Management III

Pancho Wis

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116 PART 2 | Planning

6 chapter

Entrepreneurship

After studying Chapter 6, you will be

able to

LO1 Describe why people become entrepreneurs and what it takes, personally.

LO2 Summarize how to assess opportunities to start new businesses.

LO3 Identify common causes of success and failure.

LO4 Discuss common management challenges.

LO5 Explain how to increase your chances of success, including good business planning.

LO6 Describe how managers of large companies can foster entrepreneurship.

Learning Objectives

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117

S ome extraordinary individuals have founded companies that have become famously successful: 1

• Bill Gates and Paul Allen started Microsoft.

• Oprah Winfrey founded Harpo Productions.

• Steve Jobs and Steve Wozniak created Apple Computer.

• Mary Kay Ash established Mary Kay.

• N. R. Narayana Murthy founded Infosys.

• Martha Stewart started Martha Stewart Living Omnimedia.

• Larry Page and Sergey Brin founded Google.

• Estée Lauder created her namesake company.

• Elon Musk founded Tesla Motors and Space X.

• Mark Zuckerberg started Facebook.

• Vera Wang founded her namesake firm.

services, publishing, and retail-

ing. Today the Virgin empire

has nearly 50,000 employees in

50 countries, and Branson has a

mind-boggling net worth of more

than $5 billion. In 1999 he was

knighted by Queen Elizabeth. 5

Entrepreneurs differ from

managers generally. An entre-

preneur is a manager but engages in additional activities that not

all managers do. 6 Traditionally,

managers operate in a formal

management hierarchy with

well-defined authority and responsibility. In contrast, entrepre-

neurs use networks of contacts more than formal authority. And

although managers usually prefer to own assets, entrepreneurs

often rent or use assets on a temporary basis. Some say that man-

agers often are slower to act and tend to avoid risk, whereas entre-

preneurs are quicker to act and actively manage risk.

An entrepreneur’s organization may be small, but it differs

from a typical small business: 7

• A small business has fewer than 100 employees, is independently owned and operated, is not dominant in its field, and is not charac- terized by many innovative practices. Small business owners tend not to manage particularly aggressively, and they expect normal, moderate sales, profits, and growth.

entrepreneurship the process by which enterprising individuals initiate, manage, and assume the risks and rewards associated with a business venture

small business a business having fewer than 100 employees, independently owned and operated, not dominant in its field, and not characterized by many innovative practices

As they and countless others have demonstrated, great opportu-

nity is available to talented people who are willing to work hard

to achieve their dreams. Entrepreneurship occurs when an enter- prising individual pursues a lucrative opportunity under condi-

tions of uncertainty. 2 To be an entrepreneur is to initiate and build

an organization, rather than being only a passive part of one. 3 It

involves creating new systems, resources, or processes to produce new goods or services and/or serve new markets. 4

Richard Branson is a perfect example. He seems to have busi-

ness in his blood. He was only a teen when he started his first com-

pany, a magazine called Student, in the mid-1960s. In 1970 Branson launched his next enterprise, the iconic Virgin Records, which

generated his first fortune. Since then, Branson has built 300 other

businesses, all under the Virgin umbrella: a space travel venture, a

global airline, a mobile phone enterprise, and companies in financial

Engage your professors Even though you are extremely busy, you should find time to visit with your professors when you have questions about the reading material or a challenging assignment. Similarly, you should go to office hours within a few days of taking an exam to see what questions you missed. This is a good time to ask the professor’s advice regarding how to improve your studying strategy to make a higher grade on the next exam.

study tip 6

LISTEN & LEARN ONLINE

YOUNG MANAGERS

Speak Out! “ I encourage my employees to be entrepreneurial. To think. To be creative. I encourage them by asking the hard questions and making sure they have a solid plan going forward. ”

— Joe Gaspar , Bicycle Shop Owner/Manager

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118 PART 2 | Planning

• An entrepreneurial venture has growth and high profitability as its primary objectives. Entrepreneurs manage aggressively and develop innovative strategies, practices, and products. They and their financial backers usually seek rapid growth, immediate and high profits, and sometimes a quick sellout with large capital gains.

Entrepreneurship Excitement Consider these words from Jeffry Timmons, a leading entrepreneurship scholar and author:

“During the past 30 years, America has unleashed the most

revolutionary generation the nation has experienced since its

founding in 1776. This new generation of entrepreneurs has

altered permanently the economic and social structure of this

nation and the world . . . . It will determine more than any other

single impetus how the nation and the world will live, work,

learn, and lead in this century and beyond.” 8

Overhype? Sounds like it could be, but it’s not.

Entrepreneurship is transforming economies all over the world,

and the global economy in general. In the United States since

1980, more than 95 percent of the wealth has been created by

entrepreneurs. 9 It has been estimated that since World War II,

small entrepreneurial firms have generated 95 percent of all

radical innovation in the United States. The Small Business

Administration has found that in states with more small busi-

ness start-ups, statewide economies tend to grow faster and

employment levels tend to be higher than in states with less

entrepreneurship. 10

An estimated 20 million Americans are

running a young business or actively trying to start one. 11

The self-employed love the entrepreneurial process, and

they report the highest levels of pride, satisfaction, and income.

Importantly, entrepreneurship is not about the privileged

descendants of the Rockefellers and the Vanderbilts; instead

it provides opportunity and upward mobility for anyone who

performs well. 12

Myths about Entrepreneurship Simply put, entrepreneurs generate new ideas and turn them into business ventures.

13 But

entrepreneurship is not simple, and it is frequently misunder-

stood. Exhibit 6.1 describes 12 myths and realities regarding

entrepreneurship. 14

Here is another myth: being an entrepreneur is great because

you can “get rich quick” and enjoy a lot of leisure time while

your employees run the company. But the reality is much more

difficult. During the start-up period, you are likely to have a lot

of bad days. It’s exhausting. Even if you don’t have employ-

ees, you should expect communications breakdowns and other

“people problems” with agents, vendors, distributors, family,

subcontractors, lenders, whomever. Dan Bricklin, the founder

of VisiCalc, advises that the most important thing to remem-

ber is this: “You are not your business. On those darkest days

when things aren’t going so well—and trust me, you will have

them—try to remember that your company’s failures don’t

make you an awful person. Likewise, your company’s suc-

cesses don’t make you a genius or superhuman.” 15

As you read this chapter, you will learn about two primary

sources of new venture creation:

1. Independent entrepreneurs are individuals who establish a new organization without the benefit of corporate support.

2. Intrapreneurs are new venture creators working inside big com- panies; they are corporate entrepreneurs, using their company’s resources to build a profitable line of business based on a fresh new idea. 16

“Chase the vision, not the money. The money will end up following you.”

— Tony Hsieh , CEO of Zappos

● Ryan Clark (bottom) who won the Student Leadership Award from the

Black Engineer of the Year Awards, poses with his twin brother, Ashton,

at the Coordinated Science Laboratory in Urbana, IL. The Clark brothers

(a.k.a., Dynamik Duo) graduated from the University of Illinois and in

the past 12 years have formed more than a dozen successful web-based

businesses, with products ranging from online music to sports apparel to

parking place reservations.

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CHAPTER 6 | Entrepreneurship 119

Myths Realities

1. “Anyone can start a business.”

Starting is easy. The hard part is building and sustaining a successful venture.

2. “Entrepreneurs are gamblers.”

They take careful, calculated risks and are not afraid to act on those decisions.

3. “Entrepreneurs want the whole show to themselves.”

Higher-potential entrepreneurs build a team, an organization, and a company.

4. “Entrepreneurs are their own bosses and independent.”

They have to answer to many stakeholders, including partners, investors, customers, suppliers, creditors, employees, and families.

5. “Entrepreneurs work harder than managers in big firms.”

There is no evidence to support this claim. Some work more, some less.

6. “Entrepreneurs experience a great deal of stress.”

Entrepreneurs experience stress, but they also have high job satisfaction. They tend to be healthier and less likely to retire than those who work for others.

7. “Entrepreneurs are motivated solely by the quest for the dollar.”

More are driven by building high-potential ventures and realizing long-term capital gains than instant gratification from high salaries. Feeling in control of their own destinies and realizing vision and dreams are powerful motivators.

8. “Entrepreneurs seek power and control over others.”

Many are driven by responsibility, achievement, and results. Successful entrepreneurs may become powerful and influential, but these are by-products.

9. “If an entrepreneur is talented, than success will happen quickly.”

Actually, many new businesses take three to four years to solidify. A saying from venture capitalists sums it up: “The lemons ripen in two and a half years, but the pearls take seven or eight.”

10. “Any entrepreneur with a good idea can raise venture capital.”

In practice, only 1 to 3 (out of 100) ventures are funded.

11. “If an entrepreneur has enough start-up capital, s/he can’t miss.”

Too much money at the beginning often leads to impulsive or undisciplined spending that usually result in serious problems or failure.

12. “Unless you attained a high score on your SATs or GMATs, you’ll never be a successful entrepreneur.”

Entrepreneurial IQ is actually a unique combination of creativity, motivation, integrity, leadership, team building, analytical ability, and ability to deal with ambiguity and adversity.

Exhibit 6.1 Myths and realities about entrepreneurship

1 | ENTREPRENEURSHIP Two young entrepreneurs who recently founded a highly suc-

cessful business are Tony Hsieh and Nick Swinmurn. In 1999

Swinmurn had the then-new idea to sell shoes online, but he

needed money to get started. Hsieh, who at age 24 had already

just sold his first start-up (LinkExchange, sold to Microsoft

for $265 million), agreed to take a chance on the new venture.

Swinmurn has moved on, but Hsieh remains at the helm of the

LO1 Describe why people become entrepreneurs and what it takes, personally

entrepreneurial venture a new business having growth and high profitability as primary objectives

entrepreneur an individual who establishes a new organization without the benefit of corporate sponsorship

intrapreneurs new venture creators working inside big companies

online shoe retailer, Zappos.

The successful online retail

venture attracted Amazon,

which purchased Zappos for

$1.2 billion in 2009. 17

Exceptional though their

story may be, the real, more

complete story of entrepre-

neurship is about people

you’ve probably never heard

of. They have built compa-

nies, thrived personally, cre-

ated jobs, and contributed to

their communities through their businesses. Or they’re just

starting out. Consider Shama Kabani, a 20-something who

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120 PART 2 | Planning

Why do Bill Gross and other entrepreneurs do what they do?

Entrepreneurs start their own firms because of the challenge,

profit potential, and enormous satisfaction they hope lies ahead.

People starting their own businesses are seeking a better quality

of life than they might have at big companies. They seek inde-

pendence and a feeling that they are part of the action. They get

tremendous satisfaction from building something from nothing,

seeing it succeed, and watching the market embrace their ideas

and products.

People also start their own companies when they see their

progress or ideas blocked at big corporations. When people are

laid off, believe they will not receive a promotion, or are frus-

trated by bureaucracy or other features of corporate life, they

may become entrepreneurs. Years ago Philip Catron became

disillusioned with his job as a manager at ChemLawn because

he concluded that the lawn care company’s reliance on pes-

ticides contributed to illness in its employees, its custom-

ers’ pets, and even the lawns themselves. Catron left to start

NaturaLawn of America, based on the practice of integrated

pest management (IPM), which uses natural and nontoxic prod-

ucts as much as possible, reducing pesticide use on lawns by

93 percent. Over nearly 25 years, Catron built NaturaLawn into

64 franchises in 23 states—and helped take IPM into the main-

stream, as even his former employer has changed many of its

practices. 22

Immigrants may find conventional paths to economic suc-

cess closed to them and turn to entrepreneurship. 23

The Cuban

community in Miami has produced many successful entre-

preneurs, as has the Vietnamese community throughout the

United States. Sometimes the immigrant’s experience gives

him or her useful knowledge about foreign suppliers or mar-

kets that present an attractive business opportunity. Rakesh

Kamdar immigrated to the United States from India to study

computer science but noticed a way he could meet the huge

U.S. demand for nursing talent. He set up DB Healthcare to

recruit nurses from India to work in the United States. Unlike

U.S. competitors that had failed, Kamdar set up meetings at

DB’s Indian offices, and he invited nurses to attend with their

husbands, parents, and in-laws. His staff discussed family and

individual questions related to the American jobs. Within a

few years, DB Healthcare expanded its service offerings to

staffing other medical personnel and IT professionals for the

health care industry, ultimately earning the firm millions of

dollars. 24

Born Josephine Esther Mentzer, the beauty company entrepreneur

Estée Lauder was raised in Queens, New York, by her Hungarian

mother and Czech father. Living on the floor above her father’s

hardware store, Lauder was always interested in beauty. In 1946

Lauder’s chemist uncle created a handful of skin creams that she

began selling to beauty salons and hotels. Two years after start-

ing her business, she expanded her enterprise by convincing the

managers at New York City department stores to give her counter

space to sell her beauty products. Holding strong to the belief that

went from graduate student to social media millionaire. An

early proponent of using social media to market firms’ prod-

ucts and services, Kabani wrote her masters’ thesis on “why

people use Twitter and other social networking sites.” After

applying and being rejected for jobs at large management

consulting firms, she decided to trust her own entrepreneur-

ial instincts and founded a web marketing company, The

Marketing Zen Group. In just three years, Kabani has grown

the company to 30 employees and $1.2 million in revenue. 18

In 2012, Kabani accepted an award at the White House for

being one of Empact’s top 100 companies started by an entre-

preneur under the age of 35. 19

As president of The Marketing

Zen Group, Kabani is a constant learner who provides strategy

and implementation services for businesses that want to lever-

age the power of the Internet. Her company operates virtually

with 30 employees in different countries and offers a range of

services to clients, including social media marketing, search

engine optimization, website design, content marketing, and

consulting. 20

1.1 | Why Become an Entrepreneur? Bill Gross has started dozens of companies. When he was a

boy, he devised homemade electronic games and sold candy

for a profit to friends. In college he built and sold plans for a

solar heating device, started a stereo equipment company, and

sold a software product to Lotus. Then, he started Idealab,

which hatched dozens of start-ups on the Internet. Recently

launched Idealab companies include one that is making a

three-dimensional printer, and another that sells robotics

technology to supermarkets and toy companies. Through its

Energy Innovations subsidiary, Idealab also has branched

out into the now-hot markets for alternative energy, per-

sonal robotics, and advanced mobile advertising platform

technologies. 21

● Idealab startup, New Matter , thinks its Mod T printer can bring 3D printing

to the mainstream by addressing what it sees as the biggest challenges:

accessibility, relevance, and price. The Mod T is up for preorder for $249 via

an Indiegogo campaign .

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CHAPTER 6 | Entrepreneurship 121

1.2 | What Does It Take to Succeed? What can we learn from the people who start their own com-

panies and succeed? Let’s start with the example of Ken

Hendricks, founder of ABC Supply. 26

As he acquired build-

ings and businesses, he saw opportunities where others saw

problems. Several years after the town’s largest employer,

Beloit Corporation, closed its doors, Hendricks bought its

property, where he discovered almost a half million patterns

(wooden molds) used to make a variety of machine parts.

Although a bankruptcy court ordered that he be paid to move

the patterns to the dump, Hendricks called on a friend, artist

Jack De Munnik, and offered him the patterns as free mate-

rial to create art. De Munnik fashioned them into tables,

clocks, sculptures, and other pieces. Hendricks calculated,

“Even if we only got $50 apiece for them, 50 times 500,000

is $25 million,” and he noted that that amount could have

“taken the Beloit Corporation out of bankruptcy.” 27

This

example shows how Hendricks viewed business success:

problems can be fixed. “It’s how you look at something and

how it’s managed that make the difference.” 28

Ken Hendricks is a good example of what talents enable

entrepreneurs to succeed. We express these characteristics in

general terms with Exhibit 6.2 . Successful entrepreneurs are

innovators and also have good knowledge and skills in man-

agement, business, and networking. 29

In contrast, inventors

may be highly creative but often lack the skills to turn their

ideas into a successful business. Manager—administrators

may be great at ensuring efficient operations but aren’t neces-

sarily innovators. Promoters have a different set of marketing

and selling skills—useful for entrepreneurs, but those skills

can be hired, whereas innovativeness and business manage-

ment skills remain the essential combination for successful

entrepreneurs.

2 | WHAT BUSINESS SHOULD YOU START?

You need a good idea, and you need

to find or create the right oppor-

tunity. The following discussion

offers some general considerations

for choosing a type of business. For

guidance in matching your unique

strengths and interests to a business

“every woman can be beautiful,” Lauder developed and perfected

personal selling techniques that included advising customers and

working with Beauty Advisors.

Lauder had a keen sense for marketing. At a time when her

competitors were selling French perfumes to be applied in drops

behind women’s ears, Lauder’s company launched Youth Dew, a combination bath oil and perfume that was consumed much faster

as people poured it into their bath water. Youth Dew went from selling 50,000 in 1953 to over 150 million in 1984. Such business

instincts, combined with strong selling and leadership skills, led to

Estée Lauder being honored with many awards such as the United

States’ Presidential Medal of Freedom and France’s Legion of

Honor.

Estée Lauder left a legacy of success. The company’s products

are sold in over 150 countries under brand names such as Estée

Lauder, Aramis, and Clinique. As of 2011, the company reported

$8.8 billion in sales and continued to be a leader in skin care,

makeup, fragrance, and hair care products. 25

● The Estee Lauder Companies Inc. launched the Jo Malone London brand

in Bejing, China. The brand is now available in 34 countries worldwide and

continues to inspire a loyal following.

Exhibit 6.2 Who is the entrepreneur? High

Creativity and

innovation

Low High General management skills, business know-how, and networks

Inventor Entrepreneur

Promoter Manager,

administrator

LO2 Summarize how to assess opportunities to start new businesses

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122 PART 2 | Planning

experience, had a dream of opening a chocolate chip cookie bakery

and store. After convincing a bank to finance her business idea,

Mrs. Fields was founded. Fast-forward to today. Mrs. Fields makes about $450 million in revenue and has more than 600 compa-

ny-owned and franchise stores in the United States and 10 foreign

nations. Debbie Fields attributes her success to her motto that

“Good enough never is,” which is reflected in her reputation for

providing quality products and superior customer service. 30

Many great organizations have been built on a different

kind of idea: the founder’s desire to build a great organiza-

tion, rather than offering a particular product or product line. 31

Examples abound. Bill Hewlett and David Packard decided to

start a company and then figured out what to make. J. Willard

Marriott knew he wanted to be in business for himself but

didn’t have a product in mind until he opened an A&W root

beer stand. Oprah Winfrey founded a successful production

company, Harpo Productions, that produced her popular and

● Over 35 years ago, Debbie Fields acted on her dream of opening a

chocolate chip cookie bakery and store by founding Mrs. Fields.

type, another helpful resource is What Business Should I Start? Seven Steps to Discovering the Ideal Business for You by Rhonda Abrams.

2.1 | The Idea Many entrepreneurs and observers say that in contemplating

your business, you must start with a great idea. A great prod-

uct, a viable market, and good timing are essential ingredients

in any recipe for success. For example, Tom Stemberg knew

that the growing number of small businesses in the 1980s had

no one dedicated to selling them office supplies. He saw his

opportunity, so he opened his first Staples store, the first step

toward a nationwide chain. Staples’ sales now reach more than

$18 billion annually.

Some of the best ideas start of as simple ideas. Thirty-five years

ago, Debbie Fields, a 20-year-old housewife with no business

“Many now-great companies had early failures. But the founders persisted; they believed in

themselves and in their dreams of building great organizations.”

influential talk show. Masaru Ibuka had no specific prod-

uct idea when he founded Sony in 1945. Sony’s first product

attempt, a rice cooker, didn’t work, and its first product (a tape

recorder) didn’t sell. The company stayed alive by making and

selling crude heating pads.

Many now-great companies had early failures. But the

founders persisted; they believed in themselves and in their

dreams of building great organizations. Although the conven-

tional logic is to see the company as a vehicle for your prod-

ucts, the alternative perspective sees the products as a vehicle

for your company. Be prepared to kill or revise an idea, but

never give up on your company—this has been a prescription

for success for many great entrepreneurs and business lead-

ers. At organizations including Disney, Procter & Gamble,

Estée Lauder, Harpo Productions, and Walmart, the found-

ers’ greatest achievements—their greatest ideas—were their

organizations. 32

2.2 | The Opportunity Entrepreneurs spot, create, and exploit opportunities in a vari-

ety of ways. 33

Entrepreneurial companies can explore domains

that big companies avoid and introduce goods or services that

capture the market because they are simpler, cheaper, more

accessible, or more convenient. While Shayne McQuade was

touring Spain, he noticed that he had a problem figuring out

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CHAPTER 6 | Entrepreneurship 123

Online. Featured in Inc. magazine’s Top 50 Green Companies, the web-hosting company, based in Romoland, California, is powered by 120 solar panels. Clients’ websites can boast, “Site hosted with 100% solar energy.” 37

• Economic dislocations, such as booms or failures. Rising oil prices have spurred a variety of developments related to alterna- tive energy or energy efficiency. Howard Berke, the entrepreneur behind Konarka Technologies’ solar cells, says, “I don’t come at this as an environmentalist. I come at this from good business sense. The cost of renewables . . . is more competitive when com- pared with fossil fuel.” 38

• Calamities such as wars and natural disasters. The terrorist attacks of September 2001 spurred concern about security, and entrepre- neurs today are still pursuing ideas to help government agencies prevent future attacks. Approximately one out of five United States service members returning from the wars in Iraq and Afghanistan have posttraumatic stress disorder, depression, or traumatic brain injuries. America’s Heroes at Work, a new resource-based website sponsored by the U.S. Department of Labor, provides employers with information and tools to encourage the hiring of veterans with “invisible wounds of war.” 39

• Government initiatives and rule changes. Deregulation spawned new airlines and trucking companies. Whenever the govern- ment tightens energy efficiency requirements, opportunities become available for entrepreneurs developing ideas for cutting energy use.

A decade ago, Ryan Black was surfing in Brazil where he noticed

many Brazilians gulping huge bowls of frozen purple slush. He fol-

lowed his curiosity and learned that the slush was made from acai

how to recharge his cell phone. After his trip, McQuade devel-

oped a way to make backpacks and messenger bags containing

solar panels that provide power to run personal electronics from

anywhere. His company, Voltaic Systems, contracts to have the

bags manufactured in China from material made out of recy-

cled plastic. The products are sold in sporting goods stores, and

McQuade is trying to get them stocked by Sam’s Club. 34

To spot opportunities, think carefully about events and

trends as they unfold. Consider, for example, the following

possibilities:

• Technological discoveries. Start-ups in biotechnology, microcom- puters, and nanotechnology followed technological advances. Scotland-based Touch Bionics provides high tech prosthetics to patients with missing limbs. Their leading product, the i-limb, responds to muscular signals from the residual limb while featuring longer-lasting batteries and more power-efficient microproces- sors. Also, Touch Bionics has developed functioning prototypes of artificial organs to replace one’s spleen, pancreas, or lungs. 35

• Demographic changes. As the population ages, many organizations have sprung up to serve the older demographic, from specially designed tablet and smartphone apps for seniors to assisted-living facilities. A business that targets both the aging population and the growth in single-parent and dual-career households is Errands Done Right. The service, launched by Donna Barber and Dawn Carter, targets those who are pressed for time or have difficulty getting around. 36

• Lifestyle and taste changes. In recent years, more consumers want to help take care of the environment, and more businesses are concerned about showing consumers that they care, too. This trend has opened a niche for Affordable Internet Services

Take Charge of Your Career Why Wait? Start a Business While Still in College

M ost of us are familiar with famous individ-uals who started businesses while still in college, like Michael Dell of Dell Computer and Mark Zuckerberg of Facebook. Less well known are the growing number of college student entrepreneurs who are busy launch- ing businesses while taking normal course- loads. For example, while still in high school, Caroline Rooney designed a T-shirt for herself with a “Peace and Love” theme. After start- ing college at the University of Michigan, she wore the T-shirt around campus, and soon several friends were asking her where they could buy one. This lead to Rooney’s decision

to purchase and design 25 T-shirts for a total initial investment of $300. She sold all of the shirts. This initial success encouraged Rooney to sell cool T-shirts directly from her website and with the help of salespeople at six other college campuses. She founded The Bearon, a socially conscious clothing line.

Another college start-up took a differ- ent direction. After years of long swim prac- tices followed by countless less-than-savory energy drinks, Indiana University student Zac Workman decided that he would try to use a three-generation-old family recipe for punch to create a more natural, better-tasting energy drink. With the support of his parents, Workman traveled to Los Angeles to convince a beverage development firm that worked on successful drinks like Gatorade and Sierra Mist to help him develop his new product concept.

The firm hooked up Workman with scientists who tweaked the ingredients of the punch drink so that it would be commercially viable. After a family investment of $200,000, the 21-year-old Workman launched ZW Enterprises to make and sell his energy drink, Punch. The firm is on track to make $1 million in sales revenue.

There are countless other examples of college students who turned into entrepre- neurs while still in school. Talk to your family, friends, professors, current entrepreneurs, and other people who are willing to listen to your ideas and serve as sounding boards. Most important is to not be afraid to take that first step and try out your cool idea.

Sources: Adapted from “The Coolest College Start-ups,” Inc., 31, no. 2 (March 2009), pp. 78–89; company websites, The Bearon, www.bearon.com and ZW Enterprises, www.punchenergy.com .

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124 PART 2 | Planning

berries, which grow in abundance in the area and can be turned into

smoothie-like drinks when they are crushed, blended with water,

and frozen. As Brazilians already know, the berries contain anti-

oxidants and healthy omega fats. Reflecting on U.S. consumers’

demand for more healthful foods, Ryan believed that he and his

brother could deliver a new taste sensation that was also nutritious.

The brothers founded Sambazon to develop and market fro-

zen acai drinks but had to educate the public, including restau-

rants, store owners, and other potential customers, about the

product. “They’d put on quite a show, going from store to store

and putting on this Barnum and Bailey act,” recalls Larry Sidoti,

vice president of development for Juice It Up! Franchise Corp.,

which agreed to carry Sambazon. Sambazon, now worth over

$100 million, manufacturers its products in Brazil and purchases

its fruit directly from local farmers. 40

2.3 | Franchises One important type of opportunity is the franchise. You may

know intuitively what franchising is, or at least you can name

some prominent franchises: Supercuts, Pizza Hut, 7-Eleven,

Hampton Hotels, and Quiznos. Franchising is an entrepreneur- ial alliance between two parties:

1. The franchisor —an innovator who has created at least one suc- cessful store and seeks partners to operate the same concept in other local markets.

2. The franchisee —the operator of one or more stores according to the terms of the alliance.

● Entrepreneurs can help service members returning from war by providing

them with employment opportunities, or services and products that meet

their needs.

Traditional Thinking Facebook, Twitter and Linkedln help entrepreneurs market

their goods and services to “friends.”

Source: Adapted from S. E. Needleman and A. Loten, “When ‘Friending’ Becomes a Source of Start-up Funds,” The Wall Street Journal, November 1, 2011, p. B1.

The Best Managers Today Are anticipating legislation that may permit “crowdfunding”

or raising capital from social networking sites in exchange for

an equity stake in the business.

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CHAPTER 6 | Entrepreneurship 125

lasting tiny batteries to keep

cell phones and cameras run-

ning for more hours, implant-

able wireless devices that can

monitor heartbeats or blood

sugar levels, and online

social networking sites that

allow artists and musicians

to share and promote their

work. 46

Another high-poten-

tial area for entrepreneurs includes nanotechnology, or the

engineering of matter at a molecular scale. Though still in its

infancy, this technology has potential applications for medi-

cine, defense, consumer products, energy, construction, and

electronics. 47

One fascinating opportunity for entrepreneurs is outer

space. Historically the space market was driven by the gov-

ernment and was dominated by big defense

contractors like Boeing and Lockheed

Martin. But now, with demand for satellite

launches and potential profits skyrocketing,

smaller entrepreneurs are entering the field.

Some of the most dramatic headlines involve

space tourism. Zero Gravity already oper-

ates flights in converted Boeing 727 jets that

simulate the experience of weightlessness

by flying up and down like a roller-coaster

10,000 feet above the earth. Famous passen-

gers who signed up for the $3,500 flights

included business owner Martha Stewart,

Google co-founder Sergei Brin, and physicist

Stephen Hawking. 48

Virgin Galactic’s mothership, the White Knight Two, is a specially designed jumbo jet that will carry the firm’s passenger vehicle,

the Space Ship Two, into sub-orbit. While reg- ulatory delays continue to push back the first

launch date, $70 million in deposits have been

collected from 580 customers from the United States, China,

Japan, Singapore, and Malaysia have plunked down $200,000

each for the ride. 49

Other recent ventures in space have

included using satellites for automobile navigation, tracking

trucking fleets, and monitoring flow rates and leaks in pipe-

lines; testing designer drugs in the near-zero-gravity environ-

ment; and using remote sensing to monitor global warming,

spot fish concentrations, and detect crop stress for precision

farming.

2.5 | The Internet The Internet is a business frontier that continues to expand.

With Internet commerce, as with any start-up, entrepreneurs

need sound business models and practices. You need to watch

costs carefully, and you want to achieve profitability as soon as

possible. 50

For the franchisee, the opportunity is wealth creation via

a proven (but not failure-proof) business concept, with the

added advantage of the franchisor’s expertise. For the fran-

chisor, the opportunity is wealth creation through growth. The

partnership is manifest in a trademark or brand, and together

the partners’ mission is to maintain and build the brand. The

Noodles & Company chain of fast-casual restaurants, which

serve pasta dishes, soups, and sandwiches, first grew by open-

ing 79 company-owned locations. Management concluded

that it could grow faster through franchising. Establishing

standard menus and prices took a year, but franchising helped

the company grow to approximately 350 restaurants over a

10-year period. 43

People often assume that buying a franchise is less risky

than starting a business from scratch, but the evidence is

mixed. A study that followed businesses for six years found

the opposite of the popular assumption: 65 percent of the

franchises studied were operating at the end

of the period, while 72 percent of independent

businesses were still operating. One reason

may be that the franchises involved mostly a

few, possibly riskier industries. A study that

compared only restaurants over a three-year

period found that 43 percent of the franchises

and 39 percent of independent restaurants

remained in business. 44

If you are contemplating a franchise, con-

sider its market presence (local, regional, or

national), market share and profit margins,

national programs for marketing and pur-

chasing, the nature of the business, including

required training and degree of field support,

terms of the license agreement (e.g., 20 years

with automatic renewal versus less than 10

years or no renewal), capital required, and fran-

chise fees and royalties. 45

You can learn more

from plenty of useful sources, including these:

• International Franchise Association ( www.fran- chise.org ).

• The Small Business Administration ( www.sba.gov ).

• Franchise Chat ( www.franchise-chat.com ).

• Franchise & Business Opportunity Directory ( www.franchise.com ).

In addition, the Federal Trade Commission investigates

complaints of deceptive claims by franchisors and publishes

information about those cases.

2.4 | The Next Frontiers The next frontiers for entrepreneurship—where do they lie?

When a business magazine asked prominent investors in new

businesses to name the best ideas for a new start-up, their

responses included next-generation batteries with enough

juice to power cars after a seconds-long charge, longer-

There are over 825,000 franchised businesses in the United States that supply over 7.9 million jobs. Franchises contribute approximately $2.1 trillion to the economy. 42

Did You Know?

franchising an entrepreneurial alliance between a franchisor (an innovator who has created at least one successful store and wants to grow) and a franchisee (a partner who manages a new store of the same type in a new location)

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126 PART 2 | Planning

4. Affiliate model —Sites pay commissions to other sites to drive busi- ness to their own sites. Zazzle.com , Spreadshirt.com , and CafePress.

com are variations on this model. They sell custom-decorated gift items such as mugs and T-shirts. Designers are the affiliates;

they choose basic, undecorated products (such as a plain shirt) and add their own designs. Visitors to a designer’s web- site can link to, say, Zazzle and place an order, or they can go directly to Zazzle to shop. Either way, Zazzle sets the basic price, and the designer gets about 10 percent. Spreadshirt

and CafePress let designers choose how much above the base price they want to charge consumers for the decorated

product. 53

5. Subscription model —The website charges a monthly or annual fee for site visits or access to site content. Newspapers and maga- zines are good examples.

At least five successful business models have proven suc-

cessful for e-commerce: 51

1. Transaction fee model —Companies charge a fee for goods or services. Amazon.com and online travel agents are prime examples.

2. Advertising support model —-Advertisers pay the site operator to gain access to the demographic group that visits the operator’s site. More than one- third of online ads are for financial services, and another 22 percent are for web media. More than half of the ads appear on e-mail pages. 52

3. Intermediary model —A website brings buyers and sellers together and charges a commission for each sale. The premier example is eBay.

● Mario, Nintendo’s iconic video game character, floats with ZERO-G

coaches in zero-gravity atmosphere to train for his upcoming game set in

space, Super Mario Galaxy for Wii in Las Vegas, Nevada.

transaction fee model charging fees for goods and services

“My biggest motivation? just to keep challenging myself. i see life almost like one long university education that i never had—everyday i’m learning something new.”

—Richard Branson , CEO, Virgin Group 57

2.6 | Side Streets Trial and error can also be useful in starting new businesses.

Some entrepreneurs start their enterprises and then let the mar-

ket decide whether it likes their ideas. This method is risky, of

course, and should be done only if you can afford the risks. But

even if the original idea doesn’t work, you may be able to capi-

talize on the side street effect. 54 As you head down a road, you come to unknown places, and unexpected opportunities begin

to appear. And while you are looking, prepare so you can act quickly and effectively on any opportunity that presents itself.

advertising support model charging fees to advertise on a site

intermediary model charging fees to bring buyers and sellers together

affiliate model charging fees to direct site visitors to other companies’ sites

subscription model charging fees for site visits

LO3 Identify common causes of success and failure

3 | WHAT DOES IT TAKE, PERSONALLY?

Many people assume that there is an “entrepreneurial person-

ality.” No single personality type predicts entrepreneurial suc-

cess, but you are more likely to succeed as an entrepreneur if

you have certain characteristics: 55

co or

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CHAPTER 6 | Entrepreneurship 127

1. Commitment and determination: Successful entrepreneurs are decisive, tenacious, disciplined, willing to sacrifice, and able to immerse themselves totally in their enterprises.

2. Leadership: They are self-starters, team builders, superior learn- ers, and teachers. Communicating a vision for the future of the company—an essential component of leadership—has a direct impact on venture growth. 56

3. Opportunity obsession: They have an intimate knowledge of cus- tomers’ needs, are market driven, and are obsessed with value creation and enhancement.

4. Tolerance of risk, ambiguity, and uncertainty: They are calculated risk takers and risk managers, tolerant of stress, and able to resolve problems.

5. Creativity, self-reliance, and ability to adapt: They are open- minded, restless with the status quo, able to learn quickly, highly adaptable, creative, skilled at conceptualizing, and attentive to details.

6. Motivation to excel: They have a clear results orientation, set high but realistic goals, have a strong drive to achieve, know their own weaknesses and strengths, and focus on what can be done rather than on the reasons why things can’t be done.

Bill Gross—whom you met in our earlier discussion of

“Why become an entrepreneur?” exemplifies many of these

characteristics. He persevered even after his brainchild, Idealab,

apparently crashed and burned. The company was launched in

the mid-1990s to nurture Internet start-ups as they were being

formed left and right. Companies that Idealab invested in

included eToys, Eve.com , and PetSmart.com . If you haven’t

heard of them, it’s probably because they went out of business

because sales couldn’t keep up with the hype and the hopes.

Today Gross explains that he hadn’t intended for Idealab to

help exclusively dot-com businesses, but that’s what entrepre-

neurs were all starting in the 1990s. When the Internet boom

crashed several years ago, Gross laid off employees and shut-

tered offices, but he maintained his vision of helping entrepre-

neurs. Instead of giving up, Gross established stricter criteria

for funding companies in the future—and determined that he

would choose companies whose activities make a difference.

Of the company’s near failure, Gross says, “We have a lot more

wisdom now.” 58

3.1 | Making Good Choices

Success is a function not only of per-

sonal characteristics but also of mak-

ing good choices about the business

you start. Exhibit 6.3 presents a model

for conceptualizing entrepreneurial

ventures and making the best choices.

According to this model, a new ven-

ture may involve high or low levels of

innovation, or the creation of some- thing new and different. It can also be

side street effect as you head down a road, unexpected opportunities begin to appear

characterized by low or high

risk, including the probability of major financial loss, as well

as psychological risk perceived by the entrepreneur, including

risk to reputation and ego. 59

Combining these two variables, we

can identify four kinds of new ventures:

1. In the upper left quadrant, innovation is high (ventures are truly novel ideas), and there is little risk. For example, a pioneering product idea from Procter & Gamble might fit here if there are no current competitors and because, for a company of that size, the financial risks of new product investments can seem rela- tively small.

2. In the upper right quadrant, novel product ideas (high innovation) are accompanied by high risk because the financial investments and competition are great. Virgin Galactic’s space tourism venture would likely fall into this category.

3. Most small business ventures are in the lower right, where inno- vation is low and risk is high. They are fairly conventional entries in well-established fields. New restaurants, retail shops, and com- mercial outfits involve a sizable investment by the entrepreneur and face direct competition from similar businesses.

4. Finally, the low-innovation/low-risk category includes ventures that require minimal investment and/or face minimal competition for strong market demand. Examples are some service businesses having low start-up costs and those involving entry into small towns if there is no competitor and demand is adequate.

This matrix helps entrepreneurs think about their venture and

decide whether it suits their particular objectives. It also helps

identify effective and ineffective strategies. You might find one

cell more appealing than others. The lower left cell is likely to

have relatively low payoffs but to provide more security. The

possible risks and returns are higher in other cells, especially

the upper right. So you might place your new venture idea in

the appropriate cell and pursue it only if it is in a cell where you

would prefer to operate. If it is not, you can reject the idea or

look for a way to move it toward a different cell.

The matrix also can help entrepreneurs remember a useful

point: successful companies do not always require a cutting-edge

technology or an exciting new product. Even companies offer-

ing the most mundane products—the type that might reside in

Exhibit 6.3 Entrepreneurial innovation-risk strategies

Source: Adapted from Sonfield and Lussier, “Entrepreneurial Strategy Matrix: A Model of New and Ongoing Ventures,” Business Horizons, May–June 1997.

Low Risk High Risk

High Innovation Subway launches an online service to pre-order sandwiches.

Medical researchers try to use 3D printing technology to create organs.

Low Innovation A college student launches a resume writing and interviewing tips venture.

An entrepreneur opens a pub in a downtown nightclub area.

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128 PART 2 | Planning

several philanthropic activities like the Angel Network and the

Leadership Academy for Girls in South Africa.

In January 2011 Oprah launched the Oprah Winfrey

Network (OWN) on cable. In partnership with Discovery

Communications, OWN provides 24-hour-a-day programming

and shows, including Our America with Lisa Ling, The Haves and Have Nots, and Oprah Prime. While many believed the Oprah brand would immediately translate into success with the new

network, this has not been the case. Since its inception, OWN

has received more than $500 million from its partner, Discovery.

This working capital gave Winfrey some breathing room to learn

the ins and outs of managing a network. Her skill and experience

as an entrepreneur are beginning to pay off; OWN turned its first

profit in 2013. 61

the lower left cell—can gain competitive advantage by doing

basic things better than competitors.

Oprah Winfrey is an award-winning entrepreneur with a long

track record of success. From 1986 to 2011, her nationally syndi-

cated talk show The Oprah Winfrey Show became the highest-rated talk show in television history by reaching over 40 million view-

ers each month. Not only did many of the show’s topics spur

nationwide debate on such topics as sexual abuse, discrimina-

tion, adoption, and homelessness, but it also served as a launch

pad for several other shows like Dr. Phil, Rachel Ray, The Dr. Oz Show, and The Nate Berkus Show. Her monthly magazine O, The Oprah Magazine is also successful and has a monthly circulation of 2.35 million readers. Oprah also acts, produces movies, and leads

The 5,000 fastest-growing privately held companies in the United States often started modestly. The median amount of money spent to launch these companies was just $25,000. Most of that money came from the entrepreneurs themselves. 60

Did You Know?

● Oprah Winfrey’s exclusive no-holds-barred interview with controversial cyclist

Lance Armstrong, “Oprah and Lance Armstrong: The Worldwide Exclusive,” aired

as a two-night event on OWN: Oprah Winfrey Network.

0 50 Percent

100

87%

19%

17%

Self-funding by owner

Percentage of companies using source of capital

Loans from family and friends

Bank loans

Venture capital

3.2 | Failure Happens, But You Can Improve the Odds of Success

Success or failure lies ahead for entrepreneurs starting their

own companies, as well as for those starting new businesses

within bigger corporations. Entrepreneurs succeed or fail in

private, public, and not-for-profit sectors, as well as in nations

at all stages of development and of all political types. 62

Estimated failure rates for start-ups vary. Most indicate that

failure is more the rule than the exception. The failure rate is

high for certain businesses like restaurants, and lower for suc-

cessful franchises. Start-ups have at least two major liabili-

ties: newness and smallness. 63

New companies are relatively

unknown and must learn how to beat established competitors

at doing something customers value. The odds of survival

improve if the venture grows to at least 10 or 20 people, has

revenues of $2 million or $3 million, and is pursuing opportu-

nities with growth potential. 64

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CHAPTER 6 | Entrepreneurship 129

Another silver lining in diffi-

cult economic times is that it’s

easier to recruit talent.

3.4 | Business Incubators The need to provide a nurturing environment for fledgling

enterprises has led to the creation of business incubators.

Business incubators, often located in industrial parks or abandoned factories, are protected environments for new,

small businesses. Incubators offer benefits such as low rents

and shared costs. Shared staff costs, such as for receptionists

and administrative assistants, avoid the expense of a full-time

employee but still provide convenient access to services. The

staff manager is usually an experienced businessperson or con-

sultant who advises the new business owners. Incubators often

are associated with universities, which provide technical and

business services for the new companies. The heyday of business incubators came in the 1990s,

when around 700 of them were financing start-ups, mainly

emphasizing technology. Eight out of 10 shut down fol-

lowing the collapse of the Internet bubble, but the idea of

nurturing new businesses persists. Naval Ravikant is devel-

oping a company tentatively named Hit Forge, which resem-

bles the dot-com incubators. Hit Forge hired four engineers

with experience in launching successful Internet concepts.

The engineers have wide latitude to try ideas, but they work

under strict deadlines. They must go from concept to product

within 90 days, and any enterprises that aren’t growing after a

year will be terminated. Unlike the older-style incubator, Hit

Forge lets engineers work from the location of their choice,

and the engineers retain half ownership in the ventures they

develop. Also, whereas incubators in the 1990s might have

spent $2 million developing an idea, today’s launches might

cost just $50,000. 70

One business incubator is thriving in Lebanon, New Hampshire.

The Dartmouth Regional Technology Center (DRTC) offers

young technology companies the business development sup-

port and services they need to grow. Funding for the incubator

originally came from state and federal agencies, and nearby

Dartmouth College sent some of the first businesses to the $8 mil-

lion facility, which provides lab and office space, as well as shared

conference areas.

When creative people gather, sparks fly, producing ideas

for new solutions, goods and services, or processes. The DRTC

is no exception. Some of the businesses that got their start

there include PreventAGE Health Care, whose purpose is to

improve diabetes care by providing patients and doctors with

the necessary tools to predict and more effectively manage dia-

betic complications. Another company, segTEL, has built one

of the largest telecommunications networks in northern New

England. 71

Acquiring venture capital is not essential to the success

of most start-up businesses; in fact, it is rare. Recent num-

bers from the Census Bureau say that more than three-

fourths of start-up companies with employees were financed

by entrepreneurs’ own assets or assets of their families.

Approximately one-tenth of businesses were financed with

the owners’ credit cards. 65

Still, in 2013, venture capitalists

invested $29.4 billion in approximately 4,000 deals; 66

that’s

a sizable amount of money, even if the fraction of total new

companies is small. And venture capital firms often provide

expert advice that helps entrepreneurs improve the odds for

success.

Further factors that influence success and failure include

risk, the economic environment, various management-related

hazards, and initial public stock offerings (IPOs).

Risk It’s a given: Starting a new business is risky. Entrepreneurs with plenty of business experience are especially aware of this.

When Chris McGill was evaluating his idea for Mixx.com , a

news website that could be personalized based on recommenda-

tions by users, he was USA Today ’s vice president of strategy. To make Mixx succeed, McGill knew he would be leaving a

well-paying job for an uncertain future in which he had to line

up financing and hire talented people in a turbulent business

environment. But McGill also concluded that his experience

at USA Today and prior management experience with Yahoo News gave him knowledge and connections for a successful Internet business.

3.3 | The Role of the Economic Environment

Entrepreneurial activity stems from the economic environment

as well as the behavior of individuals. For example, money is a

critical resource for all new businesses. Increases in the money

supply and the supply of bank loans, real economic growth,

and improved stock market performance lead to both improved

prospects and increased sources of capital. In turn, the pros-

pects and the capital increase the rate of business formation.

Under favorable conditions, many aspiring entrepreneurs find

early success. But economic cycles soon change favorable

conditions into downturns. To succeed, entrepreneurs must

have the foresight and talent to survive when the environment

becomes more hostile.

Although good economic times may make it easier to

start a company and to survive, bad times can offer a chance

to expand. Ken Hendricks of ABC Supply found a business

opportunity in a grim economic situation: a serious downturn

in the manufacturing economy of the Midwest contributed

to the shutdown of his town’s largest employer, the Beloit

Corporation. Hendricks purchased the company’s buildings

and lured a diverse group of new employers to town, despite

the economic challenges. In fact, Hendricks has a track record

of turning around the struggling suppliers that ABC acquires. 68

business incubators protected environments for new small businesses

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130 PART 2 | Planning

limited options for survival. Gary Gottenbusch worried when

orders slowed at his Servatii Pastry Shop and Deli, located

in Cincinnati. As a recession hit Ohio hard, customers were

deciding that fancy breads and cakes were a luxury they could

go without. Servatii might have closed, but Gottenbusch was

willing to change his vision. He kept afloat and even added to

sales by cultivating new distribution channels (sales in hospi-

tals), new products (distinctive pretzel sticks), and cost-cut-

ting measures (a purchasing association with other bakers in

the area). 75

Failure can be devastating. When Mary Garrison wanted

to own a business, she chose the women’s fitness indus-

try and decided to buy a franchise from Lady of America

Franchise Corporation. But when she held her grand open-

ing, not a single person stopped by. Three months later, she

closed. Garrison blames the franchisor for not providing the

necessary promotional support, a complaint that Lady of

America denies. 76

4.3 | Growth Creates New Challenges

Just one in three Inc. 500 companies keeps growing fast enough to make this list of fastest-growing companies two years run-

ning. The reason: they are facing bigger challenges, competing

with bigger firms, stretching the founders’ capacities, and prob-

ably burning cash. 77

It’s a difficult transition.

The transition is particularly complex for entrepreneurs

who quickly face the possibility of expanding internationally.

Whether a firm should expand internationally soon after it is

created or wait until it is better established is an open question.

Entering international markets should help a firm grow, but

going global creates challenges that can make survival more

difficult, especially when the company is young.

For instance, when Lou Hoffman decided to expand his pub-

lic relations (PR) firm to China, he couldn’t find anyone famil-

iar with both Chinese business and the creative business culture

that had served his agency well. So he hired a Chinese PR staffer

who was willing to spend a year at his California headquarters,

just absorbing the business culture. That method worked for the

Chinese market but flopped when Hoffman tried it for opening

LO4 Discuss common management challenges

“The National Business Incubation Industry estimates that United States-based incubators assisted 49,000 start-up

companies that provided full-time employment for nearly 200,000 workers and generated annual revenue of

almost $15 billion.” 69

4 | COMMON MANAGEMENT CHALLENGES

As an entrepreneur, you are likely to face several common

challenges that you should understand before you face them,

and then manage effectively when the time comes. Exhibit 6.4

illustrates eight common management challenges.

4.1 | You Might Not Enjoy It Big company managers and employees can specialize in

what they love, whether it’s selling or strategic planning.

But entrepreneurs usually have to do it all, at least in the

beginning. If you love product design, you also have to sell

what you invent. If you love marketing, get ready to manage

the money too. This last challenge was almost a stumbling

block for Elizabeth Busch, Anne Frey-Mott, and Beckie

Jankewicz when they launched The Event Studio to run

business conferences for their clients. All three women had

experience with some aspect of running conferences, but

when they started their company, they didn’t fully think out

all the accounting decisions they would need for measuring

their income and cash flow. With some practical advice,

they learned the basic accounting lessons that helped them

avoid tax troubles later on. 72

4.2 | Survival Is Difficult Zappos cofounder Tony Hsieh says, “We thought about going

under every day—until we got a $6 million credit line from

Wells Fargo.” 73

Companies without much of a track record

tend to have trouble lining up lenders, investors, and even

customers. When economic conditions cool or competition

heats up, a small start-up serving a niche market may have

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CHAPTER 6 | Entrepreneurship 131

“ Inc. Magazine’s list of best industries for starting a business in 2013 includes health and specialty food, digital forensics services like detecting phishing scams, mobile health apps,

and green construction.” 74

Exhibit 6.4 Eight common management challenges for entrepreneurs

May not like it

Survival

Growth

Delegation

Misuse of funds

Poor controls

Mortality

Going public

a London office; the British employee didn’t want to leave the

California lifestyle and return home. 78

Of course, the risks tend

to be lower when entrepreneurs (or their company’s managers)

have experience in serving foreign markets. 79

In the beginning, the start-up mentality tends to be “we

try harder.” 80

Entrepreneurs work long hours at low pay,

deliver great service, get good word-of-mouth, and their

business grows. At first, it’s “high performance, cheap

labor.” But with growth comes the need to pay higher wages

to hire more people who are less dedicated than the founders.

Then it’s time to raise prices, establish efficient systems, or

accept lower profits. The founder’s talents may not spread

to everyone else. You need a unique value proposition that

will work as well with 100 employees, because hard work or

instincts alone no longer will get the job

done. Complicating matters is the con-

tinuing growth in customers’ needs and

expectations. 81

4.4 | It’s Hard to Delegate As the business grows, entrepreneurs

often hesitate to delegate work they are

used to doing. Leadership deteriorates

into micromanagement. For example,

during the Internet craze, many company

founders with great technical knowledge

but little experience became “instant

experts” in every phase of business,

including branding and advertising. 82

Turns out, they didn’t know as much

as they thought, and their companies

crashed. In contrast, Darren Herman kept

his focus on what he knows. While still in

his early 20s, Herman combined his pas-

sion for video games and his knowledge

of marketing and came up with a busi-

ness idea: IGA Worldwide, which works

with advertisers and game developers to

place advertising within video games.

Shortly after he launched IGA, Herman

turned over the job of CEO to a more experienced person

and named himself “senior business development director,”

which means he focuses on spotting new ideas and promot-

ing the company to investors. 83

4.5 | Misuse of Funds Many unsuccessful entrepreneurs blame their failure on

inadequate financial resources. Yet failure due to a lack

of financial resources doesn’t necessarily indicate a real

lack of money; it could mean a failure to use the available

money properly. A lot of start-up capital may be wasted—

on expensive locations, great furniture, fancy stationery.

Entrepreneurs who fail to use their resources wisely usually

make one of two mistakes: they apply financial resources to

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132 PART 2 | Planning

• Family members working in the business must be at least as capa- ble and hard-working as other employees.

• At least one key position should be filled by a nonfamily member.

• Someone outside the family and the business should help plan succession.

Family members who are mediocre performers are resented

by others; outsiders can be more objective and contribute

expertise the family might not have. Issues of management

succession are often the most difficult of all, causing serious

conflict and possible breakup of the firm.

4.8 | Going Public Sometimes companies reach a point at which the owners want

to “go public.” Initial public stock offerings (IPOs) offer a way to raise capital through federally registered and underwritten

sales of shares in the company. 87

You need lawyers and accoun-

tants who know current regulations. The reasons for going

public include raising more capital, reducing debt or improv-

ing the balance sheet and enhancing net worth, pursuing other-

wise unaffordable opportunities, and improving credibility with

customers and other stakeholders—“you’re in the big leagues

now.” Disadvantages include the expense, time, and effort

involved; the tendency to become more interested in the stock

price and capital gains than in running the company properly;

and the creation of a long-term relationship with an investment

banking firm that won’t necessarily always be a good one. 88

Many entrepreneurs prefer to avoid going public, feeling

they’ll lose control if they do. States Yvon Chouinard of sports

and apparel firm Patagonia, “There’s a certain formula in business

where you grow the thing and go public. I don’t think it has to be

that way. Being a closely held company means being able to take

risks and try new things—the creative part of business. If I were

owned by a bunch of retired teachers, I wouldn’t be able to do

what I do; I’d have to be solely concerned with the bottom line.” 89

Executing IPOs and other approaches to acquiring capital is

complex and beyond the scope of this chapter. Sources for more

information include The Ernst & Young Guide to Raising Capital, the National Venture Capital Association ( www.nvca.org ),

VentureOne ( www.ventureone.com ), and VentureWire (link to this publication from www.venturecapital.dowjones.com/ ).

the wrong uses, or they main-

tain inadequate control over

their resources.

This problem may be more

likely when a lucky entrepre-

neur gets a big infusion of cash from a venture capital firm or

an initial offering of stock. For most start-ups, where the money

on the line comes from the entrepreneur’s own assets, he or

she has more incentive to be careful. Tripp Micou, founder of

Practical Computer Applications, says, “If all the money you

spend is based on what you’re bringing in [through sales], you

very quickly focus on the right things to spend it on.” 84

Micou,

an experienced entrepreneur who expects the company’s rev-

enues to double each year for the next few years, believes that

this financial limitation is actually a management advantage.

4.6 | Poor Controls Entrepreneurs, in part because they are very busy, often fail

to use formal control systems. One common entrepreneurial

malady is an aversion to record keeping. Expenses mount, but

records do not keep pace. Pricing decisions are based on intu-

ition without adequate reference to costs. As a result, the com-

pany earns inadequate margins to support growth.

Sometimes an economic slowdown provides a necessary

alarm, warning business owners to pay attention to controls.

When Servatii Pastry Shop and Deli’s sales deteriorated while

the prices of ingredients were rising, owner Gary Gottenbusch

pushed himself to go “a little out of [his] comfort zone” and con-

sulted with advisers at the Manufacturing Extension Partnership.

Besides encouraging him to innovate, the advisers helped him

set goals and monitor progress. One problem Gottenbusch tack-

led was the price of baking commodities, such as shortening and

flour. He partnered with other local bakeries to form a purchas-

ing association that buys in bulk and passes along the savings.

Keeping costs down helped Servatii stay profitable when cus-

tomers were trimming their budgets for baked goods. 85

Even in high-growth companies, great numbers can mask

brewing problems. Blinded by the light of growing sales, many

entrepreneurs fail to maintain vigilance over other aspects of the

business. In the absence of controls, the business veers out of

control. So don’t get overconfident; keep asking critical ques-

tions. Is our success based on just one big customer? Is our

product just a fad that can fade away? Can other companies eas-

ily enter our domain and hurt our business? Are we losing a

technology lead? Do we really understand the numbers, know

where they come from, and have any hidden causes for concern?

4.7 | Mortality One long-term measure of an entrepreneur’s success is the fate

of the venture after the founder’s death. Founding entrepre-

neurs often fail to plan for succession. When death occurs, the

lack of a skilled replacement for the founder can lead to busi-

ness failure.

Management guru Peter Drucker offered the following advice

to help family-managed businesses survive and prosper: 86

initial public offering (ipo) sale to the public, for the first time, of federally registered and underwritten shares of stock in the company

5 | PLANNING AND RESOURCES HELP YOU SUCCEED

Aside from financial resources, entrepreneurs need to think

through their business idea carefully to help ensure its suc-

cess. 90

This calls for good planning and nonfinancial resources.

LO5 Explain how to increase your chances of success, including good business planning

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CHAPTER 6 | Entrepreneurship 133

addition to the numbers, the

best plans convey—and make

certain that the entrepre-

neurs have carefully thought

through—five key factors: 95

1. The people: The new orga- nization’s people should be energetic and have skills and expertise directly relevant to the venture. For many astute investors, the people are the most important element, more important even than the idea. Venture capital firms often receive 2,000 business plans per year; many believe that ideas are a dime a dozen and what counts is the ability to execute. Arthur Rock, a legendary venture capitalist who helped start Intel, Teledyne, and Apple, stated, “I invest in people, not ideas. If you can find good people, if they’re wrong about the product, they’ll make a switch.” 96

2. The opportunity: You need a competitive advantage that can be defended. The focus should be on customers. Who is the customer? How does the customer make decisions? What price will the customer pay? How will the venture reach all customer segments? How much does it cost to acquire and support a customer, and to produce and deliver the product? How easy or difficult is it to retain a customer?

3. The competition: The plan must identify current competitors and their strengths and weaknesses, predict how they will respond to the new venture, indicate how the new venture will respond to the competitors’ responses, identify future potential competitors, and consider how to collaborate with or face off against actual or potential competitors. The original plan for Zappos was for its website to compete with other online shoe retailers by offering a wider selection than they did. However, most people buy shoes in stores, so Zappos cofounders Nick Swinmurn and Tony Hsieh soon realized that they needed a broader view of the competition. They began focusing more on service and planning a distribution method that would make online shopping as successful as visiting a store. 97

4. The context: The environment should be favorable from regulatory and economic perspectives. Such factors as tax policies, rules about raising capital, interest rates, inflation, and exchange rates will affect the viability of the new venture. The context can make it easier or harder to get backing. Importantly, the plan should make clear that you know that the context inevitably will change, fore- cast how the changes will affect the business, and describe how you will deal with the changes.

5. Risk and reward: The risk must be understood and addressed as fully as possible. The future is uncertain, and the elements described in the plan will change. Although you cannot predict the future, you must contemplate head-on the possibilities of key peo- ple resigning, interest rates changing, a key customer leaving, or a powerful competitor responding ferociously. Then describe what you will do to prevent, avoid, or cope with such possibilities. You should also speak to the end of the process: how to get money out of the business eventually. Will you go public? Will you sell or liqui- date? What are the various possibilities for investors to realize their ultimate gains? 98

5.1 | Planning So you think you have identified a business opportunity and

have the potential to make it succeed. Now what? Should you

act on your idea? Where should you begin?

The Business Plan Your excitement and intuition may con- vince you that you are on to something. But they might not

convince anyone else. You need more thorough planning and

analysis. This effort will help convince others to get on board

and help you avoid costly mistakes.

The first formal planning step is to do an opportunity analysis. This analysis includes a description of the good or service, an assessment of the opportunity, an assessment of the

entrepreneur (you), a specification of activities and resources

needed to translate your idea into a viable business, and your

source(s) of capital. 91

Your opportunity analysis should include

the following questions: 92

• What market need does my idea fill?

• What personal observations have I experienced or recorded with regard to that market need?

• What social condition underlies this market need?

• What market research data can be marshaled to describe this mar- ket need?

• What patents might be available to fulfill this need?

• What competition exists in this market? How would I describe the behavior of this competition?

• What does the international market look like?

• What does the international competition look like?

• Where is the money to be made in this activity?

The opportunity analysis, or opportunity assessment plan,

focuses on the opportunity, not the entire venture. It provides

the basis for deciding whether to act. Then the business plan describes all the elements involved in starting the new venture.

The business plan describes the venture and its market, strategies,

and future directions. It often has functional plans for marketing,

finance, manufacturing, and human resources. Exhibit 6.5 out-

lines a typical business plan. The business plan serves several purposes:

• It helps determine the viability of your enterprise.

• It guides you as you plan and organize.

• It helps you obtain financing.

It is read by potential investors, suppliers, customers, and

others. Get help in writing a sound plan!

Key Planning Elements Most business plans devote so much attention to financial projections that they neglect other

important information—information that matters greatly to

astute investors. In fact, financial projections tend to be overly

optimistic. Investors know this and discount the figures. 94

opportunity analysis a description of the good or service, an assessment of the opportunity, an assessment of the entrepreneur, and specification of activities and resources needed to translate your idea into a viable business and your source(s) of capital

business plan a formal planning step that focuses on the entire venture and describes all the elements involved in starting it

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134 PART 2 | Planning

Exhibit 6.5 Outline of a business plan

I. EXECUTIVE SUMMARY

A. Description of the Business Concept and the Business.

B. The Opportunity and Strategy.

C. The Target Market and Projections.

D. The Competitive Advantages.

E. The Economics, Profitability, and Harvest Potential.

F. The Team.

G. The Offering.

II. THE INDUSTRY AND THE COMPANY AND ITS PRODUCT(S) OR SERVICE(S)

A. The Industry.

B. The Company and the Concept.

C. The Product(s) or Service(s).

D. Entry and Growth Strategy.

III. MARKET RESEARCH AND ANALYSIS

A. Customers.

B. Market Size and Trends.

C. Competition and Competitive Edges.

D. Estimated Market Share and Sales.

E. Ongoing Market Evaluation.

IV. THE ECONOMICS OF THE BUSINESS

A. Gross and Operating Margins.

B. Profit Potential and Durability.

C. Fixed, Variable, and Semivariable Costs.

D. Months to Breakeven.

E. Months to Reach Positive Cash Flow.

V. MARKETING PLAN

A. Overall Marketing Strategy.

B. Pricing.

C. Sales Tactics.

D. Service and Warranty Policies.

E. Advertising and Promotion.

F. Distribution.

VI. DESIGN AND DEVELOPMENT PLANS

A. Development Status and Tasks.

B. Difficulties and Risks.

C. Product Improvement and New Products.

D. Costs.

E. Proprietary Issues.

VII. MANUFACTURING AND OPERATIONS PLAN

A. Operating Cycle.

B. Geographical Location.

C. Facilities and Improvements.

D. Strategy and Plans.

E. Regulatory and Legal Issues.

VIII. MANAGEMENT TEAM

A. Organization.

B. Key Management Personnel.

C. Management Compensation and Ownership.

D. Other Investors.

E. Employment and Other Agreements and Stock Option and Bonus Plans.

F. Board of Directors.

G. Other Shareholders, Rights, and Restrictions.

H. Supporting Professional Advisers and Services.

IX. OVERALL SCHEDULE

X. CRITICAL RISKS, PROBLEMS, AND ASSUMPTIONS

XI. THE FINANCIAL PLAN

A. Actual Income Statements and Balance Sheets.

B. Pro Forma Income Statements.

C. Pro Forma Balance Sheets.

D. Pro Forma Cash Flow Analysis.

E. Breakeven Chart and Calculation.

F. Cost Control.

G. Highlights.

XII. PROPOSED COMPANY OFFERING

A. Desired Financing.

B. Offering.

C. Capitalization.

D. Use of Funds.

E. Investor’s Return.

XIII. APPENDIXES

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CHAPTER 6 | Entrepreneurship 135

network and having a good rep-

utation—helps entrepreneurs

gain access to useful informa-

tion, win trust and cooperation

from others, recruit employees,

form successful business alli-

ances, receive funding from

venture capitalists, and become

more successful. 105

Social cap-

ital provides a lasting source of

competitive advantage. 106

To see just some of the

ways social capital can help entrepreneurs, consider a pair

of examples. Brian Ko, an engineer who founded Integrant

Technologies, got useful advice from his investors, includ-

ing private investors, a bank, and venture capital firms.

One adviser taught Ko that acquiring patents

during the start-up phase would help the com-

pany stay competitive during the long term, so

Integrant spent the money to file applications

for 150 patents in six years, positioning the

company to protect its ideas as it gains market

share and competitors’ attention. 107

A second example of the benefits of a strong

network can be seen in Victoria Colligan’s

“Ladies Who Launch,” a media firm that pro-

vides resources and connections to female

entrepreneurs. Members receive advice about

promoting and growing their new businesses,

network with several other women entrepre-

neurs, and are teamed up with expert business

coaches. 108

Top Management Teams The top manage- ment team is another crucial resource. Consider

one of Sudhin Shahani’s two start-ups,

MyMPO, whose digital media services include

Musicane, which lets musicians sell audio and

video files and ringtones online at storefronts

they create for themselves. The company’s head

of marketing was a singer. 109

Having a musician in that top spot

may help Musicane build client relationships with other artists.

Also, in companies that have incorporated, a board of directors

improves the company’s image, develops longer-term plans for

expansion, supports day-to-day activities, and develops a net-

work of information sources.

Advisory Boards Whether or not the company has a for- mal board of directors, entrepreneurs can assemble a group of

people willing to serve as an advisory board. Board members

with business experience can help an entrepreneur learn basics

like how to do cash flow analysis, identify needed strategic

changes, and build relationships with bankers, accountants,

Selling the Plan Your goal is to get investors to support the plan. The elements of a great plan, as just described, are essen-

tial. Also important is whom you decide to try to convince to

back your plan.

Many entrepreneurs want passive investors who will give

them money and let them do what they want. Doctors and den-

tists generally fit this image. Professional venture capitalists

do not, as they demand more control and more of the returns.

But when a business goes wrong—and chances are, it will—

nonprofessional investors are less helpful and less likely to

advance more (needed) money. Sophisticated investors have

seen sinking ships before and know how to help. They are

more likely to solve problems, provide more money, and also

navigate financial and legal waters such as going public. 100

View the plan as a way for you to figure out how to reduce

risk and maximize reward, and to convince others that you

understand the entire new venture process.

Don’t put together a plan built on naïveté or

overconfidence or one that cleverly hides major

flaws. You might not fool others, and you cer-

tainly would be fooling yourself.

5.2 | Nonfinancial Resources

Also crucial to the success of a new business

are nonfinancial resources, including legiti-

macy in the minds of the public and the ways

other people can help.

Legitimacy An important resource for the new venture is legitimacy —people’s judgment of a company’s acceptance, appropriateness,

and desirability. 101

When the market confers

legitimacy, it helps overcome the “liability

of newness” that creates a high percentage of

new venture failure. 102

Legitimacy helps a firm

acquire other resources such as top managers,

good employees, financial resources, and gov-

ernment support. In a three-year study tracking

business start-ups, the likelihood that a company would succeed

at selling products, hiring employees, and attracting investors

depended most on how skillfully entrepreneurs demonstrated

that their business was legitimate. 103

A business is legitimate if its goals and methods are con-

sistent with societal values. You can generate legitimacy by

visibly conforming to rules and expectations created by gov-

ernments, credentialing associations, and professional organi-

zations; by visibly endorsing widely held values; and by visibly

practicing widely held beliefs. 104

Networks The entrepreneur is aided greatly by having a strong network of people. Social capital —being part of a social

legitimacy people’s judgment of a company’s acceptance, appropriateness, and desirability, generally stemming from company goals and methods that are consistent with societal values

social capital a competitive advantage from relationships with other people and the image other people have of you

According to the State New Economy Index, the most hospitable states for starting an innovative, new economy business are Massachusetts, Delaware, Washington, California, and Maryland. 99

Did You Know?

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136 PART 2 | Planning

and attorneys. Karen Usher, founder of human resources out-

sourcing firm TPO, recently reported $5 million in revenue and

sales growth at 10 percent per year for the past decade. Usher

attributes TPO’s success to her advisory board of three veteran

executives, who give management and investment advice and

make introductions to potential clients. 110

Partners Often two people go into business together as part- ners. Partners can help one another access capital, spread the

workload, share the risk, and share expertise.

While some partnerships fall apart over time, others

endure and become very successful. Some examples of

high-performance business partnerships include Twitter’s

Evan Williams, Biz Stone, and Jack Dorsey; Microsoft’s Bill

Gates and Paul Allen; Imagine Entertainment’s Brian Grazer

and Ron Howard; the New York Yankees baseball franchise’s

Joe Torre and the late Don Zimmer; and Google’s Sergei Brin

and Larry Page.

What factors contribute to successful, long-lasting business

relationships? Some experts suggest that the answer includes

trust, mutual respect, shared vision and values, and honest and

open communication. 111

For example, Berkshire Hathaway’s

CEO, Warren Buffett, values the fact that his vice chairman,

Charlie Munger, plays devil’s advocate by looking at “every

possible business deal skeptically, always looking for a reason

to say no.” In contrast, Buffett uses every argument possible

to convince Munger to support a given deal. 112

By the end

of these discussions, the partners decide whether to invest or

● Berkshire Hathaway Inc. Chairman Warren Buffett (right) talks to

Microsoft Corp. Chairman Bill Gates at the Berkshire Hathaway annual

meeting. Buffett usually laments that his company has more cash than

investment opportunities, but announced that he envisioned an acquisition so

big that he’d have to sell some stocks to free up funds.

LO6 Describe how managers of large companies can foster entrepreneurship

6 | CORPORATE ENTREPRENEURSHIP

Large corporations are more than passive bystanders in the

entrepreneurial explosion. Consider Microsoft. Every spring,

the company hosts Techfest, essentially a three-day science

fair that spotlights innovations the company may pursue. About

half of Microsoft’s researchers come from around the world to

be inspired and energized by the glimpse at their colleagues’

creative projects. 114

Even established companies try to find and pursue profitable

new ideas—and they need in-house entrepreneurs (often called

intrapreneurs) to do so. If you work in a company and are con-

sidering launching a new business venture, Exhibit 6.6 can help

you decide whether the new idea is worth pursuing.

6.1 | Build Support for Your Ideas A manager with an idea to capitalize on a market opportunity

will need to get others in the organization to buy in or sign on.

In other words, you need to build a network of allies who sup-

port and will help implement the idea.

If you need to build support for a project idea, the first step

involves clearing the investment with your immediate boss or bosses.

115 At this stage, you explain the idea and seek approval

to look for wider support.

Higher executives often want evidence that the project is

backed by your peers before committing to it. This involves

making cheerleaders —people who will support the man- ager before formal approval from higher levels. Managers at

General Electric refer to this strategy as “loading the gun”—

lining up ammunition in support of your idea.

Next, horse trading begins. You can offer promises of pay- offs from the project in return for support, time, money, and

other resources that peers and others contribute.

Finally, you should get the blessing of relevant higher-level officials. This usually involves a formal presentation. You will

need to guarantee the project’s technical and political feasi-

bility. Higher management’s endorsement of the project and

promises of resources help convert potential supporters into an

enthusiastic team. At this point, you can go back to your boss

and make specific plans for going ahead with the project.

Along the way, expect resistance and frustration—and use

passion and persistence, as well as business logic, to persuade

others to get on board.

not in a given company. This strategy has helped Berkshire

Hathaway grow from a start-up in 1965 to an influential

investment company that reported a net worth of $34.2 billion

in 2013. 113

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CHAPTER 6 | Entrepreneurship 137

(Google 1 ) a priority, acquired

Motorola Mobility, launched

Google Wallet, and shut down

underperforming projects like

Google Labs, Aardvark, Slide,

and Fast Flip. 116

Two common approaches

used to stimulate intrapreneurial activity are skunkworks and

bootlegging. Skunkworks are project teams designated to produce a new product. A team is formed with a specific goal

within a specified time frame. A respected person is chosen to

be manager of the skunkworks. In this approach to corporate

innovation, risk takers are not punished for taking risks and

failing—their former jobs are held for them. The risk takers

also have the opportunity to earn large rewards. Adam Gryglak,

chief engineer at Ford Motor Company, led a skunkworks team

to develop an all-new Ford diesel engine in a record-setting 36

months. 117

Bootlegging refers to informal efforts—as opposed to

official job assignments—in which employees work to create

new products and processes of their own choosing and initia-

tive. Informal can mean secretive, such as when a bootlegger

believes the company or the boss will frown on those activ-

ities. But companies should tolerate some bootlegging, and

some even encourage it. To a limited extent, they allow peo-

ple freedom to pursue pet projects without asking what they

are or monitoring progress, figuring bootlegging will lead

to some lost time but also to learning and to some profitable

innovations. Merck, desiring entrepreneurial thinking and behavior

in research and development, explicitly rejects budgets for

planning and control. New product teams don’t get a budget. They must persuade people to join the team and commit their resources. This creates a survival-of-the-fittest process, mirror-

ing the competition in the real world. 118

At Merck, as at Wells

Fargo TPA, intrapreneurship derives from deliberate strategic

thinking and execution.

6.3 | Managing Intrapreneurship is Risky

Organizations that encourage intrapreneurship face an obvious

risk: the effort can fail. 119

However, this risk can be managed.

In fact, failing to foster intrapreneurship may represent a sub-

tler but greater risk than encouraging it. The organization that

resists entrepreneurial initiative may lose its ability to adapt

when conditions dictate change.

The most dangerous risk in intrapreneurship is the risk of

overrelying on a single project. Many companies fail while

awaiting the completion of one large, innovative project. 120

The

successful intrapreneurial organization avoids overcommit-

ment to a single project and relies on its entrepreneurial spirit to

produce at least one winner from among several projects.

Organizations also court failure when they spread their

entrepreneurial efforts over too many projects. 121

If there are

many projects, each effort may be too small in scale. Managers

skunkworks a project team designated to produce a new, innovative product

bootlegging informal work on projects, other than those officially assigned, of employees’ own choosing and initiative

Fit with Your Skills and Expertise

Do you believe in the product or service?

Does the need it fits mean something to you personally?

Do you like and understand the potential customers?

Do you have experience in this type of business?

Do the basic success factors of this business fit your skills?

Are the tasks of the enterprise ones you could enjoy doing yourself?

Are the people the enterprise will employ ones you will enjoy working with and supervising?

Has the idea begun to take over your imagination and spare time?

Fit with the Market

Is there a real customer need?

Can you get a price that gives you good margins?

Would customers believe in the product coming from your company?

Does the product or service you propose produce a clearly perceivable customer benefit that is significantly better than

that offered by competing ways to satisfy the same basic need?

Is there a cost-effective way to get the message and the product to the customers?

Fit with the Company

Is there a reason to believe your company could be very good at the business?

Does it fit the company culture?

Does it look profitable?

Will it lead to larger markets and growth?

What to Do When Your Idea Is Rejected

As an intrapreneur, you will frequently find that your idea has been rejected. There are a few things you can do.

1. Give up and select a new idea.

2. Listen carefully, understand what is wrong, improve your idea and your presentation, and try again.

3. Find someone else to whom you can present your idea by considering:

a. Who will benefit most if it works? Can they be a sponsor?

b. Who are potential customers? Will they demand the product?

c. How can you get to the people who really care about intrapreneurial ideas?

Exhibit 6.6 Checklist for choosing ideas

6.2 | Build Intrapreneurship in Your Organization

Since taking over as CEO of Google in April of 2011, Larry Page

has been busy reviving the organization’s entrepreneurial culture.

He’s speeding up the pace of change; and in over the six months

he’s been at the helm, he has made social media integration

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138 PART 2 | Planning

Many college students have probably shopped at IKEA to buy affordable furnish- ings for their apartments, dormitory rooms, or homes. The popular Swedish retailer has more than 151,000 employees work- ing in 345 stores in 42 countries. IKEA’s approach to business is captured in its vision:

At IKEA, our vision is to create a better everyday life for the many people. Our business idea supports this vision by offering a wide range of well designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them.

In order to keep costs low for cus- tomers, intrapreneurs at IKEA look for innovative and creative ways to be more efficient. Sometimes these ideas are exciting, but more times than not they are simple improvements that can have real impact in the long run. Consider the ubiquitous wooden pallet. For over 50 years, IKEA has shipped its merchandise on 55-pound wooden pallets. Using about 10 million each year, the pallets are rented from suppliers and used many times before they have to be replaced.

In January 2012 the company began switching to a “paper variant that’s lighter, thinner, and—the company says— cheaper to use.” The new corrugated cardboard pallet is 90 percent lighter and one-third the height of the wooden ver- sion, but can carry up to 1,650 pounds (the same as a wooden pallet). Lighter pallets can reduce the size of the environmental footprint related to transporting products from IKEA’s factories to stores. Another difference is that the cardboard version is good for only one shipment and then needs to be recycled.

IKEA is making this change because it expects the lighter and shorter pallets to decrease transportation costs by about $193 million or 10 percent per year.

Intrapreneurship at IKEA

Discussion Questions 1. IKEA has been using wooden pallets

for several decades. Why do you think it took until 2011 for the company to pur- sue the idea of switching from wooden to paper pallets?

2. The expected savings related to trans- portation costs were discussed in this feature. What are some potential

negative consequences of the compa- ny’s decision?

SOURCES: R. Leblanc, “Paper Pallets for Export,” Packaging Revolution (online), July 22, 2013, http:// packagingrevolution.net ; “IKEA’s Challenge to the Wooden Pallet,” Bloomberg Businessweek, November 28–December 4, 2011, p. 67; company website, IKEA, http://www.ikea.com .

IKEA is switching from wood to paper pallets

to transport its products around the globe. The

lighter paper pallets are expected to decrease

transportation costs by about $193 million or

10 percent per year.

Intrepreneurship at IKEA is helping the firm become more efficient with its trans- portation, which, if successful, will have a positive impact on the bottom line.

will consider the projects unattractive because of their small

size. Or those recruited to manage the projects may have diffi-

culty building power and status within the organization.

6.4 | An Entrepreneurial Orientation Encourages New Ideas

Not only can we distinguish characteristics of individual entre-

preneurs, but we can do the same for companies. Companies

that are highly entrepreneurial differ from those that are not.

CEOs play a crucial role in promoting entrepreneurship within

large corporations. 122

Entrepreneurial orientation is the tendency of an organiza- tion to engage in activities designed to identify and capitalize

successfully on opportunities to launch new ventures by enter-

ing new or established markets with new or existing goods or

services. 123

Entrepreneurial orientation is determined by five

tendencies:

1. Independent action —The organization grants individuals and teams the freedom to exercise their creativity, champion promising ideas, and carry them through to completion.

2. Innovativeness —The firm supports new ideas, experimentation, and creative processes that can lead to new products or pro- cesses; it is willing to depart from existing practices and venture beyond the status quo.

3. Risk taking —The organization is willing to commit significant resources and perhaps borrow heavily, to venture into the unknown. The tendency to take risks can be assessed by consider- ing whether people are bold or cautious, whether they require high levels of certainty before taking or allowing action, and whether they tend to follow tried-and-true paths.

4. Proactiveness —The organization acts in anticipation of future problems and opportunities. A proactive firm changes the com- petitive landscape; other firms merely react. Proactive firms, like proactive individuals, are forward-thinking and fast to act, and are

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CHAPTER 6 | Entrepreneurship 139

lack of competitive fire—

will undermine entrepre-

neurial activities. And

without entrepreneurship,

how would firms survive

and thrive in a constantly

changing competitive

environment?

Thus management can

create environments that foster more entrepreneurship. If

your bosses are not doing this, consider trying some entre-

preneurial experiments on your own. 128

Seek out others with

an entrepreneurial bent. What can you learn from them, and

what can you teach others? Sometimes it takes individuals

and teams of experimenters to show the possibilities to those

at the top. Ask yourself, and ask others: Between the bureau-

crats and the entrepreneurs, who is having a more positive

impact? And who is having more fun?

leaders rather than followers. 125 Proactive firms encourage and allow individuals and teams to be proactive.

5. Competitive aggressiveness —The firm tends to challenge com- petitors directly and intensely to achieve entry or improve its posi- tion. In other words, it has a competitive tendency to outperform its rivals in the marketplace. This might involve striking fast to beat competitors to the punch, tackle them head-to-head, and analyze and target competitors’ weaknesses.

Entrepreneurial orientation should enhance the likelihood of

success and may be particularly important for conducting busi-

ness internationally. 126

Thus an “entrepreneurial” firm engages in an effective

combination of independent action, innovativeness, risk tak-

ing, proactiveness, and competitive aggressiveness. 127

The

relationship between these factors and the performance of the

firm is complicated and depends on many things. Still, you

can imagine how the opposite profile—too many constraints

on action, business as usual, extreme caution, passivity, and a

entrepreneurial orientation the tendency of an organization to identify and capitalize successfully on opportunities to launch new ventures by entering new or established markets with new or existing goods or services

“I had to make my own living and my own opportunity! but I made it! don’t sit down and wait for the opportunities

to come. Get up and make them.” — Madam C.J. Walker , Founder of Walker Cosmetics Line 124

Study Che klist Did you tear out the perforated student review card at

the back of the text to revisit learning objectives and key terms and definitions?

Connect ® Management is available for M Management. Additional resources include: Interactive Applications: • Case Analysis: To Be, or Not to Be, an Entrepreneur • Drag & Drop: Opportunity Analysis for Shoes With Soul • Self-Assessment: Assessing Your Flexibility • Video Case: Entrepreneurship at 1154 Lill Studio

LearnSmart—Multiple choice questions help you determine what you already know, are not sure about, or need to practice based on your score. And with SmartBook, you can read the relevant section in the eBook as well as practice and recharge what you’ve learned.

Chapter Video: Pillow Pets

Young Manager Speaks Out: Joe Gaspar, Bicycle Shop/Owner

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140 PART 3 | Organizing

7 Organizing for Success chapter

After studying Chapter 7, you will be

able to

LO1 Define the fundamental characteristics of organization structure.

LO2 Distinguish among the four dimensions of an organization’s vertical structure.

LO3 Give examples of four basic forms of horizontal structures of organizations.

LO4 Describe important mechanisms used to coordinate work.

LO5 Discuss how organizations can improve their agility through strategy, commitment to customers, and use of technology.

Learning Objectives

part three

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T he worldwide mobile gaming market for smart-phones and tablets is expected to reach 22 billion in 2015, an increase of nearly 30 percent over the

previous year. 1 How many people play these mobile games?

According to AppData, a research firm that tracks this informa-

tion, as of May 2013, 2

• 43.5 million people play Candy Crush Saga (King).

• 38.4 million people play Farmville 2 (Zynga).

• 30.2 million people play Texas HoldEm Poker (Zynga).

• 24.7 million people play Pet Rescue Saga (King).

• 23.3 million people play Dragon City (Social Point).

The competition for market-leader Zynga is heating up as com-

panies like King develop and launch popular games like Candy

Crush Saga, currently the top-rated app on Facebook. Virtually

unknown in 2012, King recently filed an initial public offering

rumored to be valued at $5 billion. 3 Intense competition, nonex-

istent brand loyalty, and low barriers to entry make competing in

the mobile gaming market challenging. Companies like Electronic

Arts (FIFA and Madden) and ATVI (World of Warcraft) are reorga-

nizing their design, social media, and marketing efforts to capture

more players from Facebook. 4 EA’s gamble is paying off: since its

launch in 2012, The Simpsons: Tapped Out has generated $50 mil-

lion in revenue and has more than 5 million daily active users. 5

There are no guarantees that these organizational structur-

ing efforts will produce the next blockbuster game. For example,

Zynga’s Mafia Wars 2, which had a group of up to 80 special-

ized employees working on its development for more than a

year, lost 900,000 daily players since its peak of 2.5 million daily

players in October 2011. 6 However, given Zynga’s track record

of social virtual game hits, specialists and design experts within

the firm are undoubtedly working on the next big thing to be

played on mobile devices like smartphones and tablets.

As with Zynga and Electronic Arts, an organization’s suc-

cess often depends on the way work and responsibilities are

organized. Ideally managers make decisions that align their

company’s structure with its strategy, so employees have the

authority, skills, resources, and motivation to focus on the

activities where they can contribute most to the company’s

success.

This chapter focuses on the vertical and horizontal dimen-

sions of organization structure. We begin by covering basic

principles of differentiation and integration. Next we discuss the vertical structure, which includes issues of authority, hierar-

chy, delegation, and decentralization. Then we describe various

forms of horizontal structure, including functional, divisional,

and matrix forms. We illustrate the ways in which organiza-

tions can integrate their structures: achieving coordination by

standardization, by plan, and by mutual adjustment. Finally,

we focus on the importance of organizational flexibility and

responsiveness—that is, the organization’s ability to change

its form and adapt to new strategies, technology innovations,

changes in the environment, and other challenges.

“Good order is the foundation of all things.” — Edmund Burke

LISTEN & LEARN ONLINE

YOUNG MANAGERS

Speak Out! “ We (our team) know how to basically delegate the different tasks because we know what each other’s strengths are. Having that knowledge and being able to leverage the talent on our team really helps us to have more successful outcomes. . . ”

—Stephanie Weber, Sales Analytics Manager

141

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142 PART 3 | Organizing

Get organized—form a study group Many students feel they can earn a good grade on their own and don’t need others to help them study. While that may be true, teaming up with other students and meeting for an hour or two on a regular basis can help you learn the material better. How does it work? Meeting with peers helps you get organized and focus on the material instead of putting it off until later. Also, you will hear others’ ideas and interpretations about “what’s going to be on the exam,” “what a topic in the book means,” and “what the professor thinks is important.” Discussing course topics with others should help you learn it more thoroughly, ultimately preparing you for the next exam.

study tip 7

1 | FUNDAMENTALS OF ORGANIZING

We often begin to describe a firm’s structure by looking at its

organization chart. The organization chart depicts the posi- tions in the firm and the way they are arranged. The chart pro-

vides a picture of the reporting structure (who reports to whom)

and the various activities that are carried out by different indi-

viduals. Most companies have official organization charts

drawn up to give people this information.

Exhibit 7.1 shows a traditional organization chart. Note the

various types of information that are conveyed in a simple way:

• The boxes represent different work.

• The titles in the boxes show the work performed by each unit.

• Reporting and authority relationships are indicated by solid lines showing superior–subordinate connections.

• Levels of management are indicated by the number of horizontal layers in the chart. All persons or units that are at the same rank and report to the same person are on one level.

The organization chart in Exhibit 7.1 resembles the structure

of organizations that German sociologist Max Weber addressed

when he wrote about the concept of bureaucracy at the beginning

of the 20th century. Many years later, two British management

scholars (Burns and Stalker) described this type of structure as

a mechanistic organization, a formal structure intended to pro- mote internal efficiency.

7 But they went on to suggest the modern

corporation has another option: the organic structure, which is much less rigid and, in fact, emphasizes flexibility. Differences

between these two types of structures are listed in Exhibit 7.2 .

An organic organization depends heavily on an informal

structure of employee networks. Astute managers are keenly

aware of these interactions, and they encourage employees to

work more as teammates than as subordinates who take orders

from the boss. 8 As we will discuss later in this chapter, the

more organic a firm is, the more responsive it is to changing

competitive demands and market realities.

LO1 Define the fundamental characteristics of organization structure

● King Inc., makers of Candy Crush Saga, is the largest skill-gaming company

in the world. 150 billion games of Candy Crush have been played to date and

500 million people have installed the game.

organization chart the reporting structure and division of labor in an organization

mechanistic organization a form of organization that seeks to maximize internal efficiency

organic structure an or ganizational form that emphasizes flexibility

differentiation an aspect of the organization’s internal environment created by job specialization and the division of labor

integration the degree to which differentiated work units work together and coordinate their efforts

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CHAPTER 7 | Organizing for Success 143

1.1 | Differentiation Creates Specialized Jobs

Within an organization’s struc-

ture, differentiation is created

through division of labor and

job specialization. Division of labor means the work of the organization is subdivided into

smaller tasks to be performed by

individuals and units throughout

the organization. Specialization means different people or

groups perform specific parts

of the larger task. The two con-

cepts are, of course, closely

related. Administrative assis-

tants and accountants specialize

in, and perform, different jobs;

similarly, marketing, finance,

and human resources tasks are

divided among their respective departments. Specialization and

division of labor are necessary because of the many tasks that

must be carried out in an organization. The overall work of the

organization would be too complex for any individual. 10

Differentiation is high when an organization has many

subunits and many specialists who think differently. Harvard

professors Lawrence and Lorsch found that organizations in

a complex, dynamic environment developed a high degree of

differentiation to cope with the challenges.

Companies in a simple, stable environ-

ment had low levels of differentiation.

Companies in an intermediate environment

had intermediate differentiation. 11

1.2 | Integration Coordinates Employees’ Efforts

As organizations differentiate their struc-

tures, managers must simultaneously con-

sider issues of integration. The specialized

tasks in an organization cannot be per-

formed completely independently; they

require some degree of communication and

division of labor the assignment of different tasks to different people or groups

specialization a process in which different individuals and units perform different tasks

Characteristic Mechanistic Organic

Degree of formality Formal Informal

Primary emphasis Efficiency Flexibility

Job responsibilities Narrowly defined Broad and evolving

Communication Orders and instructions Advice and information

Decision making Centralized Decentralized

Expression of commitment Obedience to authority Commitment to organization

Source of guidance Rules Personal judgment

Employee interdependence Limited, when necessary Employees feel interconnected

Source: Adapted from T. Burns and G. Stalker, The Management of Innovation (London: Tavistock, 1961).

Exhibit 7.2 Comparison of mechanistic and organic organizations

Exhibit 7.1 A conventional organization chart

Finance R&D Marketing Human

Resources

Chemical Products Division

Human

Resources Finance

Manufacturing Sales

Metal Products

Division

Human

Resources Finance

Manufacturing Sales

President

Besides differing in their reliance on informal networks and

formal organization charts, company structures can vary in

terms of their differentiation and integration:

• Differentiation means the organization is composed of many different units that work on different kinds of tasks, using different skills and work methods.

• Integration means these differentiated units are put back together so that work is coordinated into an overall product. 9

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144 PART 3 | Organizing

2.1 | Authority Is Granted Formally and Informally

At the most fundamental level, the functioning of every orga-

nization depends on the use of authority, the legitimate right to make decisions and to tell other people what to do. For

example, a boss has the authority to give an order to a subor-

dinate. Traditionally authority resides in positions rather than in people. The job of vice president of a particular division has

authority over that division, regardless of how many people

come and go in that position and who currently holds it.

In private business enterprises, the owners

have ultimate authority. In most small, simply

structured companies, the owner also acts as

manager. Sometimes the owner hires another

person to manage the business and its employ-

ees. The owner gives this manager some

authority to oversee the operations, but the

manager is accountable to—that is, reports and

defers to—the owner, who retains the ultimate

authority. In larger companies the principle is

the same, but the structure of top management

has several components:

• Board of directors —In corporations, the owners are the stockholders. But because there are numer- ous stockholders and these individuals generally lack timely information, few are directly involved in managing the organization. Stockholders elect a board of directors to oversee the organization. The board, led by the chairperson, makes major decisions affecting the organization, subject to corporate charter and bylaw provisions. Boards select, assess, reward, and perhaps replace the CEO; determine the firm’s strategic direction and review financial performance; and assure eth- ical, socially responsible, and legal conduct. 14 The board’s membership usually includes some top executives—called inside directors. Outside

members of the board typically are executives at other companies. Successful boards tend to be those who are active, critical partici- pants in determining company strategies.

• Chief executive officer —The authority officially vested in the board of directors is assigned to a chief executive officer (CEO), who occu- pies the top of the organizational pyramid. The CEO is personally accountable to the board and to the owners for the organization’s performance. In some corporations, one person holds the three positions of CEO, chair of the board of directors, and president. 16 More commonly, however, the CEO holds two of those positions, serving as either the chair of the board or the president of the orga- nization. When the CEO is president, the chair may be honorary and do little more than conduct meetings. If the chair is the CEO, the president is second in command.

• Top management team —CEOs may share their authority with other key members of the top management team. Top management teams typically consist of the CEO, president, chief operating offi- cer, chief financial officer, and other key executives. Rather than

cooperation. Integration and its

related concept, coordination, refer to the procedures that link

the various parts of the organi-

zation to achieve the organiza-

tion’s overall mission.

Integration is accomplished

through structural mechanisms

that enhance collaboration and

coordination. Any job activity

that links work units performs an integrative function. The more

highly differentiated the firm, the greater the

need for integration among its units. Lawrence

and Lorsch found that highly differentiated firms

were successful if they also had high levels of

integration and were more likely to fail if they

existed in complex environments but failed to

integrate their activities adequately. 12

However,

focusing on integration may slow innovation,

at least for a while. In a study tracking the out-

comes at information technology companies

that acquired other firms, companies with more

structural integration were less likely to intro-

duce new products soon after the acquisition, but

integration had less impact on product launches

involving more experienced target companies. 13

These concepts permeate the rest of the

chapter. First we discuss vertical differentia- tion within organization structure—authority within an organization, the board of directors,

the chief executive officer, and hierarchical

levels, as well as issues pertaining to delegation

and decentralization. Next we turn to horizon- tal differentiation in an organization’s struc- ture, exploring issues of departmentalization

that create functional, divisional, and matrix

organizations. Then we cover issues relating to

structural integration, including coordination, organizational

roles, interdependence, and boundary spanning. Finally we

look at how these issues apply to organizations seeking greater

agility.

2 | THE VERTICAL STRUCTURE

The four dimensions of a firm’s vertical structure—authority,

span of control, delegation, and centralization—shape the com-

pany’s reporting relationships, responsibility, and accountability.

coordination the procedures that link the various parts of an organization to achieve the organization’s overall mission

authority the legitimate right to make decisions and to tell other people what to do

LO2 Distinguish among the four dimensions of an organization’s vertical structure

A recent survey of 100 large public companies in the United States found that more than half of boards had between 10 and 12 directors, the average cash retainer for serving a one-year term was $79,000, and 16 percent of directors were female and 15 percent of directors were ethnic minorities. 15

Did You Know?

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CHAPTER 7 | Organizing for Success 145

the authority to make decisions

and tell lower-level people

what to do. For example, mid-

dle managers can give orders to first-line supervisors; first-line

super-visors, in turn, direct operative-level workers.

A powerful trend for U.S. businesses over the past few

decades has been to reduce the number of hierarchical lay-

ers. General Electric used to have 29 levels; today it has only

a handful of layers, and its hierarchical structure is basically

flat. Most executives today believe that fewer layers create a

more efficient, fast-acting, and cost-effective organization.

This also holds true for the subunits of major corporations. A

study of 234 branches of a financial services company found

that branches with fewer layers tended to have higher operating

efficiency than did branches with more layers. 19

This trend and research might seem to suggest that hierar-

chy is a bad thing, but entrepreneur Joel Spolsky learned that a

completely flat structure is not necessarily ideal. When Spolsky

and Michael Pryor started Fog Creek Software, they decided

they would empower employees by having everyone report to

the two owners. The system worked fine for a few years until

Fog Creek grew to 17 full-time employees. At that size, the

company was no longer one small, happy family; employees

had concerns and were finding it difficult to approach the part-

ners and set up three-way meetings with them. So Spolsky

and Pryor tapped two of the employees to serve as leaders of

programming teams. Employees found it easier to talk to their

team leader, and Spolsky concluded that this layer of “middle

management” helps his company run more smoothly. 20

2.2 | Span of Control Determines a Manager’s Authority

The number of people under a manager is an important feature

of an organization’s structure. The number of subordinates who

report directly to an executive or supervisor is called the span of control. Differences in the span of control affect the shape of an organization. Holding size constant, narrow spans build

a tall organization with many reporting levels. Wide spans cre- ate a flat organization with fewer reporting levels. The span of control can be too narrow or too wide. The optimal span of con-

trol maximizes effectiveness by balancing two considerations:

1. It must be narrow enough to permit managers to maintain control over subordinates.

2. It must not be so narrow that it leads to overcontrol and an exces- sive number of managers overseeing a few subordinates.

make critical decisions on their own, CEOs at companies such as Shutterfly, Infosys, Walt Disney, and ConocoPhillips regularly meet with their top management teams to make decisions as a unit. 17

Formal position authority is generally the primary means

of running an organization. An order that a boss gives to a

lower-level employee is usually carried out. As this occurs

throughout the organization day after day, the organization can

move forward and achieve its goals. 18

However, authority in

an organization is not always position-dependent. People with

particular expertise, experience, or personal qualities may have

considerable informal authority—scientists in research compa- nies, for example, or employees who are computer-savvy.

Authority is directly related to the three broad levels of the

organizational pyramid, commonly called the hierarchy. The CEO occupies the top position as the senior member of top

management. The top managerial level also includes presidents

and vice presidents—the strategic managers in charge of the

entire organization. The second broad level of the organization

is middle management. At this level, managers are in charge of

facilities or departments. The lowest level, made up of lower

management and workers, includes office managers, sales man-

agers, supervisors, and other first-line managers, as well as the

employees who report directly to them. This level is also called

the operational level of the organization. An authority structure is the glue that holds these levels

together. Generally, but not always, people at higher levels have

● S.D. Shibulal, co-founder, managing director, and CEO of Infosys, makes

major decisions in concert with key members of his top management team.

Founded in India in 1981 by seven people and an initial investment of $250, the

global technology and outsourcing firm reports 2014 revenues of $8.25 billion.

span of control the number of subordinates who report directly to an executive or supervisor

“The key to successful leadership today is influence, not authority.”

— Kenneth Blanchard

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146 PART 3 | Organizing

their own actions but also for the actions of

their subordinates. Managers should not use

delegation to escape their own responsibilities;

however, sometimes managers refuse to accept

responsibility for subordinates’ actions. They

“pass the buck” or take other evasive action to

ensure they are not held accountable for mis-

takes. 22

Ideally, empowering employees to make decisions or

take action results in an increase in employee responsibility.

Advantages of Delegation As illustrated in Exhibit 7.3 , del- egating work offers important advantages, particularly when it

is done effectively. Effective delegation leverages the manager’s

energy and talent and those of his or her subordinates. It lets man-

agers accomplish much more than they could do on their own.

Conversely, lack of or ineffective delegation sharply reduces

what a manager can achieve. Delegation also conserves one of

the manager’s most valuable assets—his or her time. It frees the

manager to devote energy to important, higher-level activities

such as planning, setting objectives, and monitoring performance.

Another significant advantage of delegation is that it devel-

ops effective subordinates. Delegation essentially gives the

subordinate a more important job. The subordinate gains an

opportunity to develop new skills and demonstrate potential for

additional responsibilities and perhaps promotion—in effect, a

vital form of on-the-job training that may pay off in the future.

In addition, at least for some employees, delegation promotes a

sense of being an important, contributing member of the organi-

zation, so these employees tend to feel a stronger commitment,

perform their tasks better, and engage in more innovation. 23

Richard Semler has taken delegation and empowerment to a whole

new level at his Brazilian company, Semco. Since taking over the

struggling manufacturing company from his father 30 years ago,

Semler’s goal has been to create a work environment in which

employees feel “exhilaration and fulfillment.” His actions have

been much more than the typical lip service some companies pay

to empowerment initiatives. Semco does not have any of the follow-

ing: HR department, organizational chart, job descriptions, fixed

working hours, multiyear plans, or a permanent CEO. 24

Employees

are encouraged to pursue their own ideas without having to ask for

their managers’ approval. Employees are given a few parameters of

what’s expected from them in terms of performance and then are

given the autonomy and freedom to accomplish their jobs. 25

The optimal span of control depends on a number of factors.

The span should be wide under the following conditions:

• The work is clearly defined and unambiguous.

• Subordinates are highly trained and have access to information.

• The manager is highly capable and supportive.

• Jobs are similar, and performance measures are comparable.

• Subordinates prefer autonomy to close supervisory control.

If the opposite conditions exist, a narrow span of control

may be more appropriate. 21

2.3 | Delegation Is How Managers Use others’ Talents

As we recognize that authority in organizations is spread out

over various levels and spans of control, we see the importance

of delegation, the assignment of authority and responsibility to a subordinate at a lower level. Delegation often requires a

subordinate to report back to his or her boss about how effec-

tively the assignment was carried out. Delegation is perhaps the

most fundamental feature of management at all levels because

it entails getting work done through others. The process can

occur between any two individuals in any type of structure with

regard to any task. Some managers are comfortable fully dele-

gating an assignment to subordinates; others are not.

Responsibility, Authority, and Accountability When delegating work, it is helpful to distinguish among the concepts

of authority, responsibility, and accountability. Responsibility means that a person is assigned a task that he or she is supposed

to carry out. When delegating work responsibilities, the man-

ager also should delegate to the subordinate enough authority to

get the job done. Authority means that the person has the power and the right to make decisions, give orders, draw on resources,

and do whatever else is necessary to fulfill the responsibility.

Ironically, people often have more responsibility than author-

ity; they must perform as well as they can through informal

influence tactics instead of relying purely on authority.

As the manager delegates responsibilities, subordinates are

held accountable for achieving results. Accountability means the subordinate’s manager has the right to expect the subordi-

nate to perform the job, and the right to take corrective action

if the subordinate fails to do so. The subordinate must report

upward on the status and quality of his or her performance.

However, the ultimate responsibility—accountability to

higher-ups—lies with the manager doing the delegating.

Managers remain responsible and accountable not only for

LEVERAGES managers’ energy and talent

CONSERVES managers’ most valuable asset: time

DEVELOPS subordinates’ managerial skills and knowledge

PROMOTES subordinates’ sense of importance and commitment

Source: Adapted from Z. X. Chen and S. Aryee, “Delegation and Employee Work Outcomes: An Examination of the Cultural Context of Mediating Processes in China,” Academy of Management Journal 50, no. 1 (2007), pp. 226–38.

Exhibit 7.3 Advantages of delegation

delegation the assignment of new or additional responsibilities to a subordinate

responsibility the assignment of a task that an employee is supposed to carry out

accountability the expectation that employees will perform a job, take corrective action when necessary, and report upward on the status and quality of their performance

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CHAPTER 7 | Organizing for Success 147

The first step in the delegation process, defining the goal,

requires a manager to clearly understand the outcome he or she

wants. Then the manager should select a person who is capable of

performing the task. Delegation is especially beneficial when you

can identify an employee who would benefit from developing skills

through the experience of taking on the additional responsibility.

The person who gets the assignment should be given the

authority, time, and resources to carry out the task successfully.

The required resources usually involve people, money, and equip-

ment, but they may also involve critical information that will put

the assignment in context. Throughout the delegation process, the

manager and the subordinate must work together and communi-

cate about the project. The manager should seek the subordinate’s

ideas at the beginning and inquire about progress or problems at

periodic meetings and review sessions. Even though the subordi-

nate performs the assignment, the manager needs to be available

and aware of its current status. These checkups also provide an

important opportunity to offer encouragement and praise.

Some tasks, such as disciplining subordinates and conduct-

ing performance reviews, should not be delegated. But when

managers err, it usually is because they delegated too little

rather than too much. The manager who wants to learn how

How has Semco done as a company? Very well. Though pre-

cise sales figures are not available to the public (Semco is a pri-

vate firm), average annual revenue growth has been reported at

40 percent. Another report states that the company has grown from

$35 million and several hundred employees when Semler took over

as CEO to more than $200 million and 3,000 employees in recent

years. 26

Semco’s unusual approach to delegation and empower-

ment has led to more than 80 universities publishing case studies

about the company and Semler writing Maverick, a best-selling

management book about “the world’s most unusual workplace.” 27

Through delegation, the organization also receives payoffs.

When managers can devote more time to important managerial

functions while lower-level employees carry out assignments,

jobs are done more efficiently and cost-effectively. In addition,

as subordinates develop and grow in their own jobs, their abil-

ity to contribute to the organization increases.

How Should Managers Delegate? To achieve the advan- tages we have just discussed, managers must delegate properly.

As Exhibit 7.4 shows, effective delegation follows several steps. 28

Exhibit 7.4 Steps in effective delegation

Follow through by discussing

progress at appropriate intervals.

Schedule checkpoints for reviewing progress.

Give the subordinate the authority, time, and resources (people, money,

equipment) to perform the assignment.

Solicit the subordinate’s views

about suggested approaches.

Select the person for the task.

Define the goal succinctly.

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148 PART 3 | Organizing

the general managers of each restaurant. Employees have responded

well to the decentralized environment by suggesting several initia-

tives that the company has implemented over the past five years,

including 100 percent wind power for all of the chain’s locations;

health insurance for both full- and part-time employees; drive-

through lanes for cars and bicyclists; and new limited-time-only

products like Ale-Battered Albacore and Summer Slaw, Fresh

Strawberry Lemonade, and Rosemary Shoestring Potatoes. 31

Harvey’s leadership approach is paying off. Annual sales revenue

at Burgerville increased from $55 million in 2005 to $68 million in

2009. Harvey’s efforts were recognized in 2010 when he was cho-

sen as Restaurant Business ’s Entrepreneur of the Year. 32 Most executives today understand the advantages of push-

ing decision-making authority down to the point of the action.

The level that deals directly with problems and opportunities

has the most relevant information and can best foresee the con-

sequences of decisions. Executives also see how the decentral-

ized approach allows people to take timelier action. 33

According to Raj Gupta, president of Environmental Systems

Design (ESD), the engineering design firm decentralized as a nec-

essary response to growth. A traditional “command-and-control”

approach to management worked fine when the company was

starting out, but now with 220 engineering and design profession-

als designing for diverse clients working on commercial, trans-

portation, residential, manufacturing, energy, and other projects, it

would be impossible for a few people at the top to dictate solutions.

In fact, it wouldn’t even be desirable, given the diverse expertise of

its employees. So instead of grouping staff into functional depart-

ments such as sustainable design or electrical work, ESD has a

structure in which studios of professionals serve particular clients,

making decisions to meet their specialized needs. 34

3 | THE HORIZONTAL STRUCTURE

As the tasks of organizations become increasingly complex, the

organization inevitably must be subdivided—that is, depart- mentalized. Line departments are those that have responsibil- ity for the principal activities of the firm. Line units deal directly

with the organization’s primary goods or services; they make

things, sell things, or provide customer service. At General

Motors, line departments include product design, fabrication,

to delegate more effectively should remember this distinc-

tion: If you are not delegating, you are merely doing things; but the more you delegate, the more you are truly building and managing an organization. 29

2.4 | Decentralization Spreads Decision-Making Power

The delegation of responsibility and authority decentralizes decision making. In a centralized organization, import- ant decisions usually are made at the top. In decentralized organizations, more decisions are made at lower levels. Ideally decision making occurs at the level of the people who

are most directly affected and have the most intimate knowl-

edge about the problem. This is particularly important when

the business environment is fast-changing and decisions must

be made quickly and well. Balanced against these criteria, cen-

tralization may be valuable when departments have different

priorities or conflicting goals, which need to be mediated by

top management. For example, when researchers modeled the

search for new ideas in organizations, they found that the worst

performance occurred in decentralized organizations where the

search for new ideas was carried out at lower levels, because

ideas were presented for approval only if they benefited the

particular department doing the search. 30

Sometimes organizations change their degree of centralization,

depending on the particular challenges they face. Tougher times

often cause senior management to take charge, whereas in times of

rapid growth, decisions are pushed farther down the chain of com-

mand. When Jeff Harvey took over Burgerville, a 39-unit restaurant

chain in Vancouver, Washington, he needed to figure out a way to

keep sales from declining. His solution was to give more freedom

and autonomy to the employees and managers of the individual

restaurants. As part of this decentralization effort, he removed the

regional manager position from the organizational structure. In the

past, some of the regional managers were known to “micromanage”

● Burgerville was founded in 1961 by George Propstra in Vancouver, WA.

Burgerville is known for its progressive business practices and commitment

to local resources.

LO3 Give examples of four basic forms of horizontal structures of organizations

centralized organization an organization in which high-level executives make most decisions and pass them to lower levels for implementation

decentralized organization an organization in which lower-level managers make important decisions

line departments units that deal directly with the organization’s primary goods and services

staff departments units that support line departments

departmentalization subdividing an organization into smaller subunits

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CHAPTER 7 | Organizing for Success 149

the organization a long-term

competitive advantage. This

type of strategic thinking not

only makes staff managers

more valuable to their organi-

zations but also can reduce the

conflict between line and staff

departments. 36

As organizations divide work into different units, we can

detect patterns in the way departments are clustered and arranged.

The three basic approaches to departmentalization are func- tional, divisional, and matrix.

3.1 | Functional Organizations Foster Efficient Experts

In a functional organization, jobs (and departments) are spe- cialized and grouped according to business functions and the skills they require: production, marketing, human resources,

research and development, finance, accounting, and so forth.

Exhibit 7.5 is a basic functional organization chart.

The traditional functional approach to departmentalization

has a number of potential advantages: 37

1. Economies of scale can be realized. When people with similar skills are grouped, the company can buy more efficient equipment and obtain discounts for large purchases.

2. Monitoring of the environment is more effective. Each functional group is more closely attuned to developments in its own field, so it can adapt more readily.

assembly, distribution, and the like. Line managers typically

have much authority and power in the organization, and they

have the ultimate responsibility for making major operating

decisions. They also are accountable for the “bottom-line”

results of their decisions.

Staff departments are those that provide specialized or professional skills that support line departments. They include

research, legal, accounting, public relations, and human

resources departments. In large companies, each of these spe-

cialized units may have its own vice president, some of whom

are vested with a great deal of authority, as when accounting or

finance groups approve and monitor budgetary activities.

In traditionally structured organizations, conflicts often arose

between line and staff departments. One reason was that career

paths and success in many staff functions have depended on

being an expert in that particular functional area, whereas suc-

cess in line functions is based more on knowing the organiza-

tion’s industry. So while line managers might be eager to pursue

new products and customers, staff managers might seem to stifle

these ideas with a focus on requirements and procedures. Line

managers might seem more willing to take risks for the sake

of growth, while staff managers seem more focused on pro-

tecting the company from risks. But in today’s organizations,

staff units tend to be less focused on monitoring and controlling

performance and more interested in providing strategic support

and expert advice. 35

For example, human resource managers

have broadened their focus from merely creating procedures

that meet legal requirements to helping organizations plan for,

recruit, develop, and keep the kinds of employees who will give

Traditional Thinking It is inevitable that line managers bump heads with staff

professionals because the latter are too focused on monitoring,

controlling, and avoiding risk.

Source: Adapted from E. E. Lawler III, “New Roles for the Staff Function: Strategic Support and Services,” in Organizing for the Future, J. Galbraith, E. E. Lawler III, & Associates (San Francisco: Jossey-Bass, 1993).

The Best Managers Today Expect staff professionals to contribute to the success of

the business through their expertise and strategic thinking.

Exhibit 7.5 The functional organization

Purchasing Manufacturing Marketing

CEO

Finance Information Technology

Human Resources

functional organization departmentalization around specialized activities such as production, marketing, and human resources

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150 PART 3 | Organizing

Functional organizations, being highly differentiated, create bar-

riers to coordination across functions. The functional organiza-

tion will not disappear, in part because functional specialists will

always be needed; but functional managers will make fewer deci-

sions. The more important units will be cross-functional teams with

integrative responsibilities for products, processes, or customers. 38

3.2 | Divisional Organizations Develop a Customer Focus

As organizations grow and become increasingly diversified,

their functional departments have difficulty managing a wide

variety of products, customers, and geographic regions. In this

case, organizations may restructure by creating a divisional organization, which groups all functions into a single division and duplicates functions across all the divisions. In the divisional

organization chart in Exhibit 7.6 , each division has its own oper-

ations, marketing, and finance departments. Separate divisions

may act almost as separate businesses or profit centers and work

autonomously to accomplish the goals of the entire enterprise.

Here are some examples of how the same tasks would be orga-

nized under functional and divisional structures: 39

Organizations can create a divisional structure in several ways:

• Product divisions —All functions that contribute to a given product are organized under one product manager. Johnson & Johnson is an example of this form. It has more than 250 independent company divisions, many of which are responsible for particular product lines. One of its companies, McNeil Consumer Health Care, sells Tylenol products, while Vistakon develops and markets ACUVUE contact lenses.

3. Performance standards are better maintained. People with similar training and interests may develop a shared concern for perfor- mance in their jobs.

4. People have greater opportunity for specialized training and in-depth skill development.

5. Technical specialists are relatively free of administrative work.

6. Decision making and lines of communication are simple and clearly understood.

The functional form does have disadvantages, however.

People may care more about their own function than about the

company as a whole, and their attention to functional tasks may

reduce their focus on overall product quality and customer satis-

faction. Managers develop functional expertise but lack knowl-

edge of the other areas of the business; they become specialists,

not generalists. Between functions, conflicts arise, and commu-

nication and coordination fall off. In short, this structure may

promote functional differentiation but not functional integration. As a consequence, the functional structure may be most appro-

priate in rather simple, stable environments. If the organization

becomes fragmented (or dis integrated), it may have difficulty developing and bringing new products to market and responding

quickly to customer demands and other changes. Particularly when

companies are growing and business environments are changing,

organizations need to integrate work areas more effectively for

flexibility and responsiveness. Other forms of departmentalization

can be more flexible and responsive than the functional structure.

Demands for total quality, customer service, innovation, and

speed have highlighted the shortcomings of the functional form.

Exhibit 7.6 The divisional organization

Division A

CEO

Operations FinanceMarketing Operations FinanceMarketing

Operations FinanceMarketing

Division B Division C

Operations FinanceMarketing

Division D

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CHAPTER 7 | Organizing for Success 151

in seven parts of the world— the United States, Canada, Europe, Brazil, Russia, India, and China—it is possible that Deere will be opening addi- tional regional headquarters over the next decade. 43

The primary advantage of

the product, customer, and

regional approaches to depart-

mentalization is the ability to

focus on customer needs and provide faster, better service. But

again, duplication of activities across many customer groups

and geographic areas is expensive.

3.3 | Matrix Organizations Try to Be the Best of Both Worlds

A matrix organization is a hybrid form of organization in which functional and divisional forms overlap. Managers

and staff personnel report to two bosses—a functional man-

ager and a divisional manager—creating a dual line of com-

mand. In Exhibit 7.7 , for example, each project manager draws

employees from each functional area to form a group for the

project. The employees working on those projects report to the

individual project manager as well as to the manager of their

functional area.

A good example of the matrix structure can be found at

Time Inc., the top magazine publisher in the United States and

United Kingdom. At major Time Inc. titles like Time, Sports Illustrated, and Fortune, production managers who are respon- sible for getting the magazines printed report both to the individ-

ual publishers and editors of each title and to a senior corporate executive in charge of production. At the corporate level, Time

Inc. achieves enormous economies of scale by buying paper

and printing in bulk and by coordinating production activities

for the company as a whole. At the same time, production man-

agers working at each title ensure that the different needs and

schedules of their individual magazines are met. Similar matrix

arrangements are in place for other key managers, like circula-

tion and finance. In this way, the company attempts to benefit

from both the divisional and functional organization structures.

Like other organization structures, the matrix approach has

a number of strengths: 44

1. Cross-functional problem solving leads to better-informed and more creative decisions.

2. Decision making is decentralized to a level where information is processed properly and relevant knowledge is applied.

3. Extensive communications networks help process large amounts of information.

4. With decisions delegated to appropriate levels, higher manage- ment levels are not overloaded with operational decisions.

5. Resource utilization is efficient because key resources are shared across several important programs or products at the same time.

The product approach to departmentalization offers a num-

ber of potential advantages. 40

1. Information needs are managed more easily because people work closely on only one product.

2. People are committed full-time to a particular product line, so they are aware of how their jobs fit into the broader scheme.

3. Task responsibilities are clear, and managers are more indepen- dent and accountable.

4. Managers receive broader training. Because the product structure is more flexible than the functional structure, it is best suited for unstable environments, when an ability to adapt rapidly to change is important.

The product form does have some disadvantages, however.

Coordination across product lines and divisions is difficult.

And although managers learn to become generalists, they may

not acquire the depth of expertise that develops in the func-

tional structure. Functions are not centralized at headquarters,

and the duplication of effort is expensive. And because deci-

sion making is decentralized, top management can lose control

over decisions made in the divisions. Proper management of

all the issues surrounding decentralization and delegation, as

discussed earlier, is essential for this structure to be effective. 41

• Customer divisions —Divisions are built around groups of cus- tomers. Pfizer recently replaced divisions based on location with three based on customer groups: primary care, specialty care, and emerging markets. The pharmaceutical company hopes that this structure will make the company more responsive to the needs of doctors and their patients in each group. 42 Similarly, a hospital may organize its services around child, adult, psychiatric, and emer- gency cases. Bank loan departments commonly have separate groups handling consumer and business needs.

• Geographic divisions —Divisions are structured around geographic regions. Geographic distinctions include district, territory, region, and country. Headquartered in Moline, Illinois, John Deere is a well- known manufacturer and supplier of farming equipment. To better serve its customers in Latin America and Europe, the company also maintains regional headquarters in Brazil and Germany. Given that the company predicts that 75 percent of its future growth will occur

Functional Organization Divisional Organization

A central purchasing department

Separate companywide marketing, production, design, and engineering departments

A central city health department

Plantwide inspection, maintenance, and supply departments

A purchasing unit for each division

Each product group’s own experts in marketing, design, production, and engineering

Separate health units for the school district and the prison

Inspection, maintenance, and supply conducted by each production team

divisional organization departmentalization that groups units around products, customers, or geographic regions

matrix organization an organization composed of dual reporting relationships in which some managers report to two superiors—a functional manager and a divisional manager

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152 PART 3 | Organizing

As with the other structures, the matrix form also has dis-

advantages. Confusion can arise because people do not have a

single superior to whom they feel primary responsibility. The

design encourages managers who share subordinates to jockey

for power, so conflict can occur. The mistaken belief can arise

6. Employees learn the collaborative skills needed to function in an environment characterized by frequent meetings and more infor- mal interactions.

7. Dual career ladders are elaborated as more career options become available on both sides of the organization.

Take Charge of Your Career Be a specialist first, then a generalist

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

It will help if you can become both a spe- cialist and a generalist. However, first seek to become a specialist: you should be an expert in something. This expertise will give you specific skills that help you provide con- crete, identifiable value to your firm and to customers. And over time, you should learn to be a generalist, knowing enough about a variety of business disciplines so you can think strategically and work with different perspectives.

Patricia Calkins broadened her focus gradually and ambitiously from specialties in the sciences, expanding first to engineering and then to management. She started her career with AT&T’s Western Electric subsid- iary as a chemist. When she was considering a master’s degree in chemistry, she heeded

advice to develop her career opportunities by studying engineering. Once Calkins had her master’s degree in civil and environmental engineering, the company saw her manage- ment talent and wanted to promote her. So she returned to school for another master’s degree, this time in business administra- tion. She developed her generalist skills by consulting and from that work moved to her current—and favorite—position as global vice president of environment, health, and safety at Xerox.

Sources: Company website, www.xerox.com ; E. Garone, “Leading the Environmental Charge at Xerox,” The Wall Street Journal, March 25, 2009, http://onlinewsj.com ; and W. Kiechel III, “A Manager’s Career in the New Economy,” Fortune, April 4, 1994, pp. 68–27.

Exhibit 7.7 Matrix organizational structure

Finance Manager

CEO

Production Manager

Project Manager A

Project Manager B

Engineering Manager

Personnel Manager

Production group

Two bosses

Production group

Two bosses

Engineering group

Two bosses

Engineering group

Two bosses

Personnel group

Two bosses

Personnel group

Two bosses

Accounting group

Two bosses

Accounting group

Two bosses

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CHAPTER 7 | Organizing for Success 153

In 2013, the U.S. beer market was approxi- mately $100 billion. Though there are many different types of breweries, craft brewing is growing in popularity. With nearly 3,000 craft brewers reporting total sales of $14 bil- lion in 2013, these operations tend to be local, innovative, independent, and creative in how they connect with their customers.

A large craft brewer, Colorado-based New Belgium Brewing, produces more than 23 million gallons of beer per year that is distributed in 28 states and Washington, DC. Beer enthusiasts know the company for its popular beers like Fat Tire Amber Ale and Ranger India Pale Ale, but it is also receiving kudos for its cutting-edge sustainability and green practices. Founded by Jeff Lebesch and Kim Jordan in 1991, New Belgium Brewing immediately differentiated itself from other brewers (and companies) by its socially and environmentally responsible approach as evidenced by its purpose state- ment: “To manifest our love and talent by crafting our customers’ favorite brands and proving business can be a force for good.” Part of doing good for the environment is captured in one of the company’s core val- ues: “Environmental stewardship: Honoring nature at every turn of the business.”

How does New Belgium Brewing honor and protect the environment? The com- pany fosters a high-involvement culture in which employees are treated like owners. Actually, as of 2012, New Belgium Brewing is 100 percent employee owned. The employee owners are involved in all major decisions and take responsibility for being effective environmental stewards. For example, on a quarterly basis, all manag- ers and employees meet to identify ways to reduce the company’s consumption of nat- ural resources like water, electricity, natu- ral gas, and greenhouse gas emissions.

By 2015, New Belgium Brewing hopes to accomplish the following green goals:

• Reduce CO 2 emissions by 25 percent. • Work toward becoming a zero waste facil-

ity by conducting waste stream audits, replacing dumpsters with recycling con- tainers, and tracking key data. and,

• Decrease water use (it’s the primary ingredient in beer) by 18 percent.

A recent decision provides further evi- dence of how New Belgium Brewing tries to minimize damage to the environment. The brewery needed to replace some of the trucks that it uses to make deliveries of beer to local restaurants and pubs. After analyzing several options, the employ- ees suggested that the company lease Kenworth T370s, diesel-electric hybrids. Not only are the trucks powerful enough to haul beer, but they also get better gas mileage and produce fewer CO 2 emissions than non-hybrid trucks. In addition, New

Belgium Brewing owns two other hybrid vehicle types: two Nissan Leaf electric vehicles and five Toyota Prius hybrids.

Is environmental stewardship working for New Belgium Brewing? It would seem the answer is yes. The company reported $180 million in revenue in 2012, a 41 per- cent increase over sales in 2009. Its rep- utation as a green pioneer continues to flourish. And, by all accounts, the nearly 500 employee-owners are engaged in their work and environment and take pride in crafting innovative, tasty beers.

Can a Brewery Be a Force for Good?

Discussion Questions • How would you characterize the orga-

nizational structure of New Belgium Brewing: mechanistic or organic? Explain your answer.

• What factors contribute to New Belgium Brewing’s employees feeling empow- ered to pursue the company’s core value: “Environmental stewardship: Honoring nature at every turn of the business”?

• To what degree would you like to work for a company like the one

featured in this mini-case? Why or why not?

SOURCES: Company website, www.newbelgium .com ; “New Belgium Brewing,” company profile, (online), April 25, 2014, www.inc.com ; “Craft Brewing Facts,” Brewers Association (online), Inc. March 17, 2014, www.brewersassociation.org ; T. Kelley, “New Belgium Crafts a Green Fleet,” Beverage Industry 105, no 1 (January 2014), pp. 74-75; and “New Belgium Brewing, Maker of Fat Tire Beer, Is Now Completely Employee-Owned,” Huffington Post (online), January 15, 2013, www.huffingtonpost.com .

New Belgium Brewing Company emphasizes eco-friendly practices and employee ownership in its

marketing materials.

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154 PART 3 | Organizing

unity-of-command principle a structure in which each worker reports to one boss, who in turn reports to one boss

network organization a collection of independent, mostly single-function firms that collaborate on a good or service

modular network temporary arrangements among partners that can be assembled and reassembled to adapt to the environment; also called virtual network

that matrix management is

the same thing as group deci-

sion making—in other words,

everyone must be consulted

for every decision; this can

lead to slower decision mak-

ing. And too much democ-

racy can lead to not enough

action. 45

Many of the disadvantages

stem from the matrix’s inher-

ent violation of the unity- of- command principle, which states that a person should

have only one boss. Reporting

to two superiors can create

confusion and a difficult interpersonal situation unless steps are

taken to prevent these problems.

Matrix Survival Skills To a large degree, problems can be avoided if the key managers in the matrix learn the behavioral

skills demanded in the matrix structure. 46

These skills vary

depending on the manager’s job. The top executive must learn to balance power and emphasis between the product and func-

tional orientations. The middle managers, who are product or division managers and functional managers, must learn to col- laborate and manage their conflicts constructively. Finally, the

two-boss managers, who report to a product or division manager and to a functional manager, must learn how to be responsible

to two superiors. This means having a high level of maturity,

prioritizing multiple demands, and sometimes even reconcil-

ing conflicting orders. Some people function poorly under this

ambiguous circumstance, which signals the end of their careers

with the company. Others learn to be proactive, communicate

effectively with both superiors, rise above the difficulties, and

manage these work relationships constructively.

The Matrix Form Today Recently the matrix form has been regaining some of its popularity. Reasons for this resurgence

include pressures to consolidate costs and be faster to market,

creating a need for better coordination across functions in the

business units, and a need for coordination across countries for

firms with global business strategies. Many of the challenges

created by the matrix form are particularly acute in an inter-

national context, mainly because of the distances involved and

the differences in local markets. 47

For example, pharmaceuti-

cal firm Bristol-Myers Squibb uses a matrix structure to ensure

proper coordination among its many subsidiaries around the

globe. Jane Luciano, vice president of global learning and orga-

nization development, explains, “Based on our size and [the

fact that we are] in a highly regulated industry, the matrix helps

us to gain control of issues as they travel around the globe.” 48

The key to managing today’s matrix is not the formal struc-

ture itself but the realization that the matrix is a process. Among managers who have adopted the matrix structure because of

the complexity of the challenges they confront, many who had

trouble implementing it failed to change the employee and

managerial relationships within their organizations. Flexible

organizations cannot be created merely by changing their struc-

ture. To allow information to flow freely throughout an orga-

nization, managers must also attend to the norms, values, and

attitudes that shape people’s behavior. 49

3.4 | Network Organizations Are Built on Collaboration

So far we have been discussing variations of the traditional, hier-

archical organization, within which all the business functions of

the firm are performed. In contrast, a network organization is a collection of independent, mostly single-function firms that col-

laborate to produce a good or service. As depicted in Exhibit 7.8 ,

the network organization describes not one organization but a

web of relationships among many firms. Network organizations

are flexible arrangements among designers, suppliers, produc-

ers, distributors, and customers in which each firm is able to

pursue its own distinctive core capability yet work effectively

with other members of the network. Often members of the net-

work share information electronically to respond quickly to

customer demands. The normal boundary of the organization

becomes blurred or porous as managers within the organization

interact closely with network members outside it. The network

as a whole, then, can display the technical specialization of the

functional structure, the market responsiveness of the product

structure, and the balance and flexibility of the matrix. 50

A very flexible version of the network organization is the

modular network —also called the virtual corporation. It is composed of temporary arrangements among members that can

Source: From R. Miles and C. Snow, “Organizations: New Concepts for New Forms,” California Management Review, Spring 1986, p. 65. vol. 28, no. 3. Copyright © 1986 by The Regents of the University of California. Republished by permission of the University of California Press.

Exhibit 7.8 A network organization

Designers Producers

Suppliers Distributors

Brokers/ managers

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CHAPTER 7 | Organizing for Success 155

• Process engineering role: The broker serves as a network cooperator who takes the ini- tiative to lay out the flow of resources and relationships and makes certain that everyone shares the same goals, standards, payments, and the like.

• Nurturing role: The broker serves as a network developer who nur- tures and enhances the network (like team building) to make cer- tain the relationships are healthy and mutually beneficial.

4 | ORGANIZATIONAL INTEGRATION

Besides structuring their organization around differentiation — the way the organization is composed of different jobs and tasks,

and the way they fit on an organization chart—managers also

need to consider integration and coordination —the way all parts of the organization work

together. Often the more dif-

ferentiated the organization, the

more difficult integration may

be. Because of specialization

and the division of labor, dif-

ferent groups of managers and

employees develop different

orientations. Employees think

and act differently depending

on whether they are in a func-

tional department or a divi-

sional group, are line or staff,

and so on. When they focus on

their particular units, it is diffi-

cult for managers to integrate

all their activities.

Managers can use a variety

of approaches to foster coordination among interdependent

units and individuals. In some situations, managers might

see that employees need to work closely together to achieve

joint objectives, so they build mutual trust, train employees

in a common set of skills, and reward teamwork. In other

situations, organizations might rely more on individuals with

unique talents and ideas, so they set up flexible work arrange-

ments and reward individual achievements, while encourag-

ing employees to share knowledge and develop respect for

one another’s contributions. 53

In general, however, coordi-

nation methods include standardization, plans, and mutual

adjustment. 54

broker a person who assembles and coordinates participants in a network

be assembled and reassembled to meet a changing competitive

environment. The members of the network are held together by

contracts that stipulate results expected (market mechanisms),

rather than by hierarchy and authority. Poorly performing firms

can be removed and replaced.

Such arrangements are common in the aerospace, elec-

tronics, toy, and apparel industries, each of which creates and

sells trendy products at a fast pace. Modular networks also

are suited to organizations in which much of the work can be

done independently by experts. For example, Canada-based

Bombardier Aerospace makes and sells business jets. Instead

of manufacturing everything by itself in Canada, Bombardier

uses a virtual network of contractors to make the jets. The

firm designed the aircraft into “12 large chunks,” with some

of these modules (cockpit and forward fuselage) being made

in-house and other components (wings, engines, and land-

ing gear) manufactured by contractors from countries like

Australia, Taiwan, and Japan. After the different components

arrive at one of the firm’s production sites in Wichita, Kansas,

it takes employees about four days to assemble the final

aircraft. This modular approach to making jets has allowed

Bombardier to beat the price of its nearest competitor by

about $3 million. 51

Successful networks poten-

tially offer flexibility, innova-

tion, quick responses to threats

and opportunities, and reduced

costs and risk. But for these

arrangements to be successful,

several things must occur:

• The firm must choose the right specialty. It must be something (good or service) that the mar- ket needs and that the firm is better at providing than other firms—its core capability.

• The firm must choose collabo- rators that also are excellent at what they do and that provide complementary strengths.

• The firm must make certain that all parties fully understand the strategic goals of the partnership.

• Each party must be able to trust all the others with strategic informa- tion and also trust that each collaborator will deliver quality products even if the business grows quickly and makes heavy demands.

The role of managers shifts in a network from that of com-

mand and control to more like that of a broker. Broker/man- agers serve several important boundary roles that aid network

integration and coordination: 52

• Designer role: The broker serves as a network architect who envi- sions a set of groups or firms whose collective expertise could be focused on a particular good or service.

● Canadian jet manufacturer, Bombardier Aerospace, relies on a modular

network of contractors to supply some of the 12 large components needed to

assemble the firm’s jets.

LO4 Describe important mechanisms used to coordinate work

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156 PART 3 | Organizing

therefore, are most appropriate in situations that are relatively

stable and unchanging. In some cases, when the work envi-

ronment requires flexibility, coordination by standardization

may not be very effective. Who hasn’t experienced a time

when rules and procedures—frequently associated with a slow

bureaucracy—prevented timely action to address a problem?

In these instances, we often refer to rules and regulations as

“red tape.” 55

4.2 | Plans Set a Common Direction If laying out the exact rules and procedures by which work

should be integrated is difficult, organizations may provide

more latitude by establishing goals and schedules for interde-

pendent units. Coordination by plan does not require the same high degree of stability and routinization required for coordina-

tion by standardization. Interdependent units are free to modify

and adapt their actions as long as they meet the deadlines and

targets required for working with others.

In writing this textbook, for example, we (the authors) sat

down with a publication team that included the editors, the mar-

keting staff, the production group, and support staff. Together

we ironed out a schedule for developing this book that cov-

ered approximately a two-year period. That development plan

included dates and “deliverables” that specified what was to be

accomplished and forwarded to the others in the organization.

The plan gave each subunit enough flexibility, and the overall

approach allowed us to work together effectively.

4.3 | Mutual Adjustment Allows Flexible Coordination

Ironically, the simplest and most flexible approach to coordi-

nation may just be to have interdependent parties talk to one

another. Coordination by mutual adjustment involves feed- back and discussions to jointly figure out how to approach

problems and devise solutions that are agreeable to everyone.

The popularity of teams today is in part due to the fact that

they allow for flexible coordination; teams can operate under

the principle of mutual adjustment.

The Chinese motorcycle industry has figured out how to coordi-

nate hundreds of suppliers in the design and manufacturing of

motorcycles. Together these small firms collaborate by working

from rough blueprints to design, construct, and assemble related

components, and then deliver them to another plant for final

4.1 | Standardization Coordinates Work Through Rules and Routines

When organizations coordinate activities by establishing rou-

tines and standard operating procedures that remain in place over

time, we say that work has been standardized. Standardization constrains actions and integrates various units by regulating

what people do. People often know how to act—and how to

interact—because standard operating procedures spell out what

they should do. For example, managers may establish stan-

dards for which types of computer equipment the organization

will use. This simplifies the purchasing and training processes

(everyone is on a common platform) and helps the different

parts of the organization communicate.

To improve coordination, organizations may also rely on

formalization —the presence of rules and regulations governing how people in the organization interact. Simple, often written,

policies regarding attendance, dress, and decorum, for example,

may help eliminate a good deal of uncertainty at work.

An important assumption underlying both standard-

ization and formalization is that the rules and procedures

should apply to most (if not all) situations. These approaches,

● Organizations of all types have established routines and standard

operating procedures so employees, customers, and other stakeholders know

how to act and interact with one another.

standardization establishing common routines and procedures that apply uniformly to everyone

formalization the presence of rules and regulations governing how people in the organization interact

coordination by plan interdependent units are required to meet deadlines and objectives that contribute to a common goal

coordination by mutual adjustment units interact with one another to make accommodations in order to achieve flexible coordination

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CHAPTER 7 | Organizing for Success 157

assembly. Because design and assembly are decentralized, sup-

pliers can move quickly to make adjustments, try out new com-

ponents, and make more changes if necessary before delivering a

product for final assembly.

Using this approach, the Chinese motorcycle industry is now

designing and building new motorcycles faster and less expen-

sively than any other country in the world. In fact, production

has quadrupled from 5 million motorcycles a year to 23 million

which gives China about 50 percent of the worldwide motorcycle

market. 56

But the flexibility of mutual adjustment as a coordination

device carries some cost. Hashing out every issue takes time

and may not be the most expedient approach for organizing

work. Imagine how long it would take to accomplish even the

most basic tasks if subunits had to talk through every situation.

Still, mutual adjustment can be very effective when problems

are novel and cannot be programmed in advance with rules,

procedures, or plans. Particularly during crises, in which rules

and procedures don’t apply, mutual adjustment is likely to be

the most effective approach to coordination.

4.4 | Coordination Requires Communication

Today’s environments tend to be complex, dynamic, and there-

fore uncertain. Huge amounts of information flow from the

Exhibit 7.9 Managing high information-processing demands Specific

Techniques

Reduce the

need for information

General

Strategies

Process more

information

Create slack resources

Invest in information

systems

Create

horizontal relationships

Create

self-contained tasksHigh

information-

processing demands

● Information sharing is vital at the National Counterterrorism Center.

Technology is used to enable the efficient and safe execution of information

sharing.

external environment to the organiza-

tion and back. To cope, organizations

must acquire, process, and respond to

that information. To function effec-

tively, organizations need to develop

structures for processing information.

To cope with high uncertainty and

heavy information demands, manag-

ers can use the two general strategies

shown in Exhibit 7.9 : 57

1. Reduce the need for information. Managers can do this by creating slack resources. Slack resources are extra resources that organizations can rely on in a pinch. For example, a company that carries inventory does not need as much information about sales demand or lead time. Part-time and temporary employees are another type of slack resource because using them helps employers get around per- fectly forecasting sales peaks.

2. Increase information-processing capability. An organization may do this by investing in information sys- tems or engaging in knowledge

management —capitalizing on the intellect and experience of the organization’s human assets to increase collaboration and effec- tiveness. Managers may foster knowledge management by creat- ing horizontal relationships. These may be as simple as assigning someone to serve as a liaison between groups, or they may be more complex, such as an interdepartmental task force or team. 58

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158 PART 3 | Organizing

Organizing Around Core Capabilities A recent and important perspective on strategy and organization hinges on

the concept of core capability. 60 As you learned in Chapter 5, a core capability is the ability—knowledge, expertise, skill—

that underlies a company’s ability to be a leader in providing a

range of goods or services. It allows the company to compete

on the basis of its core strengths and expertise, not just on what

it produces.

Successfully developing a world-class core capability opens

the door to a variety of opportunities; failure means being

foreclosed from many markets. Thus a well-understood, well-

developed core capability can enhance a company’s responsive-

ness and competitiveness. Strategically, companies must commit

to excellence and leadership in capabilities and strengthen them

before they can win market share for specific products.

Organizationally, the corporation should be viewed as a portfo-

lio of capabilities, not just of specific businesses.

Managers who want to strengthen their firms’ competitive-

ness need to focus on several related issues:

• Identify existing core capabilities.

• Acquire or build core capabilities that will be important for the future.

• Keep investing in capabilities, so the firm remains world-class and better than competitors.

• Extend capabilities to find new applications and opportunities for the markets of tomorrow. 61

Keep in mind that it’s not enough for an organization to have valuable resources that provide capabilities; those resources

have to be managed in a way that gives the organization an advantage.

62 That means managers have to do three things:

1. Accumulate the right resources (such as talented people). Managers must determine what resources they need, acquire and develop those resources, and eliminate resources that don’t provide value.

5 | ORGANIZATIONAL AGILITY

Managers today place a premium on agility —being able to act fast to meet customer needs and respond to other outside

pressures. They want to correct past mistakes quickly and also

to prepare for an uncertain future. They need to respond to

threats and capitalize on opportunities when they come along.

The particular structure the organization adopts to accom-

plish agility will depend on its strategy, its customers, and its technology.

5.1 | Strategies Promote Organizational Agility

Certain strategies, and the structures, processes, and relation-

ships that accompany them, seem particularly well suited to

improving an organization’s ability to respond quickly and

effectively to the challenges it faces. They reflect managers’

determination to fully leverage people and assets to make the

firm more agile and competitive. These strategies and struc-

tures are based on the firm’s core capabilities, strategic alli-

ances, and abilities to learn to engage all its people in achieving

its objectives and to adapt its structure to its size.

Advertising agency mcgarrybowen is not letting its size or age (it’s

been in business about nine years) get in the way of its success.

Founded by three industry veterans who spent the earlier part of

their careers in much larger firms, this 2009 winner of Advertising

Age’s U.S. Agency of the Year has built a reputation for being cre-

ative, relationship-oriented, and responsive. Shortly before the first

anniversary of the September 11, 2001, attacks, CEO John McGarry

was asked by Verizon Communications to create a last-minute

television ad (within two weeks!) that would capture the spirit

and sacrifice of both the tragedy of 9/11 and the round-the-clock

commitment that Verizon’s employees made to restore phone

reception and communications to businesses and residences in the

affected area of New York City. In record time, McGarry and his

team developed a two-minute 9/11 tribute that featured children

gathering around the Statue of Liberty accompanied by a moving

song that ended with the words “in gratitude for those who served.”

Verizon’s leaders and employees were so proud and moved that the

company decided to give all of their corporate brand and image

advertising to mcgarrybowen, which currently accounts for about

one-fifth of the ad agency’s $176 million in revenue. 59

● Apple and Starbucks have a new partnership that allows customers to use

the T-Mobile HotSpot Wi-Fi Network to wirelessly download music onto their

wireless devices. The iTunes Wi-Fi Music Store offers the service with no

Wi-Fi connection fees or HotSpot login required.

LO5 Discuss how organizations can improve their agility through strategy, commitment to customers, and use of technology

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CHAPTER 7 | Organizing for Success 159

How do firms become

true learning organizations?

There are a few important

ingredients: 68

• Their people engage in disci- plined thinking and attention to details, making decisions based on data and evidence rather than guesswork and assumptions.

• They search constantly for new knowledge and ways to apply it, looking for expanding horizons and opportunities, not just quick fixes to current problems. The organization values and rewards individuals who expand their knowledge and skill in areas that benefit the organization.

• They carefully review successes and failures, looking for lessons and deeper understanding.

• They benchmark—that is, identify and implement the best prac- tices of other organizations, stealing ideas shamelessly.

• They share ideas throughout the organization via reports, informa- tion systems, informal discussions, site visits, education, and train- ing. Employees work with and are mentored by more experienced employees.

High-Involvement Organizations Another increasingly popular way to create a competitive advantage is participative

management. Particularly in high-technology companies facing

stiff international competition, the aim is to generate high lev-

els of commitment and involvement as employees and manag-

ers work together to achieve organizational goals.

2. Combine the resources in ways that give the organization capabil- ities, such as researching new products or resolving problems for customers. These combinations may involve knowledge sharing and alliances between departments or with other organizations.

3. Leverage or exploit their resources. Managers must identify the opportunities where their capabilities deliver value to custom- ers (say, by creating new products or delivering existing prod- ucts better than competitors) and then coordinate and deploy the employees and other resources needed to respond to those opportunities.

Strategic Alliances The modern organization has a variety of links with other organizations that are more complex than

traditional stakeholder relationships. Today even fierce com-

petitors are working together at unprecedented levels to achieve

their strategic goals. In early 2014, Yahoo! CEO Marissa

Mayer announced that as a strategy to compete more effec-

tively against Google and Bing search engines, the company

had formed an alliance with online review site Yelp. Yahoo!

will integrate listings and reviews of local businesses—from

restaurants to stores—into results on its search engine. 63

A strategic alliance is a formal relationship created with the purpose of joint pursuit of mutual goals. In a strategic alli-

ance, individual organizations share administrative authority,

form social links, and accept joint ownership. Such alliances

are blurring firms’ boundaries. They occur between compa-

nies and their competitors, governments, and universities.

Such partnering often crosses national and cultural boundar-

ies. Companies form strategic alliances to develop new tech-

nologies, enter new markets, and reduce manufacturing costs

through outsourcing. Not only can alliances enable companies

to move ahead faster and more efficiently, but they also are

sometimes the only practical way to bring together the vari-

ety of specialists needed for operating in today’s complex and

fast-changing environment. Rather than hiring the experts

who understand the technology and market segments for each

new product, companies can form alliances with partners that

already have those experts on board. 64

Managers must devote plenty of time to developing the

human relationships in the partnership. The best alliances are

true partnerships that meet the criteria shown in Exhibit 7.10 .

Most of these ideas apply not only to strategic alliances but

to any type of relationship. 65

Learning Organizations Being responsive requires con- tinually changing and learning new ways to act. Some experts

say the only sustainable advantage is learning faster than the

competition. This has led to interest in an idea called the learn-

ing organization. 66

A learning organization is an organiza- tion skilled at creating, acquiring, and transferring knowledge,

and at modifying its behavior to reflect new knowledge and

insights. 67

L.L. Bean, Apple, Google, and GM are good exam-

ples of learning organizations. Such organizations are skilled at

solving problems, experimenting with new approaches, learn-

ing from their own experiences, learning from other organiza-

tions, and spreading knowledge quickly and efficiently.

strategic alliance a formal relationship created among independent organizations with the purpose of joint pursuit of mutual goals

learning organization an organization skilled at creating, acquiring, and transferring knowledge, and at modifying its behavior to reflect new knowledge and insights

Individual excellence Partners add value, and their motives are to pursue opportunity.

Importance Partners want alliance to help them reach long-term objectives.

Interdependence Partners need each other and help each other reach its goals.

Investment Partners dedicate financial and other resources to relationship.

Information Partners communicate openly about goals, data, and changing situations.

Integration Partners develop shared ways of operating and learn from each other.

Institutionalization Relationship is formal with clear responsibilities.

Integrity Partners are trustworthy and honorable.

Source: Adapted and reprinted by permission of Harvard Business Review. From R. M. Kanter, “Collaborative Advantage: The Art of Alliances,” Harvard Business Review, July–August 1994, pp. 96–108. Copyright © 1994 by the Harvard Business School Publishing Corporation; all rights reserved.

Exhibit 7.10 Criteria for forming alliances

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160 PART 3 | Organizing

challenge, then, is to be both big and small to capitalize on the

advantages of each. Solutions include decentralized decision

making and the use of teams empowered to respond quickly to

a changing environment.

As large companies try to regain the responsiveness of small

companies, they often consider downsizing, the planned elimi- nation of positions, for example, by eliminating functions, hier-

archical levels, or even whole units. 70

Recognizing that people

will be unemployed and frightened, managers usually opt for

downsizing only in response to pressure. Traditionally, compa-

nies have downsized when demand falls and seems unlikely to

rebound soon. These layoffs save money so that the company

can remain profitable—or at least viable—until the next upturn.

More recently, however, global competition has forced compa-

nies to cut costs even when sales are strong and when, through

technological advances, the same output can be produced by

fewer employees. As a result, many companies have used down-

sizing to become more efficient. Whereas downsizing in response

to a slowdown in demand has tended to have the most impact

on operating-level jobs in manufacturing firms, downsizing to

improve efficiency has focused on eliminating layers of manage-

ment, so those layoffs target “white-collar” middle managers.

The recent recession has forced widespread downsizing across a

variety of industries, not just manufacturing. For example, in

response to a severe downturn in demand, Microsoft announced

that, for the first time in its history, it would have to downsize, lay-

ing off about 5,000 employees (about 5 percent of its workforce). In

a memo to employees, CEO Steve Ballmer acknowledged the risks

of such an approach: “Our success at Microsoft has always been

the direct result of the talent, hard work, and commitment of our

people.” 71

In effect, downsizing risks eliminating the very source

of a company’s success.

Done appropriately, downsizing can in fact make firms

more agile. But even under the best circumstances, downsiz-

ing can be traumatic for an organization and its employees.

Interestingly, the people who lose their jobs because of down-

sizing are not the only ones deeply affected. Those who keep

their jobs tend to exhibit what has become known as survivor’s syndrome. 72 They struggle with heavier workloads, wonder who will be next to go, try to figure out how to survive, lose

commitment to the company and faith in their bosses, and

become narrow-minded, self-absorbed, and risk-averse.

Managers can engage in a number of positive practices to

ease the pain and increase the effectiveness of downsizing: 73

• Use downsizing only as a last resort, when other methods of improving performance by innovating or changing procedures have been exhausted.

• In choosing positions to eliminate, engage in careful analysis and strategic thinking.

• Train people to cope with the new situation.

• Identify and protect talented people.

In a high-involvement organization, top manage- ment ensures that there is a

consensus about the direction

in which the business is head-

ing. The leader seeks input

from his or her top management team and from lower levels of

the company. Task forces, study groups, and other techniques

foster participation in decisions that affect the entire organi-

zation. Participants receive continual feedback regarding how

they are doing compared with the competition and how effec-

tively they are meeting the strategic agenda.

Structurally, this usually means that even lower-level employ-

ees have a direct relationship with a customer or supplier and

thus receive feedback and are held accountable for delivering a

good or service. The organization has a flat, decentralized struc-

ture built around a customer, good, or service. Employee involve-

ment is particularly powerful when the environment changes

rapidly, work is creative, complex activities require coordination,

and firms need major breakthroughs in innovation and speed—in

other words, when companies need to be more responsive. 69

Impact of Organizational Size Large organizations are typically less organic and more bureaucratic. Jobs become

more specialized, and distinct groups of specialists are created

because large organizations can add a new specialty at lower

proportional expense. The resulting complexity makes the

organization harder to control, so management adds more lev-

els to keep spans of control from becoming too large. Rules,

procedures, and paperwork are also introduced.

But a huge, complex organization can find it hard to manage

relationships with customers and among its own units. Larger

companies also are more difficult to coordinate and control.

While size may enhance efficiency, it also may create adminis-

trative difficulties that inhibit efficiency.

Nimble, small firms frequently outmaneuver big bureaucra-

cies, but size offers market power in buying and selling. The

● In an effort to exceed customers’ expectations, L.L. Bean now offers free

shipping to addresses in the United States and Canada. There is no minimum

purchase and no expiration date.

high-involvement organization an organization in which top management ensures that there is consensus about the direction in which the business is heading

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CHAPTER 7 | Organizing for Success 161

Deming’s “14 points” of

quality emphasize a holistic

approach to management:

One of the most import-

ant contributors to total qual-

ity management has been

the introduction of statistical

tools to analyze the causes

of product defects, in an

approach called six sigma quality. Sigma is the Greek letter used to designate the

estimated standard deviation

or variation in a process. (The

higher the “sigma level,” the

lower the amount of varia-

tion.) The product defects analyzed may include anything that

results in customer dissatisfaction—for example, late delivery,

wrong shipment, or poor customer service, as well as problems

with the product itself. When the defect has been identified,

managers then engage the organization in a comprehensive

effort to eliminate its causes and reduce it to the lowest prac-

ticable level. At six sigma, a product or process is defect-free

99.99966 percent of the time. Reaching that goal almost always

requires managers to restructure their internal processes and

relationships with suppliers and customers in fundamental

ways. For example, managers may have to create teams from

all parts of the organization to implement the process improve-

ments that will prevent defects from arising.

Related to this is the lean six sigma approach, which com- bines six sigma quality improvement techniques with initiatives

that eliminate waste in time, complex processes, and materials.

As a way to be more efficient and keep budgets under con-

trol, city planners in Irving, Texas, have used lean six sigma

analysis to reduce the time it takes to

complete a cycle of street repairs from

an average of 14 weeks to 6 weeks.

Instead of maintaining three separate

40-year-old, inefficient community

pools (used by about 9,700 residents

each year), city planners built a new

energy-efficient pool that is now used

by 110,000 visitors annually. 75

The influence of TQM on the

organizing process has become even

more acute with the emergence of

ISO standards. ISO 9001 is a series of voluntary quality standards devel-

oped by a committee working under

the International Organization for

Standardization (known as ISO), a

network of national standards insti-

tutions in more than 150 countries. In

contrast to most ISO standards, which

describe a particular material, product,

• Give special attention and help to those who have lost their jobs.

• Communicate constantly with people about the process, and invite ideas for alternative ways to operate more efficiently.

• Identify how the organization will operate more effectively in the future, and emphasize this positive future and the remaining employees’ new roles in attaining it.

5.2 | Agile Organizations Focus on Customers

In the end, the point of structuring a responsive, agile organiza-

tion lies in enabling it to meet and exceed the expectations of its

customers. Customers are vital to organizations because they

purchase goods and services, and their continued relationships

with the firm constitute the fundamental driver of sustained,

long-term competitiveness and success. To meet customer

needs, organizations focus on quality improvement.

Organizing for Quality Improvement Managers may embed quality programs within any organizational structure. Total quality management (TQM) is a way of managing in which everyone is committed to continuous improvement of his or her part of the

operation. TQM is a comprehensive approach to improving prod-

uct quality and thereby customer satisfaction. It is characterized by

a strong orientation toward customers (external and internal) and

has become a theme for organizing work. TQM reorients manag-

ers toward involving people across departments in improving all

aspects of the business. Continuous improvement requires mech-

anisms that facilitate group problem solving, information sharing,

and cooperation across business functions. The walls that separate

stages and functions of work tend to come down, and the organi-

zation operates in a team-oriented manner. 74

One of the founders of the quality management move-

ment was W. Edwards Deming. As illustrated in Exhibit 7.11 ,

1. Create constancy of purpose —strive for long-term improvement (vs. short-term profit).

2. Adopt the new philosophy —don’t tolerate delays and mistakes.

3. Cease dependence on mass inspection —build quality into the process on the front end.

4. End the practice of awarding business on price tag alone — build long-term relationships.

5. Improve constantly and forever the system of production and service —at each stage.

6. Institute training and retraining —continually update methods and thinking.

7. Institute leadership —provide the resources needed for effectiveness.

8. Drive out fear —people must believe it is safe to report problems or ask for help.

9. Break down barriers among departments —promote teamwork.

10. Eliminate slogans and arbitrary targets —supply methods, not buzzwords.

11. Eliminate numerical quotas —they are contrary to the idea of continuous improvement.

12. Remove barriers to pride in work —allow autonomy and spontaneity.

13. Institute a vigorous program of education and retraining —people are assets, not commodities.

14. Take action to accomplish the transformation —provide a structure that enables quality.

Exhibit 7.11 Deming’s 14 points of quality

total quality management (TQM) an integrative approach to management that supports the attainment of customer satisfaction through a wide variety of tools and techniques that result in high- quality goods and services

ISO 9001 a series of quality standards developed by a committee working under the international organization for standardization to improve total quality in all businesses for the benefit of producers and consumers

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162 PART 3 | Organizing

U.S. companies first became interested in ISO 9001 because

overseas customers, particularly those in the European Union,

embraced it. Now some U.S. customers are making the

same demand. As a result, hundreds of thousands of com-

panies in manufacturing and service industries around the

world are ISO certified. For example, UniFirst Corporation,

a Massachusetts-based provider of workplace uniforms and

protective work clothing, obtained ISO certification for its two

Mexican plants through a process that included documenting

all the facilities’ processes and training employees in quality

control. 77

5.3 | Technology Can Support Agility Another critical factor affecting an organization’s struc-

ture and responsiveness is its technology. Broadly speak- ing, technology can be viewed as the methods, processes, systems, and skills used to transform resources (inputs) into

products (outputs). Although we will discuss technology—

and innovation—more fully later, in this chapter we want to

highlight some of the important influences technology has on

organizational design.

or process, the ISO 9001 standards apply to management sys-

tems at any organization and address eight principles: 76

1. Customer focus—learning and addressing customer needs and expectations.

2. Leadership—establishing a vision and goals, establishing trust, and providing employees with the resources and inspiration to meet goals.

3. Involvement of people—establishing an environment in which employees understand their contribution, engage in problem solv- ing, and acquire and share knowledge.

4. Process approach—defining the tasks needed to successfully carry out each process and assigning responsibility for them.

5. Systems approach to management—putting processes together into efficient systems that work together effectively.

6. Continual improvement—teaching people how to identify areas for improvement and rewarding them for making improvements.

7. Factual approach to decision making—gathering accurate perfor- mance data, sharing the data with employees, and using the data to make decisions.

8. Mutually beneficial supplier relationships—working in a coopera- tive way with suppliers.

● Guided by the results of a lean six sigma analysis, city planners in Irving, TX, decided to build an 11,000 square-foot energy efficient aquatic center to serve all

age groups. The analysis suggested that thousands more people would visit the new aquatic center than the three separate inefficient pools that served the

community for the past 40 years.

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CHAPTER 7 | Organizing for Success 163

sense, today organizations are trying to produce both high- volume

and high-variety products at the same time. This is referred to as

mass customization. 79 Automobiles, clothes, computers, and other products are increasingly being manufactured to match

each customer’s taste, specifications, and budget. You can now

buy clothes cut to your proportions, supplements with the exact

blend of the vitamins and minerals you like, CDs with the music

tracks you choose, and textbooks whose chapters are picked by

your professor.

How do companies manage this type of customization at

such low cost? They organize around a dynamic network of

relatively independent operating units. 80

Each unit performs

a specific process or task—called a module —such as making

a component, performing a credit check, or performing a par-

ticular welding method. Some modules may be performed by

outside suppliers or vendors.

Different modules join forces to make the good or provide

a service. How and when the various modules interact with

one another are dictated by the unique requests of each cus-

tomer. The manager’s responsibility is to make it easier and

less costly for modules to come together, complete their tasks,

and then recombine to meet the next customer demand. The

ultimate goal of mass customization is a never-ending cam-

paign to expand the number of ways a company can satisfy

customers.

One technological advance that has helped make mass cus-

tomization possible is computer-integrated manufacturing (CIM), which encompasses a host of computerized production efforts, including computer-aided design and computer-aided

manufacturing. These systems can produce high-variety and

high-volume products at the same time. 81

They may also offer

greater control and predictability of production processes,

reduced waste, faster throughput times, and higher quality. But

managers cannot “buy” their way out of competitive trouble

simply by investing in superior technology alone. They must

also ensure that their organization has the necessary strategic

and people strengths and a well-designed plan for integrating

the new technology within the organization.

Technology Configurations Research by Joan Woodward laid the foundation for understanding technology and struc-

ture. According to Woodward, three basic technologies char-

acterize how work is done in service as well as manufacturing

companies: 78

• Small batch technologies —When goods or services are provided in very low volume or small batches, a company that does such work is called a job shop. For example, PMF Industries, a small custom metalworking company in Williamsport, Pennsylvania, pro- duces stainless steel assemblies for medical and other uses. In the service industry, local restaurants and doctors’ offices provide a variety of low-volume, customized services. In a small batch orga- nization, structure tends to be organic, with few rules and formal

procedures, and decision making tends to be decentralized. The emphasis is on mutual adjustment among people.

• Large batch technologies —Companies with higher volumes and lower varieties than a job shop tend to be characterized as large batch, or mass production technologies. Examples include the computer assembly operations at Lenovo and Apple, and in the service sector, McDonald’s and Burger King. Their production runs tend to be standardized, and customers receive similar (if not identical) products. Machines may replace people in the physical execution of work. Structure tends to be more mechanistic. There are more rules and formal procedures, and decision making is more centralized with higher spans of control. Communication tends to be more formal, and hierarchical authority more prominent.

• Continuous process technologies —At the high-volume end of the scale are companies that use continuous process technologies, technologies that do not stop and start. International Paper and Air Products and Chemicals, for example, use continuous process technologies to produce a very limited number of products. People are completely removed from the work itself, which is done by machines and computers. People may run the computers that run the machines. Structure can return to a more organic form because less supervision is needed. Communication tends to be more infor- mal, and fewer rules and regulations are established.

Organizing for Flexible Manufacturing Although issues of volume and variety are often seen as trade-offs in a technological

“Information technology and business are becoming inextricably interwoven. I don’t think anyone can talk

meaningfully about one without talking about the other.” — Bill Gates

technology the systematic application of scientific knowledge to a new product, process, or service

small batch technologies that produce goods and services in low volume

large batch technologies that produce goods and services in high volume

continuous process a process that is highly automated and has a continuous production flow

mass customization the production of varied, individually customized products at the low cost of standardized, mass- produced products

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164 PART 3 | Organizing

Organizing for Speed: Time-Based Competition Companies worldwide have devoted so much energy to improving product

quality that high quality is now the standard attained by all top com-

petitors. Competition has driven quality to such heights that quality

products no longer are enough to distinguish one company from

another. Time has emerged as the key competitive advantage that

can separate market leaders from also-rans. 86

One way to compete based on time is to set up just-in-time (JIT) operations. JIT calls for subassemblies and components to be manufactured in very small lots and delivered to the next

stage in the process precisely at the time needed, or “just in

time.” A customer order triggers a factory order and the pro-

duction process. The supplying work centers do not produce

the next lot of product until the consuming work center requires

it. Even external suppliers deliver to the company just in time.

Just-in-time is a companywide philosophy oriented toward

eliminating waste and improving materials through-out all oper-

ations. In this way, excess inventory is eliminated and costs are

reduced. The ultimate goal of JIT is to serve the customer better

by providing higher levels of quality and service. For example,

by making products perfectly, companies eliminate the need for

costly and time-consuming inspections. Likewise, production

processes are shortened when they are streamlined so that parts

are actually being worked on every minute they are in produc-

tion, rather than sitting on a table, waiting for an operator.

Many believe that only a fraction of JIT’s potential has

been realized and that its impact will grow as it is applied to

other processes, such as service, distribution, and new product

development. 87

However, it’s important to keep in mind that

JIT offers efficiency only when the costs of storing items are

greater than the costs of frequent delivery. 88

While JIT concentrates on reducing time in manufacturing, com-

panies are speeding up research and product development through

the use of simultaneous engineering. Traditionally, when R&D completed its part of the project, the work was “passed over the wall”

to engineering, which completed its task and passed it over the wall

to manufacturing, and so on. In contrast, simultaneous engineering

incorporates the issues and perspectives of all the functions—and

customers and suppliers—from the beginning of the process.

This team-based approach results in a higher-quality product

that is designed for efficient manufacturing and customer needs. 89 In the automobile industry, tools such as computer-aided design

and computer-aided manufacturing (CAD/CAM) support simul-

taneous engineering by letting various engineers submit elements

and showing how these submissions affect the overall design

and the manufacturing process. With a modern CAD system,

automobile engineers can enter performance requirements into a

spreadsheet, and the system will identify a design that meets cost

and manufacturing requirements. This technology has helped

automakers slash product development time. 90

In the realm of

computing, some organizations have taken this idea much fur-

ther, making the programming code for their products available

to the public so that anyone at any time can develop new ideas to

use with their product, and the organization can decide to license

any ideas that seem to have market potential.

As the name implies, flexi- ble factories provide more pro- duction options and a greater

variety of products. They dif-

fer from traditional factories in

three primary ways: 82

1. The traditional factory has long production runs, gener- ating high volumes of a stan- dardized product. Flexible factories have much shorter production runs, with many different products.

2. Traditional factories move parts down the line from one

lean manufacturing an operation that strives to achieve the highest possible productivity and total quality, cost-effectively, by eliminating unnecessary steps in the production process and continually striving for improvement

just-in-time (JIT) a system that calls for subassemblies and components to be manufactured in very small lots and delivered to the next stage of the production process just as they are needed

location in the production sequence to the next. Flexible factories are organized around products, in work cells or teams, so that peo- ple work closely together and parts move shorter distances with shorter or no delays.

3. Traditional factories use centralized scheduling, which is time- consuming, inaccurate, and slow to adapt to changes. Flexible fac- tories use local or decentralized scheduling, in which decisions are made on the shop floor by the people doing the work.

Another organizing approach is lean manufacturing, based on a commitment to making an operation both efficient and

effective; it strives to achieve the highest possible productivity

and total quality, cost-effectively, by eliminating unnecessary

steps in the production process and continually striving for

improvement. Rejects are unacceptable, and staff, overhead,

and inventory are considered wasteful. In a lean operation,

the emphasis is on quality, speed, and flexibility more than on

cost, efficiency, and hierarchy. If an employee spots a problem,

the employee is authorized to halt the operation and signal for

help to correct the problem at its source, so processes can be

improved and future problems avoided. With a well-managed

lean production process, a company can develop, produce, and

distribute products with half or less of the human effort, space,

tools, time, and overall cost. 83

St. Agnes Hospital in Baltimore has used lean principles to

reduce costs and patient waiting times while improving safety,

and the ThedaCare health system in Wisconsin saved more

than $3 million in one year of using lean methods. 84

For the lean approach to result in more effective operations,

the following conditions must be met: 85

• People are broadly trained rather than specialized.

• Communication is informal and horizontal among line workers.

• Equipment is general-purpose.

• Work is organized in teams, or cells, that produce a group of similar products.

• Supplier relationships are long-term and cooperative.

• Product development is concurrent, not sequential, and is done by cross-functional teams.

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CHAPTER 7 | Organizing for Success 165

Study Che klist Did you tear out the perforated student review card at

the back of the text to revisit learning objectives and key terms and definitions?

Connect ® Management is available for M Management. Additional resources include:

Interactive Applications: • Drag & Drop: Organizational Structures • Drag & Drop: The Organizational Chart • Sequencing/Timeline: Delegating • Video Case: Organizing at The Container Store

Chapter Videos: New Belgium Brewery

Young Manager Speaks Out: Stephanie Weber, Sales Analytics Manager

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6 Entrepreneurship

1. | ENTREPRENEURSHIP

1.1 | �Why Become an Entrepreneur?
1.2 | �What Does It Take to Succeed?

2. | WHAT BUSINESS SHOULD YOU START?

2.1 | �The Idea
2.2 | �The Opportunity
2.3 | �Franchises
2.4 | �The Next Frontiers
2.5 | �The Internet
2.6 | �Side Streets

3. | WHAT DOES IT TAKE, PERSONALLY?

3.1 | �Making Good Choices
3.2 | �Failure Happens, But You Can Improve the Odds of Success
3.3 | �The Role of the Economic Environment
3.4 | �Business Incubators

4. | COMMON MANAGEMENT CHALLENGES

4.1 | �You Might Not Enjoy It
4.2 | �Survival Is Difficult
4.3 | �Growth Creates New Challenges
4.4 | �It’s Hard to Delegate
4.5 | �Misuse of Funds
4.6 | �Poor Controls
4.7 | �Mortality
4.8 | �Going Public

5. | PLANNING AND RESOURCES HELP YOU SUCCEED

5.1 | �Planning
5.2 | �Nonfinancial Resources

6. | CORPORATE ENTREPRENEURSHIP

6.1 | �Build Support for Your Ideas
6.2 | �Build Intrapreneurship in Your Organization
6.3 | �Managing Intrapreneurship Is Risky
6.4 | �An Entrepreneurial Orientation Encourages New Ideas

Take Charge of Your Career // Why wait? Start a business while still in college
Intrapreneurship at IKEA

7 Organizing for Success

1 | FUNDAMENTALS OF ORGANIZING

1.1 | �Differentiation Creates Specialized Jobs
1.2 | �Integration Coordinates Employees’ Efforts

2 | THE VERTICAL STRUCTURE

2.1 | �Authority Is Granted Formally and Informally
2.2 | �Span of Control Determines a Manager’s Authority
2.3 | �Delegation Is How Managers Use Others’ Talents
2.4 | �Decentralization Spreads Decision-Making Power

3 | THE HORIZONTAL STRUCTURE

3.1 | �Functional Organizations Foster Efficient Experts
3.2 | �Divisional Organizations Develop a Customer Focus
3.3 | �Matrix Organizations Try to Be the Best of Both Worlds
3.4 | �Network Organizations Are Built on Collaboration

4 | ORGANIZATIONAL INTEGRATION

4.1 | �Standardization Coordinates Work Through Rules and Routines
4.2 | �Plans Set a Common Direction
4.3 | �Mutual Adjustment Allows Flexible Coordination
4.4 | �Coordination Requires Communication

5 | ORGANIZATIONAL AGILITY

5.1 | �Strategies Promote Organizational Agility
5.2 | �Agile Organizations Focus on Customers
5.3 | �Technology Can Support Agility

Take Charge of Your Career // Be a specialist first, then a generalist
Can a Brewery Be a Force for Good?