Th e job description , 17 a written account of specifi c tasks, duties and responsibilities required within a particular role, is listed on pages 284-285 for each position:

External recruiting The process of creating a pool of qualifi ed applicants outside the organization.

Psychometric tools Questionnaires or tests that measure an individual ’s personality, intelligence, and aptitude.

Recruiting The process of identifying the best applicants internally or externally for specifi c roles.

Selection The process that assesses the level of skills and abilities possessed by an individual to perform a specifi c role.