Case Study Principles of Management 101

ANGELO KINICKI BRIAN K. WILLIAMS

management9e A Practical Introduction

management

N I N T H E D I T I O N

Angelo Kinicki Arizona State University

Kent State University

Brian K. Williams

MANAGEMENT: NINTH EDITION

Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2020 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. Previous editions © 2018, 2016, and 2013. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning.

Some ancillaries, including electronic and print components, may not be available to customers outside the United States.

This book is printed on acid-free paper.

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ISBN 978-1-260-07511-3 MHID 1-260-07511-7

Editorial Director: Michael Ablassmeir Product Developer: Anne Ehrenworth Executive Marketing Manager: Debbie Clare Content Project Managers: Harvey Yep (Core)/Keri Johnson (Assessment) Buyer: Susan K. Culbertson Design: Jessica Cuevas Content Licensing Specialists: Carrie Burger Cover Image: ©Olivier Renck/Aurora/Getty Images Compositor: Aptara®, Inc.

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

Library of Congress Cataloging-in-Publication Data

Names: Kinicki, Angelo, author. | Williams, Brian K., 1938- author. Title: Management : a practical introduction / Angelo Kinicki, Arizona State

 University, Brian K. Williams. Description: Ninth edition. | New York, NY : McGraw-Hill Education, [2020] Identifiers: LCCN 2018047636| ISBN 9781260075113 (alk. paper) | ISBN  1260075117 (alk. paper) Subjects: LCSH: Management. Classification: LCC HD31 .K474 2020 | DDC 658—dc23 LC record available at https://lccn.loc.gov/2018047636

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

mheducation.com/highered

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Walkthrough Preface of 9e xv

PA R T 1 Introduction 1 The Exceptional Manager: What You Do, How You

Do It 2

2 Management Theory: Essential Background for the Successful Manager 42

PA R T 2 The Environment of Management 3 The Manager’s Changing Work Environment and

Ethical Responsibilities: Doing the Right Thing 76

4 Global Management: Managing across Borders 116

PA R T 3 Planning 5 Planning: The Foundation of Successful

Management 156

6 Strategic Management: How Exceptional Managers Realize a Grand Design 188

Learning Module 1: Entrepreneurship 220

7 Individual and Group Decision Making: How Managers Make Things Happen 238

PA R T 4 Organizing 8 Organizational Culture, Structure, and Design:

Building Blocks of the Organization 280

9 Human Resource Management: Getting the Right People for Managerial Success 322

10 Organizational Change and Innovation: Lifelong Challenges for the Exceptional Manager 374

PA R T 5 Leading 11 Managing Individual Differences and Behavior:

Supervising People as People 408

12 Motivating Employees: Achieving Superior Performance in the Workplace 456

13 Groups and Teams: Increasing Cooperation, Reducing Conflict 502

14 Power, Influence, and Leadership: From Becoming a Manager to Becoming a Leader 534

15 Interpersonal and Organizational Communication: Mastering the Exchange of Information 580

PA R T 6 Controlling 16 Control Systems and Quality Management:

Techniques for Enhancing Organizational Effectiveness 630

Learning Module 2: The Project Planner’s Toolkit: Flowcharts, Gantt Charts, and Break-Even Analysis 681

brief contents

Chapter Notes CN-1 Name Index IND-1

Organization Index IND-5 Glossary/Subject Index IND-11

iv

dedication

To Joyce Kinicki, the love of my life, best friend, and the wind beneath

my wings.

—Angelo

about the author

Angelo Kinicki is an emeritus professor of management and held the Weatherup/Overby Chair in Leadership from 2005 to 2015 at the W.P. Carey School of Business at Arizona State University. He joined the faculty in 1982, the year he received his doctorate in business administration from Kent State University. He was inducted into the W.P. Carey Faculty Hall of Fame in 2016. Angelo currently is the Dean's Scholar in Residence at Kent State University. He is teaching in the MBA program and serves on the Dean's National Advisory Board.

Angelo is the recipient of six teaching awards from Arizona State University, where he taught in its nationally ranked MBA and PhD programs. He also received several research awards and was selected to serve on the editorial review boards for four scholarly journals. His current research interests focus on the dynamic relationships among leadership; organizational culture; organizational change; and individual, group, and organizational performance. Angelo has published over 95 articles in a variety of academic journals and proceedings and is co-author of eight textbooks (32 including revisions) that are used by hundreds of universities around the world. Several of his books have been translated into multiple languages, and two of his books were awarded revisions of the year by McGraw-Hill. Angelo was identified as being among the top 100 most influential (top .6%) Organizational Behavioral authors in 2018 out of a total of 16,289 academics.

Angelo is a busy international consultant and is a principal at Kinicki and Associates, Inc., a management consulting firm that works with top management teams to create organizational change aimed at increasing organizational effectiveness and profitability. He has worked with many Fortune 500 firms as well as numerous entrepreneurial organizations in diverse industries. His expertise includes facilitating strategic/operational planning sessions, diagnosing the causes of organizational and work-unit problems, conducting organizational culture interventions, implementing performance management systems, designing and implementing performance appraisal systems, developing and administering surveys to assess employee attitudes, and leading management/executive education programs. He developed a 360° leadership feedback instrument called the Performance Management Leadership Survey (PMLS) that is used by companies throughout the world.

Angelo and his wife of 37 years, Joyce, have enjoyed living in the beautiful Arizona desert for 36 years. They are both natives of Cleveland, Ohio. They enjoy traveling, hiking, and spending time in the White Mountains with Gracie, their adorable golden retriever. Angelo also has a passion for golfing.

Courtesy of Angelo Kinicki

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new to the ninth edition

We are pleased to share these exciting updates and new additions! Two major changes were implemented in the ninth edition. The first involved a new strategic career readiness theme throughout the product to address employers’ concerns about students graduating without being career ready. The second was to extend our emphasis on the practical application of management. Below is a review of these substantive changes.

Career Readiness Theme Promotes Employable Skills Global surveys of CEOs and recruiters reveal that college graduates do not possess the knowl- edge, skills, and attributes desired by employers, resulting in a lack of career readiness. We want to promote the development of your students’ career readiness competencies so that they are more employable. Therefore, we’ve introduced a new strategic theme of career readiness to cre- ate a link between the principles of management and the objective of providing students with the tools they need to flourish on their chosen employment path. This integration takes five forms:

• The career readiness theme is thoroughly introduced in Chapter 1. We introduce a major section, 1.7, entitled “Building Your Career Readiness,” and present a model of career readiness along with a table of competencies desired by employers.

• Over 40 of the product’s 66 Self-Assessments pertain directly to a career readiness competency. Feedback from these self-assessment can be used to assist students in creating a development plan focused on being career ready.

• Each chapter concludes with a new section entitled “Career Corner: Managing Your Career Readiness.” This section serves two purposes. First, it assists students in linking chapter content with the competencies of career readiness, which provides a powerful association between the principles of management and the skills desired by employers. Second, this material provides students with practical tips for developing targeted career readiness competencies. We believe students can become more career ready by following the advice in these Career Corner sections.

• We developed a targeted set of exercises in Connect, our online teaching and learning platform, that give students hands-on experience working with the career readiness competencies desired by employers.

• We created a set of experiential exercises for each chapter in our unique Teaching Resource Manual that are targeted to develop students’ career readiness competencies.

Extending the Practical Application of Management Concepts Practical application has always been a major feature of this product. We want students to understand how to use what they are learning in both their personal and professional lives. We extend our emphasis on practicality by: • Every chapter begins with a new feature entitled “Manage U.” It replaces the Manager’s

Toolbox and provides students with actionable tips for applying the material in each chapter. • Each chapter includes two new boxes that provide testimonials from millennials about

their experiences with effective and ineffective management. “I wish I . . .” boxes illustrate real-world examples in which students recall an instance when they or their boss could have better applied certain management concepts. “I’m glad I . . .” boxes discuss positive applications of management concepts.

• To promote mastery of management concepts, we developed a continuing case on Uber for each chapter. Application learning can be assessed in Connect.

• To promote critical thinking and problem solving, a key career readiness competency, we revamped our Management in Action Cases. They now focus on higher levels of

vi

learning by asking students to solve real organizational problems using relevant management concepts.

Fully revised Teaching Resource Manual (TRM) provides complete guidance for instructors The TRM was new to the eighth edition and was developed to provide instructors with a turnkey solution to fostering a discussion-based and experiential learning experience. It amounts to a traditional instructor’s manual on steroids by providing suggestions for creatively teaching topics, suggested videos outside of the McGraw Hill arsenal (e.g., YouTube, The Wall Street Journal, etc.), group exercises, lecture enhancers, and supplemental exercises that correspond with cases and Self-Assessments. The TRM has been praised by instructors around the world for its depth, navigation, and experiential-based content. We improved this resource based on feedback from faculty.

Our first change acknowledges that many of us teach online or in larger, in-person classes (sometimes both!). The ninth edition TRM not only includes revised activities for the traditional classroom, but also includes new online and large, in-person class activities for every chapter.

The next set of changes involve providing follow-up activities for the new career readiness–based exercises in Connect because we believe students need these developmental activities to increase their career readiness. We also provide in-depth teaching notes for new Manager’s Hot Seat videos and Application-Based Activities in the form of simulations.

Finally, we provide new web video links for each chapter. These free, short videos allow instructors to illustrate the practical applications of management principles. We also include new current online article links instructors can use to discuss material that supplements the text.

CH APTER 1 • New Manage U feature: Using Management Skills for College

Success. • Section 1.1—New Example box on efficiency versus

effectiveness discusses how Delta Airlines handled an emergency at Atlanta’s Hartsfield-Jackson Airport. Updated CEO pay and labor statistics. New example of museum curator in discussion of rewards of management.

• Section 1.2—New boxed feature “I wish my manager was more of a leader than a manager.”

• Section 1.3—This section was moved to section 1.7 and section 1.4 was moved here. Introduces new key term “nonmanagerial employees.” Updated salary information for first-line managers. New examples for “for-profit” and “nonprofit” organizations. New data in “Managers for Three Types of Organizations.”

• Section 1.4—Section 1.6 became section 1.4, “Roles Managers Must Play Successfully.” New example of Mary Bara, CEO of GM, to illustrate managerial work activities. New Practical Action box on mindfulness. New example of Google CEO Sundar Pichai in discussion of informational roles.

viiNew to the ninth edition

” The TRM is top of the line.

—Todd Korol, Monroe Community College

The TRM is by far the most comprehensive and useful on the market. It is very user friendly for both faculty and students.

—Gerald Schoenfeld, Florida Gulf Coast University

“ “ ” Completely revamped, revised, and updated chapters In each chapter, we refreshed examples, research, figures, tables, statistics, and photos, as well as modified the design to accommodate new changes to this ninth edition. We have also largely replaced topics in such popular features as Example boxes, Practical Action boxes, Management in Action cases, and Legal/Ethical Challenges cases.

While the following list does not encompass all the updates and revisions, it does high- light some of the more notable changes.

• Section 1.5—New running example of Mary Bara used to explain the skills needed to manage. New boxed interview feature “I’m glad I have conceptual skills.” New Practical Action box on developing soft skills.

• Section 1.6—Updated Example box about Airbnb. Introduces new key terms “information technology application skills” and “meaningfulness.” New discussion of the Fourth Industrial Revolution. Updated statistics regarding workforce diversity. New discussion of Volkswagen and ethical standards. Updated Practical Action box on cheating. New reference to sexual harassment in discussion of ethical standards. New suggestions for building meaning into your life.

• Section 1.7—Entire new section on building career readiness. Introduces new key terms “attitude,” “career readiness,” “proactive learning orientation,” and “resilience.” Includes Figure 1.3 regarding gaps in college graduates and employers’ assessment of students’ career readiness; Table 1.2 description of KSAOs needed for career readiness; Figure 1.4, Model of Career Readiness; and discussion of developing career readiness. New Self-Assessment 1.2, To What Extent Do You Accept Responsibility for Your Actions?

• Section 1.8—New section titled “Career Corner: Managing Your Career Readiness.” Includes Figure 1.5, Process for Managing Career Readiness, and review of its application.

• New Management in Action case: Did Major League Baseball Value Money over Bob Bowman’s Behavior?

• New continuing case on Uber.

CHAPTER 2 • New Manage U feature: What Type of Work Do I Prefer? • Section 2.1—New Example box explores the successes and

failures of Zappos’ management experiment called “holacracy.” • Section 2.2—New coverage of Charles Clinton Spaulding’s

role in administrative management. • Section 2.3—New Example boxes including the new boxed

feature “I’m glad I work in an organization with a Theory Y culture” and an update to the Example box studying open-plan offices as an application of the behavioral science approach.

• Section 2.4—New Example box discussing operations management at Intel.

• Section 2.5—New Example box applying systems thinking. • Section 2.6—New Example box applying the contingency

viewpoint with manufacturers “pitching” jobs to parents of college students hoping they’ll influence their children to consider open positions after high school graduation. A new Practical Action box exploring Big Data.

• Section 2.7—New boxed feature “I wish my manager believed in a quality-management viewpoint,” as well as expanded content to include a deeper discussion of Six Sigma and ISO 9000, including definitions of both as well as practical examples of companies using each approach.

• Section 2.8—Expanded and updated in-content examples to showcase the three parts of a learning organization as well as expanded content examples on the three roles managers play in building learning organizations. Updated company examples for learning organizations, including a discussion of Google Buzz, American Express, and Apple.

• New Career Corner feature on Managing Your Career Readiness. • New Management in Action case: The Decline of Sears. • New continuing case on Uber.

CHAPTER 3 • New Manage U feature: Increase Ethical Behavior by

Fostering an Ethical Climate. • Section 3.1—Updated content regarding Millennials and their

search for meaning. • Section 3.2—Updated content and company applications for

internal stakeholders at SAS and the board of directors at Facebook.

• Section 3.3—New Example box discussing United Airlines and its responsibilities to its stakeholders versus customers. New boxed feature “I wish I kept a closer eye on trends affecting our suppliers.” Updated statistics regarding unions. New Example box discussing Amazon’s new headquarters and whether it will benefit the city chosen. New boxed feature “I’m glad I kept current on my industry’s general environment.” Updated Example discussing the Internet of Things. Introduces new key term “LGBTQ.” New figure showcasing the states in which marijuana is legal. Various content updates, including company examples for the task environment (including an updated list of “America’s Most Hated Companies”) and special interest groups with a discussion of the #MeToo movement and international forces such as Brexit. Updated examples for sociocultural forces to include seismic changes. Updated statistics for demographic forces of change.

• Section 3.4—New Example box featuring Volkswagen and ethics. Introduces new key term “abusive supervision.” Updated statistics on workplace cheating. New Example box discussing “whistleblowing” photographer Simon Edelman’s photos of the Trump administration and the fallout. Updated content examples for recent Sarbox cases and the most common ethics violations at work.

• Section 3.5—New content example of Tom’s Shoes as a company showcasing social responsibility. New example of the benefits to Coca-Cola for going green and new table showing how being ethical and socially responsible pays off.

• Section 3.6—New Example box discussing HD Supply Holdings and Fox News and the good and bad of corporate governance.

• New Career Corner feature on Managing Your Career Readiness.

• New Management in Action case: Who’s to Blame for College Basketball’s Dark Underbelly?

viii New to the ninth edition

• Updated Legal/Ethical Challenge: Should You Apply to Have Your Student Loans Forgiven?

• New continuing case on Uber.

CHAPTER 4 • New Manage U feature: Working Successfully Abroad:

Developing Cultural Awareness. • Section 4.1—Updated section opener with new statistics

regarding United States imports in 2016. Updated Table 4.1 and corresponding content with competitiveness rankings for 2016–2017. New Example box featuring international e-commerce company Alibaba. Updated content on the positive and negative effects of globalization. New content examples featuring recent megamergers including CVS/ Dignity Health, Amazon/Wholefoods.

• Section 4.2—New Example box discussing how to get an edge in the global job market. Introduces new key term “cross- cultural awareness.” The career readiness competency of cross-cultural awareness is defined and leads into the corresponding Practical Action box. Features an updated discussion of U.S. brands that are foreign owned. New boxed feature “I wish I considered the impact of ethnocentrism.”

• Section 4.3—Updated discussion on the foreign manufacturing of Apple products. An updated discussion of why companies expand internationally, including Netflix, Amazon, and Ford Motor Company and expanded discussion of foreign subsidiaries. Updated examples for how companies expand internationally, including Under Armour. Updated examples of global outsourced jobs, including an updated Table 4.2 with top exporting countries through 2016. Updated list of U.S. companies opening franchises overseas, including Chick-fil-A and Cold Stone.

• Section 4.4—Updated Table 4.3 with the U.S.’s top ten trading partners. Updated content regarding tariffs with a discussion of the Trump administration as well as updated content pertaining to import quotas, dumping, and embargoes and sanctions. New table featuring organizations promoting international trade. Updated discussion on NAFTA, the EU, and other trading blocs complete with a new Example box discussing Brexit’s impact on Britain and the EU. Updated Example box to showcase the exchange rates on various common products like rent, Starbucks, and designer jeans. Updated statistics for major economies, including China, India and Brazil.

• Section 4.5—Changed the section title to “The Value of Understanding International Differences” and expanded the opening with a discussion on international differences. An updated discussion on language and personal space with a discussion on learning foreign language online and through apps and a new Example box discussing the differences in personal space in various countries. Updated content on differences in communication. New Practical Action box discussing how to run an international meeting. New Figure

4.2 discussing current followers of world religions. Current examples of expropriation, corruption, and labor abuses. An updated discussion on expatriates and why U.S. managers often fail. New boxed feature “I’m glad I understood the GLOBE Project’s cultural dimensions.”

• New Career Corner feature: Managing Your Career Readiness: Working Overseas. New key term “context.”

• New Management in Action case: The Growth and Stall of Didi Chuxing.

• New Legal/Ethical Challenge: Should Qatar Be Hosting the 2022 World Cup?

• New continuing case on Uber.

CHAPTER 5 • New Manage U feature: Making an Effective Plan for Starting

Your Career. • Section 5.1—New Example box on how to write a business plan.

The previous discussion of VRIO was moved from this section to Chapter 6. New research on the benefits of planning.

• Section 5.2—Opens with a new Table 5.1 discussing and summarizing mission, vision, and values statements. New example box on Coca-Cola includes the company’s mission, vision, and values statements. A new Example box discusses Coca-Cola’s six long-term strategies. New boxed feature “I wish my manager put more effort into operational planning.”

• Section 5.3—New boxed feature “I’m glad I developed an action plan.” Updated Example box pertaining to long and short-term goals at Southwest Airlines.

• Section 5.4—New Example box on setting clear goals at Snapchat. Included new research on goal setting programs. Revised the three types of goals used in MBO: performance- based, behavioral-based, and learning-based. New Self- Assessment determining whether students have a proactive learning orientation. Added Tornier as an example of an Action Plan. New Practical Action box for small businesses and goal setting.

• Section 5.5—New Example box applying the planning/control cycle through Tesla’s Model 3.

• New Career Corner feature: Managing Your Career Readiness.

• New Management in Action case: Fender Rebrands to Stay in Tune with the Times.

• New Legal/Ethical Challenge: Is Pfizer Putting Profits above Alzheimer’s Patients?

• New continuing case on Uber.

New Learning Module: Entrepreneurship • New Manage U feature: So You Want to Start a Business? • Section LM 1.1—Introduces entrepreneurship and its

foundation, including a discussion of Elon Musk. Introduces

ixNew to the ninth edition

the concept of intrapreneurship, leading to a new Example box discussing Intel’s Genevieve Bell. Discusses how entrepreneurship is different from self-employment. A new figure LM 1.1 lists the characteristics of entrepreneurs. New Self-Assessment to determine if students have an “entrepreneurial spirit.” A discussion of entrepreneurship across the globe. New Table LM 1.1 with facts about small business.

• Section LM 1.2—Begins by discussing how entrepreneurs come up with ideas to start a business. Discusses how to write a business plan. Reviews the options for creating a legal structure for a business and how to obtain financing. The importance of creating the right organizational culture and design is explored. New Example box featuring the start and growth of a small business.

CHAPTER 6 • New Manage U feature: Building Your Personal Brand. • Section 6.1—New coverage regarding levels of strategy.

New Figure 6.1 shows three levels of strategy. Introduces the new key term “functional level strategy.” Updated research on strategic planning at small and large firms. New Example box illustrates strategic planning at Evernote and Groove HQ.

• Section 6.2—The five steps of the strategic management process were changed to reflect current thinking. New boxed feature “I wish my company would have evaluated its current reality before opening the doors for business.” New Self- Assessment on strategic thinking.

• Section 6.3—Begins with new key term “sustainable competitive advantage.” Updated Example box of SWOT analysis for Toyota; VRIO discussion from Chapter 5 now featured in this section with updated content and a new Figure 6.3. New Example box on developing competitive advantage in the Internet economy. Updated Example box with contingency planning in the wake of Hurricane Harvey with a discussion on CVS, Walgreens, and Fed Ex.

• Section 6.4—Renamed “Establishing Corporate Level Strategy.” Section now opens with Three Overall Types of Corporate Strategy and includes a new table showcasing how a company can implement overall corporate level strategies. New discussion of the BCG Matrix and different diversification strategies. Introduces new key term “unrelated diversification.” Discussion on Porter’s five competitive forces and four competitive strategies moved to Section 6.5.

• Section 6.5—Renamed “Establishing Business Level Strategy.” The discussion on Porter’s competitive forces and strategies moved to this section. New examples used to illustrate these concepts.

• Section 6.6—Renamed “Executing and Controlling Strategy.” New boxed feature “I’m glad my company adjusts its strategy as we go.”

• New Career Corner feature: Managing Your Career Readiness.

• New Management in Action case: General Electric’s Evolving Strategy.

• New Legal/Ethical Challenge: Is Your School Selling Your Bank Accounts?

• New continuing case on Uber.

CHAPTER 7 • New Manage U feature: How to Make Good Decisions. • Section 7.1—Updated Example box on Starbucks. Expanded

content on intuition with a new Example box on the power of intuition and a new Practical Action box on how to improve intuition.

• Section 7.2—Section opens with updated examples on business ethics including medication profiteering, the #MeToo movement, CEOs being punished for unethical behavior, and as a contrast to bad behavior, philanthropists Bill and Melinda Gates. New boxed feature “I’m glad I found an employer who cares about ethics more than just making money.”

• Section 7.3—Begins with an updated discussion of ethics at Google. New examples of companies using evidenced-based decision making. Updated Example box on using analytics in sports. Use of Big Data at companies such as Target, JetBlue, HP Labs, and the Obama administration is discussed. New Example box on data and hacking, featuring the Equifax breech.

• Section 7.4—New examples of various decision-making styles of CEOs, including Elon Musk, Jeff Bezos, Ginni Rometty, and Madeline Bell.

• Section 7.5—Renamed “Decision-Making Biases and the Use of Artificial Intelligence.” Section opens with a discussion on heuristics and leads into updated content and discussion illustrating overconfidence bias with BP oil and the government’s spy plane for the escalation of commitment bias. Introduces a new section on AI, reviewing its pros and cons. The use of AI at various companies is highlighted, including Google and Microsoft.

• Section 7.6—New boxed feature “I wish my workplace didn’t have a toxic group decision-making environment.” New discussion on the Delphi technique and devil’s advocacy, along with a figure illustrating their implementation. Section concludes with an introduction to the concept of project post-mortems with practical examples from Disney and Pixar.

• New Career Corner feature: Managing Your Career Readiness.

• New Management in Action case: New York Subway System. • New Legal/Ethical Challenge: It’s All about a Peacock

(featuring a discussion on emotional support animals). • New continuing case on Uber.

x New to the ninth edition

CHAPTER 8 • New Manage U feature: How to Get Noticed in a New

Job: Fitting into an Organization’s Culture in the First 60 Days.

• Section 8.1—New boxed feature “I wish my company had integrated its corporate strategy and organizational culture.” New Table 8.1 reviews the drivers of organizational culture. Updated Example box on how strategy affects culture at Cleveland Clinic.

• Section 8.2—New examples illustrate the three levels of organizational culture. New examples used to explain the four types of culture within the competing values framework. New examples used to explain how employees learn culture. Updated research on person-organization fit.

• Section 8.3—New boxed feature “I’m glad management embraced an empowering culture during a merger.” New examples used to illustrate the 12 methods organizations use to change culture.

• Section 8.5—New Practical Action box on how to effectively delegate.

• Section 8.6—Opens with an updated discussion on Google and its culture of innovation. An updated Example box on Whole Foods is used to explain horizontal designs.

• Section 8.7—Section is introduced with a new key term: “contingency approach to organizational design.” New example of Etsy is used to frame discussion of mechanistic and organic organizations.

• New Career Corner feature: Managing Your Career Readiness.

• New Management in Action case: Wells Fargo’s Sales Culture Fails the Company.

• Updated Legal/Ethical Challenge: Should Socializing Outside Work Hours Be Mandatory?

• New continuing case on Uber.

CHAPTER 9 • New Manage U feature: How to Prepare for a Job

Interview. • Section 9.1—New examples from Fortune’s 10 best work

places for Millennials, including Ultimate Software, SAS, Quicken Loans, Salesforce, and Encompass Home Health and Hospice. Updated research on the effectiveness of HR practices. New information on company rewards. New examples to illustrate human and social capital including New Brunswick Power and Inter-American Development Bank.

• Section 9.2—New statistics on recruiting trends and examples for internal and external recruiting, including Visto and Glassdoor. New boxed feature “I’m glad my company is serious about its recruiting and selection processes.” Updated Example box discussing the changing job market, Millennials, and the gig economy. New research regarding

the lies job applicants tell. New boxed feature “I wish my company used a structured interview process.” A new Practical Action box discussing what employers are looking for in a job interview. Updated information on the legality of employment tests. New Example box listing the pros and cons of personality tests and updated information on personality tests including Myers-Briggs. Section closes with a discussion on AI and how it is changing the recruitment and selection process.

• Section 9.3—Updated statistics on benefits, including a new discussion regarding gender-based preferences.

• Section 9.4—Renamed “Orientation and Learning and Development.” Opens with a new example of onboarding with Facebook’s new employee boot camp. New content on learning and development including Millennials, SAS, and Estee Lauder. Updated research on L&D programs. New Example box on Keller Williams and its learning and development program.

• Section 9.5—New Example box on performance management at Edward Jones. Updated research on performance management and performance appraisal, and new performance management examples pertaining to Deloitte, Accenture, Cigna, Microsoft, and Adobe. Discussion of how forced ranking is losing favor. New discussion of how to give effective performance feedback.

• Section 9.6—Updated Practical Action box on the right way to handle a dismissal.

• Section 9.7—Updated statistics and information regarding workplace discrimination and bullying. New Example box discussing sexual harassment at work.

• Section 9.8—Opens with updated statistics on labor unions. Updated Figure 9.4 showing right-to-work states.

• New Career Corner feature: Managing Your Career Readiness. • New Management in Action case: Difficulties Attracting and

Retaining Human Capital in the Nursing Profession. • New Legal/Ethical Challenge: Should Noncompete

Agreements Be Legal? • New continuing case on Uber.

CHAPTER 10 • New Manage U feature: How Can I Be More Creative at Work? • Section 10.1—New Example box discussing the decline of

Toys R Us. New examples of companies experiencing change. Updated Example box on BP and the oil spill in the Gulf of Mexico. New examples to explain the forces for change. Updated Example box on ridesharing and self-driving cars.

• Section 10.2—New examples to illustrate three kinds of change. New boxed feature “I’m glad my company unfroze employees before implementing organizational change.” Added a new section on applying the systems model of change featuring Stora Enso.

xiNew to the ninth edition

• Section 10.3—Updated statistics regarding the effectiveness of organizational development.

• Section 10.4—This section was completely rewritten, restructured, and renamed “Organizational Innovation.” Introduces the new key term “innovation.” New Figure 10.5 shows the various approaches to innovation. A new figure illustrates the supporting forces for innovation. A new table lists the most innovative companies. A new Self-Assessment measures organizational climate for innovation. New boxed feature “I wish my company considered the components of an innovation system.” Introduces new key term “crowdsourcing.” New Example box discussing IDEO’s approach to innovation. Recent research is used to support our discussion of innovation.

• Section 10.5—Updated research regarding resistance to change. • New Career Corner feature: Managing Your Career Readiness.

New key terms “self-affirmations” and “self-compassion.” • New Management in Action case: Chipotle Needs to Change. • New Legal/Ethical Challenge: Did L’Oreal Go Too Far in Firing

Its Patent Lawyer? • New continuing case on Uber.

CHAPTER 11 • New Manage U feature: How to Make a Positive First

Impression at Work. • Section 11.1—Opens with updated information and

statistics for employment and personality testing and the Big Five personality dimensions. Updated research regarding personality and individual behavior and work attitudes. Introduced the new key term “generalized self-efficacy” with a discussion on the topic and its tie to career readiness with a new Self-Assessment measuring levels of generalized self-efficacy. A new Practical Action box discussing how technology can be used to develop Emotional Intelligence.

• Section 11.2—New Self-Assessment to measure the career readiness competency of having a positive approach to work. New Practical Action box on using cognitive reframing to reduce cognitive dissonance.

• Section 11.3—Updated research regarding stereotypes and implicit bias. Updated discussion on distortions in perception, including gender stereotypes. New Example box discussing the halo effect and how body weight affects careers. New Example box on the Pygmalion effect.

• Section 11.4—Opens with entirely new content on employee engagement with a new table showing the predictors of engagement. Updated research on job satisfaction, organizational commitment, and important workplace behaviors like performance, organizational citizenship, and counterproductive behavior. Updated the Example box on toxic workplaces.

• Section 11.5—Updated examples and statistics regarding trends in workplace diversity, including age, gender pay gap, race, and sexual orientation. New example discussing Google’s internal memo regarding women in tech and how it showcases a barrier to diversity. Updated research pertaining to barriers to diversity. New boxed feature “I’m glad my manager embraced diversity and fostered inclusiveness.” New Example box showcasing Ultimate Software.

• Section 11.6—Updated research on stress and its consequences. Introduces new key term “work–life conflict.” New Table 11.4 discusses the negative consequences of conflict, including work, family, and other life demands. A new boxed feature “I wish my manager alleviated my work- related stress.” Reworked the content regarding workplace stress and its consequences. New coverage of resilience and its role in career readiness. A new Self-Assessment assesses levels of resilience. Updated content on holistic wellness and a new Example box showcasing Google’s corporate wellness program.

• New Career Corner feature: Managing Your Career Readiness. • New Management in Action case: Does the Financial Services

Industry Lack Diversity? • New Legal/Ethical Challenge: Should Airlines Accommodate

Oversized People? • New continuing case on Uber.

CHAPTER 12 • New Manage U feature: Managing for Motivation: Building

your Own Motivation. • Section 12.1—New company examples and statistics on

extrinsic and intrinsic rewards, including Uber, McDonald’s, Outback Steakhouse, and MARS. A new section provides an overview of all motivation theories discussed in the chapter.

• Section 12.2—Added a quick summation of the motivation theories discussed in the section. Updated Example box on hotel company Joie de Vivre. Updated research on need theories. New boxed feature “I’m glad I fostered employees’ sense of competence.” Updated research regarding the application of Herzberg’s two factor theory.

• Section 12.3—Updated research on process theories of motivation. Updated statistics on CEO pay. New examples to illustrate the application of equity theory. New Example box showcasing transparency at Buffer. New examples of Tesla and Kronos to demonstrate the application of expectancy theory. New coverage of stretch goals and two types of goal orientations—learning goal orientation and performance goal orientation.

• Section 12.4—Updated research on job design. New Example box on how job characteristics matter in the modern workforce.

xii New to the ninth edition

• Section 12.5—Updated research on rewards. New examples to illustrate the four types of reinforcement. New boxed feature “I wish my manager used positive reinforcement rather than punishment.”

• Section 12.6—Updated research on compensation, nonmonetary incentives, and other rewards. Updated statistics on money as a motivator. Updated content on incentive plans. Updated the example box on successful workspaces. New Practical Action box on how managers can encourage gratitude.

• New Career Corner feature: Managing Your Career Readiness.

• New Management in Action case: Motivation Challenges in the Fast-Food World.

• New Legal/Ethical Challenge: Are Workplace Wellness Programs Using Proper Motivational Tools?

• New continuing case on Uber.

CHAPTER 13 • New Manage U feature: Effectively Managing Team

Conflict. • Section 13.1—Updated research on teams. Updated Example

box on informal groups and informal learning. Updated content regarding self-managed and virtual teams. Updated Practical Action box regarding best practices for virtual teams.

• Section 13.2—Updated content on punctuated equilibrium and its tie to Brexit.

• Section 13.3—Updated research regarding building high- performance teams. Updated discussion on collaboration, including new a new study of the relationship between listening to happy music, mood, and collaboration. New boxed feature “I’m glad my manager fosters collaboration.” New Example box focuses on building trust. New Practical Action box on building effective team norms. Added new material regarding effective team processes and their role in building high-performance teams. Introduces the new key terms “team processes,” “team charter,” “team reflexivity,” and “team voice.”

• Section 13.4—Updated research on conflict. New examples of dysfunctional and functional conflict. New boxed feature “I wish I was able to manage interpersonal conflict more effectively.” Updated the discussions on kinds of conflict. Updated discussion on ways intergroup conflicts are expressed, including an example for ambiguous jurisdictions with a racial-profiling incident at Starbucks. New Example box on playing the devil’s advocate as a way to resolve conflict. Section closes with a new figure on five conflict handling styles.

• New Career Corner feature: Managing Your Career Readiness.

• New Management in Action case: IBM Wants Its Employees Back in the Office.

• New Legal/Ethical Challenge: When Employees Smoke Marijuana Socially: A Manager’s Quandary.

• New continuing case on Uber.

CHAPTER 14 • New Manage U feature: Improving Your Leadership Skills. • Section 14.1—Introduces key term “leadership coaching”

and the difference between leading and managing, including a new Table 14.1 showing the characteristics of managers and leaders. Introduces new key term “managerial leadership.” New coverage of managerial leadership and coping with complexity versus coping with change. Updated Table 14.2 on influence tactics with new example of exchange and legitimizing tactics. Developed a new integrated model of leadership (Figure 14.1) to foreshadow the theories covered in the chapter.

• Section 14.2—Opens with an example of Phebe Novakovic, CEO of General Dynamics, as someone who embodies the trait approach to leadership. Table 14.3 updated to show how the Big Five personality traits, which were introduced in Chapter 11, represent positive, task-oriented traits. Expanded the discussion on narcissism and gender and leadership. Updated the Example box discussing great worldwide leaders. Renamed “strategic skills” in Table 14.4 to “conceptual skills.” New for theories drawn from trait theory, including Martha Stewart as a micromanager. New company examples for organizations using trait assessments, including Citigroup, ExxonMobil, Ford Motor, Procter & Gamble, Hewlett-Packard, and JPMorgan. Replaced the discussion on “cross-cultural competency” with a “global mind-set” and illustrated its tie to career readiness. Updated research on leadership traits.

• Section 14.3—New examples of initiating structure leadership, including Meg Whitman and David Miliband. New examples for transactional and empowering leadership, including Nick Saban and Sheryl Sandberg. New Example box showcasing Lauren Bush Lauren’s values-driven leadership. Introduces key term “passive leadership.” Updated research on behavioral approaches.

• Section 14.4—Updated research on contingency leadership. • Section 14.5—New Example box discussing Pepsi’s Indra

Nooyi and her transactional and transformational leadership. New examples of John Hennessy, Dr. Donald Hopkins, Meg Whitman, and John Mackey used to illustrate the four key behaviors of transformational leaders. New boxed feature “I’m glad I understood the value of using individualized consideration.” Section closes with an updated summary on what we know about transformational leadership. Updated research on transformational leadership.

xiiiNew to the ninth edition

• Section 14.6—Expanded the discussion on the usefulness of the LMX model. New boxed feature “I wish I had known about the impact of a poor LMX: I do now!” Updated research on LMX and humility.

• New Career Corner feature: Managing Your Career Readiness. New key term “Dunning-Kruger effect.”

• New Management in Action case: VA Turnaround: A Waiting Game.

• New Legal/Ethical Challenge: Should Starbucks Have a Corporate Loitering Policy?

• New continuing case on Uber.

CHAPTER 15 • New Manage U feature: Improving Your Use of Empathy. • Section 15.1—Kicks off with new research on communication

effectiveness. New boxed feature “I’m glad my manager was an effective communicator.” New example of noise. Updated the Example box on “Secrecy and Silence” to include Volkswagen and Theranos. Updated research on media richness and selecting the best medium.

• Section 15.2—Updated discussion and research on the grapevine. Updated Practical Action box on how to streamline meetings.

• Section 15.3—Updated discussion on the physical barriers of communication, including open office plans. Updated discussion and statistics for personal barriers to communication and nonverbal communication. New Example box discussing personal and cross-cultural barriers to communication and how they adversely affect organizations. New Practical Action box on improving communications between men and women.

• Section 15.4—Updated Figure 15.3 showing the use of social media across various age groups. Updated research on social media and managerial and organizational effectiveness. New Practical Action box on building your own social media brand. New examples for crowdsourcing. New Example box on TD Bank and its use of social media. New content pertaining to the downsides of social media, including new key term “FOMO” and a discussion of microaggressions and recent threats to cybersecurity, including attacks at Target, Equifax, and Verizon. New boxed feature “I wish I didn’t have FOMO.” Updated Table 15.8 to show elements of an effective social media policy. New Example box illustrating samples of social media policies at IBM, Best Buy, McDonald’s, Walmart, Washington Post, and Intel.

• Section 15.5—New statistics on the cost of poor communication. Expanded the discussion of empathy. Updated and expanded Table 15.11, which discusses rules for business writing. Updated research on nondefensive communication, empathy, and listening.

• New Career Corner feature: Managing Your Career Readiness.

• New Management in Action case: Fyre and Fury. • Updated Legal/Ethical Challenge: Was ESPN Fair in Firing

Curt Schilling for His Social Media Post? • New continuing case on Uber.

CHAPTER 16 • New Manage U feature: Using a Mentor to Exercise Control in

Your Career. • Section 16.1—New examples on why control is needed and

new company examples for control, including Takata, FedEx, UPS, The New York Times, and Uber. New boxed feature “I’m glad my company made employees feel valued and engaged by regularly monitoring performance.” Introduces the new key term “control charts” with a discussion on the topic, including an example and new figure. New example of feedforward control at Southwest Airlines.

• Section 16.2—New Example box regarding fair labor practices at Adidas. New examples on levels of control and the supply chain at KFC in the UK.

• Section 16.3—New examples of the balanced scorecard, including an internal business perspective at National Marrow Donor Program and an innovation and learning perspective at Tolko Industries LTD. New example of cascading a strategy map.

• Section 16.4—New examples for internal audits, including Citigroup.

• Section 16.5—Opens with updates to the winner of the Baldrige Award, Bristol Tennessee Essential Services (BTES). New boxed feature “I wish my company were focused on continuously improving work processes.” New examples to illustrate Deming’s PDCA framework. New Example box discussing Hyundai and its challenge to the luxury car market. Kia Motors is introduced as a new example of improvement orientation. Updated Example box on Kaizen principles. New Example box on service excellence with a discussion including Nordstrom’s and Trader Joes. Updated statistics on outsourcing. Updated discussion on ISO 9000 standards.

• Section 16.6—New discussion on managing micromanagers. • Section 16.7—Updated Table 16.2 with statistics for GDP

through 2018. Updated statistics on productivity growth. New content on processes used to increase productivity, including new key terms “benchmarking” and “best practices.” Updated content on managing individual productivity.

• New Career Corner feature: Managing Your Career Readiness.

• New Management in Action case: Is Tesla Out of Control? • New Legal/Ethical Challenge: Should Companies use GPS to

Track Employees? • New continuing case on Uber.

xiv New to the ninth edition

Walkthrough Preface of 9e

Kinicki/Williams, Management: A Practical Introduction, 9e empowers students to develop the management career skills necessary in everyday life through the practical and relevant application of theory. Developed to help students learn management with a purpose, K/W 9e takes a student-centered approach. The revision introduces a new strategic career readiness theme throughout to address employers’ concerns about students graduating without being career ready and extends our emphasis on practicality. The hallmark strengths that have made it the market best-seller have been maintained and include:

• A student-centered approach to learning.

• Imaginative writing for readability and reinforcement.

• Emphasis on practicality.

• Resources that work.

Our product covers the principles that most management instructors have come to expect in an

introductory text—planning, organizing, leading, and controlling—plus current issues that students need to

be to be aware of to succeed: customer focus, globalism, diversity, ethics, social media, entrepreneurship,

teams, innovation, artificial intelligence, Big Data, and empowerment.

Based on a wealth of instructor feedback and blending Angelo’s scholarship, teaching, publishing, and

management-consulting with Brian’s writing and publishing background, we have worked tirelessly to

create a research-based yet highly readable, practical, and motivational product for the introductory

principles of management course. Our goal to make a difference in the lives of you and your students.

xv

It (the book) is well written and provides relevant examples in the text with great online support. The TRM (Teaching Resource Manual) is very useful and important in teaching the course. I have found the product to be one of the best I have ever used.

—Jerry D. Stevens, Texas Tech University

“ ”

Global research shows that employers are finding it hard to find college graduates who possess the skills needed to be successful. These employers also think that colleges and universities need to do a better job making students career ready. Our goal in 9e is to contribute to overcoming this problem with new content and a variety of developmental techniques.

Management Theory CHAPTER 2 69

2.9 Career Corner: Managing Your Career Readiness

LO 2-9 Describe how to develop the career readiness competency of understanding the business.

Figure 2.5 shows the model of career readiness we discussed in Chapter 1. What does a chapter on management history have to do with your career readiness? How about its application to the Knowledge competency of understanding the business? This compe- tency was defined in Table 1.2 as the extent to which you understand a company’s busi- ness and strategies and the needs of its stakeholders. It comes into play whenever you interview for a job.

Recruiters expect you to do some research, just as you would for a class assign- ment. They want you to act like Sherlock Holmes and do some snooping. That’s good for both you and a potential employer in that it helps identify the likely level of fit between the two of you. Good fit, in turn, is associated with more positive work atti- tudes and task performance, lower intentions to quit, and less job-related stress.65 Moreover, doing your homework on a company makes you a more attractive job can- didate. It shows interest on your part, and recruiters are impressed by the fact that you took the time to learn about the business.66 It also prepares you to ask smart questions, a behavior recruiters want to see. Remember, sometimes it’s the small things like this that land a job.

Career readiness

Knowledge (K)

Soft skills (S)

Career outcomes

Attitudes (A)

Other characteristics

(O)

FIGURE 2.5 Model of Career Readiness ©2018 Kinicki and Associates, Inc.

So, what does it take to demonstrate that you understand a business? We recom- mend that you learn the following seven things about a company before showing up at a job interview:67

1. The company’s mission and vision statements. These statements tell you why the company exists and what it wants to become or achieve over time. The question to answer is whether you support these pursuits and would like to be part of the journey. If you do, you will be a better fit for the company. This is important because employees are more likely to be productive and stay at a company when they fit in. For example, if you like outdoor activities, you will most likely be a better fit at Recreational Equipment, Inc. (REI), which sells sporting goods, camping gear, and outdoor clothing, than Whole Foods. You can find this information on the company’s website.

2. The company’s core values and culture. The values an organization endorses represent the foundation of its culture. You can find clues about this by study- ing a company’s website. Try to find a list of company values. What do these

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Career Corner

Each chapter concludes with a new section entitled “Career Corner: Managing Your Career Readiness.” This material provides students with practical tips for developing targeted career readiness competencies.

Concept Mastery

New exercises in Connect allow students to demonstrate lower levels of learning regarding career readiness. The Teaching Resource Manual provides opportunities for higher levels of learning for career readiness competencies.

xvi

Building Your Career Readiness

Chapter 1 contains a section devoted to explaining the need, value, and process for becoming career ready. It includes a model of career readiness along with a table of competencies desired by employers.

32 PART 1 Introduction

Career readiness

Knowledge (K)

Soft skills (S)

Career outcomes

Attitudes (A)

Other characteristics

(O)

FIGURE 1.4 Model of career readiness ©2018 Kinicki and Associates, Inc.

TABLE 1.2 Description of KSAO Skills Needed for Career Readiness

KSAO COMPETENCY DESCRIPTION

Knowledge Task-Based/Functional Demonstrated ability to apply academic and practical knowledge in pursuit of organizational and individual goals/assignments.

Information Technology Effective use of IT and learning new applications as needed. Application

Cross-Cultural Competency Awareness of cross-cultural differences; respect for diverse cultures, races, ages, genders, and religions; and demonstrated openness, inclusiveness, and ability to interact with diverse people.

Computational Thinking Ability to use numbers to distill abstract concepts and conduct data-based reasoning. Ability to work with and interpret Big Data.

Understanding the Business Understanding of the company’s business and strategies and the needs of stakeholders, and ability to see how your work fits into the larger organizational puzzle.

New Media Literacy Ability to develop, evaluate, and use new media forms, and to apply these media for persuasive communication. Ability to stay up-to-date with the latest media trends and leverage them in the interest of the organization.

Soft Skills Critical Thinking/Problem Sound reasoning to analyze situations, make decisions, and solve problems. Solving Ability to obtain, interpret, and analyze both qualitative and quantitative

information while creatively solving problems.

Oral/Written Communication Ability to effectively express your thoughts, ideas, and messages to diverse people in oral and written form. Public speaking skills and ability to write/edit emails, letters, and technical reports.

Teamwork/Collaboration Ability to work effectively with and build collaborative relationships with diverse people, work within a team structure, and manage interpersonal conflict.

Leadership Skill at influencing a group of people to achieve common goals. Ability to motivate, coach, and develop others.

Decision Making Ability to collect, process, and analyze information in order to identify and choose from alternative solutions that lead to optimal outcomes.

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30 PART 1 Introduction

About 80,000 undergraduate students from over 350 universities across the United States rated 2017’s most attractive employers. The top 10 were: (1) Google, (2) Walt Disney Company, (3) Apple, (4) Nike, (5) Amazon, (6) J.P. Morgan, (7), Goldman Sachs, (8) Ernst & Young, (9) Deloitte, and (10) FBI.115 Would you like to work at these companies or another like them? If so, you need to be career ready.

Career readiness represents the extent to which you possess the knowledge, skills, and attributes desired by employers. How ready do you believe you are? Recent surveys of college graduates and recruiters reveal a big gap in the degree of readiness each group perceives in students. Figure 1.3 shows the results of a study of 400 employers and 613 college students. The majority of students rated themselves as career-ready on 11 of 17 skills, while the majority of employers did not perceive students to be well-prepared on any of the skills.116 The three largest gaps were in critical/analytical thinking, written communication, and locating, organizing, and evaluating information, skills that are very important to employers.117 Other studies have similarly demonstrated that employ- ers see a major skills gap in college students’ interpersonal skills.118

You’ll want to close these gaps for three reasons:

1. To get a job and earn more money. Today’s jobs require greater interpersonal or soft skills, and employers are willing to pay higher salaries to those possessing them.119

2. To impress employers with your self-awareness. Companies prefer to hire people with realistic perceptions of their own strengths and weaknesses. This under- scores the need to obtain information about your strengths and weaknesses throughout your career.

3. To create your own motivation to learn. Studies of human behavior reveal that people won’t spend time on personal development unless they feel the need. Overinflated perceptions of career readiness will not motivate you to develop the attributes that enhance that readiness. You need to motivate yourself to learn and develop.

Moreover, these gaps are critical to employers too. Kate Davidson, a reporter for The Wall Street Journal, concluded that a lack of soft skills “is limiting organizational productivity,” and “it is becoming increasingly difficult to find applicants who can com- municate clearly, take initiative, problem-solve and get along with co-workers.”120 Knowing this, we want reading our textbook to help you become career-ready. The pro- cess starts with focusing on the ideas and suggestions in this section.

A Model of Career Readiness Being career-ready is a lifelong process requiring you to continually learn and develop in response to changes in organizational needs and skill requirements. It is not a one- time event that stops after graduation. Consider what René Steiner, President/CEO of Büler North America, had to say about career readiness. “Realize that learning is not complete when you graduate. Today, more so than in the past, there is the opportunity to continue to develop, through education, learning company culture, and exploring different areas of business. And, you need to adapt to future needs.”121 Authors of the Future Work Skills 2020 report similarly concluded that individuals “will increasingly be

1.7 Building Your Career Readiness THE BIG PICTURE Companies want to hire career-ready college graduates. In this section we describe a model of career readi- ness and offer tips for building your readiness.

LO 1-7 Define the knowledge, soft skills, attitudes, and other characteristics needed for career readiness and discuss how they can be developed.

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Self-Assessments

Over 66 Self- Assessments allow students to assess the extent to which they possess aspects of the career readiness competencies desired by employers.

The Manager’s Changing Work Environment and Ethical Responsibilities CHAPTER 3 99

In exposing unethical behavior, then, it’s important to be clear why you’re doing it (trying to help the company or just get someone in trouble), not report something for the wrong reason (discuss your concerns with someone who has similar values), and follow proper channels (like addressing the supervisor of the supposed culprit). Don’t try to report externally (lashing out on Facebook, for instance) without speaking to those who might resolve the problem.138

Some people view ethics in ideal terms, which means that ethical principles or stan- dards apply universally across situations and time. Others, however, take a relativistic view and believe that what is ethical depends on the situation. These differences can create conflict among managers trying to make decisions.

Consider the situation faced by a group of executives working with Angelo to make a decision about opening a new office overseas. Angelo was consulting with a global com- pany that was dealing with the issue of whether or not it should pay local officials for helping establish a new office overseas. Some executives in the meeting concluded that the company should pay these officials because it was a normal cost of doing business in this country. Others viewed the situation quite differently. They thought the pay- ments amounted to bribes and were totally against the idea. The company ultimately decided that it would not make the payments, which resulted in their inability to open the new office.

All told, it is important for you to learn more about your ethical tendencies. This will help you to behave in ways that are consistent with your values and beliefs. ●

expensive camera equipment behind. He was subsequently told his contract with the department would not be renewed as prom- ised—essentially he was fired—and he has filed a federal lawsuit seeking whistle-blower protection, reinstatement, and an ethics investigation into Perry and Murray for “public corruption.”134 Retaliation against whistle-blowers is against federal law; the DOE is calling Edelman’s accusations “ridiculous.”135

Whistlebloweraid.org is a nonprofit law firm that assists government whistle-blowers like Edelman with confidential free legal advice, especially if they witness lawbreaking when the evidence is classified and don’t know where to turn.136 Though he is working with the group, Edelman insists his

photos are in the public domain. “I’m definitely proud of what I did,” he says. “I know that I did the right thing. I just hope that more people take this as inspiration that they can also speak up and blow the whistle because it’s an important part of democracy.”137

FOR DISCUSSION What are some of the reasons someone might become a whis- tleblower? Why would someone choose not to be? Is that posi- tion defensible given the value of job attitudes like professional and ethical standards? Why or why not? What would you have done in Edelman’s position?

Assessing My Perspective on Ethics This survey is designed to assess your views about ethics. It provides feedback about your status on the Career Readiness “other characteristic” of professionalism/work ethic.

Please be prepared to answer these questions if your instructor has assigned Self-Assessment 3.1 in Connect.

1. Are your views more idealistic or more relativistic?

2. What do you think about students cheating on homework assignments in school? What about cheating on exams?

3. Are your answers consistent with your score? Explain.

4. What can you say during an interview to demonstrate an ethical orientation?

SELF-ASSESSMENT 3.1 CAREER READINESS

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Focus on Career Readiness

Student-Centered Approach to Learning

Our writing style and product design is based on neuroscience research. Greater learning occurs when information is “chunked” to keep student attention. We break down topics into easily digestible portions with purposeful pedagogy to make theories and concepts easier to learn and apply. This accounts for the use of purposeful color, an extensive photo program, bulleted lists, and headings to appeal to the visual sensibilities, time constraints, and diverse learning styles of today’s students.

Many management texts are simply dense and a slog to read. Kinicki is far more approachable in its pedagogy. It is well organized—the topics are arranged very logically in each chapter. The approach speaks directly to the student. This personalized, conversational approach engages my students. It has a new career theme that is critical to help our students demonstrate employable skills. The Teaching Resource Manual is also the best in its class.

—Todd Korol, Monroe Community College

Layout, highlighted captions, use of boxes, bolding, pictures, and color are all great. It’s easier for students to read than other textbooks I have used. The key points summaries at end of chapters are useful and it’s overall very user-friendly and engaging.

—Linsey Willis, Florida Atlantic University

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Chapter Openers

Each chapter begins with a list of key learning objectives that appeal to students concern about “what’s in it for me?” and to help them read with purpose.

FORECAST What’s Ahead in This Chapter We describe planning and its link to strategy. We define planning, strategy,

and strategic management and state why they are important. We deal with the

fundamentals of planning, including the mission, vision, and value statements,

and the three types of planning—strategic, tactical, and operational. We con-

sider goals, operating plans, and action plans; SMART goals, management by

objectives, and cascading goals; and finally the planning/control cycle. We

conclude with a Career Corner that focuses on how you can develop the ca-

reer readiness competency of proactive learning orientation.

PART 3 • PLANNING

5 After reading this chapter, you should be able to:

LO 5-1 Discuss the role of strategic management.

LO 5-2 Compare mission, vision, and value statements.

LO 5-3 Discuss the types and purposes of goals and plans.

LO 5-4 Describe SMART goals and their implementation.

LO 5-5 Outline the planning/control cycle.

LO 5-6 Describe how to develop the career readiness competency of proactive learning orientation.

Planning The Foundation of Successful Management

© O

livier Renck/Aurora/G etty Im

ages

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Chapter Sections

Within each chapter, sections are organized according to the major learning objectives. Generous use of headings and bulleted lists provide students with bite-sized chunks of information to facilitate retention. Each section begins with a recap of the Learning Objective and includes The Big Picture, which presents an overview of how the section addresses the stated objective.

44 PART 1 Introduction

“The best way to predict the future is to create it,” Peter Drucker said. The purpose of this book is, to the extent possible, to give you the tools to create your

own future in your career and as a manager.

Creating Modern Management: The Handbook of Peter Drucker Who is Peter Drucker? “He was the creator and inventor of modern management,” says management guru Tom Peters (author of In Search of Excellence). “In the early 1950s, nobody had a tool kit to manage these incredibly complex organizations that had gone out of control. Drucker was the first person to give us a handbook for that.”5

An Austrian trained in economics and international law, Drucker came to the United States in 1937, where he worked as a correspondent for British newspapers and later became a college professor. In 1954, he published his famous text The Practice of Management, in which he proposed the important idea that management was one of the major social innovations of the 20th century and should be treated as a profession, like medicine or law.

In this and other books, he introduced several ideas that now underlie the organiza- tion and practice of management—namely:

■ That workers should be treated as assets. ■ That the corporation could be considered a human community. ■ That there is “no business without a customer.” ■ That institutionalized management practices are preferable to charismatic

cult leaders.

Many ideas that you will encounter in this book—decentralization, management by objectives, knowledge workers—are directly traceable to Drucker’s pen. “Without his analysis,” says one writer, “it’s almost impossible to imagine the rise of dispersed, globe- spanning corporations.”6 In our time, Drucker’s rational approach has culminated in evidence-based management, as we describe in Section 2.6 in this chapter.

Six Practical Reasons for Studying This Chapter “Theory,” say business professors Clayton Christensen and Michael Raynor, “often gets a bum rap among managers because it’s associated with the word ‘theoretical,’ which connotes ‘impractical.’ But it shouldn’t.”7

After all, what could be more practical than studying different approaches to see which work best?

Indeed, there are six good reasons for studying theoretical perspectives:

1. Understanding of the present. “Sound theories help us interpret the present, to understand what is happening and why,” say Christensen and Raynor.8 Or as

2.1 Evolving Viewpoints: How We Got to Today’s Management Outlook

THE BIG PICTURE After studying theory, managers may learn the value of bringing rationality to the decision-making process. This chapter describes two principal theoretical perspectives—the historical and the contemporary. Studying management theory provides understanding of the present, a guide to action, a source of new ideas, clues to the meaning of your managers’ decisions, and clues to the meaning of outside events.

LO 2-1 Describe the development of current perspectives on management.

True learner. In his 70-year career, Peter Drucker published over 35 books and numerous other publications, received the Presidential Medal of Freedom, and achieved near rockstar status for his management ideas, which influenced organizations from General Electric to the Girl Scouts. A true learner who constantly expanded his knowledge, he understood that new experiences are key to nurturing new ideas and new ventures. Do you have this kind of curiosity? ©Jonathan Alcorn/ ZUMAPRESS/Newscom

kin75117_ch02_042-075.indd 44 12/3/18 6:41 PM

xvii

Forecast

Shown below the learning objectives, the forecast provides a high-level of summary of what is covered in the chapter.

We want this ninth edition to be a cherished resource that students keep as they move into future courses and their future careers. We give students a great deal of practical advice in addition to covering the fundamental concepts of management.

Practical Action boxes

Practical Action boxes offer students practical and interesting advice on issues they will face in the workplace.

Manage U

This new feature provides a pedagogical device that gives students practical, actionable tips for applying the material in each chapter. Students will find it interesting and valuable to their future careers.

The thought of starting a career (or switching to a new one) can be either intimidating or exciting. What’s the difference? Having goals and a plan.

Setting Goals and Making a Plan Here are some steps in the career-management process for you to consider as you set about building your career.1

1. Identify your options. Use the career readiness skill of self-awareness to write down areas and ideas that interest and are important to you and the functional, cross- cultural, computational, interpersonal, and other skills you can offer an employer. Then make a written list of the opportunities available to you through your networking, earlier work and volunteer experience, and other resources (don’t forget the alumni and placement offices at your school). Now match up the two lists to discover where you should focus your career-building efforts.

2. Explore conditions in your target field. The career readiness skill of understanding the business will guide you to identify important factors like the demand for new hires in your chosen field or fields, the competencies expected of incoming employees, the likely salary range and opportunities for advancement, and any geographic limitations or requirements in the industry to be aware of. If your field or industry is concentrated in one or two parts of the country, for instance, be ready to move.

3. Create your action plan. Using what you learned from steps 1 and 2, write a list of actions you can take to achieve your goal of breaking into a new career. You are more likely to achieve your goals if they are “SMART”— specific, measurable against clear criteria to show progress, attainable with a chance of 50% or higher, relevant to you, and time bound with target dates for completion. We discuss the process of writing SMART goals in Section 5.4. Try to keep your steps or goals to a manageable number; somewhere between three and five is recommended. Prioritize and schedule them to create your plan, and if it helps you to give each one a name, by all means do so.

4. Track your progress. You’ll see as you study this chapter that monitoring or controlling progress toward goals is an inherent part of the planning process. Each

time you get a result from one of your efforts, whether it’s positive or negative, that result constitutes feedback on how well you’ve selected your goals and how effective your plan is. If one step doesn’t work out as planned, don’t give up. Rely on your positive attitude and ability to adapt (more career readiness skills) and realize you have other opportunities to succeed. Try broadening your search, and begin again.

Staying Resilient during the Process Here are a few ideas about what else you can do to keep your hopes—and your finances—afloat during the career- building process.

1. Know that it takes time to find a job, especially one that’s a good fit for both you and the company that hires you. College graduates spend about six months, on average, landing their first job after graduation.2 If you are already working, even part-time, stay in the job while you pursue a new one. It’s always easier to find a job if you have one. If you are not working, consider taking a part-time or short-term job to generate some income. since you’ll want to avoid running up credit card debt.

2. Create a budget to be sure your income will cover your day-to-day expenses. This is a lifelong habit that will serve you well.

3. Avoid making any major financial commitments until you’ve actually landed your target job. You won’t know how much you can afford to pay for a car until you know your salary, for instance, and you may not want to be encumbered by a new lease if your dream job requires you to relocate. As long as you have an appropriate interview outfit, even splurging on a professional wardrobe can wait until you know the dress code at your new employer.

For Discussion What fields or industries are interesting or appealing to you as places to work? What news and information about these areas can you start tracking now, and how will you will do that? Is there anyone in your network who can help you increase your understanding of the way this industry works? If not, how could you find someone?

Making an Effective Plan for Starting Your Career

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xviii

The Exceptional Manager CHAPTER 1 21

Are you persistent, creative, curious? How do you deal with frustra- tion or anxiety? Do you see yourself as part of a larger whole that gives your work purpose? How do you perceive problems—as temporary and solvable, or as a personal burden you are doomed to bear? Are you a good listener? Your answers will give you an idea about how well developed some of your soft skills are.

More than 90 percent of respondents to a recent Global Human Capital Trends survey by the consulting firm Deloitte identified soft skills like communication, emotional understand- ing, and problem solving as a critical priority.59 Many employers say these skills are hard to find in college graduates, who often value hard skills more highly.60 Companies are eagerly looking for soft skills as well, however; Google, for example, now pri- oritizes persistence and curiosity in its hiring process.61 The good news is that soft skills can be taught. Employers are find- ing it worth investing money to develop these abilities in their employees. A new study shows that training employees in soft skills doesn’t just marginally improve individual performance and employee retention; it actually betters these metrics enough to provide a 250% return on the financial investment a company makes in training programs.62

For firms that can spare their employees for three days, the American Management Association (AMA) offers a soft-skills seminar for managers at all levels including front-line supervi- sors.63 Among the skills they can gain are the ability to give

direction without generating conflict, to lead and motivate groups and teams, to influence others including “difficult” peo- ple, to offer effective feedback, and to get things done in an at- mosphere of  trust and respect. The seminar topics are a comprehensive list of essential soft skills employers look for in college graduates and new hires—and say they seldom find: communication proficiency, which includes verbal, nonverbal, and listening skills; self-understanding, lack of defensiveness, and emotional understanding and responsiveness; the ability to productively manage conflict; and an understanding of team de- velopment and the role of a team player in getting work done.

For those who want to learn online and at their own pace, many inexpensive online classes are available.64 These short interactive programs are geared for everyone from CEOs to entry-level employees. They cover everything from self- confidence to emotional intelligence, coaching teams, building healthy work relationships, handling business etiquette, resolving conflicts, decision making, reading body language, negotiating, dealing with angry customers to becoming a successful leader.

YOUR CALL Look back at the first paragraph in this Practical Action box. Which of the soft skills listed there would you like to improve by the time you graduate, in order to make yourself a more attrac- tive candidate to prospective employers?

Developing Your Soft SkillsPRACTICAL ACTION

Often these are thought of as “soft skills.” Soft skills are interpersonal “people” skills needed for success at all levels. As discussed in Section 1.7, developing your soft skills is an ongoing, lifelong effort.

During her more than three decades at GM, Barra has demonstrated exceptionally strong soft skills. She has “an ability with people,” says her previous boss, that is critical to GM’s team-first approach.56 “She is known inside GM as a consensus builder who calls her staff together on a moment’s notice to brainstorm on pressing issues,” says another report.57 “She’s fiercely intelligent yet humble and approachable,” says a third account. “She’s col- laborative but is often the person who takes charge. And she’s not afraid to make changes.”58

Among her most significant changes: hiring people with “diverse views, diverse back- grounds, diverse experiences,” she says, to try to reshape the company’s notoriously insular corporate culture and to bring GM into the age of Apple and Google.

The Most Valued Traits in Managers Clearly, Barra embodies the qualities sought in star managers, especially top managers. “The style for running a company is different from what it used to be,” says a top execu- tive recruiter of CEOs. “Companies don’t want dictators, kings, or emperors.”65 Instead of someone who gives orders, they want executives who ask probing questions and invite people to participate in decision making and power sharing.

Among the chief skills companies seek in top managers are the following:

■ The ability to motivate and engage others. ■ The ability to communicate. ■ Work experience outside the United States. ■ High energy levels to meet the demands of global travel and a 24/7 world.66 ●

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Self-Assessments

Self-Assessment evaluations help students relate what they are learning to their own experiences and promote self-reflection, engagement, and development of their career readiness. Of the 66 total Self-Assessments included, nearly 40 of them pertain to a career readiness competency. For each of these, students are asked to consider how they might display the competency in an employment interview.

The Manager’s Changing Work Environment and Ethical Responsibilities CHAPTER 3 99

In exposing unethical behavior, then, it’s important to be clear why you’re doing it (trying to help the company or just get someone in trouble), not report something for the wrong reason (discuss your concerns with someone who has similar values), and follow proper channels (like addressing the supervisor of the supposed culprit). Don’t try to report externally (lashing out on Facebook, for instance) without speaking to those who might resolve the problem.138

Some people view ethics in ideal terms, which means that ethical principles or stan- dards apply universally across situations and time. Others, however, take a relativistic view and believe that what is ethical depends on the situation. These differences can create conflict among managers trying to make decisions.

Consider the situation faced by a group of executives working with Angelo to make a decision about opening a new office overseas. Angelo was consulting with a global com- pany that was dealing with the issue of whether or not it should pay local officials for helping establish a new office overseas. Some executives in the meeting concluded that the company should pay these officials because it was a normal cost of doing business in this country. Others viewed the situation quite differently. They thought the pay- ments amounted to bribes and were totally against the idea. The company ultimately decided that it would not make the payments, which resulted in their inability to open the new office.

All told, it is important for you to learn more about your ethical tendencies. This will help you to behave in ways that are consistent with your values and beliefs. ●

expensive camera equipment behind. He was subsequently told his contract with the department would not be renewed as prom- ised—essentially he was fired—and he has filed a federal lawsuit seeking whistle-blower protection, reinstatement, and an ethics investigation into Perry and Murray for “public corruption.”134 Retaliation against whistle-blowers is against federal law; the DOE is calling Edelman’s accusations “ridiculous.”135

Whistlebloweraid.org is a nonprofit law firm that assists government whistle-blowers like Edelman with confidential free legal advice, especially if they witness lawbreaking when the evidence is classified and don’t know where to turn.136 Though he is working with the group, Edelman insists his

photos are in the public domain. “I’m definitely proud of what I did,” he says. “I know that I did the right thing. I just hope that more people take this as inspiration that they can also speak up and blow the whistle because it’s an important part of democracy.”137

FOR DISCUSSION What are some of the reasons someone might become a whis- tleblower? Why would someone choose not to be? Is that posi- tion defensible given the value of job attitudes like professional and ethical standards? Why or why not? What would you have done in Edelman’s position?

Assessing My Perspective on Ethics This survey is designed to assess your views about ethics. It provides feedback about your status on the Career Readiness “other characteristic” of professionalism/work ethic.

Please be prepared to answer these questions if your instructor has assigned Self-Assessment 3.1 in Connect.

1. Are your views more idealistic or more relativistic?

2. What do you think about students cheating on homework assignments in school? What about cheating on exams?

3. Are your answers consistent with your score? Explain.

4. What can you say during an interview to demonstrate an ethical orientation?

SELF-ASSESSMENT 3.1 CAREER READINESS

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Extended Emphasis on Practicality

Testimonials from Millennials

Each chapter includes two new boxed features that provide testimonials from millennials about their experiences with effective and ineffective management. “I wish I . . .” boxes illustrate real-world examples in which students recall an instance when they or their boss could have better applied certain management concepts. “I’m glad I . . .” boxes discuss positive applications of management concepts.

Global Management CHAPTER 4 125

Ethnocentric views also affect our purchasing decisions. Some people believe that we should only purchase products made in our home country.42 What are your views about being an ethnocentric consumer? You can find out by taking Self-Assessment 4.1.

Assessing Your Consumer Ethnocentrism This survey is designed to assess your consumer ethnocen- trism. Please be prepared to answer these questions if your instructor has assigned Self-Assessment 4.1 in Connect.

1. Are you surprised by the results? What do they suggest about your purchasing decisions? What are the pros and cons of being an ethnocentric consumer?

2. How do American companies, associations, and unions encourage us to be ethnocentric consumers?

SELF-ASSESSMENT 4.1

Polycentric Managers—“They Know Best” Polycentric managers take the view that native managers in the foreign offices best understand native personnel and practices, and so the home office should leave them alone. Thus, the attitude of polycentric manag- ers is nearly the opposite of that of ethnocentric managers.

Geocentric Managers—“What’s Best Is What’s Effective, Regardless of Origin” Geocentric managers accept that there are differences and similarities between home and foreign personnel and practices and that they should use whatever techniques are most effective. Clearly, being an ethno- or polycentric manager takes less work. But the payoff for being a geocentric manager can be far greater. ●

Jordin Hansen is a senior director of strategic opera- tions for a global information technology company. She experienced a clashing of cul- tures when her company developed nomenclature as part of a global business strategy.

An executive team in the United States was put together to develop a global business strategy for a new

business within a larger company. Part of the strategy involved deciding on company vocabulary. “When you run a global orga- nization, having consistent nomenclature in how you talk about things is extremely important, especially when you have global customers,” said Jordin.

The approach that was used to decide on the company nomenclature was a very top-down approach. The strategy team claimed they were listening to outside opinions but really moved forward with what they thought was the best decision.

What was not taken into consideration was that English was not the main language for a majority of the company’s global stakeholders. One of the terms chosen to be part of the company nomenclature was “solution.” As Jordin explained, this word means very different things to people of different cultures.

“The word ‘solution’ in our industry in the United States can mean a piece of a larger solution; whereas in Europe when you talk about solutions it usually means the full end-to-end supply chain or product,” said Jordin.

There may have been short-term benefits to quickly announc- ing and implementing company vocabulary, but the long-term effects were negative. The team had to rethink the strategy  several times, and the buy-in from stakeholders was minimal. “We took two steps forward just to take fourteen steps back,” said Jordin.

Perhaps the most negative impact of presenting company vocabulary that was not culturally sensitive was a loss of cred- ibility and trust among stakeholders. “This overstepped the opinions and the input of the global stakeholders. It ruined credibility for anything later down the road that we wanted to implement,” said Jordin. “In a world where relationships are everything, this is incredibly important.” Courtesy of Jordin Hansen

I Wish I… …considered the impact of ethnocentrism.

Jordin Hansen Courtesy Jordin Hansen

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Management Theory CHAPTER 2 53

Douglas McGregor and Theory X versus Theory Y Having been a college pres- ident for a time (at Antioch College in Ohio), Douglas McGregor came to realize that it was not enough for managers to try to be liked; they also needed to be aware of their attitudes toward employees.22 Basically, McGregor suggested in a 1960 book, these atti- tudes could be thought of either “X” or “Y,” which we introduced in the chapter opener about people-focused organizations.

Theory X represents a pessimistic, negative view of workers. In this view, workers are considered to be irresponsible, to be resistant to change, to lack ambition, to hate work, and to want to be led rather than to lead.

Theory Y represents a human relations outlook—an optimistic, positive view of work- ers as capable of accepting responsibility, having self-direction and self-control, and being imaginative and creative.

Why Theory X/Theory Y Is Important: The principal contribution offered by the Theory X/Theory Y perspective is that it helps managers understand how their beliefs affect their behavior. For example, Theory X managers are more likely to micromanage, which leads to employee dissatisfaction, because they believe employees are inherently lazy.

Cameron Monkelien works in the banking industry as a team leader. He believes his com- pany does a great job of making employees at all levels feel included and empowered.

Cameron works for a large company with a popular name and a lot of power, but, as Cameron puts it, “It really has its head on its shoulders. They give a lot of tools and capabili- ties to everybody—not just supervisors and man- agers, but all the way down to the bottom level.”

Cameron feels interconnected with all aspects of his job because of the documenta- tion and networking his company has worked many years to build. “There isn’t a guessing game where you have to figure out who you need to talk to or where you need to go to get information. That’s something that a lot of my other jobs didn’t have: a database and network of people and documents that point you in the right direction in any given situation,” said Cameron.

Another way that the company works to make its employ- ees feel included is to have monthly meetings where employ- ees can interact with people other than their direct supervisors. This helps employees to feel like upper management is listen- ing to their concerns and ideas, and that they can really make a difference within the organization.

Cameron also feels safe to take risks and make mistakes rather than fearing the consequences of doing so. “I have

personally taken several risks because I have enough confidence in my performance and belief in my team that I can go out on a limb for them and for myself,” said Cameron. But ulti- mately, Cameron believes his direct supervisor cultivates an environment where employees feel safe to take risks and make mistakes. “My supervisor does a really good job about not coming down on us when something goes wrong. Instead she asks, ‘How can we improve this going forward?’”

Cameron takes this lesson from his supervi- sor and works to make sure his own employees feel safe taking risks. “The first time one of my employees had a setback was almost two years into his role. He felt like it was such a personal defeat on his part. I had to have a discussion with him where I said, ‘Having a failure does

not mean that you are a failure. It means that there is still room for growth, room for learning, and room for improvement.’”

Cameron’s company has taken additional steps to create an environment of empowerment by changing some of the job titles. “Instead of being a manager or a supervisor, you get the title of ‘leader’ because it instills the idea that instead of being in charge of your employees, you are leading them.”

Courtesy of Cameron Monkelien

I’m glad I… …work in an organization with a Theory Y culture.

Cameron Monkelien Courtesy Cameron Monkelien

Underlying both Maslow’s and McGregor’s theories is the notion that more job satisfaction leads to greater worker performance—an idea that is somewhat controver- sial, as we’ll discuss in Chapter 11.

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Uber Continuing cases

These new cases ask students to synthesize and apply what they’ve learned across the course to Uber. Based on reviewer feedback, we’ve introduced these at the chapter level.

186 PART 3 Planning

Other big drug makers are not letting profit and limited capacity get in their way. A top scientist at Eli Lilly, one of Pfizer’s competitors, told Financial Times that “Taking care of Alzheimer’s patients is a huge economic cost to society and now is not the time to give up.” Eli Lilly’s most advanced Alzheimer’s drug failed in a large trial in 2016, but the company has vowed to continue Alzheimer’s treat- ment R&D.80 Another U.S. competitor, AstraZeneca, also remains committed to fighting the disease.

SOLVING THE CHALLENGE What would you do if you were Pfizer’s CEO?

1. Move on to other projects. Pfizer has an obligation to its shareholders not to throw money at projects that prove to be unsuccessful.

2. Continue funding Alzheimer’s R&D. As a global leader in the pharmaceutical industry, Pfizer has an obligation to society to find treatments for diseases affecting millions of people. This would also be in line with its mission statement and values.

3. Contribute to agencies such as the National Institutes of Health so they can continue their studies of Alzheimer’s.

4. Suggest other options.

Learn how Uber’s corporate strategies have changed from those pursued by founder and CEO Travis Kalanick to those identified by current CEO Dara Khosrowshahi. Assess your ability to apply concepts discussed in this chapter to the case by going to Connect.

Uber Continuing Case

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114 PART 2 The Environment of Management

the athletes are students or being paid under the table. They just want to see the games. Thus, the reward far outweighs any risk, and the chances that the NCAA would address and attempt to stop a lucrative black market of player peddling the highest bidder stretches the limits of credibility. It can be hard to bite the hand that feeds you.”211

NOW WHAT? Justice Joon Kim described those indicted as “assis- tant coaches of major Division I schools with top-tier programs” who have “been in and around the game for a long time. All of them had the trust of players they recruited. Young men who looked up to them and be- lieved their coaches had their best interests at heart.”212 Kim described a scenario of coaches “taking cash bribes, managers and advisers circling blue-chip pros- pects like coyotes, and employees of a global sports- wear company funneling cash to families of high school recruits.”213 Kim added, “Month after month, the defendants exploited the hoop dreams of athletes around the country, allegedly treating them as little more than opportunities to enrich themselves through bribery and fraud schemes . . . The defendants’ alleged conduct not only sullied the spirit of amateur athletics, but it showed contempt for the thousands of players and coaches who follow the rules and play the game the right way.”214

As a result of the investigation and subsequent in- dictments, “the NCAA has established a Commission on College basketball” with members including “for- mer Secretary of State Condoleezza Rice, former Chairman of the Joint Chiefs of Staff Gen. Martin Dempsey, and former NBA stars David Robinson and Grant Hill.”215 Further, the federal courts have stated that these indictments are the first in a series of many that will come to light in the coming months. The FBI has set up a tip line where those with knowledge regard- ing these schemes can call and share information.216 Sources believe the ongoing probe will likely implicate additional college programs, sports apparel companies, and agents.217

There is hope that these indictments will send a strong message that these behaviors will not be toler- ated and will be punished to the fullest extent of the law. “With the federal government’s threat of serious punishment, coaches are more likely to operate within NCAA rules. At the very least, they will think twice, knowing that indictments, potential jail time and huge legal fees are on the table.”218

William Sweeney Jr., the Assistant Director-in- Charge of the FBI’s New York office, said the “arrests serve as a warning to others choosing to conduct busi- ness this way in the world of college athletics: We have your playbook.”219

FOR DISCUSSION Problem Solving Perspective

1. What is the underlying problem in this case from the federal government’s perspective?

2. Why do you think assistant coaches play such a sig- nificant role in these scandals?

3. How do you think the NCAA and the Commission on College basketball should move forward to prevent illegal behavior from occurring in the future?

Application of Chapter Content

1. How do you think the basketball teams’ task environ- ment, particularly competitors, allies, customers, reg- ulators, and media, played into the corruption in the NCAA?

2. Are the high school recruits who accepted bribes from apparel companies and coaches purely victims in this situation, or should their behavior also be con- sidered unethical? Explain your answer using one of the four approaches to deciding ethical dilemmas.

3. What might the NCAA do to promote higher ethi- cal standards among its schools, coaches, players, and allies?

4. How do you think the scandal has and will continue to affect customers, players’ attitudes on the court, and NCAA sales?

Should You Apply to Have Your Student Loans Forgiven? Student loan debt nearly tripled in the last decade, thanks to increased attendance at for-profit colleges along with rising college tuition and living expenses.220 For hundreds of thousands buried in student loan debt, a little known 1994 program called “Borrower

Defense” or “Defense to Repayment” sponsored by the Education Department offers a lifeline.

The program is available for those students who ob- tained loans from the government’s Direct Loan pro- gram. “The law says students are entitled to forgiveness of any existing debt—and, possibly, reimbursement of any repaid loans—if they can show that their school violated state law in getting them to take out the debt.

Legal/Ethical Challenge

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Legal/Ethical Challenge cases

Legal/Ethical Challenge cases ask students to resolve real ethical challenges faced by managers and organizations. They help develop students critical thinking and problem-solving skills around ethical issues.

Management in Action cases

Rather than using stories about companies, the new Management in Action cases now focus on higher levels of learning by asking students to solve real organizational problems using relevant management concepts.

112 PART 2 The Environment of Management

1. How would you explain the difference between internal and external stakeholders?

2. Among external stakeholders, what’s the difference between the task environment and the general environment?

3. Of the 11 groups in the task environment, which five do you consider most important, and why?

4. Of the six groups in the general environment, which one do you think has the least importance, and why?

5. Distinguish among the four approaches to deciding ethical dilemmas.

6. What’s the difference between insider trading and a Ponzi scheme?

7. How would you summarize Kohlberg’s levels of personal moral development?

8. What are four ways that organizations can promote ethics?

9. Describe the levels in Carroll’s corporate social responsibility pyramid. Where does trying to achieve sustainability fit in?

10. How would you explain the concept of corporate governance?

Who’s to Blame for College Basketball’s “Dark Underbelly”? The National Collegiate Athletic Association (NCAA) is “a member-led organization dedicated to the well- being and lifelong success of college athletes.”188 Founded in 1906, the NCAA “functions as a general legislative and administrative authority for men’s and women’s intercollegiate athletics” and “formulates and enforces the rules of play for various sports and the eligibility criteria for athletes.”189

One of the “bedrock principles” of the NCAA is maintaining the spirit of amateur competition. Students are not allowed to be professional athletes, education holds top priority, and all athletes receive a fair chance to compete.190 The NCAA outlines specific rules ath- letes must follow to maintain amateur status and, thus, eligibility to continue playing collegiate sports. Student athletes are, among other things, prohibited from publicly endorsing companies191 and from receiving a salary for athletic participation or benefits from prospective agents.192

Although NCAA guidelines prohibit corporate sponsorships at the individual-athlete level, college teams have benefited from such alliances since 1977, when shoe-company executive Sonny Vaccaro “signed several coaches he knew . . . to contracts with Nike.” According to Vaccaro, “‘the world changed’ in 1987, when Nike signed its first all-school deal” to sponsor all of the University of Miami’s athletic teams. With these deals, said Vaccaro, “you own everything in that school. That shoe company is now your business partner.”193

A BLURRY LINE BETWEEN AMATEURISM AND PROFESSIONALISM Benefits aside, strategic relationships between apparel companies and universities blur the line between

amateurism and professionalism for two reasons. The first is money flowing to universities. Companies such as Nike, Under Armour, and Adidas “pay tens of millions of dollars a year to equip (and, from a marketing standpoint, align themselves) with major university programs.”194 These alliances benefit universities due to increased revenues generated by the sponsorships, and they earn sports apparel companies not only exclusive rights to partner with large academic institutions, but also insider access to the country’s top athletic talent.

The second reason is money for college athletes. A particular challenge in NCAA basketball is the reality that some athletes don’t intend to graduate from college. Due in large part to the NBA’s “one-and-done” rule prohibiting athletes from playing professionally before their 19th birthday, elite players often attend classes for a year until they age into the NBA draft.195 Apparel sponsors are often overly eager to secure exclu- sive deals with elite athletes who may earn coveted spots in the NBA because these arrangements generate lots of money for the sponsors.

ASSISTANT COACHES AND FEDERAL INDICTMENTS Assistant coaches serve as the primary recruiters of top high-school talent and are expected to act as salesper- sons for their universities and build strong relationships with prize recruits.196 They are expected to follow NCAA guidelines, and they do not always do so.

In November 2017, four assistant college basketball coaches were among 10 individuals indicted by a fed- eral grand jury. Fortune described the lead-up to the indictments as “a detailed and clandestine FBI investi- gation that exposed alleged under-the-table payments to agents, coaches, and parents to influence talented athletes to choose particular colleges to play

Management in Action

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xix

Imaginative Writing for Readability and Reinforcement

Research shows that products written in an imaginative, story-telling style significantly improve students’ ability to retain information. We employ numerous journalistic devices to make the material engaging and relevant to students lives.

506 PART 5 Leading

Formal versus Informal Groups Groups can be either formal or informal.9

■ Formal groups—created to accomplish specific goals. A formal group is a group assigned by organizations or its managers to accomplish specific goals. A formal group may be a division, a department, a work group, or a committee. It may be permanent or temporary. In general, people are assigned to them according to their skills and the organization’s requirements.

■ Informal groups—created for friendship. An informal group is a group formed by people whose overriding purpose is getting together for friendship or a common interest. An informal group may be simply a collection of friends who hang out with one another, such as those who take coffee breaks together, or it may be as organized as a prayer breakfast, a bowling team, a service club, a company “alumni group” (for example, former Apple employees), or a voluntary organization.

What’s important for you as a manager to know is that informal groups can advance or undercut the plans of formal groups. The formal organization may make efforts, say, to speed up the plant assembly line or to institute workplace reforms. But these attempts may be sabotaged through the informal networks of workers who gossip over e-mails and informal gatherings, such as meeting after work for a beer.10

However, interestingly, informal groups can also be highly productive—even more so than formal groups.

EXAMPLE Informal Groups and Informal Learning: Sharing Knowledge in the Lunchroom and on Social Media

As a manager, what would you think if you saw employees making brief conversation near the lunchroom coffeepot? Are they talking about the season finale of their favorite show, or is something more productive taking place? Office kitchens have been hidden out of sight for generations, an unloved necessity kept stark to make sure workers didn’t linger, says the Los Angeles Times. Companies are now seeing office kitchens in a new light. Kitchens are being turned into showplaces intended to boost morale, encourage collaboration, and create a learn- ing environment.11 Why the change of heart?

Workplace Learning: Mostly Informal Research has found that 70 percent of workplace learning is informal.12 Organizations are taking notice of this phenomenon. For example, Siemens managers have placed overhead pro- jectors and empty pads of paper in the lunchroom to facilitate the exchange of information.13 The highest-performing Google employees teach and support those employees looking to improve. Google certainly has the resources to afford fancy training programs. The company instead opts for peer-to-peer training in order to foster a culture of learning that values continuous devel- opment and the sharing of knowledge and expertise.14

Online Peer-to-Peer Networks What about when employ- ees are in far-flung places? “Sales reps are out in the field and they’re kind of on islands,” pointed out an Indianapolis software-firm executive. “It’s a challenge to keep everyone connected.”15 So when the 75 reps started overwhelming the sales-support staff with questions about product details and client information, the company created a website on which the reps could post and answer questions in an infor- mal peer-to-peer learning setting.16 These types of portals can also be used for employees in distant locations to tell  each other personal and professional stories to share

experiences. Research has shown that when people talk informally, 65  percent of the time they are tell- ing stories. So providing an online venue for storytelling can be quite effective.17

YOUR CALL Can games (such as the online multi- player game Second Life) or other social media (Facebook, Twitter, Instagram, etc.) be used to foster informal workplace collaboration? How about allowing employees to BYOD—“bring your own device” to work, such as their own smartphone or tablet?18

Talking it out. Ever worked in a job in which you got a lot of informal training through conversations over coffee? Could this be done with social networking? ©Jacobs Stock Photography/Photodisc/Getty Images

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Example boxes

We utilize numerous Example boxes to emphasize the practical applications of business. These mini cases use snapshots of real-world companies to explain text concepts. Your Call questions stimulate class discussions and help students develop their critical thinking skills. Suggestions for how to use the Example boxes are found in the Teaching Resource Manual (TRM).

“Readability is very good for the undergraduate audience. Updates are frequent and provide current examples. —Justin Davis,

University of West Florida

The order and quality of information within the textbook (is great). Logical for faculty, plenty of examples for students; Kinicki provides better detail and examples, and good supplemental materials.

—Alex Williams, Texas A&M Commerce

“ ”

xx

”

No matter how you teach your course: face-to-face, hybrid, or online—you’re in the driver’s seat. We offer the most robust set of resources to enhance your Principles of Management course. In addition to our unique Teaching Resource Manual, packed with additional activities and supplemental teaching tools; PowerPoint presentations; and Test Bank questions, we have a wealth of assignable resources available in Connect®.

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It is the best Management textbook on the market. Most importantly, and the key competitive advantage, is the Connect material. LearnSmart/SmartBook is above and beyond anything else out there.

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acknowledgments

I have the pleasure of working with one of the best teams in the business. Their dedica- tion and effort significantly contribute to the quality of this revision. It all begins with the captain of the team, Michael Ablassmier. As my editorial director he provides the internal support to launch and manage the revision process. He also spends much time traveling in support of my products. Thanks for your continuing support over the last 10 years! To Anne Ehrenworth, product developer, thank you for paying attention to the details, keeping us all focused on the schedule, and coordinating all the moving pieces.

To Debbie Claire, executive marketing manager, you are the energizer bunny who works tirelessly in support of this product. Your creativity, passion, and effort make you the abso- lute best at your job, and you push me more than anyone to raise my “marketing” game. Thank you! To Harvey Yep, your knowledge and experience with the production process keep us on schedule and responsive to all the change requests.

To Patrick Soleymani, your support as my digital faculty consultant is invaluable. Your work on the Teaching Resource Manual and writing cases were instrumental in creating essential teaching materials. To Denise Breaux Soignet, your efforts in writing cases and developing digital activities to assess student learning greatly enhanced the product.

To Sarah Thomas, market development manager, Keri Johnson, content project man- ager; and Jessica Cuevas, designer, thanks for all you do to in support of the product. I would also like to thank Elisa Adams for her editorial assistance; Lindy Archambeau, Barbara Larson, Grace McLaughlin, and Jennifer Muryn for their work on the Teaching Resource Manual; Shelly Arneson for the PowerPoint slides; and to Ken Carson for his work on the Self-Assessments for Connect.

To McGraw-Hill company, it is a world-class publisher and I am grateful to be a member of the family.

Warmest thanks and appreciation go to the individuals who provided valuable input during the developmental stages of this edition, as follows:

Dr. M. Ruhul Amin, Bloomsburg University of Pennsylvania

Joel Andexler, Cuyahoga Community College

Lindy Archambeau, Warrington College of Business, University of Florida

Joseph Aranyosi, University of Phoenix

Shelly Arneson, Colorado State University

Lisa Augustyniak, Lake Michigan College

Tanya Balcom, Macomb Community College

Amy S. Banta, Ohio University

Valerie Barnett, Kansas State University

Lynn Becker, Univeristy of Central Florida

William Belcher, Troy University

Jessie Bellflowers, Fayetteville Technical Community College

Michael Bento, Owens Community College

George Bernard, Seminole State College of Florida

Stephen Betts, William Patterson University

Jim Bishop, New Mexico State University

Alison Bolton, Solano Community College

Anne Brantley, Central Piedmont Community College

Reginald Bruce, University of Louisville

Regina Cannon, Tarrant County College

Tara Carr, University of Wisconsin–Green Bay

Shari Carpenter, Eastern Oregon University

Anastasia Cortes, Virginia Tech

Justin L. Davis, University of West Florida

Carrie L. Devone, Mott Community College

Jennifer Egrie, Keiser University

Bennie Felts, North Carolina Wesleyan College

Charla Fraley, Columbus State Community College

xxiv

xxvAcknowledgments

Dana Frederick, Missouri State University

Patricia Galitz, Southeast Community College

Barbara Garrell, Delaware County Community College

Terry Girdon, Pennsylvania College of Technology

Lacey Gonzalez-Horan, Lehigh Carbon Community College

Jan Grimes, Georgia Southern University

William Habacivch, Central Penn College

Gordon Haley, Palm Beach State College

R. Hall, Tarleton State University

Lisa M. Harris, Southeast Community College

Joanne Hartsell, East Carolina University

Ahmad Hassan, Morehead State University

Karen H. Hawkins, Miami Dade College–Kendall Campus

Cathy Henderson, Stephen F. Austin State University

Nhung Hendy, Towson University

Lara Hobson, Western Michigan University

Anne Hoel, University of Wisconsin–Stout

Gregory A. Hoffeditz, Southern Illinois University–Carbondale

James Hopkins, University of Georgia

Tammy Hunt, University of North Carolina– Wilmington

Perwaiz Ismaili, Metropolitan State University

Jacquelyn Jacobs, University of Tennessee

Paul D. Johnson, University of Mississippi

Sue Joiner, Tarleton State University

John Kirn, University of Kentucky

Bobbie Knoblauch, Wichita State University

Todd Korol, Monroe Community College

Zahir Latheef, University of Houston Downtown

Dave Lanzilla, College of Central Florida

Barbara Larson, Northeastern University

Zahir Latheef, University of Houston–Downtown

Blaine Lawlor, University of West Florida

Benjamin Lipschutz, Central Penn College

Charles Lyons, University of Georgia

Professor Cheryl Macon, Butler County Community College

Zengie Mangaliso, University of Massachusetts–Amherst

Christine Marchese, Nassau Community College

D. Kim McKinnon, Arizona State University

Ben McLarty, Mississippi State Univerisity

Erin McLaughlin, University of Alabama–Huntsville

Christine Miller, Tennessee Tech University

Lorianne Mitchell, East Tennessee State University

Debra L. Moody, Virginia Commonwealth University

Vivianne Moore, Davenport University

Byron Morgan, Texas State University

Jennifer Muryn, Robert Morris University

Troy Nielson, Brigham Young University

Paul O’Brien, Keiser University

Nathan Oliver, University of Alabama at Birmingham

Rhonda Palladi, Georgia State University

Thomas Philippe, St. Petersburg College

Michael Pirson, Fordham University

Beth Polin, Eastern Kentucky University

Elizabeth Prejean, Northwestern State University

Kenneth Rasheed, Chattahoochee Technical College

Chelsea Hood Reese, Southeast Community College

Martha Robinson, University of Memphis

David Ruderman, University of Colorado–Denver

Jerry Schoenfeld, Florida Gulf Coast University

Marina Sebastijanovic, University of Houston

Sarah Shike, Western Illinois University

Raj K. Singh, University of California–Riverside

Paula Kirch Smith, Cincinnati State

Dustin Smith, PhD., Webster University

George E. Stevens, Kent State University

Jerry Stevens, Texas Tech University

C. Justice Tillman, Baruch College, City University of New York

Jim Turner, Davenport University

Brandi Ulrich, Anne Arundel Community College

George Valcho, Bossier Parish Community College

Tim Waid, University of Missouri

Wendy Walker, University of North Georgia

Charlene Walters, Strayer University

Rick Webb, Johnson County Community College

Joette Wisnieski, Indiana University of Pennsylvania

xxvi Acknowledgments

Steven W. Abram, Kirkwood Community College

G. Stoney Alder, University of Nevada–Las Vegas

Phyllis C. Alderdice, Jefferson Community and Technical College

Laura L. Alderson, University of Memphis

Danielle Beu Ammeter, University of Mississippi

William Scott Anchors, University of Maine at Orono

Jeffrey L. Anderson, Ohio University

Darlene Andert, Florida Gulf Coast University

John Anstey, University of Nebraska at Omaha

Maria Aria, Camden County College

Mona Bahl, Illinois State University

Pamela Ball, Clark State Community College

Valerie Barnet, Kansas State University

James D. Bell, Texas State University–San Marcos

Jessie Bellflowers, Fayetteville Technical Community College

Victor Berardi, Kent State University

Patricia Bernson, County College of Morris

David Bess, University of Hawaii

Stephen Betts, William Paterson University

Randy Blass, Florida State University

Larry Bohleber, University of Southern Indiana

Melanie Bookout, Greenville Technical College

Robert S. Boothe, University of Southern Mississippi

Carol Bormann Young, Metropolitan State University

Susan M. Bosco, Roger Williams University

David Allen Brown, Ferris State University

Roger Brown, Northwestern Oklahoma State University

Marit Brunsell, Madison Area Technical College

Jon Bryan, Bridgewater State University

Becky Bryant, Texas Woman’s University

Paul Buffa, Jefferson College, Missouri Baptist University

Mark David Burdsall, University of Pittsburgh

Neil Burton, Clemson University

Barbara A. Carlin, University of Houston

Pamela Carstens, Coe College

Julie J. Carwile, John Tyler Community College

Daniel A. Cernas Ortiz, University of North Texas

Glen Chapuis, St. Charles Community College

Rod Christian, Mesa Community College

Mike Cicero, Highline College

Jack Cichy, Davenport University

Anthony Cioffi, Lorain County Community College

Deborah Clark, Santa Fe Community College

J. Dana Clark, Appalachian State University

Dean Cleavenger, University of Central Florida

Sharon Clinebell, University of Northern Colorado

Loretta Fergus Cochran, Arkansas Tech University

Glenda Coleman, South University

Ron Cooley, South Suburban College

Melissa M. Cooper, School of Management, Texas Woman’s University

Gary Corona, Florida State College

Keith Credo, University of Louisiana–Lafayette

Derek E. Crews, Texas Woman’s University

Daniel J. Curtin, Lakeland Community College

Ajay Das, Baruch College

Tom Deckelman, Owens Community College

Linda I. DeLong, University of La Verne

Margaret Deck, Virginia Tech

Kate Demarest, University of Baltimore

E. Gordon DeMeritt, Shepherd University

Kathleen DeNisco, Erie Community College

I would also like to thank the following colleagues who served as manuscript reviewers during the development of previous editions:

Anthony Weinberg, Daymar College

David Wernick, Florida International University

Wallace Alexander Williams Jr., Texas A&M University–Commerce

Dr. Linsey Willis, Florida Atlantic University

M. Susan Wurtz, University of Northern Iowa

Jan Zantinga, University of Georgia

Anant R. Deshpande, SUNY Empire State College

John DeSpagna, Nassau Community College

Pamela A. Dobies, University of Missouri–Kansas City

David Dore, Pima Community College

Lon Doty, San Jose State University

Ron Dougherty, Ivy Tech Community College/ Columbus Campus

Scott Droege, Western Kentucky University

Ken Dunegan, Cleveland State University

Steven Dunphy, Indiana University Northwest

Linda Durkin, Delaware County Community College

Subhash Durlabhji, Northwestern State University of Louisiana

Jack Dustman, Northern Arizona University

Ray Eldridge, Lipscomb University

Bob Eliason, James Madison University

Valerie Evans, Kansas State University

W. Randy Evans, University of Tennessee at Chattanooga

Paul A. Fadil, University of North Florida

Crystal Saric Fashant, Metropolitan State University

Jud Faurer, Metropolitan State University of Denver

Judy Fitch, Augusta State University

Carla Flores, Ball State University

Christopher Flynn, University of North Florida

David Foote, Middle Tennessee State University

Lucy R. Ford, Saint Joseph’s University

Charla Fraley, Columbus State Community College

Gail E. Fraser, Kean University

Dana Frederick, Missouri State University

Tony Frontera, Binghamton University

Dane Galden, Columbus State Community College

Michael Garcia, Liberty University

Evgeniy Gentchev, Northwood University

Lydia Gilmore, Columbus State Community College

James Glasgow, Villanova University

Ronnie Godshalk, Penn State University

Connie Golden, Lakeland Community College

Deborah Cain Good, University of Pittsburgh

Kris Gossett, Mercyhurst University

Marie Gould, Horizons University

Tita Gray, Maryland University of Integrative Health

Ryan Greenbaum, Oklahoma State University– Stillwater

Kevin S. Groves, Pepperdine University

Joyce Guillory, Austin Community College

Reggie Hall, Tarleton State University

Stephen F. Hallam, The University of Akron

Marie DK. Halvorsen-Ganepola, University of Notre Dame

Charles T. Harrington, Pasadena City College

Santhi Harvey, Central State University

Karen H. Hawkins, Miami Dade College, Kendall Campus

Samuel Hazen, Tarleton State University

Jack Heinsius, Modesto Junior College

Duane Helleloid, University of North Dakota

Evelyn Hendrix, Lindenwood University

Kim Hester, Arkansas State University

Anne Kelly Hoel, University of Wisconsin–Stout

Mary Hogue, Kent State University

David Hollomon, Victor Valley College

Tammy Hunt, University of North Carolina– Wilmington

Aviad Israeli, Kent State University

Edward Johnson, University of North Florida

Nancy M. Johnson, Madison Area Technical College

Kathleen Jones, University of North Dakota

Rusty Juban, Southeastern Louisiana University

Dmitriy Kalyagin, Chabot College

Heesam Kang, Trident University International

Marvin Karlins, University of South Florida

Marcella Kelly, Santa Monica College

Richard Kimbrough, University of Nebraska–Lincoln

Renee N. King, Eastern Illinois University

Shaun C. Knight, Penn State University

Bobbie Knoblauch, Wichita State University

Todd Korol, Monroe Community College

Leo C. Kotrodimos, NC Wesleyan College

xxviiAcknowledgments

Sal Kukalis, California State University–Long Beach

Chalmer E. Labig Jr., Oklahoma State University

Wendy Lam, Hawaii Pacific University

Robert L. Laud, William Paterson University

Rebecca Legleiter, Tulsa Community College

David Leonard, Chabot College

Chris Levan, University of Tennessee– Chattanooga

David Levy, United States Air Force Academy

Chi Lo Lim, Northwest Missouri State University

Natasha Lindsey, University of North Alabama

Beverly Little, Western Carolina University

Guy Lochiatto, MassBay Community College

Mary Lou Lockerby, College of DuPage

Michael Dane Loflin, York Technical College

Jessica Lofton, University of Mount Olive

Paul Londrigan, Charles Stewart Mott Community College

Tom Loughman, Columbus State University

Ivan Lowe, York Technical College

Gregory Luce, Bucks County Community College

Margaret Lucero, Texas A & M–Corpus Christi

James Manicki, Northwestern College

Christine I. Mark, University of Southern Mississippi

Marcia A. Marriott, Monroe Community College

Dr. David Matthews, SUNY Adirondack

Brenda McAleer, University of Maine at Augusta

Daniel W. McAllister, University of Nevada–Las Vegas

David McArthur, Utah Valley University

Tom McFarland, Mount San Antonio College

Joe McKenna, Howard Community College

Zack McNeil, Metropolitan Community College

Jeanne McNett, Assumption College

Spencer Mehl, Coastal Carolina Community College

Mary Meredith, University of Louisiana

Lori Merlak, Kirkwood Community College

Douglas Micklich, Illinois State University

Christine Miller, Tennessee Tech University

Val Miskin, Washington State University

Kelly Mollica, University of Memphis

Gregory Moore, Middle Tennessee State University

Rob Moorman, Elon University

Jaideep Motwani, Grand Valley State University

Troy Mumford, Colorado State University

Robert Myers, University of Louisville

Christopher P. Neck, Arizona State University

Patrick J. Nedry, Monroe County Community College

Francine Newth, Providence College

Margie Nicholson, Columbia College, Chicago

Thomas J. Norman, California State University–Dominguez Hills

Joanne Orabone, Community College of Rhode Island

John Orife, Indiana University of Pennsylvania

Eren Ozgen, Florida State University–Panama City

Fernando Pargas, James Madison University

Jack Partlow, Northern Virginia Community College

Don A. Paxton, Pasadena City College

John Paxton, Wayne State College

John Pepper, The University of Kansas

Clifford R. Perry, Florida International University

Sheila Petcavage, Cuyahoga Community College– Western Campus

Barbara Petzall, Maryville University

Shaun Pichler, Mihaylo College of Business, California State University, Fullerton

Anthony Plunkett, Harrison College

Tracy H. Porter, Cleveland State University

Paula Potter, Western Kentucky University

Cynthia Preston, University of Northwestern Ohio

Ronald E. Purser, San Francisco State University

Gregory R. Quinet, Kennesaw State University

George Redmond, Franklin University

Deborah Reed, Benedictine College

Rosemarie Reynolds, Embry Riddle Aeronautical University

H. Lynn Richards, Johnson County Community College

Leah Ritchie, Salem State College

Gary B. Roberts, Kennesaw State University

Sean E. Rogers, University of Rhode Island

xxviii Acknowledgments

Katherine Rosenbusch, George Mason University

Barbara Rosenthal, Miami Dade Community College/ Wolfson Campus

Gary Ross, Cardinal Stritch University

Catherine Ruggieri, St. John’s University–Staten Island

Storm Russo, Valencia Community College

Cindy Ruszkowski, Illinois State University

William Salyer, Illinois State University

Diane R. Scott, Wichita State University

Alex J. Scrimpshire, Xavier University

Marianne Sebok, College of Southern Nevada

Thomas J. Shaughnessy, Illinois Central College

Joanna Shaw, Tarleton State University

Randi Sims, Nova Southeastern University

Frederick J. Slack, Indiana University of Pennsylvania

Erika E. Small, Coastal Carolina University

Jim Smas, Kent State University

Gerald F. Smith, University of Northern Iowa

Mark Smith, University of Southwest Louisiana

Shane Spiller, Western Kentucky University

Jeff Stauffer, Ventura College

George E. Stevens, Kent State University

Martin St. John, Westmoreland County Community College

Raymond Stoudt, DeSales University

Barb Stuart, Daniels College of Business

Robert Scott Taylor, Moberly Area Community College

Virginia Anne Taylor, William Patterson University

Wynn Teasley, University of West Florida

Marguerite Teubner, Nassau Community College

Jerry Thomas, Arapahoe Community College

C. Justice Tillman, Baruch College–City University of New York

Jody Tolan, University of Southern California, Marshall School of Business

Joseph Tomkiewicz, East Carolina University

Robert Trumble, Virginia Commonwealth University

Joy Turnheim Smith, Elizabeth City State University

Isaiah Ugboro, North Carolina Agricultural & Technical State University

Brandi Ulrich, Anne Arundel Community College

Anthony Uremovic, Joliet Junior College

Barry Van Hook, Arizona State University

Scot W. Vaver, University of Wisconsin–Stout

Susan Verhulst, Grand View University

Annie Viets, Prince Mohammad Bin Fahd University

Tom Voigt Jr., Judson University

Carolyn Waits, Cincinnati State

Bruce C. Walker, University of Louisiana at Monroe

Tekle O. Wanorie, Northwest Missouri State University

Charles Warren, Salem State College

Kerry Webb, Texas Woman’s University

Brian D. Webster, Ball State University

Velvet Weems-Landingham, Kent State University–Geauga

Allen Weimer, University of Tampa

David A. Wernick, Florida International University

James Whelan, Manhattan College

John Whitelock, Community College of Baltimore/ Catonsville Campus

Eric S. Williams, University of Alabama– Tuscaloosa

Joette Wisnieski, Indiana University of Pennsylvania

Colette Wolfson, Ivy Tech Community College

Wendy V. Wysocki, Monroe County Community College

Carol Bormann Young, Metropolitan State University, Minnesota

Ned D. Young, Sinclair Community College

Jan T. Zantinga, University of Georgia

Mary E. Zellmer-Bruhn, University of Minnesota

Mark Zorn, Butler County Community College

Finally, I would like to thank my wife, Joyce, for being understanding, patient, and encourag- ing throughout the process of writing this edition. Your love and support helped me endure the trials of completing this text. I hope you enjoy reading and applying the book. Best wishes for success in your career.

Angelo Kinicki

xxixAcknowledgments

contents

Walkthrough Preface of 9e xv

PART 1 Introduction

CHAPTER ONE The Exceptional Manager: What You Do, How You Do It 2

1.1 Management: What It Is, What Its Benefits Are 4 The Rise of the Die Maker’s Daughter 4

Key to Career Growth: “Doing Things I’ve Never Done Before” 4

The Art of Management Defined 5

Why Organizations Value Managers: The Multiplier Effect 6

The Financial Rewards of Being an Exceptional Manager 6

What Are the Rewards of Studying and Practicing Management? 7

1.2 What Managers Do: The Four Principal Functions 9 Planning: Discussed in Part 3 of This Book 9

Organizing: Discussed in Part 4 of This Book 9

Leading: Discussed in Part 5 of This Book 10

Controlling: Discussed in Part 6 of This Book 10

1.3 Pyramid Power: Levels and Areas of Management 11 The Traditional Management Pyramid: Levels and Areas 11

Three Levels of Management 11

Areas of Management: Functional Managers versus General Managers 13

Managers for Three Types of Organizations: For-Profit, Nonprofit, Mutual-Benefit 14

Different Organizations, Different Management? 14

1.4 Roles Managers Must Play Successfully 15 The Manager’s Roles: Mintzberg’s Useful Findings 15

Three Types of Managerial Roles: Interpersonal, Informational, and Decisional 17

1.5 The Skills Exceptional Managers Need 19 1. Technical Skills—The Ability to Perform a Specific Job 19

2. Conceptual Skills—The Ability to Think Analytically 19

3. Human Skills—“Soft Skills,” the Ability to Interact Well with People 20

The Most Valued Traits in Managers 21

1.6 Seven Challenges to Being an Exceptional Manager 22 CHALLENGE #1: Managing for Competitive Advantage—Staying Ahead of Rivals 23

CHALLENGE #2: Managing for Information Technology—Dealing with the “New Normal” 24

CHALLENGE #3: Managing for Diversity—The Future Won’t Resemble the Past 26

CHALLENGE #4: Managing for Globalization—The Expanding Management Universe 26

CHALLENGE #5: Managing for Ethical Standards 27

CHALLENGE #6: Managing for Sustainability—The Business of Green 28

CHALLENGE #7: Managing for Happiness and Meaningfulness 28

How Strong Is Your Motivation to Be a Manager? The First Self-Assessment 29

1.7 Building Your Career Readiness 30 A Model of Career Readiness 30

Developing Career Readiness 35

Let Us Help 36

1.8 Career Corner: Managing Your Career Readiness 37

Key Terms Used in This Chapter 38 Key Points 38 Understanding the Chapter: What Do I Know? 39 Management in Action 39 Legal/Ethical Challenge 41

CHAPTER TWO Management Theory: Essential Background for the Successful Manager 42 2.1 Evolving Viewpoints: How We Got to Today’s

Management Outlook 44 Creating Modern Management: The Handbook of Peter Drucker 44

Six Practical Reasons for Studying This Chapter 44

Two Overarching Perspectives about Management: Historical and Contemporary 46

2.2 Classical Viewpoint: Scientific and Administrative Management 47 Scientific Management: Pioneered by Taylor and the Gilbreths 47

xxx

Administrative Management: Pioneered by Spaulding, Fayol, and Weber 49

The Problem with the Classical Viewpoint: Too Mechanistic 50

2.3 Behavioral Viewpoint: Behaviorism, Human Relations, and Behavioral Science 51 Early Behaviorism: Pioneered by Munsterberg, Follett, and Mayo 51

The Human Relations Movement: Pioneered by Maslow and McGregor 52

The Behavioral Science Approach 54

2.4 Quantitative Viewpoints: Management Science and Operations Management 56 Management Science: Using Mathematics to Solve Management Problems 56

Operations Management: Being More Effective 57

2.5 Systems Viewpoint 58 The Systems Viewpoint 59

The Four Parts of a System 59

2.6 Contingency Viewpoint 61 Gary Hamel: Management Ideas Are Not Fixed, They’re a Process 61

Evidence-Based Management: Facing Hard Facts, Rejecting Nonsense 62

2.7 Quality-Management Viewpoint 63 Quality Control and Quality Assurance 63

Total Quality Management: Creating an Organization Dedicated to Continuous Improvement 63

Six Sigma and ISO 9000

2.8 The Learning Organization in an Era of Accelerated Change 66 The Learning Organization: Handling Knowledge and Modifying Behavior 66

How to Build a Learning Organization: Three Roles Managers Play 67

2.9 Career Corner: Managing Your Career Readiness 69

Key Terms Used in This Chapter 71 Key Points 71 Understanding the Chapter: What Do I Know? 72 Management in Action 73 Legal/Ethical Challenge 74

PART 2 The Environment of Management

CHAPTER THREE The Manager’s Changing Work Environment and Ethical Responsibilities: Doing the Right Thing 76

3.1 The Triple Bottom Line: People, Planet, and Profit 78 The Millennials’ Search for Meaning 78

3.2 The Community of Stakeholders Inside the Organization 79 Internal and External Stakeholders 79

Internal Stakeholders 79

3.3 The Community of Stakeholders Outside the Organization 82 The Task Environment 82

The General Environment 87

3.4 The Ethical Responsibilities Required of You as a Manager 92 Defining Ethics and Values 93

Four Approaches to Resolving Ethical Dilemmas 95

White-Collar Crime, SarbOx, and Ethical Training 95

How Organizations Can Promote Ethics 97

3.5 The Social Responsibilities Required of You as a Manager 100 Corporate Social Responsibility: The Top of the Pyramid 100

Is Social Responsibility Worthwhile? Opposing and Supporting Viewpoints 100

One Type of Social Responsibility: Climate Change, Sustainability, and Natural Capital 103

Another Type of Social Responsibility: Undertaking Philanthropy, “Not Dying Rich” 104

Does Being Good Pay Off? 104

3.6 Corporate Governance 106 Ethics and Corporate Governance 106

The Need for Trust 106

3.7 Career Corner: Managing Your Career Readiness 108 Focus on the Greater Good and on Being More Ethical 108

Become an Ethical Consumer 109

Key Terms Used in This Chapter 110 Key Points 110 Understanding the Chapter: What Do I Know? 112 Management in Action 112 Legal/Ethical Challenge 114

CHAPTER FOUR Global Management: Managing across Borders 116 4.1 Globalization: The Collapse of Time and

Distance 118 Competition and Globalization: Who Will Be No. 1 Tomorrow? 118

The Rise of the “Global Village” and Electronic Commerce 119

One Big World Market: The Global Economy 120

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Cross-Border Business: The Rise of Both Megamergers and Minifirms Worldwide 121

4.2 You and International Management 122 Why Learn about International Management? 123

The Successful International Manager: Geocentric, Not Ethnocentric or Polycentric 124

4.3 Why and How Companies Expand Internationally 126 Why Companies Expand Internationally 126

How Companies Expand Internationally 127

4.4 The World of Free Trade: Regional Economic Cooperation and Competition 131 Barriers to International Trade 131

Organizations Promoting International Trade 133

Major Trading Blocs: NAFTA and the EU 134

Most Favored Nation Trading Status 136

Exchange Rates 136

4.5 The Value of Understanding Cultural Differences 139 The Importance of National Culture 140

Cultural Dimensions: The Hofstede and GLOBE Project Models 140

Other Cultural Variations: Language, Interpersonal Space, Communication, Time Orientation, Religion, and Law and Political Stability 144

U.S. Managers on Foreign Assignments: Why Do They Fail? 148

4.6 Career Corner: Managing Your Career Readiness 149 1. Listen and Observe 149

2. Become Aware of the Context 150

3. Choose Something Basic 150

Key Terms Used in This Chapter 151 Key Points 151 Understanding the Chapter: What Do I Know? 153 Management in Action 153 Legal/Ethical Challenge 154

PART 3 Planning

CHAPTER FIVE Planning: The Foundation of Successful Management 156 5.1 Planning and Strategy 158

Planning, Strategy, and Strategic Management 158

Why Planning and Strategic Management Are Important 159

5.2 Fundamentals of Planning 162 Mission, Vision, and Values Statements 163

Three Types of Planning for Three Levels of Management: Strategic, Tactical, and Operational 166

5.3 Goals and Plans 169 Long-Term and Short-Term Goals 169

The Operating Plan and Action Plan 169

Types of Plans: Standing Plans and Single-Use Plans 171

5.4 Promoting Consistencies in Goals: SMART Goals, Management by Objectives, and Goal Cascading 172 SMART Goals 172

Management by Objectives: The Four-Step Process for Motivating Employees 173

Cascading Goals: Making Lower-Level Goals Align with Top Goals 176

The Importance of Deadlines 177

5.5 The Planning/Control Cycle 178

5.6 Career Corner: Managing Your Career Readiness 180 Becoming More Proactive 181

Keeping an Open Mind and Suspending Judgment 181

Key Terms Used in This Chapter 182 Key Points 182 Understanding the Chapter: What Do I Know? 183 Management in Action 184 Legal/Ethical Challenge 185

CHAPTER SIX Strategic Management: How Exceptional Managers Realize a Grand Design 188 6.1 Strategic Positioning and Levels of

Strategy 190 Strategic Positioning and Its Principles 190

Levels of Strategy 191

Does Strategic Management Work for Small as Well as Large Firms? 192

6.2 The Strategic-Management Process 193 The Five Steps of the Strategic-Management Process 193

6.3 Assessing the Current Reality 196 SWOT Analysis 196

Using VRIO to Assess Competitive Potential: Value, Rarity, Imitability, and Organization 199

Forecasting: Predicting the Future 200

Benchmarking: Comparing with the Best 202

6.4. Establishing Corporate-Level Strategy 203 Three Overall Types of Corporate Strategy 203

The BCG Matrix 204

Diversification Strategy 205

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6.5 Establishing Business-Level Strategy 206 Porter’s Five Competitive Forces 206

Porter’s Four Competitive Strategies 207

6.6 Executing and Controlling Strategy 209 Executing the Strategy 209

Maintaining Strategic Control 209

Execution: Getting Things Done 209

The Three Core Processes of Business: People, Strategy, and Operations 210

How Execution Helps Implement and Control Strategy 211

6.7 Career Corner: Managing Your Career Readiness 213 Why Is Strategic Thinking Important to New Graduates? 213

Key Terms Used in This Chapter 215 Key Points 215 Understanding the Chapter: What Do I Know? 217 Management in Action 217 Legal/Ethical Challenge 219

LEARNING MODULE 1: Entrepreneurship 220

LM1.1 Entrepreneurship: Its Foundations and Importance 221 Entrepreneurship: It’s Not the Same as Self-Employment 222

Characteristics of Entrepreneurs 224

Entrepreneurship Matters across the Globe 226

LM1.2 Starting a Business 229 Businesses Start with an Idea 229

Writing the Business Plan 230

Choosing a Legal Structure 232

Obtaining Financing 233

Creating the “Right” Organizational Culture and Design 234

Key Terms Used in This Learning Module 237 Key Points 237

CHAPTER SEVEN Individual and Group Decision Making: How Managers Make Things Happen 238 7.1 Two Kinds of Decision Making: Rational and

Nonrational 240 Decision Making in the Real World 241

Rational Decision Making: Managers Should Make Logical and Optimal Decisions 242

Stage 1: Identify the Problem or Opportunity— Determining the Actual versus the Desirable 242

Stage 2: Think Up Alternative Solutions—Both the Obvious and the Creative 242

Stage 3: Evaluate Alternatives and Select a Solution—Ethics, Feasibility, and Effectiveness 242

Stage 4: Implement and Evaluate the Solution Chosen 243

What’s Wrong with the Rational Model? 244

Nonrational Decision Making: Managers Find It Difficult to Make Optimal Decisions 244

7.2 Making Ethical Decisions 247 The Dismal Record of Business Ethics 247

Road Map to Ethical Decision Making: A Decision Tree 248

7.3 Evidence-Based Decision Making and Analytics 250 Evidence-Based Decision Making 251

In Praise of Analytics 252

“Big Data”: What It Is, How It’s Used 254

7.4 Four General Decision-Making Styles 257 Value Orientation and Tolerance for Ambiguity 257

1. The Directive Style: Action-Oriented Decision Makers Who Focus on Facts 258

2. The Analytical Style: Careful Decision Makers Who Like Lots of Information and Alternative Choices 258

3. The Conceptual Style: Decision Makers Who Rely on Intuition and Have a Long-Term Perspective 258

4. The Behavioral Style: The Most People-Oriented Decision Makers 258

Which Style Do You Have? 259

7.5 Decision-Making Biases and the Use of Artificial Intelligence 260 Nine Common Decision-Making Biases: Rules of Thumb, or “Heuristics” 260

The Decision-Making Potential of Artificial Intelligence 262

Pros and Cons of Artificial Intelligence 263

7.6 Group Decision Making: How to Work with Others 265 Advantages and Disadvantages of Group Decision Making 265

Groupthink 266

Characteristics of Group Decision Making 267

Group Problem-Solving Techniques: Reaching for Consensus 269

More Group Problem-Solving Techniques 269

7.7 Career Corner: Managing Your Career Readiness 272 Improving Your Critical Thinking and Problem-Solving Skills 272

Reflect on Past Decisions 272

Key Terms Used in This Chapter 274 Key Points 274 Understanding the Chapter: What Do I Know? 276 Management in Action 276 Legal/Ethical Challenge 278

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PART 4 Organizing

CHAPTER EIGHT Organizational Culture, Structure, and Design: Building Blocks of the Organization 280 8.1 Aligning Strategy, Culture, and Structure 282

How an Organization’s Culture and Structure Are Used to Implement Strategy 282

8.2 What Kind of Organizational Culture Will You Be Operating In? 286 The Three Levels of Organizational Culture 286

Four Types of Organizational Culture: Clan, Adhocracy, Market, and Hierarchy 287

How Employees Learn Culture: Symbols, Stories, Heroes, Rites and Rituals, and Organizational Socialization 290

The Importance of Culture 291

What Does It Mean to “Fit”? Anticipating a Job Interview 292

8.3 The Process of Culture Change 293 1. Formal Statements 293

2. Slogans and Sayings 293

3. Rites and Rituals 293

4. Stories, Legends, and Myths 294

5. Leader Reactions to Crises 294

6. Role Modeling, Training, and Coaching 294

7. Physical Design 294

8. Rewards, Titles, Promotions, and Bonuses 295

9. Organizational Goals and Performance Criteria 295

10. Measurable and Controllable Activities 295

11. Organizational Structure 296

12. Organizational Systems and Procedures 296

Don’t Forget about Person–Organization Fit 297

8.4 Organizational Structure 298 The Organization: Three Types 298

The Organization Chart 298

8.5 The Major Elements of an Organization 300 Common Elements of Organizations: Four Proposed by Edgar Schein 300

Common Elements of Organizations: Three More That Most Authorities Agree On 301

8.6 Basic Types of Organizational Structures 304 1. Traditional Designs: Simple, Functional, Divisional, and Matrix Structures 304

2. The Horizontal Design: Eliminating Functional Barriers to Solve Problems 307

3. Designs That Open Boundaries between Organizations: Hollow, Modular, and Virtual Structures 309

8.7 Contingency Design: Factors in Creating the Best Structure 311 Three Factors to Be Considered in Designing an Organization’s Structure 311

1. The Environment: Mechanistic versus Organic Organizations—the Burns and Stalker Model 311

2. The Environment: Differentiation versus Integration— the Lawrence and Lorsch Model 313

3. Linking Strategy, Culture, and Structure 313

8.8 Career Corner: Managing Your Career Readiness 314 Understanding the Business and Where You “Fit” In 314

Becoming More Adaptable 315

Key Terms Used in This Chapter 316 Key Points 316 Understanding the Chapter: What Do I Know? 318 Management in Action 318 Legal/Ethical Challenge 320

CHAPTER NINE Human Resource Management: Getting the Right People for Managerial Success 322 9.1 Strategic Human Resource Management 324

Human Resource Management: Managing an Organization’s Most Important Resource 324

Planning the Human Resources Needed 326

9.2 Recruitment and Selection: Putting the Right People into the Right Jobs 329 Recruitment: How to Attract Qualified Applicants 329

Selection: How to Choose the Best Person for the Job 333

9.3 Managing an Effective Workforce: Compensation and Benefits 339 Wages or Salaries 339

Incentives 339

Benefits 339

9.4 Orientation and Learning and Development 340 Orientation: Helping Newcomers Learn the Ropes 340

Learning and Development: Helping People Perform Better 341

9.5 Performance Appraisal 344 Performance Management in Human Resources 344

Performance Appraisals: Are They Worthwhile? 345

Two Kinds of Performance Appraisal: Objective and Subjective 346

Who Should Make Performance Appraisals? 347

Effective Performance Feedback 348

9.6 Managing Promotions, Transfers, Disciplining, and Dismissals 350 Promotion: Moving Upward 350

Transfer: Moving Sideways 351

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Disciplining and Demotion: The Threat of Moving Downward 351

Dismissal: Moving Out of the Organization 351

9.7 The Legal Requirements of Human Resource Management 354 1. Labor Relations 354

2. Compensation and Benefits 354

3. Health and Safety 354

4. Equal Employment Opportunity 356

Workplace Discrimination, Affirmative Action, Sexual Harassment, and Bullying 356

9.8 Labor–Management Issues 361 How Workers Organize 361

How Unions and Management Negotiate a Contract 362

The Issues Unions and Management Negotiate About 362

Settling Labor–Management Disputes 364

9.10 Career Corner: Managing Your Career Readiness 366 Becoming a Better Receiver 366

Key Terms Used in This Chapter 368 Key Points 368 Understanding the Chapter: What Do I Know? 371 Management in Action 371 Legal/Ethical Challenge 373

CHAPTER TEN Organizational Change and Innovation: Lifelong Challenges for the Exceptional Manager 374 10.1 The Nature of Change in Organizations 376

Fundamental Change: What Will You Be Called On to Deal With? 376

Two Types of Change: Reactive and Proactive 378

The Forces for Change Outside and Inside the Organization 380

10.2 Types and Models of Change 383 Three Kinds of Change: From Least Threatening to Most Threatening 383

Lewin’s Change Model: Unfreezing, Changing, and Refreezing 384

A Systems Approach to Change 385

10.3 Organizational Development: What It Is, What It Can Do 389 What Can OD Be Used For? 389

How OD Works 390

The Effectiveness of OD 391

10.4 Organizational Innovation 392 Approaches to Innovation 392

An Innovation System: The Supporting Forces for Innovation 394

10.5 The Threat of Change: Managing Employee Fear and Resistance 399 The Causes of Resistance to Change 399

Ten Reasons Employees Resist Change 400

10.6 Career Corner: Managing Your Career Readiness 402 Applying Self-Affirmation Theory 402

Practicing Self-Compassion 403

Key Terms Used in This Chapter 404 Key Points 404 Understanding the Chapter: What Do I Know? 405 Management in Action 405 Legal/Ethical Challenge 407

PART 5 Leading

CHAPTER ELEVEN Managing Individual Differences and Behavior: Supervising People as People 408 11.1 Personality and Individual Behavior 410

The Big Five Personality Dimensions 410

Core Self-Evaluations 411

Emotional Intelligence: Understanding Your Emotions and the Emotions of Others 414

11.2 Values, Attitudes, and Behavior 416 Organizational Behavior: Trying to Explain and Predict Workplace Behavior 416

Values: What Are Your Consistent Beliefs and Feelings about All Things? 416

Attitudes: What Are Your Consistent Beliefs and Feelings about Specific Things? 416

Behavior: How Values and Attitudes Affect People’s Actions and Judgments 419

11.3 Perception and Individual Behavior 420 The Four Steps in the Perceptual Process 420

Five Distortions in Perception 420

The Self-Fulfilling Prophecy, or Pygmalion Effect 424

11.4 Work-Related Attitudes and Behaviors Managers Need to Deal With 426 1. Employee Engagement: How Connected Are You to Your Work? 426

2. Job Satisfaction: How Much Do You Like or Dislike Your Job? 428

3. Organizational Commitment: How Much Do You Identify with Your Organization? 428

Important Workplace Behaviors 429

11.5 The New Diversified Workforce 431 How to Think about Diversity: Which Differences Are Important? 431

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Trends in Workforce Diversity 433

Barriers to Diversity 437

11.6 Understanding Stress and Individual Behavior 441 The Toll of Workplace Stress 441

How Does Stress Work? 442

The Sources of Job-Related Stress 442

Reducing Stressors in the Organization 445

11.7 Career Corner: Managing Your Career Readiness 448 Fostering a Positive Approach 448

Self-Managing Your Emotions 449

Key Terms Used in This Chapter 450 Key Points 450 Understanding the Chapter: What Do I Know? 452 Management in Action 452 Legal/Ethical Challenge 454

CHAPTER TWELVE Motivating Employees: Achieving Superior Performance in the Workplace 456 12.1 Motivating for Performance 458

Motivation: What It Is, Why It’s Important 458

The Four Major Perspectives on Motivation: An Overview 460

12.2 Content Perspectives on Employee Motivation 461 Maslow’s Hierarchy of Needs Theory: Five Levels 461

McClelland’s Acquired Needs Theory: Achievement, Affiliation, and Power 463

Deci and Ryan’s Self-Determination Theory: Competence, Autonomy, and Relatedness 464

Herzberg’s Two-Factor Theory: From Dissatisfying Factors to Satisfying Factors 466

12.3 Process Perspectives on Employee Motivation 469 Equity/Justice Theory: How Fairly Do You Think You’re Being Treated in Relation to Others? 469

Expectancy Theory: How Much Do You Want and How Likely Are You to Get It? 473

Goal-Setting Theory: Objectives Should Be Specific and Challenging but Achievable 475

12.4 Job Design Perspectives on Motivation 478 Fitting People to Jobs 478

Fitting Jobs to People 478

The Job Characteristics Model: Five Job Attributes for Better Work Outcomes 479

12.5 Reinforcement Perspectives on Motivation 483 The Four Types of Reinforcement: Positive, Negative, Extinction, and Punishment 483

Using Reinforcement to Motivate Employees 484

12.6 Using Compensation, Nonmonetary Incentives, and Other Rewards to Motivate: In Search of the Positive Work Environment 487 Is Money the Best Motivator? 487 Motivation and Compensation 487 Nonmonetary Ways of Motivating Employees 489

12.7 Career Corner: Managing Your Career Readiness 494 1. Identify Your “Wildly Important” Long-Term Goal 494 2. Break Your Wildly Important Goal into Short-Term Goals 495 3. Create a “To-Do” List for Accomplishing Your Short-Term Goals 495 4. Prioritize the Tasks 495 5. Create a Time Schedule 495 6. Work the Plan, Reward Yourself, and Adjust as Needed 495

Key Terms Used in This Chapter 496 Key Points 496 Understanding the Chapter: What Do I Know? 498 Management in Action 498 Legal/Ethical Challenge 500

CHAPTER THIRTEEN Groups and Teams: Increasing Cooperation, Reducing Conflict 502 13.1 Groups versus Teams 504

Groups and Teams: How Do They Differ? 505 Formal versus Informal Groups 506 Types of Teams 507

13.2 Stages of Group and Team Development 510 Tuckman’s Five-Stage Model 510 Punctuated Equilibrium 512

13.3 Building Effective Teams 513 1. Collaboration—the Foundation of Teamwork 513 2. Trust: “We Need to Have Reciprocal Faith in Each Other” 514 3. Performance Goals and Feedback 515 4. Motivation through Mutual Accountability and Interdependence 516 5. Team Composition 516 6. Roles: How Team Members Are Expected to Behave 517 7. Norms: Unwritten Rules for Team Members 518 8. Effective Team Processes 520 Putting It All Together 520

13.4 Managing Conflict 521 The Nature of Conflict: Disagreement Is Normal 521 Can Too Little or Too Much Conflict Affect Performance? 522 Three Kinds of Conflict: Personality, Intergroup, and Cross-Cultural 523

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How to Stimulate Constructive Conflict 524

Five Basic Behaviors to Help You Better Handle Conflict 526

Dealing with Disagreements: Five Conflict-Handling Styles 526

13.5 Career Corner: Managing Your Career Readiness 528 Become a More Effective Team Member 528

Become a More Effective Collaborator 529

Key Terms Used in This Chapter 530 Key Points 530 Understanding the Chapter: What Do I Know? 531 Management in Action 531 Legal/Ethical Challenge 533

CHAPTER FOURTEEN Power, Influence, and Leadership: From Becoming a Manager to Becoming a Leader 534 14.1 The Nature of Leadership: The Role of Power

and Influence 536 What Is the Difference between Leading and Managing? 536

Managerial Leadership: Can You Be Both a Manager and a Leader? 537

Coping with Complexity versus Coping with Change: The Thoughts of John Kotter 538

Five Sources of Power 538

Common Influence Tactics 540

Match Tactics to Influence Outcomes 542

An Integrated Model of Leadership 542

14.2 Trait Approaches: Do Leaders Have Distinctive Traits and Personal Characteristics? 544 Positive Task-Oriented Traits and Positive/Negative Interpersonal Attributes 544

What Do We Know about Gender and Leadership? 545

Are Knowledge and Skills Important? 548

So What Do We Know about Leadership Traits? 548

14.3 Behavioral Approaches: Do Leaders Show Distinctive Patterns of Behavior? 550 Task-Oriented Leader Behaviors: Initiating-Structure Leadership and Transactional Leadership 550

Relationship-Oriented Leader Behavior: Consideration, Empowerment, Ethical Leadership, and Servant Leadership 551

Passive Leadership: The Lack of Leadership Skills 555

So What Do We Know about the Behavioral Approaches? 556

14.4 Situational Approaches: Does Leadership Vary with the Situation? 557 1. The Contingency Leadership Model: Fiedler’s Approach 557

2. The Path–Goal Leadership Model: House’s Approach 559

So What Do We Know about the Situational Approaches? 561

14.5 The Uses of Transformational Leadership 563 Transformational Leaders 563

The Best Leaders Are Both Transactional and Transformational 563

Four Key Behaviors of Transformational Leaders 564

So What Do We Know about Transformational Leadership? 567

14.6 Three Additional Perspectives 568 Leader–Member Exchange Leadership: Having Different Relationships with Different Subordinates 568

The Power of Humility 569

Followers: What Do They Want, How Can They Help? 570

14.7 Career Corner: Managing Your Career Readiness 572 Becoming More Self-Aware 572

Key Terms Used in This Chapter 574 Key Points 574 Understanding the Chapter: What Do I Know? 576 Management in Action 576 Legal/Ethical Challenge 578

CHAPTER FIFTEEN Interpersonal and Organizational Communication: Mastering the Exchange of Information 580 15.1 The Communication Process: What It Is, How It

Works 582 Communication Defined: The Transfer of Information and Understanding 582

How the Communication Process Works 583

Selecting the Right Medium for Effective Communication 586

15.2 How Managers Fit into the Communication Process 588 Formal Communication Channels: Up, Down, Sideways, and Outward 588

Informal Communication Channels 589

15.3 Barriers to Communication 592 1. Physical Barriers: Sound, Time, Space 592

2. Personal Barriers: Individual Attributes That Hinder Communication 593

3. Cross-Cultural Barriers 595

4. Nonverbal Communication: How Unwritten and Unspoken Messages May Mislead 596

5. Gender Differences 598

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15.4 Social Media and Management 600 Social Media Has Changed the Fabric of Our Lives 600

Social Media and Managerial and Organizational Effectiveness 601

Downsides of Social Media 608

Managerial Implications of Texting 611

Managerial Considerations in Creating Social Media Policies 612

15.5 Improving Communication Effectiveness 615 Nondefensive Communication 615

Using Empathy 617

Being an Effective Listener 618

Being an Effective Writer 619

Being an Effective Speaker 620

15.6 Career Corner: Managing Your Career Readiness 623 Improve Your Face-to-Face Networking Skills 623

Key Terms Used in This Chapter 625 Key Points 625 Understanding the Chapter: What Do I Know? 626 Management in Action 627 Legal/Ethical Challenge 628

PART 6 Controlling

CHAPTER SIXTEEN

Control Systems and Quality Management: Techniques for Enhancing Organizational Effectiveness 630 16.1 Control: When Managers Monitor

Performance 632 Why Is Control Needed? 632

Steps in the Control Process 635

Types of Controls 639

16.2 Levels and Areas of Control 641 Levels of Control: Strategic, Tactical, and Operational 641

Six Areas of Control 641

Controlling the Supply Chain 643

Control in Service Firms 644

16.3 The Balanced Scorecard and Strategy Maps 645 The Balanced Scorecard: A Dashboard-like View of the Organization 645

Strategy Mapping: Visual Representation of the Path to Organizational Effectiveness 648

16.4 Some Financial Tools for Control 650 Budgets: Formal Financial Projections 650

Financial Statements: Summarizing the Organization’s Financial Status 651

Audits: External versus Internal 652

16.5 Total Quality Management 654 Deming Management: The Contributions of W. Edwards Deming to Improved Quality 655

Core TQM Principles: Deliver Customer Value and Strive for Continuous Improvement 655

Applying TQM to Services 659

Some TQM Tools, Techniques, and Standards 661

Takeaways from TQM Research 663

16.6 Managing Control Effectively 664 The Keys to Successful Control Systems 664

Barriers to Control Success 665

16.7 Managing for Productivity 667 What Is Productivity? 667

Why Is Increasing Productivity Important? 668

What Processes Can I Use to Increase Productivity? 669

Managing Individual Productivity 670

16.8 Career Corner: Managing Your Career Readiness 671 1. Make Every Day Count 672

2. Stay Informed and Network 672

3. Promote Yourself 672

4. Roll with Change and Disruption 673

5. Small Things Matter during Interviews 673

Epilogue: The Keys to Your Managerial Success 674

Key Terms Used in This Chapter 676 Key Points 676 Understanding the Chapter: What Do I Know? 678 Management in Action 678 Legal/Ethical Challenge 680

LEARNING MODULE 2: The Project Planner’s Toolkit: Flowcharts, Gantt Charts, and Break-Even Analysis 681

Tool #1: Flowcharts—for Showing Event Sequences and Alternate Decision Scenarios 681

Tool #2: Gantt Charts—Visual Time Schedules for Work Tasks 683

Tool #3: Break-Even Analysis—How Many Items Must You Sell to Turn a Profit? 684

CHAPTER NOTES CN-1

NAME INDEX IND-1

ORGANIZATION INDEX IND-5

GLOSSARY/SUBJECT INDEX IND-11

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management

N I N T H E D I T I O N

We describe the rewards, benefits, and privileges managers might expect.

We also describe the four principal functions of management—planning,

organizing, leading, and controlling. We consider levels and areas of

management and describe the three roles managers must play.

We  describe the three skills required of a manager and the three roles

managers play and discuss seven challenges to managers in today’s

world. We then focus on a model of career readiness and offer tips for

building your career readiness. The chapter concludes with a Career

Corner that presents a process that can be used to develop your career

readiness.

What’s Ahead in This ChapterFORECAST

PART 1 • INTRODUCTION

The Exceptional Manager What You Do, How You Do It1

After reading this chapter, you should be able to:

LO 1-1 Identify the rewards of being an exceptional manager.

LO 1-2 List the four principal functions of a manager.

LO 1-3 Describe the levels and areas of management.

LO 1-4 Identify the roles an effective manager must play.

LO 1-5 Discuss the skills of an outstanding manager.

LO 1-6 Identify the seven challenges faced by most managers.

LO 1-7 Define the knowledge, soft skills, attitudes, and other characteristics needed for career readiness and discuss how they can be developed.

LO 1-8 Describe the process for managing your career readiness.

© O

livier Renck/Aurora/G etty Im

ages

Our goal is to make this book as practical as possible for you. One place we do this is in the Manager’s Toolbox, like this one, which appears at the beginning of every chapter and offers practical advice for applying the topic of the chapter to your personal life and career. Here, for instance, we show you how to make teamwork one of your job strengths, starting now. This is an important skill that recruiters look for when hiring college graduates.1

Functions of Management

In the chapter you will read about the four functions of  management—planning, organizing, leading, and controlling. They represent essential activities that all managers undertake in the course of doing their jobs. Although they may sound a little abstract right now, you can use them today to work more successfully on team projects assigned by your professors.

Applying the Functions of Management to School Projects Consider the students in a Princeton University summer business program. Working in teams, they had 10 weeks to prepare a pitch for a start-up idea and ask for funding. One of the teams ran a four-week pilot after-school program for five Trenton, NJ girls and asked for $324,000 to scale the program up to include 40 girls on a year-round basis. Their pitch was that the program would help more young women graduate from high school and have a positive effect on the entire community. The students planned their pilot program, its budget, and its schedule and curriculum; they organized the four weeks of activities for the girls they recruited; they led the girls through each day’s events; and they used before and after surveys to control (that is, measure) the effects of their efforts. In other words, they relied on the four functions of management to ensure that they worked together to achieve their goals.2

Think about how you might make better use of planning and controlling in a team assignment for a course. You might draw up a detailed schedule of tasks and assign them to team members (planning), and then identify checkpoint dates on which you measure progress toward your deadline (controlling). You could set up a way to best use the resources at your disposal, such as time, library materials, personal expertise, and outside experts (organizing), and then use the progress checkpoints to motivate your fellow team members to continue putting forth their best effort (leading). The experience you can gain by using these essential management skills now will serve you well in your studies and throughout your career.

Applying the Functions of Management in your Personal Life Consider how you might use the functions of management to lose 10 pounds. Your plan would include dates and times to exercise on your Google or Outlook calendar along with ideas for how you will change your eating habits. You then would make sure you have the resources (time, clothing, support network, dietary plan) to assist you along your weight loss journey (organizing). You also may find it valuable to have an exercise buddy during some of your workouts (leading). Alternatively, some people find it motivational to have someone hold them accountable via weekly weigh-ins (controlling).

For Discussion Why would employers seek to hire people with good management skills? How can you strive to improve your managerial skills while working on class projects?

Using Management Skills for College Success

4 PART 1 Introduction

When chief executive officer Mary Barra took the reins of Detroit-based General Motors (GM) in January 2014, she became the first female CEO of a global automaker anywhere in the world. She also became only the 22nd woman at the helm of a Fortune 500 company, one of those 500 largest U.S. companies that appear on the prestigious annual list compiled by Fortune magazine. (Other female CEOs of major companies are IBM’s Virginia “Ginni” Rometty, Hewlett-Packard’s Meg Whitman, Lynne Doughtie of KPMG, Sofra Katz of Oracle, Marillyn Hewson of Lockheed Martin, and Mondelez International’s Irene Rosenfeld.)

What kind of a person is Barra, a 30-year GM veteran? She has been called “nearly impossible to dislike” and is credited with bringing a much-needed “calm stability” to GM. Among her many people skills is the ability to engage and motivate others, includ- ing top executives who may have vied for her job but who have been persuaded to stay and work with her.3 Are these qualities—which many people have—enough to propel someone to the top of a great organization?

The Rise of the Die Maker’s Daughter The daughter of a die maker, Barra grew up in suburban Detroit, joined GM at age 18 as an intern on the factory floor, graduated from General Motors Institute (now Kettering University) with a degree in electrical engineering, and then became a plant engineer in GM’s Pontiac Division. Spotting her talent, GM gave her a scholarship to Stanford University, where she earned a graduate degree in business. She then began moving up the GM ladder, first as the executive assistant to the CEO and then as the company’s head of human resources—formerly often as high as female executives ever got in the auto industry and many others. In 2011, Barra’s big break came when she was promoted to lead GM’s $15 billion vehicle-development operations, a high-profile role that became the stepping-stone to the CEO spot. In 2016, she was also made chairwoman of the board.4

Key to Career Growth: “Doing Things I’ve Never Done Before”

Did it help that Barra has such deep experience in the auto industry and at GM in particular? No doubt it did. But there is another key to career growth—the ability to take risks. Jeff Bezos, the founder of Amazon.com, was holding down a lucrative job as a Wall Street hedge fund manager in the 1990s when he read that the Internet had recently grown 2,300% in a single year. Even though it meant leaving a stable job with a big bonus on the way, Bezos made the risky leap to the start-up he called Amazon, working out of a garage. “I knew that I might sin- cerely regret not having participated in this thing called the Internet that I thought was going to be a revolutionizing event,” he says. “When I thought about it that way . . . it was incredibly easy to make the

1.1 Management: What It Is, What Its Benefits Are THE BIG PICTURE Management is defined as the pursuit of organizational goals efficiently and effectively. Organizations, or people who work together to achieve a specific purpose, value managers because of the multiplier effect: Good managers have an influence on the organization far beyond the results that can be achieved by one person acting alone. Managers are well paid, with the chief executive officers (CEOs) and presidents of even small and midsize businesses earning good salaries and many benefits.

LO 1-1 Identify the rewards of being an exceptional manager.

The driving force. One quality that stands out about General Motors CEO Mary Barra is her obvious enthusiasm for cars. She is said to be given to talking excitedly about whatever car she is currently driving and what it demonstrates about GM’s product line. Do you think passion about one’s work is a necessary quality for managerial success? ©Mark Lennihan/AP Images

The Exceptional Manager CHAPTER 1 5

decision.”5 Bezos built his company into the largest e-commerce hub in the world and now operates several other businesses and charities as well. He is one of the two or three richest people in the world.

The Art of Management Defined Is being an exceptional manager a gift, like a musician having perfect pitch? Not exactly. But in good part it may be an art.6 Fortunately, it is one that is teachable.

Management, said one pioneer of management ideas, is “the art of getting things done through people.”7

Getting things done. Through people. Thus, managers are task oriented, achieve- ment oriented, and people oriented. And they operate within an organization—a group of people who work together to achieve some specific purpose.

More formally, management is defined as (1) the pursuit of organizational goals effi- ciently and effectively by (2) integrating the work of people through (3) planning, organiz- ing, leading, and controlling the organization’s resources.

Note the words efficiently and effectively, which basically mean “doing things right.”

■ Efficiency—the means. Efficiency is the means of attaining the organization’s goals. To be efficient means to use resources—people, money, raw materials, and the like—wisely and cost-effectively.

■ Effectiveness—the ends. Effectiveness regards the organization’s ends, the goals. To be effective means to achieve results, to make the right decisions, and to suc- cessfully carry them out so that they achieve the organization’s goals.

Good managers are concerned with trying to achieve both qualities. Often, however, organizations will erroneously strive for efficiency without being effective. Retired U.S. Army general Stanley McChrystal, former commander of all American and coalition forces in Afghanistan, suggests that effectiveness is a more important outcome in today’s organizations.8

EXAMPLE Efficiency versus Effectiveness: How Did Delta Airlines Deal with the Emergency at Atlanta’s Hartsfield-Jackson Airport?

Atlanta’s Hartsfield-Jackson Airport is the busiest in the world, serving a quarter million passengers daily. So when an electri- cal fire blacked out the airport one Sunday afternoon before Christmas 2017, the potential for chaos was high. Over a long night without power, tens of thousands of passengers were stranded with no light, heat, or communications, and thou- sands of flights were canceled or diverted across the United States, disrupting travel for several days.

The blackout halted computer systems, escalators, baggage carousels, inter-terminal transportation, and even the automatic soap dispensers and toilets in the airport’s restrooms. Passengers slept in the darkened airport overnight, unable to check social media, use travel apps, or recharge their phones, while employees gave out blankets, bottled water, and paper towels.

Efficiency. Three-quarters of the airport’s traffic consists of Delta flights to and from more than 200 cities around the world.9 Atlanta is Delta’s hub and the location of its Operations and Customer Center, where 300 employees monitor local and global weather and air traffic. The Center had power during the

blackout, and emergency staff arrived to help rebook passen- gers and cope with 400 additional flight cancelations made on Monday because the needed planes had not been able to land

Passengers scrambllng for help during the power outage at Hartsfield- Jackson Airport in Atlanta. Do you think more effective management might have prevented this accident? ©Jessica McGowan/Getty Images

6 PART 1 Introduction

Why Organizations Value Managers: The Multiplier Effect Some great achievements of history, such as scientific discoveries or works of art, were accomplished by individuals working quietly by themselves. But so much more has been achieved by people who were able to leverage their talents and abilities by being manag- ers. For instance, of the top 10 great architectural wonders of the world named by the American Institute of Architects, none was built by just one person. All were triumphs of management, although some reflected the vision of an individual. (The wonders are the Great Wall of China, the Great Pyramid, Machu Picchu, the Acropolis, the Coliseum, the Taj Mahal, the Eiffel Tower, the Brooklyn Bridge, the Empire State Building, and Frank Lloyd Wright’s Falling Water house in Pennsylvania.)

Good managers create value. The reason is that in being a manager you have a mul- tiplier effect: Your influence on the organization is multiplied far beyond the results that can be achieved by just one person acting alone. Thus, while a solo operator such as a salesperson might accomplish many things and incidentally make a very good living, his or her boss could accomplish a great deal more—and could well earn two to seven times the income. And the manager will undoubtedly have a lot more influence.

The Financial Rewards of Being an Exceptional Manager How well compensated are managers? According to the U.S. Bureau of Labor Statistics, the median weekly wage for full-time U.S. workers is $859, or $44,688 a year.15 Education pays: The median 2017 yearly income for full-time workers with at least a bachelor’s degree was $66,092, compared to $37,128 for high-school graduates. People employed full-time in management, professional, and related occupations had the highest median incomes, $73,372 for men and $55,016 for women.16

the day before. Delta’s staff also had to get its pilots and crews from Atlanta to the cities where they were needed next, but without unlawfully lengthening their shifts.

Delta distributed donated food at the terminal and reim- bursed passengers for Atlanta hotel stays on Sunday night. Those who rebooked flights were given waivers to make the change. On Monday Delta was reporting progress. Gil West, Senior Executive Vice President and COO, said, “At the airport, Delta people . . . have been serving customers—from passing out refreshments to assisting customers with wheelchair sup- port. Thanks to everyone’s hard work, we’re nearly back to nor- mal at our biggest hub.” By Tuesday the airline was reporting a nearly 90 percent on-time arrival rate at Atlanta, all passengers had been rebooked, and a dedicated phone line had opened to help reunite passengers with their luggage, most of which had already been delivered.10

Effectiveness. Passengers on one Delta flight spent six hours on the runway, consuming the plane’s stores of food and drinks until they could disembark. “Under the circumstances it was well- managed,” said one passenger, who praised Delta employees for doing their best to keep everyone calm and comfortable.11

Still, many who spent hours at the darkened airport wonder- ing what happened felt Delta could have done more. Said one, “There was no one who could help us. There wasn’t a single Delta employee who knew what was going on. They could have at least used a megaphone to say, ‘This is what’s happen- ing.’ ”12 Many others echoed these comments and said that despite a repeated recorded announcement that an emer- gency had occurred, no further information ever came.

YOUR CALL The fire that caused the blackout was apparently an accident, partly attributed to aging equipment, a factor over which Delta may have little control though it is the airport’s major lessee. Some, including a former U.S. Secretary of Transportation who was stranded, saw “no excuse” for the failure of the airport’s backup power system.13 Delta believes the outage and ripple effects may have cost it $25 to $50 million and said it would seek reimburse- ment. “I don’t know whose responsibility it is between the airport and Georgia Power,” said Delta’s CEO Ed Bastian, “but we’re going to have conversations with both of them.”14 Do you think Delta handled the airport emergency efficiently? Could the airline have been more effective from a passenger’s point of view? How?

The Exceptional Manager CHAPTER 1 7

The business press frequently reports on the astronomical earnings of top chief executive officers. The top earner in 2016 was Thomas Rutledge, CEO of Charter Communications, whose total compensation topped $98 million.17 Average compensation for CEOs at the 350 largest companies was $15.6 million in 2016, or 271 times the salary of the aver- age worker, based on a survey by Fortune.18 The more usual median wage for CEOs in 2015 was $737,613, according to Salary.com, and for gen- eral and operations managers $102,750, according to the Bureau of Labor Statistics.19

Managers farther down in the organization usually don’t make this much, of course; nevertheless, they do fairly well compared with most workers. At the lower rungs, managers may make between $35,000 and $60,000 a year; in the middle levels, between $50,000 and $135,000. (For examples of managerial salaries, go to www.bls.gov/ooh/management/ home.html.)

There are also all kinds of fringe benefits and status rewards that go with being a manager, ranging from health insurance to stock options to large offices. And the higher you ascend in the management hierar- chy, the more privileges may come your way: personal parking space, better furniture, and—for those on the top rung of big companies— company car and driver, corporate jet, company-paid resort-area villa, and even executive sabbaticals (months of paid time off to pursue alter- native projects).

What Are the Rewards of Studying and Practicing Management? Are you studying management but have no plans to be a manager? Or are you trying to learn techniques and concepts that will help you be an exceptional management practitioner? Either way, you will use what you learn. Mike Dikison, for instance, is the curator of natural history at the Whanganui Regional Museum in New Zealand. As his recent “A Day in the Life . . .” blog post reveals, Dikison uses the skills of a manager every day, whether he is planning the loan of some rare mounted specimens to another organization, valuing the collection for insurance purposes, answering visi- tors’ questions, arranging publicity on social media for a guest lecturer who will speak about poisons in the environment, organizing a donated collection of bone specimens for display in the museum’s galleries, meeting with a community conservation group, or exploring the possibility of collaborative research with the Department of Conservation.20 Time management, people skills, mastery of interpersonal and e-communication, and the capacity to organize and plan are some of the management abilities that serve him well in his busy days.

The Rewards of Studying Management Students sign up for an introductory management course for all kinds of reasons. Many, of course, are planning business careers, but others are taking it to fulfill a requirement or an elective. Some students are in technical or nonprofit fields—computer science, education, health, and the like—and never expect to have to supervise people.

Here are just a few of the payoffs of studying management as a discipline:

■ You will have an insider’s understanding of how to deal with organizations from the outside. Since we all are in constant interaction with all kinds of organizations, it helps to understand how they work and how the people in them make decisions. Such knowledge may give you skills that you can use in dealing with organizations from the outside, as a customer or investor, for example.

Best paid. Thomas Rutledge, CEO of Charter Communications, earned $98 million in 2016 making him the highest-paid manager in the United States that year. That’s far greater than the largest salary paid to any NBA player in that period ($25 million to Kobe Bryant of the Los Angeles Lakers). What do you think your chances are of making even $100 million in your entire lifetime? ©Michael Nagle/Bloomberg/Getty Images

8 PART 1 Introduction

■ You will know from experience how to relate to your supervisors. Since most of us work in organizations and most of us have bosses, studying management will enable you to understand the pressures managers deal with and how they will best respond to you.

■ You will better interact with co-workers. The kinds of management policies in place can affect how your co-workers behave. Studying management can give you the understanding of teams and teamwork, cultural differences, conflict and stress, and negotiation and communication skills that will help you get along with fellow employees.

■ You will be able to manage yourself and your career. Management courses in general, and this book in particular, give you the opportunity to realize insights about yourself—your personality, emotions, values, perceptions, needs, and goals. We help you build your skills in areas such as self-management, listening, handling change, managing stress, avoiding groupthink, and coping with orga- nizational politics.

The Rewards of Practicing Management Many young people want not only to make money but also to make a difference. As Swarthmore psychology professor Barry Schwartz, author of Why We Work, suggests, “We care about more than money. We want work that is challenging and engaging, that enables us to exercise some discretion and control over what we do, and that provides us with opportunities to learn and grow.”21 Becoming a management practitioner offers many rewards apart from money and status, as follows:

■ You and your employees can experience a sense of accomplishment. Every suc- cessful goal accomplished provides you not only with personal satisfaction but also with the satisfaction of all those employees you directed who helped you accomplish it.

■ You can stretch your abilities and magnify your range. Every promotion up the hierarchy of an organization stretches your abilities, challenges your talents and skills, and magnifies the range of your accomplishments.

■ You can build a catalog of successful products or services. Every product or service you provide—the personal Eiffel Tower or Empire State Building you build, as it were—becomes a monument to your accomplishments. Indeed, studying management may well help you in running your own business.

■ You can become a mentor and help others. According to one survey, 84% of workers who had a mentor—an experienced person who provided guidance to  someone new to the work world—said the mentor helped them advance their careers.22 ●

These three machinists are using several managerial skills to produce better products. One involves mentoring from the man in the middle. ©stockbroker/123RF

The Exceptional Manager CHAPTER 1 9

What do you as a manager do to get things done—that is, to achieve the stated goals of the organization you work for? You perform what is known as the management process, also called the four management functions: planning, organizing, leading, and controlling. (The abbreviation “POLC” may help you to remember them.) As the diagram illustrates, all these functions affect one another, are ongoing, and are performed simultaneously. (See Figure 1.1.)

1.2 What Managers Do: The Four Principal Functions THE BIG PICTURE Management has four functions: planning, organizing, leading, and controlling.

LO 1-2 List the four principal functions of a manager.

Planning You set goals and

decide how to achieve them.

Organizing You arrange tasks, people, and other

resources to accomplish the work.

Controlling You monitor

performance, compare it with goals,

and take corrective action as needed.

Leading You motivate, direct,

and otherwise influence people to

work hard to achieve the organization’s goals.

FIGURE 1.1 The management process What you as a manager do to get things done—to achieve the stated goals of your organization.

Although the process of management can be quite varied, these four functions repre- sent its essential principles. Indeed, as a glance at our text’s table of contents shows, they form four of the part divisions of the book. Let’s consider what the four functions are, using the management (or “administration,” as it is called in nonprofit organiza- tions) of your college to illustrate them.

Planning: Discussed in Part 3 of This Book Planning is defined as setting goals and deciding how to achieve them. Your college was established for the purpose of educating students, and its present managers, or admin- istrators, now must decide the best way to accomplish this. Which of several possible degree programs should be offered? Should the college be a residential or a commuter campus? What sort of students should be recruited and admitted? What kind of faculty should be hired? What kind of buildings and equipment are needed?

Organizing: Discussed in Part 4 of This Book Organizing is defined as arranging tasks, people, and other resources to accomplish the work. College administrators must determine the tasks to be done, by whom, and what the reporting hierarchy is to be. Should the institution be organized into schools with departments, with department chairpersons reporting to deans who in return report to

10 PART 1 Introduction

vice presidents? Should the college hire more full-time instructors than part-time instructors? Should English professors teach just English literature or also composition, developmental English, and “first-year experience” courses?

Leading: Discussed in Part 5 of This Book Leading is defined as motivating, directing, and otherwise influencing people to work hard to achieve the organization’s goals. At your college, leadership begins, of course, with the president (who would be the chief executive officer, or CEO, in a for-profit organi- zation). He or she is the one who must inspire faculty, staff, students, alumni, wealthy donors, and residents of the surrounding community to help realize the college’s goals. As you might imagine, these groups often have different needs and wants, so an essen- tial part of leadership is resolving conflicts.

Controlling: Discussed in Part 6 of This Book Controlling is defined as monitoring performance, comparing it with goals, and taking cor- rective action as needed. Is the college discovering that fewer students are majoring in nursing than they did five years previously? Is the fault with a change in the job market? With the quality of instruction? With the kinds of courses offered? Are the nursing department’s student recruitment efforts not going well? Should the department’s bud- get be reduced? Under the management function of controlling, college administrators must deal with these kinds of matters. ●

I Wish My Manager… …was more of a leader than a manager.

Tom Haley works in the motorcycle retail indus- try. “My boss is a great numbers guy,” said Tom, “But he is a man- ager and not a leader.”

Tom’s manager strives at planning by setting achievable goals for each month, like prioritizing the sale of wheels over handle- bars. And his manager strives at organizing by delegating the right tasks to the right peo- ple. “We pool toge- ther and talk about everyone’s individual strengths. We have

one employee who is very computer savvy, so he takes care of the online orders. We have another employee who manages the work orders because he’s really good at itemizing and breaking the orders down properly. And we have other employees out on the floor because they are talented in sales,” said Tom.

While Tom’s boss is successful at the planning and organizing steps of management, he is less successful at leading and

controlling. Tom believes this is because his boss lacks human skills and doesn’t interact well with other people. “He has even said he doesn’t like to deal with people. He likes being back in the warehouse. He mostly stays behind the scenes,” said Tom.

While Tom’s manager struggles with leading and control- ling, there is another employee that Tom works with who func- tions as the team leader, even though he isn’t the manager. “Instead of just taking care of customers by himself and send- ing them on their way, he makes sure that the team sees what he does and why he does it so that if he’s ever not there, we’re able to give the customers the same kind of service.”

“I remember the first time I witnessed his incredible talent on the floor,” said Tom. “We had a gentleman come in who had visited five other dealerships and was really frustrated. He drove three hours to get to our store, and he was just tired and fed up. He said, ‘I’m trying to buy a bike and I want to make this happen, can you guys do it?’ And my co-worker, without missing a beat, said, ‘Whatever you want to do, I’ll make it happen.’”

The customer came into the shop with a $3,000 budget. An hour and a half later, the customer’s total came out to $12,500 on top of the price of his motorcycle, but he was more than happy to pay extra. All because Tom’s co-worker made the customer excited to build his dream bike and worked with him to make it happen.

“Truthfully, our motivation comes from sales commissions. But come winter time when things slow down, the motivation drags a little bit. But this leader’s personality keeps you intrigued and happy to keep coming into work every day.”

Tom Haley loves to ride. He also wishes his manager was more of a leader than a manager. Courtesy Tom Haley

The Exceptional Manager CHAPTER 1 11

1.3 Pyramid Power: Levels and Areas of Management THE BIG PICTURE Within an organization, there are four levels of managers: top, middle, and first-line managers as well as team leaders. Managers may also be general managers, or they may be functional managers, responsible for just one organizational activity, such as Research & Development, Marketing, Finance, Production, or Human Resources. Managers may work for for-profit, nonprofit, or mutual-benefit organizations.

The workplace of the future may resemble a symphony orchestra, famed management theorist Peter Drucker said.23 Employees, especially so-called knowledge workers—those who have a great deal of technical skills—can be compared to concert musicians. Their managers can be seen as conductors.

In Drucker’s analogy, musicians are used for some pieces of music—that is, work projects—and not others, and they are divided into different sections (teams) based on their instruments. The conductor’s role is not to play each instrument better than the musicians but to lead them all through the most effective performance of a particu- lar work.

This model differs from the traditional pyramid-like organizational model, where one leader sits at the top, with layers of managers beneath, each of whom must report to and justify his or her work to the manager above (what’s called accountability, as we discuss in Chapter 8). We therefore need to take a look at the traditional arrange- ment first.

The Traditional Management Pyramid: Levels and Areas A new Silicon Valley technology start-up company staffed by young people in sandals and shorts may be so small and so loosely organized that only one or two members may be said to be a manager. General Motors or the U.S. Army, in contrast, has thousands of managers doing thousands of different things. Is there a picture we can draw that applies to all the different kinds of organizations and describes them in ways that make sense? Yes: by levels and by areas, as the pyramid shows. (See Figure 1.2.)

Three Levels of Management Not everyone who works in an organization is a manager, of course, but those who are may be classified into three levels—top, middle, and first-line managers. Nonmanagerial employees represent the foundation of an organizational pyramid.

Top Managers: Determining Overall Direction Their offices may be equipped with expensive leather chairs and have lofty views. Or, as with one Internet company, they may have plastic lawn chairs in the CEO’s office and beat-up furniture in the lobby. Whatever their decor, an organization’s top managers tend to have titles such as chief executive officer (CEO), chief operating officer (COO), president, and senior vice president.

Some may be the stars in their fields, the men and women whose pictures appear on the covers of business magazines, people such as Nike CEO Mark Parker or IBM CEO Virginia Rommety or Lucasfilm president Kathleen Kennedy or Apple CEO Tim Cook, all of whom have appeared on the front of Fortune.

Top managers make long-term decisions about the overall direction of the organization and establish the objectives, policies, and strategies for it. They need to pay a lot of

LO 1-3 Describe the levels and areas of management.

12 PART 1 Introduction

attention to the environment outside the organization, being alert for long-run opportu- nities and problems and devising strategies for dealing with them. Thus, executives at this level must be future oriented, strategic, and able to deal with uncertain, highly competitive conditions.

These people stand at the summit of the management pyramid. But the nature of a pyramid is that the farther you climb, the less space remains at the top. Thus, most pyra- mid climbers never get to the apex. However, that doesn’t mean that you shouldn’t try. Indeed, you might end up atop a much smaller pyramid of some other organization than the one you started out in—and happier with the result.

Middle Managers: Implementing Policies and Plans Middle managers imple- ment the policies and plans of the top managers above them and supervise and coordinate the activities of the first-line managers below them. Titles might include plant manager, district manager, and regional manager, among others. In the nonprofit world, middle managers may have titles such as clinic director, dean of student services, and the like.

Middle managers are critical for organizational success because they implement the strategic plans created by CEOs and top managers. (Strategic planning is discussed in Chapter 6.) In other words, these managers have the type of “high-touch” jobs—dealing with people rather than computer screens or voice-response systems—that can directly affect employees, customers, and suppliers.

First-Line Managers: Directing Daily Tasks The job titles at the bottom of the managerial pyramid tend to be on the order of department head, foreman or fore- woman, or supervisor—clerical supervisor, production supervisor, research supervisor, and so on. Indeed, supervisor is the name often given to first-line managers as a whole. Their salaries may run from $43,000 to $74,000 a year.24

Following the plans of middle and top managers, first-line managers make short- term operating decisions, directing the daily tasks of nonmanagerial personnel, who are,

Levels of Management

Top managers

Middle managers

First-line managers

R&D Marketing Finance Production Human resources

Nonmanagerial employees

Functional Areas

FIGURE 1.2 The levels and areas of management Top managers make long-term decisions, middle managers implement those decisions, and first-line managers make short- term decisions. Team leaders facilitate team activities toward achieving a goal.

Successful top manager. India- born Satya Nadella, who joined Microsoft in 1992, became CEO of the technology company in early 2014 and has helped transition it to cloud computing. His net worth in 2018 was over $126 million. Do you see yourself joining a company and staying with it for life, as Nadella has (after an earlier job at Sun Microsystems), or is that even possible anymore? ©Justin Sullivan/Getty Images

The Exceptional Manager CHAPTER 1 13

of course, all those people who work directly at their jobs but don’t oversee the work of others.

No doubt the job of first-line manager will be the place where you would start your managerial career. This can be a valuable experience because it will be the training and testing ground for your management ideas.

Nonmanagerial Employees Nonmanagerial employees either work alone on tasks or with others on a variety of teams. They do not formally supervise or manage other people, and they are the bulk of a company’s workforce.

Areas of Management: Functional Managers versus General Managers We can represent the levels of management by slicing the organizational pyramid hori- zontally. We can also slice the pyramid vertically to represent the organization’s depart- ments or functional areas, as we did in Figure 1.2.

In a for-profit technology company, these might be Research & Development, Marketing, Finance, Production, and Human Resources. In a nonprofit college, these might be Faculty, Student Support Staff, Finance, Maintenance, and Administration. Whatever the names of the departments, the organization is run by two types of managers—functional and general. (These are line managers, with authority to direct employees. Staff managers mainly assist line managers.)

Functional Managers: Responsible for One Activity If your title is Vice Presi- dent of Production, Director of Finance, or Administrator for Human Resources, you are a functional manager. A functional manager is responsible for just one organiza- tional  activity. Google is particularly noteworthy for its unusual functional manage- ment job titles, such as Fitness Program Manager, Green Team Lead, and Vice President of Search Products & User Experience. Yahoo! also has unusual functional titles, such as VP of Talent Acquisition, VP Consumer Platforms, and VP of Research for Europe & LatAm.

General Managers: Responsible for Several Activities If you are working in a small organization of, say, 100 people and your title is Executive Vice President, you are probably a general manager over several depart- ments, such as Production and Finance and Human Resources. A general manager is responsible for several organizational activities.

At the top of the pyramid, general managers are those who seem to be the subject of news stories in magazines such as Bloomberg Businessweek, Fortune, Forbes, and Inc. Examples are big-company CEOs Denise Morrison of Campbell Soup and Jeff Bezos of Amazon.com, as well as small-company CEOs such as Gayle Martz, founder/CEO of GMinc who heads New York–based Sherpa’s Pet Trading Co., which sells travel bags. But not all general managers are in for- profit organizations.

Susan L. Solomon is the chief executive officer of the nonprofit New York Stem Cell Foundation. As the parent of a 10-year-old boy diagnosed with Type 1 dia- betes, Solomon began reading widely about the disease and came to think that stem cells might transform the

Nonprofit general manager. As CEO of the nonprofit New York Stem Cell Foundation, Susan L. Solomon does a lot of fundraising, along with directing the activities of the foundation’s research scientists, plus keeping up with the latest scientific research. “As a lawyer, you learn how to learn about a new field instantly,” she says. In addition, she learned how to read quickly—and “I’m really comfortable asking dumb questions.” Do you think managerial skills are different for nonprofit and for-profit organizations? ©D Dipasupil/Getty Images

14 PART 1 Introduction

understanding and treatment of diabetes, which led her to co-found NYSCF as a research foundation out of her apartment in 2005. As CEO, Solomon has helped to raise $150 million, which makes NYSCF one of the biggest nonprofits dedicated to stem-cell research, employing 45 full-time scientists and funding 75 others around the world. Earlier she started out in law, then went into business and finance, worked for the online auction house Sothebys.com, then formed her own consulting business.25

Managers for Three Types of Organizations: For-Profit, Nonprofit, Mutual-Benefit There are three types of organizations classified according to the three purposes for which they are formed—for-profit, nonprofit, and mutual-benefit.

1. For-Profit Organizations: For Making Money For-profit, or business, organi- zations are formed to make money, or profits, by offering products or services. When most people think of “management,” they think of business organiza- tions, ranging from Allstate to Zynga, from Amway to Zagat. There are 3,766 public companies in the United States today, more than 1,000 fewer than 40 years ago. A mere 30 of these firms accounted for half the total profit U.S. public firms made in 2015.26

2. Nonprofit Organizations: For Offering Services Managers in nonprofit orga- nizations are often known as administrators. Nonprofit organizations may be either in the public sector, such as the University of California, or in the pri- vate sector, such as Stanford University. Either way, their purpose is to offer services to some clients, not to make a profit. Examples of such organizations are hospitals, colleges, and social-welfare agencies (the Salvation Army, the Red Cross). According to the National Center for Charitable Statistics (NCCS), more than 1.5 million nonprofit organizations are registered in the United States. This number includes public charities, private foundations, and other types of nonprofit organizations, including chambers of commerce, fraternal organizations and civic leagues.27

One particular type of nonprofit organization is called the commonweal organi- zation. Unlike nonprofit service organizations, which offer services to some clients, commonweal organizations offer services to all clients within their jurisdictions. Examples are the military services, the U.S. Postal Service, and your local fire and police departments.

3. Mutual-Benefit Organizations: For Aiding Members Mutual-benefit organiza- tions are voluntary collections of members—political parties, farm coopera- tives, labor unions, trade associations, and clubs—whose purpose is to advance members’ interests. There are nearly 10,000 such organizations.28

Different Organizations, Different Management? If you became a manager, would you be doing the same types of things regardless of the type of organization? Generally you would be; that is, you would be performing the four management functions—planning, organizing, leading, and controlling—that we described in Section 1.2.

The single biggest difference, however, is that in a for-profit organization, the mea- sure of its success is how much profit (or loss) it generates. In the other two types of organizations, although income and expenditures are very important concerns, the measure of success is usually the effectiveness of the services delivered—how many students were graduated, if you’re a college administrator, or how many crimes were prevented or solved, if you’re a police chief. ●

The Exceptional Manager CHAPTER 1 15

1.4 Roles Managers Must Play Successfully THE BIG PICTURE Managers tend to work long hours at an intense pace; their work is characterized by fragmentation, brevity, and variety; and they rely more on verbal than on written communication. According to management scholar Henry Mintzberg, managers play three roles—interpersonal, informational, and decisional. Interpersonal roles include figurehead, leader, and liaison activities. Informational roles are monitor, disseminator, and spokesperson. Decisional roles are entrepreneur, disturbance handler, resource allocator, and negotiator.

Clearly, being a successful manager requires playing several different roles and exercis- ing several different skills. We discuss managerial roles in this section and key manage- rial skills in the next.

The Manager’s Roles: Mintzberg’s Useful Findings Maybe, you think, it might be interesting to follow some managers around to see what it is they actually do. That’s exactly what management scholar Henry Mintzberg did when, in the late 1960s, he shadowed five chief executives for a week and recorded their work- ing lives.29 And what he found is valuable to know, since it applies not only to top man- agers but also to managers on all levels.

Consider this portrait of a manager’s workweek: “There was no break in the pace of activity during office hours,” reported Mintzberg about his subjects. “The mail (average of 36 pieces per day), telephone calls (average of five per day), and meetings (average of eight) accounted for almost every minute from the moment these execu- tives entered their offices in the morning until they departed in the evening.”30

Only five phone calls per day? And, of course, this was back in an era before e-mail, texting, and Twitter, which nowadays can shower some executives with 100, even 300, messages a day. Indeed, says Ed Reilly, who heads the American Management Association, all the e-mail, cell-phone calls, text messaging, and so on can lead peo- ple to end up “concentrating on the urgent rather than the important.”31

Obviously, the top manager’s life is extraordinarily busy. Here are three of Mintzberg’s findings, important for any prospective manager:

1. A Manager Relies More on Verbal Than on Written Communication Writing letters, memos, and reports takes time. Most managers in Mintzberg’s research tended to get and transmit information through telephone conversations and meetings. No doubt this is still true, although the technologies of e-mail, texting, and Twitter now make it pos- sible to communicate almost as rapidly in writing as with the spoken word.

2. A Manager Works Long Hours at an Intense Pace “A true break seldom occurred,” wrote Mintzberg about his subjects. “Coffee was taken during meetings, and lunchtime was almost always devoted to formal or informal meetings.”

Long hours at work are standard, he found, with 50 hours being typical and up to 90 hours not unheard of. More recently, decades following the Mintzberg

LO 1-4 Identify the roles an effective manager must play.

Multitasking. Multiple activities are characteristic of a manager—which is why so many managers use their smartphones to keep track of their schedules. Interestingly, although many of us multitask, research shows that very few people are good it. In general, multitasking reduces your productivity. Why do you think this happens? ©Olivier Lantzendörffer/Getty Images

16 PART 1 Introduction

research, another study found that many professionals worked a whopping 72 hours a week, including weekend work.32 In highly competitive industries such as finance and technology, where employees are often considered to be on call even when they’re not in the office, it’s not uncommon for many employees to work more than 60 hours a week.33

3. A Manager’s Work Is Characterized by Fragmentation, Brevity, and Variety Only about one-tenth of the managerial activities observed by Mintzberg took more than an hour; about half were completed in under 9 minutes. Phone calls averaged 6 minutes, informal meetings 10 minutes, and desk-work sessions 15 minutes. “When free time appeared,” wrote Mintzberg, “ever-present subordinates quickly usurped it.”

No wonder the executive’s work time has been characterized as “the interrupt-driven day” and that many managers—such as GM’s Mary Barra—are often in their offices by 6 a.m., so that they will have a quiet period in which to work undisturbed. No wonder that finding balance between work and family lives—work–life balance, as we consider in Chapter 12—is an ongoing concern. No wonder, in fact, that the division between work and nonwork hours is considered almost obsolete in newer industries such as information technology, where people seem to use their smartphones 24/7 to stay linked to their jobs.34

It is clear from Mintzberg’s work that it is easy for managers to get distracted and lose focus and attention during the workday. The practice of mindfulness can help overcome these tendencies (see the Practical Action box, “Mindfulness: How Good Are You at Focusing Your Thoughts, Controlling Your Impulses, and Avoiding Distractions?”).

How many other things are you trying to do right now, besides read this chapter? If you are a fan of multitasking, you may want to challenge yourself to try its more effective opposite: practicing mindfulness. If you’ve never done it before, consider this challenge a practical test of your curiosity, it is an important soft skill.

So what is mindfulness?

Mindfulness is “the awareness that emerges through paying attention on purpose, in the present moment, and nonjudgmentally to the unfolding of experience moment by moment.”35 In case you are thinking this sounds like an impractical trait for a busy manager to cultivate, consider that learning how to focus just on the task or conversation at hand is actually an invaluable way to get more done. By focusing on one thing at a time, you can complete it fully, put it behind you,  and be ready to move on unencumbered by distracting thoughts. Multitasking, on the other hand, divides the mind’s attention and actually slows work down.36

One of the most effective strategies for increasing your ability to be mindful is meditation, which has also been shown to relieve anxiety and depression and improve sleep.37 Meditation can literally recharge your brain as well as strengthen your ability to break out of destructive thought patterns that have become habitual.38 There is even some evidence that meditation can improve your memory.39 All these are mental traits that will serve anyone well.

Companies that now offer their employees mindfulness training include American Express, Ford, LinkedIn, General Mills, Intel, Goldman Sachs, Apple, Nike, and Target.40 A study at General Mills showed that after its 7-week program, 80% of

Mindfulness: How Good Are You at Focusing Your Thoughts, Controlling Your Impulses, and Avoiding Distractions?

PRACTICAL ACTION

Snake River at Grand Teton ©SeanXu/Getty Images

The Exceptional Manager CHAPTER 1 17

Three Types of Managerial Roles: Interpersonal, Informational, and Decisional From his observations and other research, Mintzberg concluded that managers play three broad types of roles or organized sets of behavior: interpersonal, informational, and decisional.

1. Interpersonal Roles—Figurehead, Leader, and Liaison In their interper- sonal roles, managers interact with people inside and outside their work units. The three interpersonal roles include figurehead, leader, and liaison activities.

2. Informational Roles—Monitor, Disseminator, and Spokesperson The most important part of a manager’s job, Mintzberg believed, is information handling, because accurate information is vital for making intelligent decisions. In their three informational roles—as monitor, disseminator, and spokesperson— managers receive and communicate information with other people inside and outside the organization.

At Google, CEO Sundar Pichai scheduled a company-wide “town hall” meeting that was abruptly canceled when some employees revealed they were being harassed online because their names and concerns had been leaked to outside websites. Pichai’s memo announcing the cancelation needed to communicate clearly and calmly in a tense situation. In it he explained the employees’ concerns for their safety and promised to set up several smaller forums “where people can feel comfort- able to speak freely.” Pichai also acknowledged the many personal meetings and e-mails in which he had heard employees’ views and their concerns about being able to speak out. He closed by reminding Googlers that their “desire to build great prod- ucts” is what unites them and communicated his own excitement about carrying that goal onward.44

3. Decisional Roles—Entrepreneur, Disturbance Handler, Resource Allocator, and Negotiator In their decisional roles, managers use information to make deci- sions to solve problems or take advantage of opportunities. The four decision-making roles are entrepreneur, disturbance handler, resource allocator, and negotiator.

These roles are summarized in Table 1.1. Did anyone say a manager’s job is easy? Certainly it’s not for people who want to sit

on the sidelines of life. Above all else, managers are doers. ●

participating managers were making better decisions and nearly 90% felt they had become better listeners.41 Many busi- nesses now believe that mindfulness leads to greater self- awareness, and that this, in turn, makes for stronger leaders who can better manage their own emotions as well as respond more effectively to the concerns of others.42

YOUR CALL Meditation is called a practice because it’s a skill that you improve over time. If you’re new to it, try repeating this

simple method for five minutes a day: Sit still in a quiet place, inhale while counting to seven, hold your breath for seven counts, and exhale for seven counts.43 Clear your mind, thinking of nothing but your breathing, and if you find other thoughts intruding, don’t be discouraged. Put them gently aside and try again. If you find it helpful, place a neu- tral object in front of you on which to focus, like a candle or a small object that has religious or spiritual meaning for you, or close your eyes.

18 PART 1 Introduction

TABLE 1.1 Three Types of Managerial Roles: Interpersonal, Informational, and Decisional

BROAD MANAGERIAL TYPES OF ROLES ROLES DESCRIPTION

Interpersonal Figurehead role In your figurehead role, you show visitors around your company, attend employee birthday parties, and present ethical guidelines to your subordinates. In other words, you perform symbolic tasks that represent your organization.

Leadership role In your role of leader, you are responsible for the actions of your subordinates, as their successes and failures reflect on you. Your leadership is expressed in your decisions about training, motivating, and disciplining people.

Liaison role In your liaison role, you must act like a politician, working with other people outside your work unit and organization to develop alliances that will help you achieve your organization’s goals.

Informational Monitor role As a monitor, you should be constantly alert for useful information, whether gathered from newspaper stories about the competition or gathered from snippets of conversation with subordinates you meet in the hallway.

Disseminator role Workers complain they never know what’s going on? That probably means their supervisor failed in the role of disseminator. Managers need to constantly

disseminate important information to employees, as via e-mail and meetings.

Spokesperson role You are expected, of course, to be a diplomat, to put the best face on the activities of your work unit or organization to people outside it. This is the

informational role of spokesperson.

Decisional Entrepreneur role A good manager is expected to be an entrepreneur, to initiate and encourage change and innovation.

Disturbance Unforeseen problems—from product defects to international currency crises— handler role require you be a disturbance handler, fixing problems.

Resource Because you’ll never have enough time, money, and so on, you’ll need to be a allocator role resource allocator, setting priorities about use of resources.

Negotiator role To be a manager is to be a continual negotiator, working with others inside and outside the organization to accomplish your goals.

The Exceptional Manager CHAPTER 1 19

1.5 The Skills Exceptional Managers Need THE BIG PICTURE Good managers need to work on developing three principal skills. The first is technical, the ability to perform a specific job. The second is conceptual, the ability to think analytically. The third is human, the ability to interact well with people.

Lower- and middle-level managers are a varied lot, but what do top managers have in com- mon? A supportive spouse or partner, suggests one study.45 Regardless of gender, reaching the top demands a person’s all-out commitment to work and career, and someone needs to be there to help with children and laundry. Thus, in 2017, the majority of the 54 Fortune 1000 female CEOs were married and told the Korn Ferry Institute that they had supportive spouses: “Being a CEO, they acknowledge, is not a one-person job; a CEO’s partner has to ‘lean in’ too. The partners of the women CEOs often took primary responsibility on the home front.”46

General Motors CEO Mary Barra, who is married and is the mother of two grown children, has been assisted in her rise by her husband, Tony Barra, a technology consul- tant. Although female managers with supportive partners are becoming more common, society is still struggling with what it means for men and women to be peers and whether one’s career should come first or both should be developed simultaneously.

Whether or not they have support at home, aspiring managers also need to have other kinds of the “right stuff.” In the mid-1970s, researcher Robert Katz (in this book we boldface important scholar names to help you remember key contributors to the field of management) found that through education and experience managers acquire three principal skills—technical, conceptual, and human.47

1. Technical Skills—The Ability to Perform a Specific Job Technical skills consist of the job-specific knowledge needed to perform well in a special- ized field. Having the requisite technical skills seems to be most important at the lower levels of management—that is, among employees in their first professional job and first- line managers.

Mary Barra has a bachelor’s degree in electrical engineering and a master’s in busi- ness administration and a well-rounded resume that includes important experience as executive assistant to the CEO, being head of midsize car engineering, managing GM’s Detroit-Hamtramck plant, and leading the company’s human resources division. Then in 2011 she was made head of GM’s huge worldwide product development, where she “brought order to chaos,” according to one account, “mostly by flattening its bureau- cracy . . . reducing the number of expensive, global vehicle platforms, and bringing new models to market faster and at lower cost.”48

Said by her predecessor to be “one of the most gifted executives” he had met in his career, she displays an engineer’s enthusiasm for cars, a quality not found among other car-company CEOs promoted from finance operations.49 Indeed, says one account, “Ms. Barra can often be found on the company’s test track putting vehicles through their paces at high speeds.”50

2. Conceptual Skills—The Ability to Think Analytically Conceptual skills consist of the ability to think analytically, to visual- ize an organization as a whole and understand how the parts work together. Conceptual skills are more important as you move up the management ladder, particularly for top managers, who must deal with problems that are ambiguous but that could have far-reaching consequences. Today a top car executive must deal with several

LO 1-5 Discuss the skills of an outstanding manager.

Triple threat. Mary Barra unveils the new-model Chevrolet Volt hybrid electric car in Las Vegas in January 2016. Barra seems to have the three skills—technical, conceptual, and human— necessary to be a terrific manager in the complex organization that is General Motors. Which skill do you think you need to work on the most? (Human skills are the most difficult to master.) ©Tony Ding/ AP Images

20 PART 1 Introduction

radical trends—autonomous (self-driving) cars, electric-powered vehicles, and new busi- ness models of start-ups like Uber and Lyft.

Said a GM executive about Barra, “When you put her in a position that’s completely new to her, she does an amazing job of getting grounded, understanding what’s impor- tant and what’s not, and executing very well.”51 Or, as Barra said about her management approach, “Problems don’t go away when you ignore them—they get bigger. In my expe- rience, it is much better to get the right people together, to make a plan, and to address every challenge head on.”52

At every stop along the way in rising through GM, Barra analyzed the situation and simplified things. For example, in her product-development job, she streamlined designs by using the same parts in many different models. She also assigned engineers to work in car dealerships to learn more about what customers want in their vehicles.53 When pro- moted to CEO, she stepped into the middle of a safety crisis in which GM had to admit to misleading regulators and consumers about a defective ignition switch and agree to pay a $900 million penalty.54

Now she is dealing with bigger issues and trying to make GM a more nimble and forward-thinking company. “We know our industry is being disrupted,” Barra says. The century-old company is leading the industry in connected-car technology, new electric and hybrid vehicles, and investing in the ride-share service Lyft to prepare for a future in which city residents use self-driving cars to get around.55

Spencer McGuffey works in construction management. Because the employees in his industry are naturally self- motivated by pay and time off needs, he does not have to put as much energy into the leading and controlling steps of the management process. Instead, Spencer spends the majority of his time planning and organizing.

“I am a site manager for a residential building, so I’m busy making schedules and making sure everyone is here on time. I would say 75% of my day is planning tomorrow as well as the coming weeks, and making sure that everyone is able to not only make the schedule, but also perform the quality work that I expect in a timely manner,” said Spencer.

When it comes to planning out the schedule, Spencer con- verses with his employees before doing anything else. “I typi- cally call my employees before I even start plugging in dates and getting everything situated. I ask if there is anything spe- cial about this particular unit or house that we’re going to be building that would require them to take more time than nor- mal,” said Spencer. “After that, I go into our computer system that allows us to process the schedule and send it to the employees as quickly as possible so they have a copy.”

Spencer understands that, once the schedule is in place, he still has to remain flexible with emergencies and last-second changes.

“I carry around a hard copy of the schedule so that if someone doesn’t show up one day, I can quickly and easily track who didn’t show up, and it also allows me to correct the schedule for every- one else later. That also goes for people who are working slower than we expected,” said Spencer. He has to be able to adjust con- stantly, visualizing the project as a whole from start to finish.

While human skills do come into play occasionally for Spencer and his team, Spencer’s conceptual skills are what help to keep his team organized and running smoothly.

“I have found that it works best if you invite all of the super- visors from across the organization to lunch and have a real heart-to-heart meeting with them to figure out who needs to be where and when so that no one is stepping on anyone else’s toes,” said Spencer. “This helps me a lot. I started doing this after my first month or two on the job, and it helped me to real- ize that the employees weren’t in the best order prior to our discussion over lunch.”

This personal touch provides Spencer with an opportunity for occasional face-to-face communication with his employees. The skill that keeps his team running smoothly on a day-to-day basis, however, is his ability to think analytically and visualize a project from start to finish with all its moving parts.

Courtesy of Spencer McGuffey

I’m Glad I… …have conceptual skills.

3. Human Skills—“Soft Skills,” the Ability to Interact Well with People This may well be the most difficult set of skills to master. Human skills consist of the abil- ity to work well in cooperation with other people to get things done—especially with people in teams, an important part of today’s organizations (as we discuss in Chapter 13).

The Exceptional Manager CHAPTER 1 21

Are you persistent, creative, curious? How do you deal with frustra- tion or anxiety? Do you see yourself as part of a larger whole that gives your work purpose? How do you perceive problems—as temporary and solvable, or as a personal burden you are doomed to bear? Are you a good listener? Your answers will give you an idea about how well developed some of your soft skills are.

More than 90 percent of respondents to a recent Global Human Capital Trends survey by the consulting firm Deloitte identified soft skills like communication, emotional understand- ing, and problem solving as a critical priority.59 Many employers say these skills are hard to find in college graduates, who often value hard skills more highly.60 Companies are eagerly looking for soft skills as well, however; Google, for example, now pri- oritizes persistence and curiosity in its hiring process.61 The good news is that soft skills can be taught. Employers are find- ing it worth investing money to develop these abilities in their employees. A new study shows that training employees in soft skills doesn’t just marginally improve individual performance and employee retention; it actually betters these metrics enough to provide a 250% return on the financial investment a company makes in training programs.62

For firms that can spare their employees for three days, the American Management Association (AMA) offers a soft-skills seminar for managers at all levels including front-line supervi- sors.63 Among the skills they can gain are the ability to give

direction without generating conflict, to lead and motivate groups and teams, to influence others including “difficult” peo- ple, to offer effective feedback, and to get things done in an at- mosphere of  trust and respect. The seminar topics are a comprehensive list of essential soft skills employers look for in college graduates and new hires—and say they seldom find: communication proficiency, which includes verbal, nonverbal, and listening skills; self-understanding, lack of defensiveness, and emotional understanding and responsiveness; the ability to productively manage conflict; and an understanding of team de- velopment and the role of a team player in getting work done.

For those who want to learn online and at their own pace, many inexpensive online classes are available.64 These short interactive programs are geared for everyone from CEOs to entry-level employees. They cover everything from self- confidence to emotional intelligence, coaching teams, building healthy work relationships, handling business etiquette, resolving conflicts, decision making, reading body language, negotiating, dealing with angry customers to becoming a successful leader.

YOUR CALL Look back at the first paragraph in this Practical Action box. Which of the soft skills listed there would you like to improve by the time you graduate, in order to make yourself a more attrac- tive candidate to prospective employers?

Developing Your Soft SkillsPRACTICAL ACTION

Often these are thought of as “soft skills.” Soft skills are interpersonal “people” skills needed for success at all levels. As discussed in Section 1.7, developing your soft skills is an ongoing, lifelong effort.

During her more than three decades at GM, Barra has demonstrated exceptionally strong soft skills. She has “an ability with people,” says her previous boss, that is critical to GM’s team-first approach.56 “She is known inside GM as a consensus builder who calls her staff together on a moment’s notice to brainstorm on pressing issues,” says another report.57 “She’s fiercely intelligent yet humble and approachable,” says a third account. “She’s col- laborative but is often the person who takes charge. And she’s not afraid to make changes.”58

Among her most significant changes: hiring people with “diverse views, diverse back- grounds, diverse experiences,” she says, to try to reshape the company’s notoriously insular corporate culture and to bring GM into the age of Apple and Google.

The Most Valued Traits in Managers Clearly, Barra embodies the qualities sought in star managers, especially top managers. “The style for running a company is different from what it used to be,” says a top execu- tive recruiter of CEOs. “Companies don’t want dictators, kings, or emperors.”65 Instead of someone who gives orders, they want executives who ask probing questions and invite people to participate in decision making and power sharing.

Among the chief skills companies seek in top managers are the following:

■ The ability to motivate and engage others. ■ The ability to communicate. ■ Work experience outside the United States. ■ High energy levels to meet the demands of global travel and a 24/7 world.66 ●

22 PART 1 Introduction

Would you agree that the ideal state many people seek is an emotional zone somewhere between boredom and anxiety? That’s the view of psychologist Mihaly Csikszentmihalyi (pronounced Me-high Chick-sent-me-high-ee), founder of the Quality of Life Research Center at Claremont Graduate University.67

Boredom, he says, may arise because skills and challenges are mismatched: You are exer- cising your high level of skill in a job with a low level of challenge, such as licking envelopes. Anxiety arises when someone has low levels of skill but a high level of challenge, such as (for many people) suddenly being called upon to give a rousing speech to strangers.

As a manager, could you achieve a balance between these two states—between bore- dom and anxiety, or between action and serenity? Certainly managers have enough challenges to keep their lives more than mildly interesting. Let’s see what they are.

1.6 Seven Challenges to Being an Exceptional Manager

THE BIG PICTURE Seven challenges face any manager: You need to manage for competitive advantage—to stay ahead of rivals. You need to manage for the effects of globalization and of information technology. You need to manage for diversity in race, ethnicity, gender, and so on, because the future won’t resemble the past. You always need to manage to maintain ethical standards. You need to manage for sustainability—to practice sound environmen- tal policies. Finally, you need to manage for the achievement of your own happiness and life goals.

LO 1-6 Identify the seven challenges faced by most managers.

EXAMPLE The Struggle for Competitive Advantage: Airbnb Shakes Up the Hotel Business

In San Francisco a few years ago, jobless industrial designers Brian Chesky and Joe Gebbia, wondering how to make the rent, realized that a major design conference was about to be held in the city and that hotel rooms would be scarce. Gebbia had three air mattresses and suggested turning their apart- ment into an “air bed and breakfast.” Within three days they had a quicky website up and had booked three guests, each paying about $70 for several nights.68

Thus Airbnb was born, which today appeals to everyone from tourists to business travelers with $18 shared downtown living rooms but can even offer Beyoncé, in northern California for a halftime appearance at the 2016 Super Bowl, a $10,000-a-night estate in Los Altos Hills. Offering more than a million rooms in homes, apartments, even treehouses or barns—indeed, even European castles—in 34,000 cities in 190 countries ranging from Cuba to Israel’s West Bank, the com- pany is valued at $30 billion.69

The Rise of the New Sharing Economy. Airbnb represents an example of the sharing economy, also known as collaborative or peer-to-peer marketplaces, a technological variation on past behavior. “Peer-to-peer lodging has been around for quite a while,” points out one writer. “For hundreds of years, family-owned boardinghouses were the lodging alternative for frugal travelers;

homeowners listed their spare rooms in newspapers; . . . and European families often purchased second homes together.”70

What is different about today’s sharing economy is that ordinary people can now take advantage of the Internet and widespread use of credit cards to effectively turn their homes into hotel rooms.

Trouble for the Hotel Industry. Airbnb has had a major impact on the hotel industry, offering more places to sleep than Hilton, Hyatt, or Wyndham combined. In the beginning there were few com- plaints from traditional hotels, although there is evidence that the greater room supply created by Airbnb helped restrain traditional hotel prices.71 Some small hotels even started joining the service themselves, such as the Box House Hotel in Brooklyn, New York.

Before long, however, hotels began to feel the upstart’s effects and now are fighting back.72 Large hotel chains have launched new chains (such as Tru by Hilton) aimed at Airbnb’s core market of Millennials looking for a lodging experience suited to their tastes and budget. They also started creating “micro-hotels,” such as Pod, Yotel, and citizenM, hotels with tiny rooms (think 50 square feet) but big public spaces that appeal to social travelers.

Some hotels now offer “pillow menus,” allowing guests to choose from a range of pillow firmnesses and shapes to suit

The Exceptional Manager CHAPTER 1 23

Challenge #1: Managing for Competitive Advantage— Staying Ahead of Rivals Competitive advantage is the ability of an organization to produce goods or services more effectively than competitors do, thereby outperforming them. This means an organization must stay ahead in four areas: (1) being responsive to customers, (2) innovation, (3) quality, and (4) efficiency.

1. Being Responsive to Customers The first law of business is Take care of the customer. Without customers—buyers, clients, consumers, shoppers, users, patrons, guests, investors, or whatever they’re called—sooner or later there will be no organiza- tion. Nonprofit organizations are well advised to be responsive to their “customers,” too, whether they’re called citizens, members, students, patients, voters, rate-payers, or whatever, since they are the justification for the organizations’ existence.

different sleep habits. Some remade their rooms with flexible tables, laptop trays, and abundant electrical outlets to accom- modate different work styles. Roughly 40 hotels worldwide joined in creating LobbyFriend, a temporary social network that enables users to get information on nearby events, as well as send messages to other guests.

The hotel industry also funded research that suggests some Airbnb operators are running “illegal” hotels.73 And it has lob- bied for laws that will stop or slow Airbnb’s growth by restricting the apartments and homes that can be listed on the service.

Airbnb is upping the stakes again, however. Its Niido project is a venture into several co-branded apartment buildings to appeal to tenants as well as tourists. The first apartment com- plex will open in Kissimmee, FL, in early 2018 with about 325 units. Renters can list their apartments on Airbnb for any

part of the year. They also enjoy perks like a concierge-type service to look after guests on their behalf.74

YOUR CALL Airbnb is an example of disruptive innovation, a process in which a product or service first takes root in simple applications at the bottom of the market (Chesky and Gebbia’s air mattresses on the floor) and then relentlessly moves up market, eventually displacing established competitors. The notion of  “disruptive innovation” by computer technology is a far- reaching development in the ongoing struggle of organizations to stay ahead of rivals by maintaining competitive advantage, and we describe the concept further in Chapter 10.

Which sector, Airbnb or hotels, do you think will prevail in the lodging industry? Why?

Competitive advantage? Do you think traditional hotels will still exist 10 years from now? ©Antenna/Getty Images

24 PART 1 Introduction

2. Innovation Finding ways to deliver new or better goods or services is called innovation. No organization, for-profit or nonprofit, can allow itself to become complacent—especially when rivals are coming up with creative ideas. “Innovate or die” is an important adage for any manager. We discuss innovation in Chapter 10.

3. Quality If your organization is the only one of its kind, customers may put up with products or services that are less than stellar (as they have with some airlines that have a near monopoly on flights out of certain cities), but only because they have no choice. But if another organization comes along and offers a better-quality travel experi- ence, TV program, cut of meat, computer software, or whatever, you may find your company falling behind. Making improvements in quality has become an important management idea in recent times, as we shall discuss.

4. Efficiency A generation ago, organizations rewarded employees for their length of service. Today, however, the emphasis is on efficiency: Companies strive to produce goods or services as quickly as possible using as few employees (and raw materials) as possible. Although a strategy that downgrades the value of employees might ultimately backfire—resulting in the loss of essential experience and skills and even customers—an organization that is overstaffed may not be able to compete with leaner, meaner rivals. This is the reason why, for instance, today many companies rely so much on temp ( temporary) workers.

Challenge #2: Managing for Information Technology— Dealing with the “New Normal” The challenge of managing for information technology, not to mention other technolo- gies affecting your business, will require your unflagging attention. Some observers even see a Fourth Industrial Revolution evolving from the Third, which was notable for intro- ducing electronics and information technology as means to automate the production of physical goods. (The First Revolution relied on steam and water power and the Second on electric power.) Justifying the idea that a fourth revolution is on the horizon are the unprecedented speed, scope, and impact of technological breakthroughs in every indus- try, including AI, robotics, self-driving cars, 3D printers, the Internet of Things, and many more innovations.75 Julio Portalatin, president and CEO of Mercer Consulting, is very concerned about this issue. He told The Wall Street Journal “that high on his prior- ity list is guarding against unforeseen, nimble rivals that could harness automation and artificial intelligence to poach customers in niche markets.”76

U.S. consumers spent more than $395 billion online in 2016, nearly 12% of overall retail spending, and are expected to spend as much as $603 billion in 2021.77 E-commerce, or electronic commerce—the buying and selling of goods or services over computer networks— has reshaped entire industries and revamped the very notion of what a company is. More important than e-commerce, information technology has led to the growth of e-business, using the Internet to facilitate every aspect of running a business. Because the Internet so dramatically lowers the cost of communication, it can radically alter any activity that depends heavily on the flow of information. The result is that disruption has become the “new normal,” according to Forrester Research.78

Some of the implications of information technology that we will discuss throughout the book are as follows:

■ Far-ranging electronic management: e-communication all the time. Using mobile devices such as smartphones and tablets, 21st-century managers will be mas- ters of electronic communication, able to create powerful messages to motivate and lead teams of specialists all over the world. The next section notes that employers are looking to hire college graduates with information technology application skills. Information technology application skills reflect the extent to

The Exceptional Manager CHAPTER 1 25

which you can effectively use information technology and learn new applications on an ongoing basis. You will clearly want to excel at e-communication.

■ Ever more data: a challenge to decision making. The digital universe is expected to at least double in size every two years, and by 2020, it will be 50 times as large as it was in 2010.79 Ninety percent of generated data from now on, says one source, “will be unstructured and this includes tweets, photos, customer purchase history, and even customer service call logs.”80 The Internet, then, not only speeds everything up; through cloud computing—the storing of software and data on gigantic collections of computers located away from a company’s principal site (“in the cloud”)—and huge, interconnected databases—computerized collec- tions of interrelated files—it can also assemble astonishing quantities of informa- tion and make them available to us instantaneously. This has led to the phenomenon known as Big Data, stores of data so vast that conventional data- base management systems cannot handle them, so very sophisticated analysis software and supercomputers are required. The challenge: How do we deal with this massive amount of data to make useful decisions without violating people’s right to privacy? We discuss Big Data in Chapter 7.

■ The rise of artificial intelligence: more automation in the workforce. Artificial intelligence (AI) is the discipline concerned with creating computer systems that simulate human reasoning and sensation, as represented by robots, natural lan- guage processing, pattern recognition, and similar technologies. Some people fear that increasingly sophisticated robots powered by AI technology will be able to take over even complex jobs that have been thought safe from automa- tion, such as the work of surgeons, writers, lawyers, and airline pilots.81 They point out that most workers will need expensive retraining to fill the jobs that remain. But others are more optimistic and argue for focusing on what technol- ogy has created rather than on what might be lost. For instance, a report by McKinsey & Co. points out that 33% of the jobs created in the United States in the last 25 years are in careers that did not even exist when today’s college stu- dents were born.82 Work will be transformed, these observers say, rather than eliminated, and the change will be slow enough for employers, and employees, to adapt.83 What will be the implications of these events for you as a manager for staffing and training employees and for your own professional development?

■ Organizational changes: shifts in structure, jobs, goals, and management. With computers and telecommunications technology, organizations and teams become “virtual”; they are no longer as bound by time zones and locations. Employees, for instance, may telecommute, or work from home or remote loca- tions using a variety of information technologies. Telecommuting was found to enhance employee satisfaction and performance.84 Meetings may be conducted via videoconferencing, using video and audio links along with computers to let people in different locations see, hear, and talk with one another. Goal setting and feedback will be conducted via web-based software programs such as eWork- bench, which enables managers to create and track employee goals. Such man- agers will also rely on project management software, programs for planning and scheduling the people, costs, and resources to complete a project on time.

■ Knowledge management and collaborative computing. The forms of interaction just described will require managers and employees to be more flexible, and there will be an increased emphasis on knowledge management—the imple- menting of systems and practices to increase the sharing of knowledge and infor- mation throughout an organization. In addition, collaborative computing, using state-of-the-art computer software and hardware, will help people work better together. Many hospitals, for example, now knit various functions together— patient histories, doctors’ orders, lab results, prescription information, billing— in a single information system, parts of which patients can access themselves to schedule appointments, question doctors, and request prescription refills.

26 PART 1 Introduction

Challenge #3: Managing for Diversity— The Future Won’t Resemble the Past In 2015, more than 43 million people in the United States were foreign born, represent- ing 13.4% of the population.85 In 2020, there will be nearly 48 million foreign born, representing 14.3% of the population, and by 2060 they are projected to be 18.8%.86

But greater changes are yet to come. By mid-century, the mix of American racial or ethnic groups will change considerably, with the United States becoming half (54%) racial or ethnic minority. Non-Hispanic whites are projected to decrease from 62% of the population in 2014 to 43% in 2060. African Americans will increase from 13% to 14%, Asians from 5% to 9%, and Hispanics (who may be of any race) from 17% to 29%.87

In addition, in the coming years there will be a different mix of women, immigrants, and older people in the general population, as well as in the workforce. For instance, in 2030, nearly one in five U.S. residents is expected to be 65 and older. This age group is projected to increase to 98.1 million in 2060, more than doubling the number in 2014 (40.1 million).88

Some scholars think that diversity and variety in staffing produce organizational strength, as we in discuss in Chapter 11. Clearly, however, the challenge to the manager of the near future is to maximize the contributions of employees diverse in gender, age, race, ethnicity, and sexual orientation.

Challenge #4: Managing for Globalization— The Expanding Management Universe When you ask some Russians “How are you?” the response may not be a simple “Fine” but rather the complete truth as to how they really feel—“a blunt pronouncement of dissatisfac- tion punctuated by, say, the details of any recent digestive troubles,” as one American world traveler explained it.89 And when you meet Cambodians or Burmese and are asked “Have you eaten yet?” you should not mistake this as an invitation to lunch—all it means is “Hello.”90

The point is this: Verbal expressions and gestures don’t mean the same thing to everyone around the world. Failure to understand such differences can affect organiza- tions’ ability to manage globally.

U.S. firms have been going out into the world in a major way, even as the world has also been coming to them. This increasingly interconnected nature of business around the word, called globalization, has had economic downsides for workers in some industries, such as

Cross-border burger business. The manager of this Johnny Rockets hamburger store, which opened in Lagos, Nigeria, in 2012, found that to achieve an authentic, U.S.-style taste he needed to fly in the toppings— onions, mushrooms, and iceberg lettuce—which meant that he had to start prices at $14 for a single-patty burger. ©Sunday Alamba/AP Images

The Exceptional Manager CHAPTER 1 27

clothing, shoe, and toy manufacturing, which have largely moved out of the United States to countries where labor is less expensive. Some critics have therefore pushed back against the idea that globalization is always a good idea, but the fact is that it is likely here to stay.91 “We know from experience that international cooperation works—from reconstruction after World War II more than 70 years ago to fighting Ebola just a few years back,” says Christine Lagarde, the International Monetary Fund’s Managing Director.92 Managing for globaliza- tion will be a complex, ongoing challenge, as we discuss at length in Chapter 4.93

Challenge #5: Managing for Ethical Standards Under pressure to meet sales, production, and other targets, managers can find themselves confronting ethical dilemmas. What would you do if, as an employee, you discovered that your company was deliberately falsifying data about its product? In 2015, Volkswagen was found to have installed, in some 11 million cars sold in the United States, software that deac- tivated required emissions controls while on the road, releasing many times more emissions than allowed by law, because the controls reduced the cars’ advertised fuel economy and drivers might complain. When the vehicles were being tested for compliance with EPA stan- dards, however, their computer systems sensed the test in progress and turned the emissions controls back on, concealing the cars’ real environmental cost. Fines and other costs result- ing from the scandal are expected to cost VW more than $15 billion.94 Some executives were forced to resign and at least one was sentenced to jail time.95 How far would you go to satisfy demanding customers in a highly competitive international market? In an era of climate change, with increasingly severe storms and rising sea levels, what is your respon- sibility to “act green”—to avoid company policies that are damaging to the environment?

Ethical behavior is not just a nicety; it is an essential principle to follow in every indus- try, and one that is even more compelling when you are in a position of power. This was certainly made clear in late 2017, when several women raised accusations of sexual mis- conduct against Hollywood mogul Harvey Weinstein in a story published in the New York Times.96 This opening in a longstanding wall of silence about mistreatment of women and men by men in power was followed in rapid succession by similar charges against such prominent figures as actor Kevin Spacey, former senator Al Franken (among sev- eral other members of Congress), Def Jam Recordings co-founder Russell Simons, “Today” show host Matt Lauer, celebrity chef Mario Batali, federal court judge Alex Kozinski, actor and comedian Louis C. K., opera conductor James Levine, and longtime newscaster Charlie Rose, to name only a few. All have retired, been fired, or resigned.97

How would you treat others if you were in a position of power? Would you offer to boost someone’s career in return for sexual favors, or ruin someone who refused you? These incidents, and many similar ones that continue to be revealed, show the enormous repercussions when people fail to realize that ethical standards must be followed in every area of life. Clearly ethical lapses have the potential to do great harm, and not only financial harm.

We consider ethics in Chapter 3 and throughout the book.

Harvey Weinstein, cofounder of Miramax, has been accused by dozens of women of committing sexual assault and sexual abuse. The allegations span 30 years. Weinstein has denied engaging in nonconsensual sex. The courts will ultimately decide. ©Paul Zimmerman/ WireImage/Getty Images

All kinds of pressures influence people to cheat. Some people may cheat more in the afternoon than in the morning, perhaps because mental fatigue sets in as the day wears on.98  They may cheat more when technology makes it easy. (Access to copy/paste tools was associated with a higher rate of cheating.)99 One recent study of 300 college students found that 9 in 10 admitted to cheating, and some believed their instructors did as well.100

Of course, just because you may feel okay about cheating doesn’t mean it’s right, or, from a hard-headed business point of view, even effective—either for you or for the organization you work for.101 Did you know, for instance, that you can be fired for lying on a job application or resume?

Learning to Be Ethical. Concerned about transgressions in the managerial world, some of the top U.S. researchers in

Preparing Yourself to Behave Right When You’re Tempted to Cheat

PRACTICAL ACTION

28 PART 1 Introduction

Challenge #6: Managing for Sustainability— The Business of Green An apparently changing climate, bringing increased damage from hurricanes, floods, and fires throughout the United States and the world, has brought the issue of “being green” to increased prominence. Following The World Is Flat, Thomas Friedman wrote Hot, Flat, and Crowded, urging a strategy of “Geo-Greenism” in addressing the crises of destabilizing climate change and rising competition for energy.104 Earlier former U.S. Vice President Al Gore’s documentary film An Inconvenient Truth, along with his book by the same name, further popularized the concepts of global climate change and the idea of sustainability as a business model.105

Our economic system has brought prosperity, but it has also led to unsustainable business practices because it has assumed that natural resources are limitless, which they are not. Sustainability is defined as economic development that meets the needs of the present without compromising the ability of future generations to meet their own needs.106 A number of companies—from PepsiCo to Walmart to REI—have recognized that corporations have a responsibility to address the causes of climate change.107 Engineering and consulting firm CH2M is a good example. Chairman and CEO Jacqueline Hinman told Fortune “as engineers and project managers, we have an inher- ent opportunity and responsibility to make a positive difference in the world, so our entire business is predicated on that purpose. We lead in delivering sustainable solu- tions for growth and a better quality of life, ultimately to achieve greater social, environ- mental, and economic outcomes—with intentional emphasis on the ‘and.’”108

Challenge #7: Managing for Happiness and Meaningfulness Which would you rather have, a happy life or a meaningful life? We recommend both!

One study found that “Happiness was linked to being a taker rather than a giver, whereas meaningfulness went with being a giver rather than a taker,” as a study author put it.109 Happiness is getting what you want, having your desires fulfilled. Meaningfulness is the sense of “belonging to and serving something that you believe is bigger than the self.”110 In our case, for example, we derive meaning from writing this book because we believe it can enrich your life and help you manage others more effec- tively. Research clearly shows that a sense of meaningfulness in your life is associated with better health, work and life satisfaction, and performance.111

business ethics recently introduced a new website, EthicalSystems.org (www.ethicalsystems.org). One of its pur- poses is to examine the problem that, as one article describes it, “how we think we’re going to act when faced with a moral decision and how we really do act are often vastly different.”102 Originally business ethics grew out of philosophy that ethical behavior was the right thing to do. Now research is uncovering the underlying reasons people act the way they do, to develop a more psychologically realistic approach and learn what tools will nudge people toward right behavior. We include a “Legal/ Ethical Challenge” case at the end of every chapter to assist you in developing an ethical orientation.

Doing Right versus Being Liked. When people predict how they’re going to act in a given situation, “the ‘should’ self domi- nates—we should be fair, we should be generous, we should

assert our values,” says business ethics professor Ann E. Tenbrunsel. “But when the time for action comes, the ‘want’ self dominates—I don’t want to look like a fool, I don’t want to be punished.”103 Thus, you may see some wrong occur (such as an act of cheating) and actually mean to do something about it, but can’t quite figure how—and then the moment passes and you let it go and tell yourself that what you did was okay.

YOUR CALL How can you learn to be ethical? First, recognize the reasons you are tempted to overlook wrongdoing—reluctance to disap- point your friends, worry about what others will think of you, or fear that you’ll get in trouble if you speak up. Then realize that the discomfort you’re experiencing is a signal that you need to be courageous and act. What will you tell yourself the next time you’re tempted to cheat or see someone cheating?

The Exceptional Manager CHAPTER 1 29

We have three suggestions for building meaning into your life.

1. Identify activities you love doing. Try to do more of these activities or find ways to build them into your work role. Employees at St. Jude Children’s Research Hospital embody this suggestion. They truly enjoy participating in the St. Jude Marathon weekend because it raises money for the children being treated at the hospital. One employee, a cancer survivor, commented, “Each year it pro- vides me with another opportunity to give back so that we can help countless other children have anniversaries of their own.”112

2. Find a way to build your natural strengths into your personal and work life. Doing this requires that you assess yourself along a host of competencies desired by employers. The next section identifies these competencies and discusses how you might evalu- ate your strengths and development opportunities.

3. Go out and help someone. Research shows that people derive a sense of meaningfulness from helping others.113 Salesforce, ranked as the eighth best place to work by Fortune, follows this suggestion. The company donates “subscriptions for its technology to nonprofits and educa- tors, it grants employees seven days off to volunteer each year and has given away more than $137 million.”114

How Strong Is Your Motivation to Be a Manager? The First Self-Assessment As we stated at the beginning of this chapter, it is our desire to make this book as practi- cal as possible for you. As an important means of advancing this goal, we developed 65 self-assessments—two to four per chapter—that allow you to gauge how you feel about the material you are reading and how you can make use of it.

Go to the self-assessment website at connect.mheducation.com, complete the assess- ment, then answer the self-assessment questions in the book. (Note: These assessments are available only if your instructor uses Connect and assigns them to you.) Taking them is a valuable way to develop your self-awareness and interpersonal skills. The first one assesses your motivation to lead. Do you desire to hold leadership positions? Find out by taking the self-assessment. ●

Hurricane Katrina left many people in need of help. The three men here rescued the women in the middle from flood waters caused by the breakdown of levees in New Orleans, Louisiana. These good samaritans likely felt a great deal of meaningfulness from helping others. ©JAMES NIELSEN/AFP/Getty Images

How Strong Is My Motivation to Lead? Please be prepared to answer these questions if your instructor has assigned Self-Assessment 1.1 in Connect.

Are you motivated to lead others? Go to connect. mheducation.com and take the self-assessment. When you’re done, answer the following questions:

1. Do results match your desire to assume leadership roles at school, work, and home? Explain.

2. Which of the three dimensions do you think is most likely to affect your future success as a leader? Discuss.

3. What things would you say during an interview to demonstrate that you possess the career readiness competency of leadership?

SELF-ASSESSMENT 1.1 CAREER READINESS

30 PART 1 Introduction

About 80,000 undergraduate students from over 350 universities across the United States rated 2017’s most attractive employers. The top 10 were: (1) Google, (2) Walt Disney Company, (3) Apple, (4) Nike, (5) Amazon, (6) J.P. Morgan, (7), Goldman Sachs, (8) Ernst & Young, (9) Deloitte, and (10) FBI.115 Would you like to work at these companies or another like them? If so, you need to be career ready.

Career readiness represents the extent to which you possess the knowledge, skills, and attributes desired by employers. How ready do you believe you are? Recent surveys of college graduates and recruiters reveal a big gap in the degree of readiness each group perceives in students. Figure 1.3 shows the results of a study of 400 employers and 613 college students. The majority of students rated themselves as career-ready on 11 of 17 skills, while the majority of employers did not perceive students to be well-prepared on any of the skills.116 The three largest gaps were in critical/analytical thinking, written communication, and locating, organizing, and evaluating information, skills that are very important to employers.117 Other studies have similarly demonstrated that employ- ers see a major skills gap in college students’ interpersonal skills.118

You’ll want to close these gaps for three reasons:

1. To get a job and earn more money. Today’s jobs require greater interpersonal or soft skills, and employers are willing to pay higher salaries to those possessing them.119

2. To impress employers with your self-awareness. Companies prefer to hire people with realistic perceptions of their own strengths and weaknesses. This under- scores the need to obtain information about your strengths and weaknesses throughout your career.

3. To create your own motivation to learn. Studies of human behavior reveal that people won’t spend time on personal development unless they feel the need. Overinflated perceptions of career readiness will not motivate you to develop the attributes that enhance that readiness. You need to motivate yourself to learn and develop.

Moreover, these gaps are critical to employers too. Kate Davidson, a reporter for The Wall Street Journal, concluded that a lack of soft skills “is limiting organizational productivity,” and “it is becoming increasingly difficult to find applicants who can com- municate clearly, take initiative, problem-solve and get along with co-workers.”120 Knowing this, we want reading our textbook to help you become career-ready. The pro- cess starts with focusing on the ideas and suggestions in this section.

A Model of Career Readiness Being career-ready is a lifelong process requiring you to continually learn and develop in response to changes in organizational needs and skill requirements. It is not a one- time event that stops after graduation. Consider what René Steiner, President/CEO of Büler North America, had to say about career readiness. “Realize that learning is not complete when you graduate. Today, more so than in the past, there is the opportunity to continue to develop, through education, learning company culture, and exploring different areas of business. And, you need to adapt to future needs.”121 Authors of the Future Work Skills 2020 report similarly concluded that individuals “will increasingly be

1.7 Building Your Career Readiness THE BIG PICTURE Companies want to hire career-ready college graduates. In this section we describe a model of career readi- ness and offer tips for building your readiness.

LO 1-7 Define the knowledge, soft skills, attitudes, and other characteristics needed for career readiness and discuss how they can be developed.

The Exceptional Manager CHAPTER 1 31

called upon to continually reassess the skills they need, and quickly put together the right resources to develop and update these. Workers in the future need to be adaptable lifelong learners.”122

Being career ready is more encompassing than you might think. Four key categories of competency fuel career readiness: knowledge, soft skills, attitudes, and other charac- teristics (KSAOs for short; see Figure 1.4). Let’s look at each.

Knowledge (K) Skills in the knowledge category, generally referred to as “hard skills,” encompass the basic knowledge employers expect you to possess. They develop from your ability to apply academic and practical knowledge while performing the job. Your grade point average is one way to assess your current level of this type of knowl- edge.123 Other types of knowledge desired by employers include information technology application, cross-cultural awareness, computational thinking, understanding the busi- ness, and new media literacy (see Table 1.2).

Analyzing/solving complex problems

Being innovative/ creative

Critical/analytical thinking

Written communication

Working with numbers/ statistics

Oral communication

Locating, organizing, evaluating information

Ethical judgement and decision making

Staying current on technologies

Working with others in teams

Applying knowledge/ skills to real world

Awareness/experience of diverse cultures in U.S.

Working with people from di�erent backgrounds

Staying current on developments in science

Staying current on global developments

Awareness/experience of diverse cultures outside U.S.

Proficient in other language

Employers Students

42% 15%

34% 16%

43%

55%

55%

62%

64%

62%

46%

64% 37%

59%

59%

57%

66%

65%

44%

48%

18%

18%

21%

21%

23%

24%

25%

26%

27%

28%

28%

29%

30%

37%

*8-10 ratings on 0-to-10 scale

Proportions Saying They/Recent College Graduates Are Well Prepared in Each Area* FIGURE 1.3 Employers and college graduates disagree about levels of career readiness

Hart Research Associates, “Employers Give College Graduates Low Scores for Preparedness Across Learning Outcomes; Students Think They are Better Prepared” Falling Short? College Learning and Career Success, 2015, 12. Copyright © 2015 Association of American Colleges & Universities. All rights reserved. Used with permission.

32 PART 1 Introduction

Career readiness

Knowledge (K)

Soft skills (S)

Career outcomes

Attitudes (A)

Other characteristics

(O)

FIGURE 1.4 Model of career readiness ©2018 Kinicki and Associates, Inc.

TABLE 1.2 Description of KSAO Skills Needed for Career Readiness

KSAO COMPETENCY DESCRIPTION

Knowledge Task-Based/Functional Demonstrated ability to apply academic and practical knowledge in pursuit of organizational and individual goals/assignments.

Information Technology Effective use of IT and learning new applications as needed. Application

Cross-Cultural Competency Awareness of cross-cultural differences; respect for diverse cultures, races, ages, genders, and religions; and demonstrated openness, inclusiveness, and ability to interact with diverse people.

Computational Thinking Ability to use numbers to distill abstract concepts and conduct data-based reasoning. Ability to work with and interpret Big Data.

Understanding the Business Understanding of the company’s business and strategies and the needs of stakeholders, and ability to see how your work fits into the larger organizational puzzle.

New Media Literacy Ability to develop, evaluate, and use new media forms, and to apply these media for persuasive communication. Ability to stay up-to-date with the latest media trends and leverage them in the interest of the organization.

Soft Skills Critical Thinking/Problem Sound reasoning to analyze situations, make decisions, and solve problems. Solving Ability to obtain, interpret, and analyze both qualitative and quantitative

information while creatively solving problems.

Oral/Written Communication Ability to effectively express your thoughts, ideas, and messages to diverse people in oral and written form. Public speaking skills and ability to write/edit emails, letters, and technical reports.

Teamwork/Collaboration Ability to work effectively with and build collaborative relationships with diverse people, work within a team structure, and manage interpersonal conflict.

Leadership Skill at influencing a group of people to achieve common goals. Ability to motivate, coach, and develop others.

Decision Making Ability to collect, process, and analyze information in order to identify and choose from alternative solutions that lead to optimal outcomes.

The Exceptional Manager CHAPTER 1 33

TABLE 1.2 Description of KSAO Skills Needed for Career Readiness (Continued)

KSAO COMPETENCY DESCRIPTION

Social Intelligence Ability to connect with others in a meaningful way, to recognize and understand another person’s feelings and thoughts, and to use this information to stimulate positive relationships and beneficial interactions.

Networking Ability to build and maintain a strong, broad professional network of relationships.

Emotional Intelligence Ability to monitor your emotions and those of others, to discriminate among them, and to use this information to guide your thinking and behavior.

Attitudes Ownership/Accepting Willingness to accept responsibility for your actions. Responsibility

Self-Motivation Ability to work productively without constant direction, instruction, and praise. Ability to establish and maintain good work habits and consistent focus on organizational goals and personal development.

Proactive Learning Desire to learn and improve your knowledge, soft skills, and other Orientation characteristics in pursuit of personal development.

Showing Commitment Willingness to support others and positively work toward achieving individual and company goals.

Positive Approach Willingness to accept developmental feedback, to try and suggest new ideas, and to maintain a positive attitude at work.

Career Management Ability to proactively manage your career and identify opportunities for professional development.

Other Characteristics Professionalism/Work Ethic Accountability and positive work habits such as punctuality, time management, appropriate dress and appearance, and willingness to go beyond a job description or ask for help when needed. Demonstrated integrity, ethical behavior, and concern for the greater good.

Resilience Ability to bounce back from adversity and to remain motivated when confronted with challenges.

Personal Adaptability Ability and willingness to adapt to changing situations.

Self-Awareness A realistic view of your strengths and weaknesses relative to a specific job and context, and the ability to create and implement a personal development plan.

Service/Others Orientation Willingness to put the needs of others over self-interests.

Openness to Change Flexibility when confronted with change, ability to see change as a challenge, and willingness to apply new ideas, processes, or directives.

Generalized Self-Efficacy Confidence in your ability to perform across a variety of situations.

Source: Based on material in NACE Staff, “Employers Rate Career Competencies, New Hire Proficiency,” December 11, 2017, www.naceweb.org; Matthew Tarpey, “The Skills You Need for the Jobs of the Future,” February 16, 2017, www.careerbuilder.com; Alex Gray, “The 10 Skills You Need to Thrive in the Fourth Industrial Revolution,” January 19, 2016, https://www.weforum.org; and Kevin Lowden, Stuart Hall. Dely Elliot, and Jon Lewin, “Employers’ Perceptions of the Employability Skills of New Graduates,” 2011, www.gla.ac.uk.

34 PART 1 Introduction

Soft Skills (S) We defined soft skills above as interpersonal or “people” skills needed for success at work. These are not knowledge or technical skills. Soft skills are becom- ing increasingly important as companies outsource and automate routine tasks. For example, a Wall Street Journal survey reported that 92% of executives believed “soft skills were equally important or more important than technical skills.” Further, 89% said they had “a very or somewhat difficult time finding people with the requisite attri- butes.” These gaps were found across all age groups and experience levels.124 You can increase your career readiness by focusing on the eight soft skills described in Table 1.2. You will learn more about each one as we progress through this book.

Attitudes (A) Attitudes are beliefs and feelings directed toward specific objects, peo- ple, or events. More formally, an attitude is defined as a learned predisposition toward a given object. Attitudes are thoroughly discussed in Chapter 11.

Table 1.2 indicates that recruiters prefer to find six attitudes in college graduates they hire. All have a positive and proactive focus. People perceive our attitudes by observing what we do and say. For example, taking ownership or responsibility is a key attitude preferred by recruiters. It reflects the extent to which a person accepts responsibility for his or her actions. We suspect recruiters desire this attitude because it is positively asso- ciated with employees’ commitment, job satisfaction, and engagement. Feelings of own- ership also reduce employees’ desire to quit.125 All told, you can create more favorable impressions during interviews if you demonstrate this attitude. Find out where you stand on this attitude by taking self-assessment 1.2. It was designed to enhance your self-awareness about the extent you accept responsibility for your actions.

Please be prepared to answer these questions if your instructor has assigned Self-Assessment 1.2 in Connect.

To What Extent Do You Accept Responsibility for Your Actions?

Building Your Career Readiness People are more likely to diligently work toward accomplishing their goals and accept performance feedback when they accept responsibility for their actions. They also are less likely to blame others for their mistakes or poor performance. This self- assessment allows you to determine your status regarding this important attitude. The survey feedback will help you to maintain

or improve your attitude about taking ownership/responsibility for your actions.

Go to connect.mheducation.com and take the self- assessment. When you’re done, answer the following questions:

1. Do you have a strong attitude about accepting responsibility for your actions? Do you agree with these results? Explain your thinking.

2. What can you do to increase the strength of this attitude?

3. What things would you say during an interview to demonstrate that you possess the career readiness competency of ownership/accepting responsibility?

SELF-ASSESSMENT 1.2 CAREER READINESS

Other Characteristics (O) This category contains a host of personal characteristics that prompt positive impressions among others and help you effectively adapt to personal and work-related changes. Consider professionalism/work ethic and resilience. Aaron Michel, cofounder and CEO at PathSource, a career navigation and education software company, believes professionalism/work ethic “cannot be overvalued in the job market.” He concluded that “just being on time and behaving responsibly can leave a strong impression.”126

Resilience is the ability to bounce back from adversity and to sustain yourself when faced with a challenge. Research shows that it is a key trait of successful people 127 The Arizona State women’s golf team displayed resiliency in 2017. After finishing sixth in the Pac-12 Women’s Golf Championship, they came back and won the 2017 NCAA National Championship. Head coach Missy Farr-Kaye said the team “dug a little deeper, practiced a little harder and showed what they were made of.” She told the team

The Exceptional Manager CHAPTER 1 35

that its poor showing in the conference championship wasn’t a bad thing but rather an opportunity.128 This type of cognitive reframing is key to becoming resilient.129 Can you see why employers want to hire people who are professional and resilient?

Developing Career Readiness We classify the many ways to develop career readiness into six categories: (1) build self- awareness, (2) learn from educational activities, (3) model others possessing the desired competencies, (4) learn from on-the-job-activities, (5) seek experience from student groups and organizations, and (6) experiment.

1. Build Self-Awareness. There are two ways to gather the data or information you need to make an accurate evaluation of your strengths and developmental opportunities. ● Ask for honest, targeted feedback from fellow students, co-workers, manag-

ers, teachers, and family. Find people you trust. ● Take validated self-assessment surveys. This textbook provides 66 assess-

ments for this purpose. Each provides developmental feedback, enabling you to devise a path toward improvement of a particular skill.

2. Learn from Educational Activities. To continue the lifelong process of learning, you need a proactive learning orientation. As defined in Table 1.2, a proactive learning orientation is the desire to learn and improve your knowledge, soft skills, and other characteristics in pursuit of personal development. This orientation allows you to improve your chances of learning new skills by means of the fol- lowing: ● Taking courses at your university or attending training seminars that focus on

the competencies you need, such as time management or communication. ● Watching training videos and documentaries.

MIssy Farr-Kay, at the far left, is head coach of the Arizona State University women’s golf team since 2015. She led her team to a NCAA national championship in 2017. It is a nation leading 8th time that the women’s golf team at ASU has won a national championship truly creating a golf dynasty at the collegiate level. Farr-Kaye notes that her team was highly resilient, never giving up even in the face of adversity. How do you think Farr-Kay and her coaches develop a resilient mindset within the players? ©Steve Woltmann/NCAA Photos/Getty Images

36 PART 1 Introduction

● Reading books, magazines, and research articles in pursuit of developmental ideas.130 This textbook is a good source. You can also consult the references cited in this book to find more detailed information about a variety of topics.

● Search the Internet or Amazon for relevant source materials from reputa- ble sources.

3. Model others possessing the targeted competencies. To learn from others around you, you can: ● Identify role models or mentors who possess the skills or traits you need

and then interview them. Try to learn how they execute their competencies. ● Observe people who possess the targeted competency and learn from their

behavior. ● Try out new behaviors and then discuss your results with a mentor, coach,

or colleague.

4. Learn from on-the-job activities. Steps you can take include: ● Seeking new assignments that require you to use one of your targeted

competencies. ● Representing a member of management at a meeting or business function. ● Serving as a coach to another employee. ● Asking to serve as a team leader or project manager. ● Making presentations and facilitating meetings. ● Volunteering for special projects or committees. ● Transferring to another job to obtain new skills and experience.

5. Seek Experience from Student Groups and Organizations. The following activi- ties are useful: ● Join student groups and seek leadership positions. ● Join and network at student organizations such as Toastmasters. ● Volunteer at organizations where you can practice your developing skills. ● Enroll in internships, research projects, service learning opportunities, or

co-ops. Internships generally last one semester or summer and can be paid or unpaid. Co-ops are paid full-time jobs that typically last 3 to 12 months.131

● Make presentations to professional or civic organizations. ● Volunteer in religious, civic, or community organizations.

6. Experiment. Developing soft skills requires you to put new knowledge or infor- mation to use. Try these ideas: ● Identify new behaviors you want to master and then practice them. For

example, if you want to increase your leadership skills, volunteer to facili- tate your next team meeting at school or work. Practice using the influ- ence skills we’ll discuss in Chapter 14.

● Keep a career journal. Record the details of your developmental efforts and learn from both success and missteps. Collect stories about your strengths and improvements you’ve made and then use them during job interviews.

Let Us Help Our two overriding goals for writing this book are to (1) assist you in leading a happy and meaningful life and (2) help you become career ready by learning about the prin- ciples of management. Thus we have created a feature for each chapter titled “Career Corner: Managing Your Career Readiness.” The purpose of this feature is to help you integrate what you learn in a chapter into the process of building your career readiness. The next section is our first installment. ●

The Exceptional Manager CHAPTER 1 37

The goal of this section is to help you apply what you learn to building your career readiness. Let’s begin with three keys to success:

1. It’s your responsibility to manage your career. Don’t count on others.

2. Personal reflection, motivation, commitment, and experimentation are essential.

3. Success is achieved by following a process. A process is defined as a series of actions or steps followed to bring about a desired result.

Figure 1.5 illustrates a process to guide the pursuit of managing your career readiness. The first step entails examining the list of knowledge, skills, attitudes, and other

characteristics (KSAOs) in Table 1.2 and picking two or three that impact your current performance at school, work, or extracurricular activities. You then need to assess your skill level for these competencies. This textbook contains 65 self-assessments you can take for this purpose. The first one was presented on page 29.

The second step requires you to consider how you can use the material covered in a chapter to develop your targeted competencies. For example, do your targeted KSAOs at this point relate to any of the four functions of management: planning, organizing, leading, or control? If yes, reflect on what you learned while reading material regarding the functions of management and consider how you can apply ideas, concepts, or suggestions that were discussed.

The third step involves experimenting with small steps aimed at developing your targeted KSAOs. The final step is to evaluate what happened during your small-step experiments. This entails reflecting on what went right and wrong. Remember, you can learn as much from failure as success.

Figure 1.5 shows that willingness is at the center of developing your career readiness. This reinforces the point that it’s up to you to shape and direct your future. We are con- fident that you can develop your career readiness by following this process and using the guidance provided at the end of every chapter.132 ●

LO 1-8 Describe the process for managing your career readiness.

Identify the KSAOs you want to develop.

Experiment with implementing a few small steps

aimed at developing your KSAOs.

Evaluate the results of your experimental small steps.

Determine which concepts are relevant for

developing your targeted KSAOs.

Willingness

FIGURE 1.5 Process for managing career readiness ©2018 Kinicki and Associates, Inc.

1.8 Career Corner: Managing Your Career Readiness

38 PART 1 Introduction

artificial intelligence (AI) 25 attitude 34 Big Data 25 career readiness 30 cloud computing 25 collaborative computing 25 competitive advantage 23 conceptual skills 19 controlling 10 databases 25 decisional roles 17 e-business 24 e-commerce 24 effective 5 efficient 5 first-line managers 12

four management functions 9

functional manager 13 general manager 13 human skills 20 information technology

application skills 24 informational roles 17 innovation 24 interpersonal roles 17 knowledge management 25 leading 10 management 5 meaningfulness 28 mentor 8 middle managers 12

mindfulness 16 nonmanagerial employees 13 organization 5 organizing 9 planning 9 proactive learning

orientation 35 process 37 project management software 25 resilience 34 soft skills 21 sustainability 28 technical skills 19 telecommute 25 top managers 11 videoconferencing 25

Key Points

1.1 Management: What It Is, What Its Benefits Are

• Management is defined as the pursuit of organizational goals efficiently, meaning to use resources wisely and cost-effectively, and effectively by integrating the work of people through planning, organizing, leading, and controlling the organization’s resources.

1.2 What Managers Do: The Four Principal Functions

• The management process consists of four functions. • Planning is setting goals and deciding how to

achieve them. • Organizing is arranging tasks, people, and other

resources to accomplish the work. • Leading is motivating, directing, and otherwise

influencing people to work hard to achieve the organization’s goals.

• Controlling is monitoring performance, comparing it with goals, and taking corrective action as needed.

1.3 Pyramid Power: Levels and Areas of Management

• Within an organization, there are managers at three levels.

• Top managers make long-term decisions about the overall direction of the organization and establish the objectives, policies, and strategies for it.

• Middle managers implement the policies and plans of their superiors and supervise and coordinate the activities of the managers below them.

• First-line managers make short-term operating decisions, directing the daily tasks of nonmanagerial personnel.

• There are three types of organizations—for-profit, nonprofit, and mutual benefit.

• For-profit organizations are formed to make money by offering products or services.

• Nonprofit organizations offer services to some, but not to make a profit.

• Mutual-benefit organizations are voluntary collections of members created to advance members’ interests.

1.4 The Skills Exceptional Managers Need • The three skills that exceptional managers cultivate

are technical, conceptual, and human. • Technical skills consist of job-specific knowledge

needed to perform well in a specialized field. • Conceptual skills consist of the ability to think

analytically, to visualize an organization as a whole, and to understand how the parts work together.

• Human skills consist of the ability to work well in cooperation with other people in order to get things done.

1.5 Roles Managers Must Play Successfully • The Mintzberg study shows that, first, a manager

relies more on verbal than on written communication; second, managers work long hours at an intense pace; and, third, a manager’s work is characterized by fragmentation, brevity, and variety.

Key Terms Used in This Chapter

The Exceptional Manager CHAPTER 1 39

1. What is the difference between being efficient and being effective?

2. What is the formal, three-part definition of management?

3. How would I define the four functions of management? 4. What are the differences among the four levels of

managers in the organizational pyramid? 5. Mintzberg’s study in the 1960s came up with three

important findings about a manager’s routine. What are they, and are they probably still the same today?

6. Mintzberg also found that managers play three important roles. What are they, and what examples can I think of?

7. What are the three skills that exceptional managers need to cultivate, and which one do I probably have to work on most?

8. What are the seven challenges of being a manager, and which one is the one I will probably most have to worry about during my lifetime?

9. What does it mean to be career ready, and what are the attributes that define it?

10. How can I build my level of career readiness?

Understanding the Chapter: What Do I Know?

• Mintzberg concluded that managers play three broad roles: (1) interpersonal—figurehead, leader, and liaison; (2) informational—monitor, disseminator, and spokesperson; and (3) decisional—entrepreneur, disturbance handler, resource allocator, and negotiator.

1.6 Seven Challenges to Being an Exceptional Manager

• Managing for competitive advantage, which means an organization must stay ahead in four areas— being responsive to customers, innovating new products or services offering better quality, being more efficient.

• Managing for diversity among different genders, ages, races, and ethnicities.

• Managing for globalization, the expanding universe. • Managing for computers and telecommunications—

information technology. • Managing for right and wrong, or ethical standards. • Managing for sustainability. • Managing for your own happiness and meaningful

life goals.

1.7 Building Your Career Readiness • Career readiness reflects the extent to which you

possess the knowledge, skills, attitudes and other characteristics (KSAOs) desired by employers.

• Research uncovered 27 KSAOs preferred by employers (see Table 1.2).

• Six actions develop career readiness: Build self- awareness, learn from educational activities, model others possessing the targeted competencies, learn from on-the-job activities, seek experience from student groups and organizations, and experiment.

1.8 Career Corner: Managing Your Career Readiness

• A four-step process is recommended for managing your career readiness: Identify the KSAOs you want to develop, determine which concepts are relevant for developing your targeted KSAOs, experiment with implementing a few small steps aimed at developing your KSAOs, and evaluate the results of your experimental small steps.

• It takes willingness on your part to manage career readiness.

Did Major League Baseball Value Money Over Bob Bowman’s Behavior? Major League Baseball (MLB) is the oldest major pro- fessional sports league in the United States. It is com- posed of 30 teams in two leagues, the National League and the American League, each containing 15 teams. The two leagues merged into a single organization in 2000 and are led by the Commissioner of Baseball.133

The Commissioner oversees the hiring and manage- ment of umpiring crews and negotiates all contracts controlling marketing, labor, and television rights. MLB Advanced Media (MLBAM) is the multimedia arm of MLB. It was formed in 2000 by then Commis- sioner Bud Selig: Selig was Commissioner from 1998 to 2015. MLBAM “operates the official website for the league and the 30 Major League Baseball club websites

Management in Action

40 PART 1 Introduction

via MLB.com, which draws four million hits per day. The site offers news, standings, statistics, and sched- ules, and subscribers have access to live audio and video broadcasts of most games. The company also em- ploys reporters, with one assigned to each team for the season and others serving more general beats. MLB Advanced Media also owns and operates Baseball- Channel.tv and MLB Radio.”134

BOWMAN AND HIS SUCCESS AT MLBAM Bob Bowman was hired to run MLBAM in 2000. Prior to that he worked as treasurer of the state of Michigan from 1983 to 1990 and then for ITT Corp. He ultimately became ITT’s president and chief oper- ating officer.135

Bowman was given great latitude and autonomy by Commissioner Selig. He thus decided to locate MLBAM’s headquarters two miles away from the league office on Park Avenue and ran his operation like a fiefdom, according to The Wall Street Journal. A reporter from the New York Times concluded that the physical distance between the two corporate offices and Bowman’s “ability to deliver enormous profits for the league and its team owners, apparently enabled Bowman to operate with little scrutiny from league officials.”136

MLBAM prospered under Bowman. The New York Times reported that MLBAM “became the crown jewel of Major League Baseball, the envy of every sports league and one of the most important companies as the broadcast world transitioned to digital streaming. It generates hundreds of millions of dollars in revenue annually, and 75 percent of a spinoff company, Bam- Tech, has been sold for $2.58 billion.”137 Current MLB Commissioner Rob Manfred said “Bob’s vision made our game even more accessible and enjoyable to millions of fans.”138

Bowman’s success led one reporter to conclude that he “was once considered one of the two or three most powerful figures in all of professional sports.”139 It was even suggested that Bowman should have been selected over Rob Manfred as Commissioner, and as a possible successor to replace Bob Iger as CEO of The Walt Disney Company.140

ALLEGATIONS PERSIST ABOUT BOWMAN’S BEHAVIOR Reporters from The Wall Street Journal concluded that Bowman was forced to resign “after years of troubling workplace behavior that former baseball executives were said to be made aware of at least a decade ago.” The reporters noted evidence suggesting that Bowman “engaged in a pattern of behavior that included propo- sitioning female colleagues, allegedly having consen- sual relationships with subordinate co-workers and cultivating a culture of partying and heavy drinking

with employees outside the office.” These concerns were raised at least 10 years ago with Bob DuPuy, MLB’s president and chief operating officer, who in turn informed Commissioner Selig.141

Bowman was considered brilliant yet hard on others. The Wall Street Journal reported that he “would just talk down to people,” often yelling. “Just disrespectful.”142

More recently, Bowman was accused of “pushing an executive for the Fenway Sports Management, the Red Sox parent company, and verbally abusing an em- ployee in October” [2017]. It also was alleged that Bowman hired women to entertain people at the 2016 All-Star Game. These women were believed to be escorts and “some of them were heard encouraging attendees to leave to have sex quickly so that they could return to solicit another attendee,” according to The Wall Street Journal.143

A former high-ranking baseball official told Wall Street Journal reporters that what Bowman “gave in heartburn was always overshadowed by what he gave in money.” This individual also stated that Bud Selig “had no interest in dealing with it.”144

NOW WHAT? Current MLB Commissioner Rob Manfred said he was unaware of Bowman’s historically bad behavior. He did, however, believe that the latest incidents necessi- tated a conversation with Bowman. This conversation resulted in a joint decision that it was time for Bowman to leave.145

Bowman provided a statement to The Wall Street Journal. He acknowledged that MLBAM’s culture was hardworking and driven, and that his behavior was in- appropriate. He took full responsibility for his actions. He also apologized to those he offended or hurt.

Following Bowman’s departure, Commissioner Manfred made it mandatory for all full and part-time staff to participate in a 45-minute online training course that focused on discrimination and harassment. Manfred wants employees to have practical tools they can use in combatting disruptive employee behavior, according to The Wall Street Journal.146

Manfred also is addressing the culture gap between MLB and MLBAM. His solution is to combine the two offices in one location in the summer of 2019.

FOR DISCUSSION Problem Solving Perspective

1. What is the underlying problem in this case from Commissioner Rob Manfred’s perspective?

2. Why do you think Bowman’s behavior was ignored for over 10 years?

3. What would you have done if you were Commissioner Manfred?

The Exceptional Manager CHAPTER 1 41

Application of Chapter Content

1. Did Commissioner Bud Selig operate more from a principle of efficiency or effectiveness? Explain your rationale.

2. Which of the seven challenges to being an exceptional manager did Commissioner Manfred face in dealing with Bowman? How did he handle them?

3. Which of the three skills exceptional managers need did Bowman most lack? Which ones does Commis- sioner Manfred most need? Explain your answers.

4. Which of the KSAOs needed for career readiness did Bowman lack? Which ones did he display?

5. Given the facts of this case, do you believe Bud Selig should have been inducted into the Baseball Hall of Fame in 2016? Why or why not?

To Delay or Not to Delay? You have been hired by a vice president of a national company to create an employee attitude survey, to ad- minister it to all employees, and to interpret the re- sults. You have known this vice president for more than 10 years and have worked for her on several occa- sions. She trusts and likes you, and you trust and like her. You have completed your work and now are ready to present the findings and your interpretations to the vice president’s management team. The vice president has told you that she wants your honest interpretation of the results, because she is planning to make changes based on the results. Based on this discussion, your report clearly identifies several strengths and weak- nesses that need to be addressed. For example, em- ployees feel that they are working too hard and that management does not care about providing good cus- tomer service. At the meeting you will be presenting the results and your interpretations to a group of 15 managers. You also have known most of these managers for at least five years.

You arrive for the presentation armed with slides, handouts, and specific recommendations. Your slides are loaded on the computer, and most of the partici- pants have arrived. They are drinking coffee and telling you how enthused they are about hearing your presentation. You also are excited to share your insights. Ten minutes before the presentation is set

to begin, however, the vice president takes you out of the meeting room and says she wants to talk with you about your presentation. The two of you go to an- other office, and she closes the door. She then tells you that her boss’s boss decided to come to the pre- sentation unannounced. She thinks that he is coming to the presentation to look solely for negative infor- mation in your report. He does not like the vice presi- dent and wants to replace her with one of his friends. If you present your results as planned, it will provide this individual with the information he needs to cre- ate serious problems for the vice president. Knowing this, the vice president asks you to find some way to postpone your presentation. You have 10 minutes to decide what to do.

SOLVING THE CHALLENGE What would you do?

1. Deliver the presentation as planned.

2. Give the presentation but skip over the negative results.

3. Go back to the meeting room and announce that your spouse has had an accident at home and you must leave immediately. You tell the group that you just re- ceived this message and that you will contact the vice president to schedule a new meeting.

4. Invent other options. Discuss.

Legal/Ethical Challenge

Learn about Uber’s history, starting from its beginning to the company’s current chal- lenges. Assess your ability to apply concepts discussed in this chapter to the case by going to Connect.

Uber Continuing Case

This chapter gives you a short overview of the three principal historical

perspectives or viewpoints on management—classical, behavioral, and

quantitative. It then describes the three principal contemporary view-

points—systems, contingency, and quality-management. We also con-

sider the concept of learning organizations. We conclude with a Career

Corner that focuses on how you can demonstrate the career readiness

competency of understanding the business.

What’s Ahead in This ChapterFORECAST

PART 1 • INTRODUCTION

Management Theory Essential Background for the Successful Manager2

After reading this chapter, you should be able to:

LO 2-1 Describe the development of current perspectives on management.

LO 2-2 Discuss the insights of the classical view of management.

LO 2-3 Describe the principles of the behavioral view of management.

LO 2-4 Discuss the two quantitative approaches to solving problems.

LO 2-5 Identify takeaways from the systems view of management.

LO 2-6 Explain why there is no one best way to manage in all situations.

LO 2-7 Discuss the contributions of the quality- management view.

LO 2-8 Define how managers foster a learning organization.

LO 2-9 Describe how to develop the career readiness competency of understanding the business.

© O

livier Renck/Aurora/G etty Im

ages

You’ll see a bit later in this chapter that a view of the organization that considers employees to be capable, creative, responsible, and motivated to work and learn is called Theory Y. It contrasts sharply with Theory X, which suggests that workers are resistant and unwilling and need to be monitored and controlled in order to achieve anything. Theory Y is obviously a more benevolent and optimistic view of workers, and it has lately given rise to a real-world phenomenon known as the people-focused organization.

What Does It Mean for You? People-focused organizations are guided by the Theory Y view that people are essentially good, trustworthy, and productive, and that they flourish when they are empowered to act independently in an atmosphere that respects their diversity and values their well-being. Efforts to improve the work experience in people-focused organizations might become the responsibility of managers in such newly created jobs as Diversity Director, Director of Inclusion, and People Success Manager. Some consulting companies even focus on helping their clients nurture younger workers by designating a Millennial Generation Expert. As Forbes magazine notes, “companies have started to figure out that they can stay competitive with customers and in the war for talent if they become more people-focused.”1 The key is for managers to see the company’s positive internal culture as a competitive advantage. For young and entry-level workers, the rise of this new focus on people means there may be more choices about the kind of environment in which you can work. Self- awareness is one of the career readiness competencies employers desire in new college graduates. Are you aware of the type of work environment you prefer? While you may not find yourself in an organization with four-day workweeks and almost no managers—two innovations the e-learning company Treehouse briefly experimented with2—you might be given some responsibility for deciding how to accomplish your work with less direct oversight and fewer rules than you are used to. Of course, to

succeed in this kind of culture, you need to be self- directed, motivated, and able to quickly identify the questions you need to ask, all competencies associated with career readiness.

How Can You Get a Job in a People-Focused Organization? Nearly 70% of U.S. college students work while in school, many of them full time.3 If you are one of these students, or if you are thinking ahead to getting an entry-level job after graduation, you may want to consider how well you would fit into a people-focused organization that takes the optimistic Theory Y view of its employees. For instance, do you like to work independently? That calls for you to set your own goals and figure out how to achieve them on time and on budget. You’ll need to develop and demonstrate good organizational and time-management skills, a willingness to contribute to the organization’s larger purpose, and the ability to do so without a manager’s heavy hand. REI, the maker of outdoor and camping gear, is a good example of a people-focused organization. In describing how to get hired there, the company says, “We’re looking for passionate and knowledgeable employees who want to work with purpose and a shared belief that a life outdoors is a life well lived. We hire people who intentionally direct their skills and experience toward a greater good. People who are already living by our values—authenticity, integrity, quality, respect, balance and service.”4

For Discussion Would you like to work for a company that follows a people-focused, Theory Y view of its employees? What about Theory X? What questions might you ask a recruiter to determine whether a company believes in a Theory Y or Theory X view of its employees?

What Type of Work Environment Do I Prefer?

44 PART 1 Introduction

“The best way to predict the future is to create it,” Peter Drucker said. The purpose of this book is, to the extent possible, to give you the tools to create your

own future in your career and as a manager.

Creating Modern Management: The Handbook of Peter Drucker Who is Peter Drucker? “He was the creator and inventor of modern management,” says management guru Tom Peters (author of In Search of Excellence). “In the early 1950s, nobody had a tool kit to manage these incredibly complex organizations that had gone out of control. Drucker was the first person to give us a handbook for that.”5

An Austrian trained in economics and international law, Drucker came to the United States in 1937, where he worked as a correspondent for British newspapers and later became a college professor. In 1954, he published his famous text The Practice of Management, in which he proposed the important idea that management was one of the major social innovations of the 20th century and should be treated as a profession, like medicine or law.

In this and other books, he introduced several ideas that now underlie the organiza- tion and practice of management—namely:

■ That workers should be treated as assets. ■ That the corporation could be considered a human community. ■ That there is “no business without a customer.” ■ That institutionalized management practices are preferable to charismatic

cult leaders.

Many ideas that you will encounter in this book—decentralization, management by objectives, knowledge workers—are directly traceable to Drucker’s pen. “Without his analysis,” says one writer, “it’s almost impossible to imagine the rise of dispersed, globe- spanning corporations.”6 In our time, Drucker’s rational approach has culminated in evidence-based management, as we describe in Section 2.6 in this chapter.

Six Practical Reasons for Studying This Chapter “Theory,” say business professors Clayton Christensen and Michael Raynor, “often gets a bum rap among managers because it’s associated with the word ‘theoretical,’ which connotes ‘impractical.’ But it shouldn’t.”7

After all, what could be more practical than studying different approaches to see which work best?

Indeed, there are six good reasons for studying theoretical perspectives:

1. Understanding of the present. “Sound theories help us interpret the present, to understand what is happening and why,” say Christensen and Raynor.8 Or as

2.1 Evolving Viewpoints: How We Got to Today’s Management Outlook

THE BIG PICTURE After studying theory, managers may learn the value of bringing rationality to the decision-making process. This chapter describes two principal theoretical perspectives—the historical and the contemporary. Studying management theory provides understanding of the present, a guide to action, a source of new ideas, clues to the meaning of your managers’ decisions, and clues to the meaning of outside events.

LO 2-1 Describe the development of current perspectives on management.

True learner. In his 70-year career, Peter Drucker published over 35 books and numerous other publications, received the Presidential Medal of Freedom, and achieved near rockstar status for his management ideas, which influenced organizations from General Electric to the Girl Scouts. A true learner who constantly expanded his knowledge, he understood that new experiences are key to nurturing new ideas and new ventures. Do you have this kind of curiosity? ©Jonathan Alcorn/ ZUMAPRESS/Newscom

Management Theory CHAPTER 2 45

scholars Scott Montgomery and Daniel Chirot argue, ideas “do not merely matter, they matter immensely, as they have been the source for decisions and actions that have structured the modern world.”9 Understanding history will help you understand why some practices are still favored, whether for right or wrong reasons.

2. Guide to action. Good theories help you make predictions and enable you to develop a set of principles that will guide your actions. For example, the theory of supply and demand tells us that prices go up when demand is high and sup- ply is low. This is the situation with respect to the cost of labor in 2018. Firms are having to pay more for workers due to the shortage of qualified employees looking for work.

3. Source of new ideas. It can also provide new ideas that may be useful to you when you come up against new situations. For example, theories of employee engagement, which are discussed in Chapter 11, offer managers new ideas for how to best engage their workers. Contrary to the notion that compensation drives employee performance, these theories reveal that employees become engaged when an organization has the kind of cuture that promotes employee development, recognition, and trust between management and employees.

4. Clues to meaning of your managers’ decisions. It can help you understand your firm’s focus, where the top managers are “coming from.”

5. Clues to meaning of outside events. It may allow you to understand events out- side the organization that could affect it or you.

6. Producing positive results. It can help you understand why certain management practices—such as setting goals that stretch you to the limit (stretch goals), bas- ing compensation and promotion on performance, and monitoring results— have been so successful for many firms.

EXAMPLE Zappos’ Holacracy: A Success or a Failure?

A few years ago Zappos, the innovative online clothing and shoe retailer, undertook a radical management experiment called holacracy. The company eliminated job titles and organi- zational hierarchy, replacing them with democratic assemblies called “circles” in which its 1,500 employees proposed their own job descriptions, ratified the roles of others, and decided what projects the group should undertake.10 Holacracy, says CEO Tony Hsieh (pronounced shay ), “enables employees to act more like entrepreneurs and self-direct their work instead of reporting to a manager who tells them what to do.”11

In its early days, Zappos was so successful at creating a vibrant culture based on fun, “a little weirdness,” and open relationships that it started a separate business unit to help other companies learn from its example. But a few years into its experiment with holacracy, employees seemed shaken and confused by the pace of change and resulting uncer- tainty. For the first time in eight years, the company had fallen off Fortune’s list of Best Companies to Work. Turnover increased, partly because some managers were given buy- outs and some people felt the wrong leaders had left. Meanwhile a new self-management initiative called “teal” is being implemented. “The one thing I’m absolutely sure of,” Hsieh says, “is that the future is about self-management.”12 If he could do it all over again, he says, he would introduce it even sooner.13

The basic reason Hsieh introduced holacracy was to avoid cutting off innovation with an increasingly stifling bureaucracy. Although holacracy itself requires several different kinds of meetings and its own versions of rules, structure, and disci- pline, it offers everyone in the organization the opportunity to make big decisions, including about their own roles. As one

©Jonathan Weiss/Alamy Stock Photo

46 PART 1 Introduction

The Systems Viewpoint Regards the organization as systems of interrelated parts that operate together to achieve a common purpose

The Quality-Management Viewpoint Three approaches

The Contingency Viewpoint Emphasizes that a manager’s approach should vary accord- ing to—i.e., be contingent on—the individual and environ- mental situation

Classical Viewpoint 1911–1947 Emphasis on ways to manage work more e�ciently

The Historical Perspective (1911–1950s)

The Contemporary Perspective (1960s–Present)

e Historical Perspective (1911–1950s)Th

Contemporary Perspective (1960s–PreseCo

Behavioral Viewpoint 1913–1950s Emphasis on importance of understanding human behavior and motivating and encouraging employees toward achievement

ent)en

Quantitative Viewpoint 1940s–1950s Applies quantitative techniques to management

FIGURE 2.1 The two overarching perspectives—historical and contemporary

Two Overarching Perspectives about Management: Historical and Contemporary In this chapter, we describe two overarching perspectives about management. (See Figure 2.1.)

■ The historical perspective (1911–1950s) includes three viewpoints—classical, behavioral, and quantitative.

■ The contemporary perspective (1960s–present) also includes three viewpoints— systems, contingency, and quality-management. ●

employee says, “My worst day at Zappos is still better than my best day anywhere else. I can’t imagine going back to tradi- tional hierarchy anymore.”14 Flattened hierarchies in some form also work for other large organizations, such as W.L. Gore, maker of Gore-Tex fabric, which employs 10,000 people.

YOUR CALL Why do you think, then, that many organizations resist using flat structures? Do you think studying management theory could help you answer this question? Why or why not?

Management Theory CHAPTER 2 47

2.2 Classical Viewpoint: Scientific and Administrative Management

THE BIG PICTURE The three historical management viewpoints we will describe are (1) the classical, described in this section; (2) the behavioral; and (3) the quantitative. The classical viewpoint, which emphasized ways to manage work more efficiently, had two approaches: (a) scientific management and (b) administrative management. Scientific management, pioneered by Frederick W. Taylor and Frank and Lillian Gilbreth, emphasized the scientific study of work methods to improve the productivity of individual workers. Administrative management, pioneered by Charles Spaulding, Henri Fayol, and Max Weber, was con- cerned with managing the total organization.

Have you ever heard of a therblig? Therblig is a made-up word coined by Frank Gilbreth and is, in fact, “Gilbreth” spelled backward, with the “t” and the “h” reversed. It refers to 1 of 17 basic motions workers can perform. By identifying the therbligs in a job, such as that of a bricklayer (which he had once been), Gilbreth and his wife, Lillian Gilbreth, were able to help workers eliminate unnecessary motions and reduce their fatigue.

The Gilbreths were industrial engineers and pioneers in one of the classical approaches to management, part of the historical perspective (1911–1950s). As we men- tioned, there are three historical management viewpoints or approaches.15 (See Figure 2.2, next page.)

■ Classical viewpoint (1911–1947) ■ Behavioral viewpoint (1913–1950s) ■ Quantitative viewpoint (1940s–1950s)

In this section, we describe the classical perspective of management, which origi- nated during the early 1900s. The classical viewpoint, which emphasized finding ways to manage work more efficiently, assumed that people are rational. It had two branches— scientific and administrative—each of which is identified with particular pioneering theo- rists. Let’s compare the two approaches.

Scientific Management: Pioneered by Taylor and the Gilbreths The problem for which scientific management emerged as a solution was this: In the expansive economy of the early 20th century, labor was in such short supply that man- agers looked for ways to raise the productivity of workers. Scientific management applied the scientific study of work methods to improving the productivity of individual workers. Two of its chief proponents were Frederick W. Taylor and the team of Frank and Lillian Gilbreth.

Frederick Taylor and the Four Principles of Scientific Management Known as “the father of scientific management,” Taylor was an engineer from Philadelphia who believed managers could improve workers’ productivity by applying four principles of science:16

1. Evaluate a task by scientifically studying each part of it (not by using old rule- of-thumb methods). This leads to the establishment of realistic performance goals for a job.

2. Carefully select workers with the right abilities for the task.

LO 2-2 Discuss the insights of the classical view of management.

48 PART 1 Introduction

3. Give workers the training and incentives to do the task with the proper work methods.

4. Use scientific principles to plan the work methods and ease the way for work- ers to do their jobs.

Taylor based his system on motion studies, in which he broke down each worker’s job—moving pig iron at a steel company, say—into basic physical motions and then trained workers to use the methods of their best-performing co-workers. He suggested employers institute a differential rate system, in which more efficient workers earned higher rates of pay.

Why Taylor Is Important: “Taylorism” met considerable resistance from workers, who feared it would lead to lost jobs except for the highly productive few. In fact, Taylor believed that increasing production would benefit both labor and management by increasing profits to the point where they no longer had to quarrel over them. If used correctly, the principles of scientific management can enhance productivity, and inno- vations like motion studies and differential pay are still used today.

Classical Viewpoint 1911–1947 Emphasis on ways to manage work more e�ciently

Proponents : Henri Fayol

Max Weber

Administrative management Concerned with managing the total organization

Scientific management Emphasized scientific study of work methods to improve pro- ductivity of individual workers

Proponents : Frederick W. Taylor

Frank and Lillian Gilbreth

Behavioral science approach Relies on scientific research for developing theory to provide practical management tools

Behavioral Viewpoint 1913–1950s Emphasis on importance of understanding human behavior and motivating and encouraging employees toward achievement

Early behaviorists

Proponents : Hugo Munsterberg

Mary Parker Follett

Elton Mayo

Human relations movement Proposed better human relations could increase worker productivity

Proponents : Abraham Maslow

Douglas McGregor

Management science Focuses on using mathematics to aid in problem solving and decision making

Operations management Focuses on managing the production and delivery of an organization’s products or services more e�ectively

Quantitative Viewpoint 1940s–1950s Applies quantitative techniques to management

The Historical Perspective (1911–1950s)

FIGURE 2.2 The historical perspective: three viewpoints—classical, behavioral, and quantitative

Frederick W. Taylor. Called the father of scientific management, Taylor published The Principles of Scientific Management in 1911. ©Bettmann/Getty Images

Management Theory CHAPTER 2 49

Frank and Lillian Gilbreth and Industrial Engineering Frank and Lillian Gilbreth’s experiences raising 12 children—to which they applied some of their ideas about improving efficiency—were later popularized in a book, two movies, and a TV sitcom, Cheaper by the Dozen. The Gilbreths expanded on Taylor’s motion studies—for instance, by using movie cameras to film workers in order to isolate the parts of a job.

Lillian Gilbreth, who received a PhD in psychology, was the first woman to be a major contributor to management science.

Administrative Management: Pioneered by Spaulding, Fayol, and Weber Scientific management is concerned with the jobs of individuals. Administrative man- agement is concerned with managing the total organization. Among the pioneering theo- rists were Charles Clinton Spaulding, Henri Fayol, and Max Weber.

Charles Clinton Spaulding and the “Fundamental Necessities” of Management Spaulding was the son of a farmer and had 13 siblings. He proposed eight “necessities” of management based on his experiences working at his father’s fields as a boy and later leading the North Carolina Mutual Life Insurance Company. He is recognized as the “Father of African-American Management” and published his classic article in the Pitts- burgh Courier in 1927.17

Why Spaulding Is Important: Spaulding’s “necessities” went beyond the task- orientation of scientific management, thereby broadening the view of what it takes to effectively manage people and organizations. He suggested that considerations such as the need for authority, division of labor, adequate capital, proper budgeting, and cooperation and teamwork were essential for smooth organizational operations. He also was one of the first management practitioners to highlight the need to enrich “the lives of his organizational and community family” while simultaneously focus- ing on making a profit.18

Lillian and Frank Gilbreth with 11 of their dozen children. As industrial engineers, the Gilbreths pioneered time and motion studies. If you’re an athlete, you can appreciate how small changes can make you more efficient. ©Bettmann/Getty Images

50 PART 1 Introduction

Henri Fayol and the Functions of Management Fayol was not the first to investigate management behavior, but he was the first to systematize it. A French engineer and industrialist, he became known to American business when his most important work, General and Industrial Management, was translated into English in 1930.

Why Fayol Is Important: Fayol was the first to identify the major functions of management—planning, organizing, leading, and controlling, as well as coordinating— the first four of which you’ll recognize as the functions providing the framework for this and most other management books.19

Max Weber and the Rationality of Bureaucracy In our time, the word bureau- cracy has come to have negative associations: impersonality, inf lexibility, red tape, a molasses-like response to problems. But to German sociologist Max Weber, a bureaucracy was a rational, efficient, ideal organization based on principles of logic. After all, in Weber’s Germany in the late 19th century, many people were in positions of authority (particularly in the government) not because of their abilities but because of their social status. The result, Weber wrote, was that they didn’t per- form effectively.

A better-performing organization, he felt, should have five positive bureaucratic features:

1. A well-defined hierarchy of authority.

2. Formal rules and procedures.

3. A clear division of labor, with parts of a complex job being handled by specialists.

4. Impersonality, without reference or connection to a particular person.

5. Careers based on merit.

Why Weber Is Important: Weber’s work was not translated into English until 1947, but it came to have an important influence on the structure of large corporations, such as the Coca-Cola Company.

The Problem with the Classical Viewpoint: Too Mechanistic

A flaw in the classical viewpoint is that it is mech- anistic: It tends to view humans as cogs within a machine, not taking into account the importance of human needs. Behavioral theory addressed this problem, as we explain next.

Why the Classical Viewpoint Is Important: The essence of the classical viewpoint was that work activity was amenable to a rational approach, that through the application of scientific methods, time and motion studies, and job specialization it was possible to boost productivity. Indeed, these concepts are still in use today, the results visible to you every time you visit McDonald’s or Pizza Hut. The classical viewpoint also led to such innovations as management by objectives and goal setting. ●

Scientific management. Carmakers have broken down automobile manufacturing into its constituent tasks, as shown here for an assembly plant. This reflects the contributions of the school of scientific management. Is there anything wrong with this approach? How could it be improved? ©RainerPlendl/Getty Images

Management Theory CHAPTER 2 51

2.3 Behavioral Viewpoint: Behaviorism, Human Relations, and Behavioral Science

THE BIG PICTURE The second of the three historical management perspectives was the behavioral viewpoint, which empha- sized the importance of understanding human behavior and of motivating employees toward achievement. The behavioral viewpoint developed over three phases: (1) Early behaviorism was pioneered by Hugo Munsterberg, Mary Parker Follett, and Elton Mayo. (2) The human relations movement was pioneered by Abraham Maslow (who proposed a hierarchy of needs) and Douglas McGregor (who proposed a Theory X and Theory Y view to explain managers’ attitudes toward workers). (3) The behavioral science approach relied on scientific research for developing theories about behavior useful to managers.

The behavioral viewpoint emphasized the importance of understanding human behavior and of motivating employees toward achievement. The behavioral viewpoint developed over three phases: (1) early behaviorism, (2) the human relations movement, and (3) behavioral science.

Early Behaviorism: Pioneered by Munsterberg, Follett, and Mayo The three people who pioneered behavioral theory were Hugo Munsterberg, Mary Parker Follett, and Elton Mayo.

Hugo Munsterberg and the First Application of Psychology to Industry Called “the father of industrial psychology,” German-born Hugo Munsterberg had a PhD in psychology and a medical degree and joined the faculty at Harvard University in 1892. Munsterberg suggested that psychologists could contribute to industry in three ways. They could:

1. Study jobs and determine which people are best suited to specific jobs.

2. Identify the psychological conditions under which employees do their best work.

3. Devise management strategies to influence employees to follow management’s interests.

Why Munsterberg Is Important: His ideas led to the field of industrial psychology, the study of human behavior in workplaces, which is still taught in colleges today.

Mary Parker Follett and Power Sharing among Employees and Managers A Massachusetts social worker and social philosopher, Mary Parker Follett was lauded on her death in 1933 as “one of the most important women America has yet produced in the fields of civics and sociology.” Instead of following the usual hierarchical arrange- ment of managers as order givers and employees as order takers, Follett thought organi- zations should become more democratic, with managers and employees working cooperatively.

The following ideas were among her most important:

1. Organizations should be operated as “communities,” with managers and subor- dinates working together in harmony.

2. Conflicts should be resolved by having managers and workers talk over differ- ences and find solutions that would satisfy both parties—a process she called integration.

LO 2-3 Describe the principles of the behavioral view of management.

52 PART 1 Introduction

3. The work process should be under the control of workers with the relevant knowledge, rather than of managers, who should act as facilitators.

Why Follett Is Important: With these and other ideas, Follett anticipated some of today’s concepts of “self-managed teams,” “worker empowerment,” and “interdepartmental teams”—that is, members of different departments working together on joint projects.

Elton Mayo and the Supposed “Hawthorne Effect” Do you think workers would be more productive if they thought they were receiving special attention? This was the conclusion drawn by a Harvard research group in the late 1920s.

Conducted by Elton Mayo and his associates at Western Electric’s Hawthorne (Chicago) plant, what came to be called the Hawthorne studies began with an inves- tigation into whether workplace lighting level affected worker productivity. (This was the type of study that Taylor or the Gilbreths might have done.) In later experi- ments, other variables were altered, such as wage levels, rest periods, and length of workday. Worker performance varied but tended to increase over time, leading Mayo and his colleagues to hypothesize what came to be known as the Hawthorne effect—namely, that employees worked harder if they received added attention, if they thought that managers cared about their welfare and that supervisors paid special attention to them.

However, later investigators found flaws in the studies, such as variations in ventilation and lighting or inadequate follow-through, that were overlooked by the original researchers. Critics also point out that it’s doubtful that workers improved their productivity merely on the basis of receiving more attention rather than because of a particular instructional method or social innovation.20

Why the Hawthorne Studies Are Important: Ultimately, the Hawthorne studies were faulted for being poorly designed and not having enough empirical data to support the conclusions. Nevertheless, they succeeded in drawing atten- tion to the importance of “social man” (social beings) and how managers using good human relations could improve worker productivity. This in turn led to the so-called human relations move- ment in the 1950s and 1960s.

The Human Relations Movement: Pioneered by Maslow and McGregor The two theorists who contributed most to the human relations movement—which pro- posed that better human relations could increase worker productivity—were Abraham Maslow and Douglas McGregor.

Abraham Maslow and the Hierarchy of Needs What motivates you to perform: Food? Security? Love? Recognition? Self-fulfillment? Probably all of these, Abraham Maslow would say, although some needs must be satisfied before others. The chairman of the psychology department at Brandeis University and one of the earliest researchers to study motivation, in 1943 Maslow proposed his famous hierarchy of human needs: physiological, safety, love, esteem, and self-actualization.21

We discuss this hierarchy in detail in Chapter 12, where we explain why Maslow is important.

Elton Mayo. In the 1920s, Elton Mayo (shown with long cigarette holder) and his team conducted studies of Western Electric’s Hawthorne plant. Do you think you’d perform better in a robotlike job if you thought your supervisor cared about you and paid more attention to you? ©AP Images

Management Theory CHAPTER 2 53

Douglas McGregor and Theory X versus Theory Y Having been a college pres- ident for a time (at Antioch College in Ohio), Douglas McGregor came to realize that it was not enough for managers to try to be liked; they also needed to be aware of their attitudes toward employees.22 Basically, McGregor suggested in a 1960 book, these atti- tudes could be thought of either “X” or “Y,” which we introduced in the chapter opener about people-focused organizations.

Theory X represents a pessimistic, negative view of workers. In this view, workers are considered to be irresponsible, to be resistant to change, to lack ambition, to hate work, and to want to be led rather than to lead.

Theory Y represents a human relations outlook—an optimistic, positive view of work- ers as capable of accepting responsibility, having self-direction and self-control, and being imaginative and creative.

Why Theory X/Theory Y Is Important: The principal contribution offered by the Theory X/Theory Y perspective is that it helps managers understand how their beliefs affect their behavior. For example, Theory X managers are more likely to micromanage, which leads to employee dissatisfaction, because they believe employees are inherently lazy.

Cameron Monkelien works in the banking industry as a team leader. He believes his com- pany does a great job of making employees at all levels feel included and empowered.

Cameron works for a large company with a popular name and a lot of power, but, as Cameron puts it, “It really has its head on its shoulders. They give a lot of tools and capabili- ties to everybody—not just supervisors and man- agers, but all the way down to the bottom level.”

Cameron feels interconnected with all aspects of his job because of the documenta- tion and networking his company has worked many years to build. “There isn’t a guessing game where you have to figure out who you need to talk to or where you need to go to get information. That’s something that a lot of my other jobs didn’t have: a database and network of people and documents that point you in the right direction in any given situation,” said Cameron.

Another way that the company works to make its employ- ees feel included is to have monthly meetings where employ- ees can interact with people other than their direct supervisors. This helps employees to feel like upper management is listen- ing to their concerns and ideas, and that they can really make a difference within the organization.

Cameron also feels safe to take risks and make mistakes rather than fearing the consequences of doing so. “I have

personally taken several risks because I have enough confidence in my performance and belief in my team that I can go out on a limb for them and for myself,” said Cameron. But ulti- mately, Cameron believes his direct supervisor cultivates an environment where employees feel safe to take risks and make mistakes. “My supervisor does a really good job about not coming down on us when something goes wrong. Instead she asks, ‘How can we improve this going forward?’”

Cameron takes this lesson from his supervi- sor and works to make sure his own employees feel safe taking risks. “The first time one of my employees had a setback was almost two years into his role. He felt like it was such a personal defeat on his part. I had to have a discussion with him where I said, ‘Having a failure does

not mean that you are a failure. It means that there is still room for growth, room for learning, and room for improvement.’”

Cameron’s company has taken additional steps to create an environment of empowerment by changing some of the job titles. “Instead of being a manager or a supervisor, you get the title of ‘leader’ because it instills the idea that instead of being in charge of your employees, you are leading them.”

Courtesy of Cameron Monkelien

I’m glad I… …work in an organization with a Theory Y culture.

Cameron Monkelien Courtesy Cameron Monkelien

Underlying both Maslow’s and McGregor’s theories is the notion that more job satisfaction leads to greater worker performance—an idea that is somewhat controver- sial, as we’ll discuss in Chapter 11.

54 PART 1 Introduction

What is your basic view of human nature? Your attitude could be key to your career success. To see the general direction of your outlook, try the following self-assessment if your instructor assigns it to you.

The Behavioral Science Approach The human relations movement was a necessary correction to the sterile approach used within scientific management, but its optimism came to be considered too simplistic for practical use. More recently, the human relations view has been superseded by the behavioral science approach to management. Behavioral science approach relies on sci- entific research for developing theories about human behavior that can be used to provide practical tools for managers. The disciplines of behavioral science include psychology, sociology, anthropology, and economics. ●

What Is Your Orientation: Toward Theory X/Theory Y? This self-assessment is designed to reveal your orientation as a manager—whether it tends toward Theory X or Theory Y.

Please be prepared to answer these questions if your instructor has assigned Self-Assessment 2.1 in Connect.

1. To what extent do you think your results are an accurate reflection of your beliefs about others? Are you surprised by the results?

2. As a leader of a student or work-related project team, how might your results affect your approach toward leading others? Explain.

3. If an employee doesn’t seem to show ambition, can that be changed? Discuss.

SELF-ASSESSMENT 2.1

EXAMPLE Application of Behavioral Science Approach: The Open-Plan Office—Productivity Enhancer or Productivity Killer?

Today as many as 80% of U.S. office spaces have an open floor plan,23 mixing managers and workers in completely open offices, often using shared tables and desks.24

When the concept originated in the 1950s, its purpose was to “facilitate communication and idea flow,” according to one report.25 Other goals were to save money (because such spaces are cheap to build26) and to increase productiv- ity. The idea was not only that open spaces encourage col- laboration but also that workers are discouraged from wasting time if everyone can see them. But do open-plan offices work? The latest results suggest they are a mixed blessing at best.

Noise is one of the biggest distractions of open work spaces. When people are actively collaborating or socializ- ing in a large room without walls, the sound of their conver- sation is hard to ignore and can even be amplified by the open space. The same goes for the sound of phones ring- ing and desktop alerts going off, or even worse, the sound of someone eating lunch or having a personal phone

conversation. Some workers respond to the stress that can result from such constant distractions and over-stimulation by emotionally isolating themselves, using rooms intended for private meetings as their personal offices, or even repeatedly calling in sick or working from home. Headphones are one of the most common ways not only to block out noise distractions but to send the message, “Please don’t interrupt me now.” All this evidence tends to weigh against the idea that working without walls will encourage people to  work together more often, more productively, or more creatively.

“Visual noise” is a distraction too. As a Wall Street Journal article27 reports, “Visual noise, the activity or movement around the edges of an employee’s field of vision, can erode concentration and disrupt analytical thinking or creativity.” It’s almost impossible, for instance, to see a group of co-workers gathering nearby and not wonder what they are talking about, or to keep your focus when co-workers are visibly and chronically late.

Management Theory CHAPTER 2 55

One study28 of more than 40,000 U.S. workers in 300 differ- ent office buildings concluded that the expected benefits of open-plan offices showed were outweighed by the noise and lack of privacy. Some research suggests that even employee relationships are better when everyone has  an office than when they are all in the same room.29 Apple is moving 12,000 employees to a new 175-acre campus in Cupertino, CA, where many of them are reportedly going to be working at long tables rather than in cubicles or offices. Business Inside reports that one Apple team has requested a different location for its work- space, and a blogger who follows the company says some employees have threatened to quit over their unhappiness with the new floor plan.30

A team of researchers studied seating arrangements from over 2,000 employees of a large technology company. Results

showed that 10% of a person’s performance spills over to those nearby. If you want to improve your performance, try to get a desk near a high performer. The researchers estimated that “a strategic seating chart” could bring in $1 million in annual profit from greater productivity for an organization of 2,000 workers.31

YOUR CALL If so many U.S. employees now work in open offices, yet behavioral science studies largely show they are not a produc- tive or beneficial arrangement, why do you suppose they con- tinue to be so prevalent? What kind of office arrangements do you think would work best and why?

©Kelvin Murray/Taxi/Getty Images

56 PART 1 Introduction

2.4 Quantitative Viewpoints: Management Science and Operations Management

THE BIG PICTURE The third and last category under historical perspectives consists of quantitative viewpoints, which empha- size the application to management of quantitative techniques, such as statistics and computer simulations. Two approaches of quantitative management are management science and operations management.

During the air war known as the Battle of Britain in World War II, a relative few of England’s Royal Air Force fighter pilots and planes were able to successfully resist the overwhelming might of the German military machine. How did they do it? Military planners drew on mathematics and statistics to determine how to most effec- tively allocate use of their limited aircraft.

When the Americans entered the war in 1941, they used the British model to form operations research (OR) teams to determine how to deploy troops, subma- rines, and other military personnel and equipment most effectively. For example, OR techniques were used to establish the optimum pattern that search planes should fly to try to locate enemy ships.

After the war, businesses also began using these techniques. One group of for- mer officers, who came to be called the Whiz Kids, used statistical techniques at Ford Motor Co. to make better manage- ment decisions. Later Whiz Kid Robert McNamara, who had become Ford’s president, was appointed Secretary of Defense and introduced similar statistical techniques and cost–benefit analyses throughout the Department of Defense. Since then, OR tech- niques have evolved into quantitative management, the application to management of quantitative techniques, such as statistics and computer simulations. Two branches of quantitative management are management science and operations management.

Management Science: Using Mathematics to Solve Management Problems How would you go about deciding how to assign utility repair crews during a blackout? Or how many package sorters you needed and at which times for an overnight delivery service such as FedEx or UPS? You would probably use the tools of management science.

Management science is not the same as Taylor’s scientific management. Management science focuses on using mathematics to aid in problem solving and decision making. Sometimes management science is called operations research.

Why Management Science Is Important: Management science stresses the use of rational, science-based techniques and mathematical models to improve decision mak- ing and strategic planning. Management science is a forerunner to analytics and Big Data, as we will discuss in Chapter 7.

LO 2-4 Discuss the two quantitative approaches to solving problems.

American engineer Jack Kilby invented the first integrated circuit, also known as a silicon chip by using quantitative methods. He was awarded the Nobel Prize in Physics in 2000. Chips like this have brought tremendous changes in our lives including computers, smartphones, and GPS. ©WidStock/Alamy Stock Photo

Management Theory CHAPTER 2 57

EXAMPLE Operations Management at Intel

Intel is a leading global maker of semiconductors for comput- ers and other electronic devices. It retains that status by func- tioning as a highly efficient operation, thanks to its well-oiled operations management functions. For instance, operations management helps keep the design process efficient by focus- ing it on keeping costs down and using resources sustainably. Intel gathers market research about its products from custom- ers and distributors to feed into its quality control processes and even to help shape the company’s overall strategies for future growth, based on what customers may need in the future. Managers develop different kinds of schedules for dif- ferent kinds of processes, such as short-term manufacturing

schedules for products made in batches like microprocessors, or ongoing schedules for tasks done on a continuous basis like equipment maintenance. Inventory is managed by the proven “first in, first out” or FIFO method. The sustainability of the sup- ply chain is constantly monitored via computer systems and databases that can head off potential problems in the flow of manufacturing components in or finished products out.32

YOUR CALL In Chapter 1, we described the problem of “efficiency versus effectiveness.” Does it seem that Intel has chosen efficiency over effectiveness, or does it demonstrate both?

Operations Management: Being More Effective Operations management focuses on managing the production and delivery of an organi- zation’s products or services more effectively. In the day-to-day running of the com- pany, it consists of all the job functions and activities in which managers schedule and delegate work and job training, plan production to meet customer needs, design services customers want and how to deliver them, locate and design company facili- ties, and choose optimal levels of product inventory to keep costs down and reduce backorders. It governs managers’ decisions about how to increase productivity and efficiency, as well as how to achieve the highest possible quality of both goods and services. Another major function of operations management is managing the supply chain, which is the process of creating the product, starting with designing and obtaining raw materials for physical goods or technology for services and going all the way through delivery to customers’ hands, and sometimes even beyond to respon- sible disposal or recycling.

Why Operations Management Is Important: Through the rational management of resources and distribution of goods and services, operations management helps ensure that business operations are efficient and effective. ●

FedEx. FedEX uses a variety of management science tools to schedule employees and aircraft to deal with wide variations in package volume—such as December 23 versus December 26. ©Jim Weber/The Commercial Appeal/ZUMAPRESS.com/Alamy Stock Photo

58 PART 1 Introduction

2.5 Systems Viewpoint THE BIG PICTURE Three contemporary management perspectives are (1) the systems, (2) the contingency, and (3) the quality- management viewpoints. The systems viewpoint sees organizations as a system, either open or closed, with inputs, outputs, transformation processes, and feedback. The systems viewpoint has led to the devel- opment of complexity theory, the study of how order and pattern arise from very complicated, apparently chaotic systems. The contingency viewpoint emphasizes that a manager’s approach should vary according to the individual and environmental situation. It is a forerunner to evidence-based management. The quality-management viewpoint has two traditional approaches: quality control, the strategy for minimizing errors by managing each stage of production, and quality assurance, which focuses on the performance of workers, urging employees to strive for zero defects. A third quality approach is the movement of total quality management (TQM), a comprehensive approach dedicated to continuous quality improvement, training, and customer satisfaction.

Being of a presumably practical turn of mind, could you run an organization or a department according to the theories you’ve just learned? Probably not. The reason: People are complicated. To be an exceptional manager, you need to learn to deal with individual differences in a variety of settings.

Thus, to the historical perspective on management (classical, behavioral, and quanti- tative viewpoints), let us now add the contemporary perspective, which consists of three viewpoints. (See Figure 2.3.)

■ Systems ■ Contingency ■ Quality-management

In this section, we discuss the systems viewpoint.

LO 2-5 Identify takeaways from the systems view of management.

Quality control Strategy for minimizing errors by managing each state of production

Proponent : Walter Shewart

The Systems Viewpoint Regards the organization as systems of interrelated parts that operate together to achieve a common purpose

The Quality-Management Viewpoint Three approaches

Total quality management Comprehensive approach dedicated to continuous quality improvement, training, and customer satisfaction

The Contingency Viewpoint Emphasizes that a manager’s approach should vary accord- ing to—i.e., be contingent on—the individual and environ- mental situation

Quality assurance Focuses on the performance of workers, urging employees to strive for “zero defects”

Proponents : W. Edwards Deming

Joseph M. Juran

The Contemporary Perspective (1960s–Present)

FIGURE 2.3 The contemporary perspective: three viewpoints—systems, contingency, and quality-management

Management Theory CHAPTER 2 59

The Systems Viewpoint The 27 bones in the hand. The monarchy of Great Britain. A weather storm front. Each of these is a system. A system is a set of interrelated parts that operate together to achieve a common purpose. Even though a system may not work very well—as in the inefficient way the Italian government collects taxes, for example—it is nevertheless still a system.

The systems viewpoint regards the organization as a system of interrelated parts. By adopting this point of view, you can look at your organization both as (1) a collection of subsystems—parts making up the whole system—and (2) a part of the larger environment. A college, for example, is made up of a collection of academic departments, support staffs, students, and the like. But it also exists as a system within the environment of education, having to be responsive to parents, alumni, legislators, nearby townspeople, and so on.

The Four Parts of a System The vocabulary of the systems perspective is useful because it gives you a way of under- standing many different kinds of organizations. The four parts of a system are defined as follows:

1. Inputs are the people, money, information, equipment, and materials required to pro- duce an organization’s goods or services. Whatever goes into a system is an input.

2. Transformational processes are the organization’s capabilities in management, internal processes, and technology that are applied to converting inputs into out- puts. The main activity of the organization is to transform inputs into outputs.

3. Outputs are the products, services, profits, losses, employee satisfaction or dis- content, and the like that are produced by the organization. Whatever comes out of the system is an output.

4. Feedback is information about the reaction of the environment to the outputs that affects the inputs. Are the customers buying or not buying the product? That information is feedback.

The four parts of a system are illustrated in Figure 2.4.

Transformational processes The organization’s capabilities in management and technology that are applied to converting inputs into outputs

Example : Designer’s management skills (planning, organizing, leading, controlling), gold and silver smithing tools and expertise, website for marketing

Feedback Information about the reaction of the environment to the outputs, which a�ects the inputs

Example : Web customers like African-style designs, dislike imitation Old English designs

Outputs The products, services, profits, losses, employee satisfaction or discontent, etc., produced by the organization

Example : Gold and silver rings, earrings, bracelets, etc.

2 3

4

1

Example : For a jewelry designer—design, money, artistic talent, gold and silver, tools, marketing expertise

Inputs The people, money, information, equipment, and materials required to produce an organization’s goods or services

FIGURE 2.4 The four parts of a system

60 PART 1 Introduction

Closed Systems, Open Systems, and the Concept of Synergy A closed sys- tem has little interaction with its environment; that is, it receives very little feedback from the outside. The classical management viewpoint often considered an organization a closed system. So does the management science perspective, which simplifies organiza- tions for purposes of analysis. However, any organization that ignores feedback from the environment opens itself up to possibly spectacular failures.

An open system continually interacts with its environment. Today nearly all organiza- tions are, at least to some degree, open systems rather than closed. Open systems have the potential of producing synergy. Synergy (pronounced “sin-ur-jee”) is the idea that two or more forces combined create an effect that is greater than the sum of their indi- vidual effects, as when a guitarist, drummer, and bassist combine to play a better ver- sion of a song than any of them would playing alone. Or a copywriter, art director, and photographer combine to create a magazine ad, each representing various influences from the environment.

Complexity Theory: The Ultimate Open System The systems viewpoint has led to the development of complexity theory, the study of how order and pattern arise from very complicated, apparently chaotic systems. Complexity theory recognizes that all complex systems are networks of many interdependent parts that interact with each other according to certain simple rules. Used in strategic management and organiza- tional studies, the discipline seeks to understand how organizations, considered as rela- tively simple and partly connected structures, adapt to their environments.

Why the Systems Viewpoint—Particularly the Concept of Open Systems—Is Important: History is full of accounts of products that failed (such as the 1959 Ford Edsel) because they were developed in closed systems and didn’t have sufficient feedback. Open systems stress multiple feedback from both inside and outside the organization, resulting in a continuous learning process to try to correct old mistakes and avoid new ones. ●

EXAMPLE Do Nudges Achieve Results? Using the Systems Viewpoint to Find Out

What does it take to change your mind? Can a small nudge or incentive motivate you to make a big decision?

Richard H. Thaler thinks so. Thaler is a professor at the University of Chicago who has long championed the field of behavioral economics. He recently won the Nobel Prize for Economics for his many years of work on the effects of human bias and irrationality. His work built “a bridge between the eco- nomic and psychological analyses of individual decision mak- ing,” according to the Royal Swedish Academy of Sciences.33

Let’s see how nudges work in the real world of student loans.

Repaying Student Loans: Results of a Closed System. If af- ter college you are struggling to repay your student loans, did you know that you can apply to the government to have your monthly payments reduced to a more manageable share of your income? The government mandates that you are obligated to repay your debt, but in this alternate arrangement you are allowed to do so more slowly. However, lots of borrowers who are new to repayment are unaware of this possibility and miss their first payments. This is an example of a closed system.

Repaying Student Loans: Results of an Open System. The problem, observes economist Justin Wolfers, is that few people are aware of this possibility of making reduced payments over a longer period of time, and so few apply. “That’s a shame,” says Wolfers, “because the federal government actually knows who is struggling to repay their loans and could help them directly.”

How would things be different under an open system? Researchers sent e-mails to student loan borrowers who had missed their first payments reminding them that they had missed a payment and directed them to information about dif- ferent repayment plans. The result was a four-fold increase in applications for repayment plans.34

YOUR CALL Using “small nudges” like this to create open feedback systems and testing their results to see what works has proven success- ful in reducing use of printing paper, increasing retirement con- tributions, spurring health care enrollment, and other matters. Can you think of an idea in which you’d like to try small nudges?

Management Theory CHAPTER 2 61

EXAMPLE The Contingency Viewpoint: Manufacturers Pitch Parents to Recruit Their Kids

Parents around the country are increasingly worried about pay- ing for their children to attend college. Young college gradu- ates are worried about succeeding in a tough job market. And U.S. manufacturers are worried about how they’re going to fill approximately 400,000 open positions, the highest number reported by the Bureau of Labor Statistics since 2001. What’s wrong with this picture?

Some U.S. manufacturers are taking creative steps to recruit workers for critical and well-paid jobs, including reaching out to the parents of young people they hope to hire. “Parents are the missing part of this,” said one economic development manager in Colorado.

One engine parts maker in Colorado recently hosted a “Parents’ Night” at its plant for about 200 people with high-school age children. As the company’s vice president of operations (and lifelong employee) explained, “We’re really trying to get after the parents—the parents are influential with their kids. Our message

was ‘there’s another option’” to a four-year college degree. Recruiters from Michelin pitched parents at a recent parents’ night hosted by the Greenville SC Chamber of Commerce, offer- ing to hire their children part-time while paying their tuition for a two-year technical program at a local college. Graduates of the program can be hired into full-time jobs at Michelin with starting pay of around $53,000 and generous benefits.35

Said one parent who is reconsidering his teenage son’s options, “Well, you know, not everyone is an accountant.”

YOUR CALL U.S. manufacturers are trying a novel contingency plan for meeting the challenge of recruiting young people for profitable careers that don’t necessarily require a four-year degree. Are there any downsides to their appeal to parents? What other contingency approaches can you suggest to help solve their recruiting problem?

The classical viewpoints advanced by Taylor, Spaulding, and Fayol assumed that their approaches had universal applications—that they were “the one best way” to manage organizations. The contingency viewpoint began to develop when managers discovered that under some circumstances better results could be achieved by breaking the one-best- way rule. The contingency viewpoint emphasizes that a manager’s approach should vary according to—that is, be contingent on—the individual and the environmental situation.

A manager subscribing to the Gilbreth approach might try to get workers to be more productive by simplifying the steps. A manager of the Theory X/Theory Y persuasion might try to use motivational techniques. But the manager following the contingency viewpoint would simply ask, “What method is the best to use under these particular circumstances?”

2.6 Contingency Viewpoint THE BIG PICTURE The second viewpoint in the contemporary perspective, the contingency viewpoint, emphasizes that a man- ager’s approach should vary according to the individual and environmental situation.

LO 2-6 Explain why there is no one best way to manage in all situations.

Gary Hamel: Management Ideas Are Not Fixed, They’re a Process Discussion of the contingency viewpoint leads us naturally to the thoughts of Gary Hamel, co-founder of the Management Innovation Lab and ranked by The Wall Street Journal in 2008 as the most influential business thinker.36 “Over time,” he says, “every great inven- tion, management included, travels a road that leads from birth to maturity, and occasion- ally to senescence.”37 Hamel holds that much of management theory is dated and doesn’t fit the current realities of organizational life and that management innovation is essential to future organizational success. Indeed, he suggests, what we need to do is look at manage- ment as a process, and then make improvements and innovation ongoing and systematic. After all, if managers now innovate by creating new products or new business strategies, why can’t they be equally innovative in how they manage their companies?

62 PART 1 Introduction

How do forward-looking managers get the ball rolling in management innovation, par- ticularly in a traditional, conventional company? Hamel believes that the answer can be found by identifying core beliefs that people have about the organization, especially those that detract from the pursuit of management innovation. He suggests that these beliefs can be rooted out by repeatedly asking the right questions—namely, the following:

1. Is this a belief worth challenging? Is it debilitating? Does it get in the way of an important organizational attribute that we’d like to strengthen?

2. Is this belief universally valid? Are there counterexamples? If so, what do we learn from those cases?

3. How does this belief serve the interests of its adherents? Are there people who draw reassurance or comfort from this belief?

4. Have our choices and assumptions conspired to make this belief self-fulfilling? Is this belief true simply because we have made it true—and, if so, can we imagine alternatives?38

Why the Contingency Viewpoint Is Important: The contingency viewpoint would seem to be the most practical of the viewpoints discussed so far because it addresses prob- lems on a case-by-case basis and varies the solution accordingly.

Evidence-Based Management: Facing Hard Facts, Rejecting Nonsense Evidence-based management is very much in the spirit of the contingency viewpoint’s practical approach to management. Evidence-based management means translating principles based on best evidence into organizational practice, bringing rationality to the decision-making process.

As its two principal proponents, Stanford business scholars Jeffrey Pfeffer and Robert Sutton, put it, evidence-based management is based on the belief that “facing the hard facts about what works and what doesn’t, understanding the dangerous half-truths that constitute so much conventional wisdom about management, and rejecting the total non- sense that too often passes for sound advice will help organizations perform better.”39

Learning to make managerial decisions based on evidence is the approach we hope you will learn to take after studying many other approaches—the perspectives we cov- ered in this chapter. We will consider evidence-based management further, along with analytics and Big Data, in Chapter 7. ●

Big Data, as the name implies, refers to sets of data so vast and complex that new methods have been developed to analyze them. Businesses and governments will find many applications for the information Big Data can yield. Amazon, Spotify, and Delta Airlines are just a handful of the companies already doing so; about three- quarters of U.S. companies say their competitors are as well.40

Drug manufacturers, for instance, can analyze insurance claims, research results, and clinical trial data to accurately demonstrate the benefits of their products, helping them support value-based prices.41 The Weather Channel combines consumer information with climate data to tailor its sponsors’ ads with pinpoint accu- racy.42 Hotels can use Big Data to anticipate the needs of even first-time guests; the hotel-search company Trivago is already capi- talizing on Big Data’s capabilities to match users with their

preferred lodging.43 Transportation safety, emergency prepared- ness and response, and climate research are just a few of the gov- ernment applications of Big Data.44

Privacy is an issue users of Big Data must confront. As one writer says, “Transparency and ethical use of data is vital . . . . Companies should do what they can where they can to be trans- parent and help consumers understand what data they are col- lecting and for what purpose. The Big Data ecosystem is becoming increasingly complex . . . . Companies who are forthright and build trust will be increasingly important to their customers.”45

YOUR CALL Do you think the application of Big Data could stifle managers’ creativity?

Evidence-Based Management: Big DataPRACTICAL ACTION

Management Theory CHAPTER 2 63

Although not a “theory” as such, the quality-management viewpoint, which includes quality control, quality assurance, and total quality management, deserves to be consid- ered because of its impact on contemporary management perspectives.

Quality Control and Quality Assurance Quality refers to the total ability of a product or service to meet customer needs. Quality is seen as one of the most important ways of adding value to products and services, thereby distinguishing them from those of competitors. Two traditional strategies for ensuring quality are quality control and quality assurance.

Quality Control Quality control is defined as the strategy for minimizing errors by managing each stage of production. Quality control techniques were developed in the 1930s at Bell Telephone Labs by Walter Shewart, who used statistical sampling to locate errors by testing just some (rather than all) of the items in a particular production run.

Quality Assurance Developed in the 1960s, quality assurance focuses on the per- formance of workers, urging employees to strive for “zero defects.” Quality assurance has been less successful because often employees have no control over the design of the work process.

Total Quality Management: Creating an Organization Dedicated to Continuous Improvement In the years after World War II, the imprint “Made in Japan” on a product almost guar- anteed that it was cheap and flimsy. That began to change with the arrival in Japan of two Americans, W. Edwards Deming and Joseph M. Juran.

W. Edwards Deming Desperate to rebuild its war-devastated economy, Japan eagerly received mathematician W. Edwards Deming’s lectures on “good management.” Deming believed that quality stemmed from “constancy of purpose”—steady focus on an organization’s mission—along with statistical measurement and reduction of varia- tions in production processes. He also thought that managers should stress teamwork, be helpful rather than simply give orders, and make employees feel comfortable about asking questions.

Joseph M. Juran Another pioneer with Deming in Japan’s quality revolution was Joseph M. Juran, who defined quality as “fitness for use.” By this he meant that a prod- uct or service should satisfy a customer’s real needs. Thus, the best way to focus a com- pany’s efforts, Juran suggested, was to concentrate on the real needs of customers.

TQM: What It Is From the work of Deming and Juran has come the strategic commit- ment to quality known as total quality management. Total quality management (TQM) is a comprehensive approach—led by top management and supported throughout the organization—dedicated to continuous quality improvement, training, and customer  satisfaction.

2.7 Quality-Management Viewpoint THE BIG PICTURE The quality-management viewpoint, the third category under contemporary perspectives, consists of quality control, quality assurance, and especially the movement of total quality management (TQM), dedicated to continuous quality improvement, training, and customer satisfaction.

LO 2-7 Discuss the contributions of the quality-management view.

64 PART 1 Introduction

The four components of TQM are as follows:

1. Make continuous improvement a priority. TQM companies are never satisfied. They make small, incremental improvements an everyday priority in all areas of the organization. By improving everything a little bit of the time all the time, the company can achieve long-term quality, efficiency, and customer satisfaction.

2. Get every employee involved. To build teamwork, trust, and mutual respect, TQM companies see that every employee is involved in the continuous improvement process. This requires that workers must be trained and empow- ered to find and solve problems.

3. Listen to and learn from customers and employees. TQM companies pay atten- tion to their customers, the people who use their products or services. In addi- tion, employees within the companies listen and learn from other employees, those outside their own work areas.

4. Use accurate standards to identify and eliminate problems. TQM organizations are always alert to how competitors do things better, then try to improve on them—a process known as benchmarking. Using these standards, they apply statistical measurements to their own processes to identify problems.

Why Total Quality Management Is Important: The total quality management view- point emphasizes infusing concepts of quality throughout the total organization in a way that will deliver quality products and services to customers. The “I Wish My Manager …” box provides a great illustration. The adoption of TQM helped American companies deal with global competition.

Ashley Rippentrop works in the home health care industry. When she first began her job as a medical records man- ager, her company was in the early stages of implementing a computer charting system.

The system was new for both Ashley and the company, and there were a lot of kinks to work out. “The year before I got there, they had just started using the computer charting system. It was intense to jump into because the company was learning the system, and I was

learning as I went because I took care of all of the medical records. I filed all of the patient information, and I printed and sent all of the documentation to the doctors’ offices and received signed copies back,” said Ashley. “But the company hated the new system. They wanted to use the old paper system instead.”

While they were working through the kinks of the new pro- cess, Ashley started to notice some significant errors. “Something we had a problem with, which was difficult to explain to my man- ager, was that we were missing orders,” said Ashley. “For exam- ple, when you call a doctor and ask to prescribe a certain

medication to a patient and the doctor says yes, the nurse has to document this and send it in to the doctor to sign for permission and send it back to us. We were missing some of these orders. And there were duplicates of other orders, too.”

“It was easy for me to see these errors because I was work- ing with this system every day, but it was hard to describe to my manager because these errors could get the company in trouble legally,” said Ashley. If the company did not have a signed order from a doctor giving permission for a patient to use a certain medication, and that patient began to experience negative side effects, the company could be in serious trouble if someone were to inquire about the missing order.

Ashley brought these errors to her manager’s attention, but Ashley’s ideas were not well-received. “They didn’t want to change how they were documenting. They weren’t receptive to the information I was trying to give them. Ultimately, they weren’t happy with me when I was trying to get them to fix the issue,” said Ashley. This began to affect how the company was communicating with the doctors they worked with—some doc- tors even refused to work with the company due to these issues. There were other legal issues that came about when insurance companies audited them and their paperwork was not in order.

Eventually, Ashley’s managers fixed most of the errors, but not without suffering some setbacks due to their resistance to new ideas and change. Courtesy of Ashley Rippentrop

I Wish My Manager… …believed in a quality-management viewpoint.

Ashley Rippentrop Courtesy Ashley Rippentrop

Management Theory CHAPTER 2 65

Want to find out how committed to TQM the organizations are that you are most familiar with? Even the most sophisticated organizations, you may be surprised to learn in Self-Assessment 2.2, may not measure up very well when it comes to the quality of their products.

Six Sigma and ISO 9000 Two other noteworthy quality management initiatives are Six Sigma and ISO 9000. Six Sigma, as we’ll see in Chapter 16, is a rigorous statistical-analysis process that measures and reduces defects in and improves manufacturing and service-related processes. Its name is a reference to the statistical methods behind its goal, which is to have no more than 3.4 defects per million products or procedures.46

Six Sigma relies on two processes. The first is DMAIC, or the series of steps called Define, Measure, Analyze, Improve, and Control, which is intended to improve existing processes, The second is DFSS (Design for Six Sigma), which managers can employ to create new products or processes. Lean Six Sigma is a variation on the original approach that focuses on problem solving and process improvement, combining speed with excellence.

One successful adopter of Lean Six Sigma is the Akron-Canton Regional Foodbank in Ohio, where donated food is now sorted, inspected, packed, and delivered to those in need within 39 days instead of the 92 days it used to take.47 Staples, the office-supply giant, has deployed Lean Six Sigma to cut four weeks off the time it needs to open a new store, shorten its product-ordering cycle, redesign its loading docks, and make doz- ens of other changes worth tens of millions of dollars saved.48

ISO 9000, also discussed in Chapter 16, is a series of quality-control standards set by the International Organization for Standardization (ISO) to reduce manufacturing flaws and improve productivity. Companies must adopt a set of processes covering busi- ness functions like purchasing, manufacturing, inventory, and shipping; carefully docu- ment their use of these processes; and train their employees to use them, all of which takes time and financial investment. If they pass an audit by the ISO organization, they become ISO certified, a credential that has been credited with improving a company’s marketability and reputation, reducing its costs, improving customer service and cus- tomer satisfaction, and even making it more attractive to investors. Of course, quality improvement is the first and foremost goal.49 More than 1 million companies in 170 countries around the world have adopted ISO standards.50 ●

TQM pioneer. W. Edwards Deming in 1961. Deming proposed his so-called 85–15 rule—namely, when things go wrong, there is an 85% chance that the system is at fault, only a 15% chance that the individual worker is at fault. Most of the time, he thought, managers erroneously blamed individuals rather than the system. ©Bettmann/Getty Images

To What Extent Is Your Organization Committed to Total Quality Management? This self-assessment is designed to gauge the extent to which the organization you have in mind is committed to total quality management (TQM).

Please be prepared to answer these questions if your instructor has assigned Self-Assessment 2.2 in Connect.

1. Which of the five dimensions is most and least important to the organization? Are you surprised by this conclusion? Explain.

2. Based on the three lowest-rated items in the survey, what advice would you give to senior leaders in the company?

3. Considering all of the questions in the survey, which three do you think are most important in terms of fostering TQM in a company? Why?

SELF-ASSESSMENT 2.2

66 PART 1 Introduction

2.8 The Learning Organization in an Era of Accelerated Change

THE BIG PICTURE Learning organizations actively create, acquire, and transfer knowledge within themselves and are able to modify their behavior to reflect new knowledge. There are three ways you as a manager can help build a learning organization.

LO 2-8 Define how managers foster a learning organization.

Ultimately, the lesson we need to take from the theories, perspectives, and viewpoints we have described is this: We need to keep on learning. Organizations are the same way: Like people, they must continually learn new things in order to improve and innovate.51 A key challenge for managers, therefore, is to establish a culture of shared knowledge and values that will enhance their employees’ ability to learn—to build so-called learning organizations. An offsetting advantage for tomorrow’s managers is that Millennials, now the largest generation ever, don’t just appreciate but actively expect to have learning opportunities at work.52

Learning organizations, says Massachusetts Institute of Technology professor Peter Senge, who coined the term, are places “where people continually expand their capac- ity to create the results they truly desire, where new and expansive patterns of thinking are nurtured, where collective aspiration is set free, and where people are continually learning how to learn together.”53

The Learning Organization: Handling Knowledge and Modifying Behavior

More formally, a learning organization is an organization that actively creates, acquires, and transfers knowledge within

itself and is able to modify its behavior to reflect new knowledge.54 Note the three parts:

1. Creating and acquiring knowledge. In learning organizations, managers try to actively infuse their organizations with new ideas and information, which are the prerequisites for learning. They acquire such knowledge by constantly scanning

their external environments, by hiring new talent and expertise when needed, and by devoting signifi-

cant resources to training and developing their employ- ees. Another helpful strategy is to maintain a learning

culture within the organization, which encourages people to ask questions without negative consequences (such as

being made to feel ignorant) and recognizes that differ- ences of opinion, when handled with respect, can often lead to new and better ideas. Also critical to acquiring new knowledge is learning from failure, as Google did when its

Google Buzz project fizzled.55

A learning organization is like a lightbulb. It must be turned on before it creates value. How do you think organizations promote the value of continually learning? ©Photodisc/Getty Images

Management Theory CHAPTER 2 67

2. Transferring knowledge. American Express and Apple are not only standouts in their business sectors, says management studies professor Robert Gross- man, they “nurture top-to-bottom learning cultures.”56 Companies can also institute formal training and career-development programs for their employees; AT&T and Pixar call theirs “universities.”57 Individual managers should actively work at transferring knowledge throughout the organization, reducing barriers to sharing information and ideas among employees. One consultant suggests three strategies for managers: share your personal success story and challenges overcome, be ready to learn any and everything from peers and employees, and align your learning goals for the company with its business goals.58 Managers should not be afraid to try new technologies to help employ- ees learn; Walmart is using virtual reality to train employees in management and customer service skills and will soon expand its program to all the 150,000 employees who receive training each year.59

3. Modifying behavior. Learning organizations are nothing if not results oriented. First, managers should make sure the learning or training opportunity meets a real employee or organizational need. Does it solve a specific problem, and how? The link between learning and performance improvement, and the way the improvement will be measured, should be clear to the employee as well.60 Next, both formal and informal learning experiences should be followed up with surveys or other measures to see whether the employee is applying the new skills or information or needs more coaching or encouragement.61

How to Build a Learning Organization: Three Roles Managers Play To create a learning organization, managers must perform three key functions or roles: (1) build a commitment to learning, (2) work to generate ideas with impact, and (3) work to generalize ideas with impact.62

1. You can build a commitment to learning. To instill in your employees an intel- lectual and emotional commitment to the idea of learning, you as a manager need to lead the way by investing in it, publicly promoting it, creating rewards

The learning organization. In rigid organizations, employees often keep information to themselves. In learning organizations, workers are encouraged to share information with each other—both inside and outside their department. ©Sam Edwards/Getty Images

68 PART 1 Introduction

and symbols of it, and performing similar activities. For example, the CEO of a hospitality company in the Asia Pacific region, curious about why a group of people had gathered in the office on a Saturday morning, decided to investi- gate. On finding an orientation program for new employees under way, he found himself a chair and stayed for most of the day, listening and contributing along with the others.63

2. You can work to generate ideas with impact. As a manager, you need to try to generate ideas with impact—that is, ideas that add value for customers, employ- ees, and shareholders—by increasing employee competence through training, experimenting with new ideas, and engaging in other leadership activities. Xerox, for example, hired researchers called “innovation managers” to hunt for inventions and products from start-ups in India that could be adapted for the North American market. Hewlett-Packard used its research lab in India to see how it could adapt mobile phone web-interface applications in Asia and Africa to markets in developed countries.64

3. You can work to generalize ideas with impact. Besides generating ideas with impact, you can also generalize them—that is, reduce the barriers to learning among employees and within your organization. You can create a climate that reduces conflict, increases communication, promotes teamwork, rewards risk taking, reduces the fear of failure, and increases cooperation. In other words, you can create a psychologically safe and comforting environment that increases the sharing of successes, failures, and best practices.

Based on the given discussion, do you wonder about the specific behaviors that peo- ple exhibit in a learning organization? It would be interesting to determine if you have ever worked for such an organization. The following self-assessment was created to evaluate whether an organization you now work for or formerly worked for could be considered a serious learning organization. The survey items provide a good indication of what it takes to become a learning organization. ●

Are You Working for a Learning Organization? This self-assessment provides a measure of the extent to which an organization of your choice is a learning organization. Please be prepared to answer these questions if your instructor has assigned Self-Assessment 2.3 in Connect.

1. What are the strengths and weaknesses of this company in terms of being a learning organization?

2. If you were CEO of this organization, what changes would you make based on your survey results? Explain.

3. What suggestions would you make for how this organization might (1) build a commitment to learning, (2) work to generate ideas with impact, and (3) work to generalize ideas with impact? Discuss.

4. How does the learning score for the organization probably compare with the scores of other organizations you are familiar with?

SELF-ASSESSMENT 2.3

Management Theory CHAPTER 2 69

2.9 Career Corner: Managing Your Career Readiness

LO 2-9 Describe how to develop the career readiness competency of understanding the business.

Figure 2.5 shows the model of career readiness we discussed in Chapter 1. What does a chapter on management history have to do with your career readiness? How about its application to the Knowledge competency of understanding the business? This compe- tency was defined in Table 1.2 as the extent to which you understand a company’s busi- ness and strategies and the needs of its stakeholders. It comes into play whenever you interview for a job.

Recruiters expect you to do some research, just as you would for a class assign- ment. They want you to act like Sherlock Holmes and do some snooping. That’s good for both you and a potential employer in that it helps identify the likely level of fit between the two of you. Good fit, in turn, is associated with more positive work atti- tudes and task performance, lower intentions to quit, and less job-related stress.65 Moreover, doing your homework on a company makes you a more attractive job can- didate. It shows interest on your part, and recruiters are impressed by the fact that you took the time to learn about the business.66 It also prepares you to ask smart questions, a behavior recruiters want to see. Remember, sometimes it’s the small things like this that land a job.

Career readiness

Knowledge (K)

Soft skills (S)

Career outcomes

Attitudes (A)

Other characteristics

(O)

FIGURE 2.5 Model of Career Readiness ©2018 Kinicki and Associates, Inc.

So, what does it take to demonstrate that you understand a business? We recom- mend that you learn the following seven things about a company before showing up at a job interview:67

1. The company’s mission and vision statements. These statements tell you why the company exists and what it wants to become or achieve over time. The question to answer is whether you support these pursuits and would like to be part of the journey. If you do, you will be a better fit for the company. This is important because employees are more likely to be productive and stay at a company when they fit in. For example, if you like outdoor activities, you will most likely be a better fit at Recreational Equipment, Inc. (REI), which sells sporting goods, camping gear, and outdoor clothing, than Whole Foods. You can find this information on the company’s website.

2. The company’s core values and culture. The values an organization endorses represent the foundation of its culture. You can find clues about this by study- ing a company’s website. Try to find a list of company values. What do these

70 PART 1 Introduction

values tell you about the company? Next, look for statements that inform you about how the company treats its employees. For example, does the company support empowerment and employee development? Look at any photos posted online and consider what they tell you. If you see pictures only of products and not of people, for instance, it suggests the company really cares about prod- ucts. What type of goals is the company pursuing? Does the company care about the environment, quality, or customers’ opinions?

3. The history of the company? When was the company founded? What were the values and background of the founder? Try to find out how the company evolved, grew, or changed over the years.

4. Key organizational players. It’s important to demonstrate this knowledge dur- ing a job interview. Who holds important positions in the company? What are their backgrounds? You can find this out by reading the employer’s “About” page and top employees’ bios. You might check them out on LinkedIn or read what they say on Twitter.

5. The company’s products, services, and clients. What are people saying about the company’s products and services? You can explore this by locating reviews or comments about the company’s products and services. It would also be use- ful to try the company’s products and services. This would enable you to speak directly from experience.

6. Current events and accomplishments. Look for current news stories about the company and examine its website for a list of accomplishments. Note what this information reveals about the company and decide whether it matches what you learned about the company’s mission, vision, stated values, and organiza- tional culture. Inconsistencies are a red flag.

7. Comments from current or previous employees. Talk to anyone you know at the company. Ask their opinion about working there and how they feel about man- agement and corporate policies. Search websites like Glassdoor to find inside information such as salary ranges and company reviews.

These activities will increase your career readiness and chances of getting a desired job. They also demonstrate that you care or have passion about working at the company. This will differentiate you from others who did not do their research. Remember, it is important to stand out from other applicants when looking for a job. More importantly, understanding the business will help you determine if you are a good fit for an employer. Go get ’em! ●

You must do research to understand a business. This takes time and attention. At what point in the interview process should you investigate a potential employer? ©Kraska/ Shutterstock

Management Theory CHAPTER 2 71

Key Points

2.1 Evolving Viewpoints: How We Got to Today’s Management Outlook

• The two overarching perspectives on management are (1) the historical perspective, which includes three viewpoints—classical, behavioral, and quantitative; and (2) the contemporary perspective, which includes three other viewpoints—systems, contingency, and quality-management.

• Six practical reasons for studying theoretical perspectives are that they provide (1) understanding of the present, (2) a guide to action, (3) a source of new ideas, (4) clues to the meaning of your managers’ decisions, (5) clues to the meaning of outside ideas, and (6) understanding as to why certain management practices produce positive outcomes.

2.2 Classical Viewpoint: Scientific and Administrative Management

• The first of the historical perspectives was the classical viewpoint, which emphasized finding ways to manage work more efficiently. It had two branches, scientific management and administrative management.

• Scientific management emphasized the scientific study of work methods to improve productivity by individual workers. It was pioneered by Frederick W. Taylor, who offered four principles of science that could be applied to management, and by Frank and Lillian Gilbreth, who refined motion studies that broke job tasks into physical motions.

• Administrative management was concerned with managing the total organization. Among its pioneers were Charles Clinton Spaulding, the “Father of African-American Management”; Henri Fayol, who identified the major functions of management (planning, organizing, leading, controlling); and Max Weber, who identified five

positive bureaucratic features in a well-performing organization.

• The classical viewpoint showed that work activity was amenable to a rational approach, but it has been criticized as being too mechanistic, viewing humans as cogs in a machine.

2.3 Behavioral Viewpoint: Behaviorism, Human Relations, and Behavioral Science

• The second of the historical perspectives, the behavioral viewpoint emphasized the importance of understanding human behavior and of motivating employees toward achievement. It developed over three phases: (1) early behaviorism, (2) the human relations movement, and (3) the behavioral science approach.

• Early behaviorism had three pioneers: (a) Hugo Munsterberg suggested that psychologists could contribute to industry by studying jobs, identifying the psychological conditions for employees to do their best work; (b) Mary Parker Follett thought organizations should be democratic, with employees and managers working together; (c) Elton Mayo hypothesized a so-called Hawthorne effect, suggesting that employees worked harder if they received added attention from managers.

• The human relations movement suggested that better human relations could increase worker productivity. Among its pioneers were (a) Abraham Maslow, who proposed a hierarchy of human needs, and (b) Douglas McGregor, who proposed a Theory X (managers have pessimistic view of workers) and Theory Y (managers have positive view of workers).

• The behavioral science approach relied on scientific research for developing theories about human behavior that can be used to provide practical tools for managers.

administrative management 49 behavioral science approach 54 behavioral viewpoint 51 classical viewpoint 47 closed system 60 complexity theory 60 contemporary perspective 46 contingency viewpoint 61 DFSS (design for six sigma) 65 DMAIC 65 evidence-based management 62

feedback 59 Hawthorne effect 52 historical perspective 46 human relations movement 52 inputs 59 learning organization 66 management science 56 open system 60 operations management 57 outputs 59 quality 63

quality assurance 63 quality control 63 quality-management viewpoint 63 quantitative management 56 scientific management 47 subsystems 59 synergy 60 system 59 systems viewpoint 59 total quality management (TQM) 63 transformational processes 59

Key Terms Used in This Chapter

72 PART 1 Introduction

2.4 Quantitative Viewpoints: Management Science and Operations Management

• The third of the historical perspectives, quantitative viewpoints emphasized the application to management of quantitative techniques.

• Two approaches are (1) management science, which focuses on using mathematics to aid in problem solving and decision making; and (2) operations management, which focuses on managing the production and delivery of an organization’s products or services more effectively.

2.5 Systems Viewpoint • Following the historical perspective, the

contemporary perspective includes three viewpoints: (1) systems, (2) contingency, and (3) quality-management.

• The systems viewpoint regards the organization as a system of interrelated parts or collection of subsystems that operate together to achieve a common purpose. A system has four parts: inputs, outputs, transformational processes, and feedback.

• A system can be closed, having little interaction with the environment, or open, continually interacting with it.

• Open systems have the potential of producing synergy, the idea that two or more forces combined create an effect that is greater than the sum of their individual efforts.

• The systems viewpoint has led to the development of complexity theory, the study of how order and pattern arise from very complicated, apparently chaotic systems.

2.6 Contingency Viewpoint • The second viewpoint in the contemporary

perspective, the contingency viewpoint emphasizes that a manager’s approach should vary according to the individual and the environmental situation.

• In the spirit of the contingency viewpoint is evidence- based management, which means translating principles based on best evidence into organizational practice, bringing rationality to the decision-making process.

2.7 Quality-Management Viewpoint • The third category in the contemporary perspective,

the quality-management viewpoint is concerned with quality, the total ability of a product or service to meet customer needs.

• Quality management has three aspects: (1) quality control is the strategy for minimizing errors by managing each stage of production; (2) quality assurance focuses on the performance of workers, urging employees to strive for “zero defects”; (3) total quality management (TQM) is a comprehensive approach dedicated to continuous quality improvement, training, and customer satisfaction.

• TQM has four components: (a) make continuous improvement a priority; (b) get every employee involved; (c) listen to and learn from customers and employees; and (d) use accurate standards to identify and eliminate problems.

2.8 The Learning Organization in an Era of Accelerated Change

• A learning organization is one that actively creates, acquires, and transfers knowledge within itself and is able to modify its behavior to reflect new knowledge.

• Three roles that managers must perform to build a learning organization are to (1) build a commitment to learning, (2) work to generate ideas with impact, and (3) work to generalize ideas with impact.

2.9 Career Corner: Managing Your Career Readiness

• You can increase the competency of understanding the business by engaging in seven activities. They are: (1) learn the company’s mission and vision, (2) identify the company’s core values and culture, (3) learn the history of the company, (4) identify the key organizational players, (5) learn about the company’s products, services, and clients, (6) study current events and accomplishments about the company, and (7) talk to current or former employees.

1. What are the two overarching perspectives about management, and what are the three viewpoints that each one covers?

2. What are six practical reasons for studying theoretical perspectives?

3. What are the contributions of scientific management? 4. How would I summarize the behavioral viewpoint,

and what are its contributions? 5. What is the difference between management science

and operations management?

6. What would be an example of the application of the four parts of a system?

7. What would be an example of the application of the contingency viewpoint?

8. Where have I seen an organization employ evidence- based management?

9. Why should I adopt a total quality management viewpoint?

10. What are three roles I could play as a manager in a learning organization?

Understanding the Chapter: What Do I Know?

Management Theory CHAPTER 2 73

The Decline of Sears Sears, Roebuck and Company, commonly called Sears, was founded in 1892 to sell one product—watches. By 1989 the company had grown into the largest retailer in the United States. Sears initially focused on selling its products via a mail-order business that relied on a catalog.68 “When the catalog first appeared on doorsteps in the 1890s, it funda- mentally changed how Americans shopped. Back then, much of the population lived in rural areas, and they bought almost everything from little shops at rural junc- tions. These general stores had limited selection and charged exorbitant prices. They were the only game in town.”69 Sears’ mail-order business was a disruptor.

Over the years Sears evolved along with changing con- sumer tastes. When people moved from rural areas to cit- ies, for example, the company opened hundreds of standalone urban stores to meet consumers’ desire to shop in attractive department stores rather than via cata- log. Sears was also one of the first retailers to offer a credit card in the 1980s—the Discover card—that earned cash rewards for customers based on their purchases. This innovation brought in a consistent source of revenue for many years. The next change was to accommodate con- sumer preferences for shopping at malls. Sears responded by anchoring its stores in malls across the country.

The retail environment started to change in the 1990s, and Sears began to fall behind as discount shopping at Walmart and Kmart took off. These companies were nim- bler, changing prices and inventory to meet customer preferences. Sears was more bureaucratic and was stuck with higher overhead costs and catalog prices that had been set months earlier. Not surprisingly, Walmart’s rev- enue grew while Sears’ did not. Enter online shopping.

The combination of convenience, selection, speed, and low prices available through online shopping has been a disruptive force for all retailers. Like its com- petitors, Sears has struggled against online sellers such as Amazon.70 According to a writer from USA Today, however, the venerable retailer faces even deeper chal- lenges: Sears “has also suffered in the wake of its man- agement’s decisions, including the sale of its more than $30 billion credit card portfolio to Citibank in 2003, and a merger with Kmart.”71

THE MERGER OF SEARS AND KMART In 2004, Sears was acquired by Kmart, a company that was then coming out of bankruptcy. The new firm was christened Sears Holdings and led by Edward Lampert. He had a background in investments but no retail expe- rience at that time.72

Some business writers suggest Lambert purchased Sears for the land on which hundreds of its stores stood. According to one writer, “Lampert saw real estate value

as the key, and he has managed the two chains as a value play ever since, ignoring the fundamentals of running a retail business. Under Lampert, the company chroni- cally underinvested in store maintenance, spending as little as one-fifth of what its rivals spent to keep stores clean and up to date. The result has been a customer exodus, as no one likes shopping in dilapidated stores.”73

Another writer described Sears Holdings as having “all the charm of a dollar store without the prices, nor even the service, and with even more disengaged employ- ees. Bright fluorescent lights highlight the drab floors, peeling paint and sad displays of merchandising that are reminiscent of department stores in the communist Soviet Union. Some employees carry iPads, others do not: Lampert’s affections for technology led to a policy of employees required to use tablets on the shop floor, even though most clerks said they were unnecessary.”74

WHAT LED TO SEARS’ DECLINE? Forbes reported that “the popular opinion is that poor management has led to the demise of both companies” (Sears and Kmart). The magazine suggested that Lampert pursued the wrong strategies, assuming the goal was to improve Sears’ profitability and long-term survival.75 Consider the organizational structure Lampert installed at Sears Holdings.

Following a structural model used in the finance industry in which different teams compete for scarce company resources, Lampert segmented the company into 30 autonomous business units such as men’s wear, shoes, and home furnishings. Each had its own executive staff and board of directors. Rather than fostering colla- boration, this structural arrangement led to “cutthroat competition and sabotage. Incentives were tied to the suc- cess of the individual business divisions, which often came at the expense of other parts of the company.”76 A former executive told the New York Times that “managers would tell their sales staff not to help customers in adjacent sections, even if someone asked for help. Mr. Lampert would praise polices like these, said the executive.”77

Another aspect of Lampert’s strategy was to spend on technology rather than on stores. Lampert thought Sears was competing against Amazon. He thus “plowed investment, new talent and marketing into Sears’ web- site and a customer loyalty program called Shop Your Way. The program allows customers to earn points, for purchases not only at Sears but at partnering busi- nesses including Burger King, Under Armour, and Uber, that can be redeemed for Sears merchandise.”78 Store appearance languished under this strategy.

WHAT’S THE LATEST? Sears closed more than 350 stores in 2017 and plans to sell an additional 100 in spring 2018. The company

Management in Action

74 PART 1 Introduction

generated much-needed cash by selling off some of its key brands such as Craftsman for about $900 million.79 It also established new sources of revenue by making a deal to sell “its DieHard-branded products—such as car batteries, jump starters, and tires—on Amazon’s web- site. The retailer also started selling its Kenmore- branded appliances on Amazon” in 2017.80

Despite these efforts, Sears is “hemorrhaging money” according to Business Insider. “Sales are down 45% since early 2013, its debt load has spiked to $4 billion, and the company is losing well over $1 billion annually.”81

Making matters worse, “Sears said in a filing with the Securities and Exchange Commission [in 2017] that it had ‘substantial doubt’ about its ability to stay in business unless it can borrow more and tap cash from assets.”82 The company is definitely pursuing this strat- egy according to CNNMoney. This source reported in 2018 that the company announced it will “cut another $200 million a year (beyond the stores it already planned to close). And it’s looking to increase the amount of money it is able to borrow.”83

According to the New York Times, Lampert believes the company can turn things around. He told a reporter that “while there is still work to do, we are determined to do what is necessary to remain a competitive retailer in a challenging environment.”84 Others doubt this

conclusion because Lampert is too disengaged from the running of Sears’ operations. Former executives say he managed the company from his home in Miami, setting foot in the company headquarters only for its annual meeting.85

FOR DISCUSSION Problem Solving Perspective

1. What is the underlying problem in this case from Edward Lampert’s perspective?

2. What are the key causes of Sears’ decline?

3. Do you think Lampert can turn the company around? Why or why not?

Application of Chapter Content

1. What does the Human Relations Movement suggest went wrong at Sears?

2. Use the four parts of a system to diagnose the com- pany’s decline. Provide support for your conclusions.

3. To what extent did Sears use a total quality manage- ment perspective in running its business? Explain.

4. What key lessons from this chapter could Lampert have used to improve Sears’ performance following the merger with Kmart? Explain.

What Should You Do about an Insubordinate Employee? You are a vice president for a company in the insur- ance industry, and you supervise five managers. These managers in turn supervise a host of employees work- ing in their departments. Your company is having trou- ble achieving its sales growth goals and your boss, the president of a division, called a meeting with you and your peers to create a plan of action.

The meeting was a bit volatile because layoffs were proposed and it was agreed that all vice presidents had to decrease their budgets. This means that you and your peers were not allowed to hire consultants or send employees to training. You also have to reduce your labor costs by $300,000. This means that you must lay off employees. You informed the managers that report to you about these decisions and asked them to come up with a list of potential people to lay off. You suggested that performance should be the key criterion for deciding layoffs.

Two weeks later one of your reporting managers walked into your office with a worried look. He told you that Jim, one of your other reporting managers, had just hired a consultant to lead a teambuilding

session with his group in another state. Not only did this require significant travel expenses, but the consul- tant’s fees were well outside of your budgeted expenses. Further, your other employees were expressing feelings of unfairness because Jim was taking his team on a teambuilding trip and they were being forced to cut costs. It also was a bit inconsistent to spend money on teambuilding when impending layoffs were just around the corner.

In terms of layoffs, all your reporting managers sub- mitted a list of potential employees to let go except for Jim. You have no idea why he avoided this task.

Jim’s behavior clearly violates the agreement that was made about cost cutting, and you are upset that he has not submitted his list of employees to lay off. You have not yet spoken to him about this insubordination, and now you are wondering what to do.

SOLVING THE CHALLENGE What would you do?

1. Meet with Jim to review his behavior. Tell him that any more acts of insubordination will result in termi- nation. Don’t make a big deal about these events and don’t include documentation in his personnel file.

Legal/Ethical Challenge

Management Theory CHAPTER 2 75

2. Put Jim on the list of people to be laid off. Although the company will have to pay him a severance check, it reduces the chance of any lawsuit.

3. Call your human resource representative and discuss the legality of firing Jim. Jim was insubordinate in hiring a consultant and irresponsible for not submit- ting his list of potential employees to be laid off. If human resources agrees, I would fire Jim.

4. Reprimand Jim by putting him on a Performance Improvement Plan (PIP). This plan outlines specific changes Jim needs to make going forward, and it gives him a chance to make up for his poor decisions.

5. Invent other options. Discuss.

Learn more about Uber’s history by considering events that occured under Uber’s first CEO, Travis Kalanick, and his replacement, Dara Khsrowshahi. Assess your ability to apply concepts discussed in this chapter to the case by going to Connect.

Uber Continuing Case

The triple bottom line of people, planet, and profit represents new stan-

dards of success for businesses. This helps define the new world in which

managers must operate and their responsibilities, including the community

of stakeholders, both internal and external, they must deal with. The chap-

ter also considers a manager’s ethical and social responsibilities, as well as

the importance of corporate governance. We conclude with a Career Cor-

ner that focuses on how you can develop the career readiness compe-

tency of professionalism/work ethic.

What’s Ahead in This ChapterFORECAST

PART 2 • THE ENVIRONMENT OF MANAGEMENT

The Manager’s Changing Work Environment and Ethical Responsibilities Doing the Right Thing

3 After reading this chapter, you should be able to:

LO 3-1 Describe the triple bottom line of people, planet, and profit.

LO 3-2 Identify important stakeholders inside the organization.

LO 3-3 Identify important stakeholders outside the organization.

LO 3-4 Explain the importance of ethics and values in effective management.

LO 3-5 Describe the concept of social responsibility and its role in today’s organizations.

LO 3-6 Discuss the role of corporate governance in assessing management performance.

LO 3-7 Describe how to develop the career readiness competency of professionalism/work ethic.

© O

livier Renck/Aurora/G etty Im

ages

Just as a car needs gasoline or electric power to run, employees need the right environment to flourish. The term “right environment” refers to what academics call organizational climate. This chapter is concerned with one type of climate, namely an ethical one. An ethical climate represents employees’ perceptions about the extent to which work environments support ethical behavior. It is important for managers to foster ethical climates because they significantly affect the frequency of ethical behavior, which in turn impacts employee performance and a firm’s profitability.1 Let’s consider whether Wells Fargo has an ethical climate.

Ethics at Wells Fargo It’s not often that 5,300 people are fired from a single company—and all for the same reason. At Wells Fargo Bank, however, that’s what happened in 2016 when it was discovered that employees throughout the organization had secretly created 3.5 million unauthorized new accounts in order to generate profitable fees from unsuspecting depositors. Under pressure to achieve ambitious sales goals, these employees may have decided it was worth it to cheat in order to meet the company’s high (and perhaps unrealistic) expectations. They may have reasoned that the harm to each customer was small compared to the gains to themselves of posting stellar performances. And repetition may have made each transgression easier to rationalize than the last one.2

The scandal had lingering effects on Wells Fargo’s financial position and led some to think the company would not survive.3 Could it have been prevented? Whistle- blowing—alerting authorities to illegal or unethical behavior you witness in an organization—is an ethical action we consider later in the chapter. Here, we’ll focus on how to work ethically, demonstrating the career readiness competency of professionalism and work ethic when others around you are being rewarded for dishonesty.

Showing Integrity and Ethics in an Unethical Climate You first must decide the kind of person you want to be. Integrity and ethical character are difficult to demonstrate if you have a record of cheating, even if you feel you can  justify your efforts because “I had no choice” or “Everybody’s doing it.” If the goal you’re trying to achieve is unrealistic, as was probably true at Wells Fargo, ask yourself how you can influence the outcome. Can you negotiate a more achievable goal or deadline? Can you find allies who will help you pursue this option? Together you might even be able to work for the greater good of your fellow students or employees (honing another career readiness skill). If you work in a company like Wells Fargo where people are doing unethical things, it takes courage to confront the culprits. As you will learn later when we discuss whistle-blowing, there can be career risks when you expose unethical actions. Deciding what to do in this case takes us right back to considering what type of person you want to be. As a manager you’ll want to be sure you model ethical behavior yourself, since an organization’s ethical climate is shaped by managerial actions.4 Make sure you are rewarding the right behaviors—perhaps good stewardship of customers’ finances is a better goal for bank employees, for instance, than the number of new accounts opened. Finally, be sure you’re aware of the family and cultural values that create your ethics, be open about what they are, and be willing to act on them.5

For Discussion To what extent did Wells Fargo have an ethical climate? Why do you think employees failed to challenge the unethical organizational practices? How can you model ethical behavior to others at school?

Increase Ethical Behavior by Fostering an Ethical Climate

78 PART 2 The Environment of Management

3.1 The Triple Bottom Line: People, Planet, and Profit

THE BIG PICTURE Many businesses, small and large, are beginning to subscribe to a new standard of success—the triple bottom line, representing people, planet, and profit. This outlook has found favor with many young adults ( Millennials) who are more concerned with finding meaning than material success.

“Profit is a tool,” says Judy Wicks, who founded the White Dog Café in Philadelphia 30 years ago. “The major purpose of business is to serve.”6

In Wicks’s view, making money should be only one goal of business. The others are to foster social and environmental consciousness—the two other elements of what’s known as the “triple bottom line.” The triple bottom line—representing people, planet, and profit (the 3 Ps)—measures an organization’s social, environmental, and financial performance. In this view of corporate performance, an organization has a responsibility to its employees and to the wider community (people); is committed to sustainable (green) environmental prac- tices (planet); and includes the costs of pollution, worker displacement, and other factors in its financial calculations (profit), matters high in the minds of many of today’s consum- ers.7 Success in these areas can be measured through a social audit, a systematic assess- ment of a company’s performance in implementing socially responsible programs, often based on predefined goals.

The White Dog Café (now in three locations), for instance, is known for such social and environmental activities as buying wind-powered electricity, organic produce, and humanely raised meat and poultry, as well as sharing ideas with competitors and opening up its premises for educational forums and speakers. But the triple bottom line isn’t just to be practiced by small businesses. As a co-author of Everybody’s Business: The Unlikely Story of How Big Business Can Fix the World observes, “big businesses can . . . be really powerful, positive engines for social change.”8 For instance, Ben & Jerry’s ice cream, according to its director of social mission, now has a bigger impact since being taken over by Unilever.9 The file-storage company Box offers its products free to certain nonprofits.10 The online bookseller Better World Books donates one book for every book it sells.11

The Millennials’ Search for Meaning The “Millennial” generation, generally defined as people born between 1977 and 2000, care about the triple bottom line.12 Millennials now make up more than 25% of the U.S. workforce and could be as much as 50% in just a few years.13

In Chapter 1, we mentioned that one of the great challenges for a manager is in trying to achieve personal success, whether in striving for a happy life or a meaningful life—or, if pos- sible, both.14 Millennials are no different, and they expect more from the organizations they work for and do business with. “More than any other previous generation,” reports Forbes, “millennials are concerned about business ethics, motives and methods. According to a Deloitte study of millennials, 58% of respondents indicated they believed corporations, in general, are moving in a more ethical direction, yet 64% still believed companies operate according to their own agenda first and society’s needs second. Slightly over half believed the average company has ‘no ambition’ beyond turning a profit.”15 Another study finds that Millennials who came of age during the 2007–2009 Great Recession reported more con- cern for others and less interest in material goods.16 They also want work/life balance.17

In this chapter, we discuss two factors in achieving a meaningful life:

■ Understanding the environment in which a manager operates—the community of stakeholders inside and outside the organization.

■ The ethical and social responsibilities of being a manager. ●

LO 3-1 Describe the triple bottom line of people, planet, and profit.

The Manager’s Changing Work Environment and Ethical Responsibilities CHAPTER 3 79

3.2 The Community of Stakeholders inside the Organization

THE BIG PICTURE Managers operate in two organizational environments—internal and external—both made up of stakehold- ers, the people whose interests are affected by the organization. The first, or internal, environment consists of employees, owners, and the board of directors.

Is a company principally responsible only to its stockholders and executives? Or are other groups equal in significance?

Perhaps we need a broader term than “stockholders” to indicate all those with a stake in an organization. That term, appropriately, is stakeholders—the people whose interests are affected by an organization’s activities.

Internal and External Stakeholders Managers operate in two organizational environments, both made up of various stake- holders. (See Figure 3.1.) As we describe in the rest of this section, the two environ- ments are these:

■ Internal stakeholders. ■ External stakeholders.

Internal Stakeholders Whether small or large, the organization to which you belong has people in it who have an important stake in how it performs. These internal stakeholders consist of employees, owners, and the board of directors, if any. Let us consider each in turn.

Employees As a manager, could you run your part of the organization if you and your employees were constantly in conflict? Labor history, of course, is full of accounts of just that. But such conflict may lower the performance of the organization, thereby hurting everyone’s stake. In many of today’s forward-looking organizations, employees are considered “the talent”—the most important resource.

“My chief assets drive out the gate every day,” says Jim Goodnight, CEO of North Carolina–based SAS Institute. “My job is to make sure they come back.”18 SAS is the world’s largest privately held software business and was ranked No. 15 on Fortune’s 2017 list of “100 Best Companies to Work For.”19 In the recent past, it has been in the magazine’s top spot in attracting and holding on to the best talent (it ranked 1, 1, 3, and 2, respectively, in the years 2010–2014), but that prize now belongs to Google.

Even so, SAS treats its employees exceptionally well, resulting in a turnover rate of only 4%, compared with a software industry average of 22%.

As we saw in Chapter 1 (manager’s challenge 3), the U.S. workforce of the future will consist of employees diverse in gender, age, race, ethnicity, and sexual orientation from what we’ve been accustomed to. We consider this further in Chapter 11.

Owners The owners of an organization consist of all those who can claim it as their legal property, such as Walmart’s stockholders. There are five principal types of ownership.

■ Sole proprietorship: In the for-profit world, if you’re running a one-person graphic design firm, the owner is just you—you’re what is known as a sole proprietorship.

LO 3-2 Identify important stakeholders inside the organization.

80 PART 2 The Environment of Management

■ Partnership: If you’re in an Internet start-up with your brother-in-law, you’re both owners—you’re a partnership.

■ Private investors: If you’re a member of a family running a car dealership, you’re all owners—you’re investors in a privately owned company.

■ Employee owners: If you work for a company that is more than half owned by its employees (such as W. L. Gore & Associates, maker of Gore-Tex fabric and No. 52 on Fortune’s 2017 “Best Companies to Work For” list, or Lakeland, Florida’s Publix Super Markets, No. 21), you are one of the joint owners— you’re part of an Employee Stock Ownership Plan (ESOP).20

■ Stockholders: And if you’ve bought a few shares of stock in a company whose shares are listed for sale on the New York Stock Exchange, such as General Motors, you’re one of thousands of owners—you’re a stockholder.

In all these examples, of course, the stated goal of the owners is to make a profit.

The General Environment

Economic forces

The Task Environment

Customers

EXTERNAL STAKEHOLDERS

INTERNAL STAKEHOLDERS

Employees

Owners

Board of directors

Unions

Lenders Allies

Governments Distributors

Interest groups

Suppliers

Media Competitors

Technological forces

International forces

Political-legal forces

Demographic forces

Sociocultural forces

FIGURE 3.1 The organization’s environment The two main groups are internal and external stakeholders. Source: From Diverse Teams at Work by Lee Gardenswartz. Published by the Society for Human Resource Management.

The Manager’s Changing Work Environment and Ethical Responsibilities CHAPTER 3 81

Board of Directors Who hires the chief executive of a for-profit or nonprofit orga- nization? In a corporation, it is the board of directors, whose members are elected by the stockholders to see that the company is being run according to their interests. In non- profit organizations, such as universities or hospitals, the board may be called the board of trustees or board of regents. Board members are very important in setting the organi- zation’s overall strategic goals and in approving the major decisions and salaries of top management.

A large corporation might have eight or so members on its board of directors. Some of these directors (inside directors) may be top executives of the firm. The rest (outside directors) are elected from outside the firm. The board of directors at Facebook, for instance, includes not only insiders CEO Mark Zuckerberg and chief operating officer (COO) Sheryl Sandberg but also executives from outside firms including Netf lix, BDT Capital Partners, the Bill and Melinda Gates Foundation, Palantir Technologies, Andreesen Horowitz, and a member of the board of WhatsApp (owned by Facebook).21

Boards of directors can play an important role in setting corporate strategy and executive compensation. Research shows that companies with good boards “did not pay CEOs high bonuses for luck.” Conscientious boards also prevented self- serving CEOs from skimming corporate profits.22 Some experts further speculate that balanced gender representation on boards was an important characteristic of a “good” board.

Interest in the gender composition of boards grew partly in response to a study by Catalyst. Catalyst claimed “the Fortune 500 companies that had the greatest representa- tion of women board directors had . . . a 66% higher return on investment than the companies with fewer women on their boards.” Unfortunately, this finding suffered from two statistical problems. Forbes reviewed these problems and concluded that “women aren’t miracle workers for an organization. But that’s okay, because neither are men. Women should be provided the same opportunities to sit on boards as their male counterparts, because it is the fair thing to do.”23 We clearly have room for improve- ment, given that women account for only 21.2% of board seats in S&P companies.24

We consider directors further in Section 3.6, “Corporate Governance.” ●

These Naples, Florida Publix grocery store employees are focused on helping customers. Their motivation may be enhanced by the fact that Publix is an employee-owned American supermarket. Why would employee ownership fuel employee motivation? ©Education & Exploration 3/Alamy Stock Photo

82 PART 2 The Environment of Management

3.3 The Community of Stakeholders outside the Organization

THE BIG PICTURE The external environment of stakeholders consists of the task environment and the general environment. The task environment consists of customers, competitors, suppliers, distributors, strategic allies, employee associations, local communities, financial institutions, government regulators, and special-interest groups. The general environment consists of economic, technological, sociocultural, demographic, political–legal, and international forces.

In the first section, we described the environment inside the organization. Here let’s consider the environment outside it, which consists of external stakeholders—people or groups in the organization’s external environment that are affected by it. This environ- ment consists of:

■ The task environment. ■ The general environment.

The Task Environment The task environment consists of 10 groups that present you with daily tasks to handle: customers, competitors, suppliers, distributors, strategic allies, employee organizations, local communities, financial institutions, govern- ment regulators, and special-interest groups.

1. Customers The first law of business (and even nonprofits), we’ve said, is take care of the customer. Customers are those who pay to use an organization’s

goods or services. Many customers are generally frustrated by poor customer relations at airlines, banks, cable and satellite service providers, and some big

retailers, in part because many of these companies have few competitors and so don’t have to worry about making customers happy. Among “America’s most hated

companies,” by one account: Comcast, Bank of America, Mylan (which dramatically raised the price of its EpiPen, the emergency treatment for allergic reaction), McDonald’s, Wells Fargo Bank, Facebook, Spirit Air- lines, DISH Network, Sears, Walmart, and Charter Communications. The most frequent reason is poor customer service; Facebook also suffers because of its massive data collection and lax privacy policies.25

LO 3-3 Identify important stakeholders outside the organization.

We all are customers in one way or another on a daily basis. Do you feel that most companies really care about our attitudes toward their levels of service? ©Ingram Publishing

EXAMPLE Did United Sacrifice a Customer’s Well-Being to Its Own Needs?

A writer for Forbes says, “Just as chess players sacrifice pawns to meet the needs of other pieces, companies routinely sacrifice customers’ interests and well-being to feed their own needs of well-being and prosperity.” The problem, says this writer, occurs when employees who abuse customers are following practices they believe have been demonstrated by management.26

A recent example drew shocked attention around the world after a video of it went viral. In April 2017, Dr. David Dao, a

passenger on a United Airlines flight who had refused to give up his seat on an overbooked flight, was eventually forcibly dragged shouting and bloodied from the plane, sparking a pub- lic relations nightmare, accusations of racism, a threatened con- sumer boycott, and calls for an investigation. United apologized and promised to review its policies, but its response was late and its message inconsistent. The damage had been done.27 “The back-against-the-wall, through-gritted-teeth apology isn’t

The Manager’s Changing Work Environment and Ethical Responsibilities CHAPTER 3 83

2. Competitors Is there any line of work you could enter in which there would not be competitors—people or organizations that compete for customers or resources, such as talented employees or raw materials? We mentioned that some of the most hated com- panies in America have little competition—but every organization has to be on the look- out for possible competitors, even if not yet in sight.

E-commerce companies such as Amazon already represent huge threats to such retailers as Walmart, Sears, Macy’s, Kohl’s, and Pier 1, for example.32 In addition, stud- ies seem to show that experiences, not objects, bring the most happiness, and, points out one writer, “the Internet is bursting with ‘Buy Experiences, Not Things’ type of stories that can give retailing executives nightmares.”33

3. Suppliers A supplier, or vendor, is a person or an organization that provides sup- plies—that is, raw materials, services, equipment, labor, or energy—to other organizations. Suppliers in turn have their own suppliers. For instance, Werner Paddles makes hand- crafted kayak paddles from carbon fiber reinforced plastic. When the company wanted to improve the appearance of its product, not usually a priority for components made of carbon fiber, it went to its supplier, KASO Plastics, for help. KASO, in turn, searched out a recycled material made by RTP Company, which was working in partnership with aircraft maker Boeing to reclaim manufacturing scrap from Boeing’s 787 Dreamliner. The result was a paddle blade that met Werner’s aesthetic criteria at no increase in cost, with the bonus of including recycled content that would appeal to its environmentally conscious customers.34

The “I Wish I…” box provides a great example of what can happen when U.S. com- panies fail to pay attention to economic conditions faced by international suppliers.

generally a winning strategy,” said one public relations execu- tive.28 The airline’s stock price dropped, and the Senate Commerce Committee called on the Chicago Department of Aviation for a full accounting of Dr. Dao’s experience.29

United explained the overbooking of Dr. Dao’s Chicago-to- Louisville flight as caused by the airline’s need to transport sev- eral crew members to Kentucky to avoid canceling a scheduled flight from Louisville the next day. When there are not enough volunteers willing to give up their seats, the airline says it implements a “written policy on boarding priority” (which it would not share with the media) to deny some passengers their seats. “We recognize that our response . . . did not reflect

the gravity of the situation,” said a United spokesperson. “And for that we also apologize. Our focus now is looking ahead and making this right.”30

YOUR CALL “Despite all the posturing and loud advertising . . . the dominant reality still is that ‘the company matters more than the cus- tomer.’”31 Do you agree that this is how businesses view their cus- tomers? Does an airline’s need to staff or cancel a flight supersede paying passengers’ needs to travel to their destination? What if the airline makes a poor choice, as in Dr. Dao’s case, that affects its external stakeholders by jeopardizing its stock price?

Yuvraj Singh works in the manufacturing industry as a commod- ity manager. Recently, his company experienced financial set- backs due to an unanticipated change in the external environment.

The company that Yuvraj works for purchases electrical components for their machinery from a supplier in China. Recently, the company ran into issues with the dollar exchange rate against China.

“We got a lot of pushback from our suppliers in China on the price increase. We have a contract in place with this supplier that covers inflation and depreciation, but there is something that we did not cover in our contract: the labor costs,” said Yuvraj. “Our suppliers are claiming that labor rates are increas- ing in their area. This gives them double the pressure—they are not just dealing with the depreciation of the dollar, but the increase in labor rates, as well.”

I Wish I… …kept a closer eye on trends affecting our suppliers.

84 PART 2 The Environment of Management

4. Distributors A distributor, sometimes called a middle man, is a person or an orga- nization that helps another organization sell its goods and services to customers. Publish- ers of magazines, for instance, don’t sell directly to newsstands; rather, they go through a distributor, or wholesaler. Tickets to Maroon Five, Phish, or other artists’ perfor- mances might be sold to you directly by the concert hall, but they are also sold through such distributors as TicketMaster, LiveNation, and StubHub.

Distributors can be quite important because in some industries (such as movie the- aters and magazines), there is not a lot of competition, and the distributor has a lot of power over the ultimate price of the product. However, the popularity of the Internet has allowed manufacturers of cell phones, for example, to cut out the “middleman”—the distributor—and to sell to customers directly.

5. Strategic Allies Companies, and even nonprofit organizations, frequently link up with other organizations (even competing ones) in order to realize strategic advan- tages. The term strategic allies describes the relationship of two organizations who join forces to achieve advantages neither can perform as well alone.

With their worldwide reservation systems and slick marketing, big companies— Hilton, Hyatt, Marriott, Starwood, and so on—dominate the high-end business-center hotels. But in many cities, there are still independents—such as The Rittenhouse in Philadelphia; The Hay-Adams in Washington, DC; and The Adolphus in Dallas—that compete with the chains by promoting their prestigious locations, grand architecture, rich history, and personalized service. In recent years, however, some high-end indepen- dents have become affiliated with chains as strategic allies because chains can buy sup- plies for less and they have more far-reaching sales channels. The 105-year-old U.S. Grant in downtown San Diego, for example, became part of Starwood’s Luxury Collection to get better worldwide exposure.

6. Employee Organizations: Unions and Associations As a rule of thumb, labor unions (such as the United Auto Workers or the Teamsters Union) tend to represent hourly workers; professional associations (such as the National Education Association or The Newspaper Guild) tend to represent salaried workers. Nevertheless, during a labor dispute, salary-earning teachers in the American Federation of Teachers might well act in sympathy with the wage-earning janitors in the Service Employees International Union.

In recent years, the percentage of the labor force represented by unions has steadily declined (from 35% in the 1950s to 10.7% in 2017).35 Indeed, more than five times as many

As a result, the supplier received fewer dollars from Yuvraj’s company, and they also had to pay a premium to cover the increased labor costs. This increased pressure threatened the long-term rela- tionship between the compa- nies. It seemed that the supplier would not be able to recover from such a signifi- cant loss despite attempts to negotiate.

The company Yuvraj works for receives parts from suppli-

ers, puts them into assembly, and ships them to customers. They do not store the parts for long periods of time, and they are very dependent on the suppliers. If they cannot receive the parts from one of their suppliers for an extended period of

time, it can result in delays in manufacturing and meeting cus- tomer requirements.

“Within China, you have different provinces. There are dif- ferent labor rates in each province. You have to keep an eye on where your suppliers are and whether their rates are fluctuat- ing,” said Yuvraj. “This was one thing that we didn’t consider to put in the contract. In the end we couldn’t push back and we had to accept the price increase.” By accepting the price increase, Yuvraj was able to maintain a long-term relationship with his supplier and meet customer requirements on time.

Learning from this mistake, Yuvraj says that his company can work to get income statements from both public and private com- panies that they do business with. “For public companies in China, you can get all of their balance sheets and income statements. From now on, we will put in the contract that all private companies will have to share their numbers with us going forward, as well.”

Yuvraj hopes that planning ahead and developing a mitigation strategy will help prevent unseen roadblocks like this in the future. Courtesy of Yuvraj Chibber

Yuvraj Singh Courtesy Yuvraj Singh

The Manager’s Changing Work Environment and Ethical Responsibilities CHAPTER 3 85

union members are now public-sector workers than private-sector workers, whose unioniz- ing has sharply fallen off, mainly because of job losses in manufacturing and construction. The unionization rates remain highest in protective service occupations (34.7%) and in education, training, and library occupations (33.5%).36 Men have maintained a slightly higher union membership rate (11.4%) than women (10.0)%), while among the states, New York has the highest membership rate (23.8%) compared to South Carolina (2.6%).37

7. Local Communities Local communities are obviously important stakeholders, as becomes evident not only when a big organization arrives but also when it leaves, send- ing government officials scrambling to find new industry to replace it. Schools and municipal governments rely on the organization for their tax base. Families and mer- chants depend on its employee payroll for their livelihoods. In addition, everyone from the United Way to the Little League may rely on it for some financial support.

If a community gives a company tax breaks in return for the promise of new jobs and the firm fails to deliver, does the community have the right to institute clawbacks— rescinding the tax breaks when firms don’t deliver promised jobs? But what is a town to do if a company goes bankrupt, as did Hoku Materials, manufacturer of materials for solar panels, after the struggling town of Pocatello, Idaho, gave it numerous concessions?38

EXAMPLE Local Communities as Stakeholders: Does Amazon Really Need the Tax Break?

Amazon recently announced it would be opening a second U.S. headquarters, dubbed HQ2 and meant to be “fully equal” to its Seattle campus. The company then issued a set of criteria it would seek in the new location, inviting cities and communities around the country to bid.39 Its requirements focused on popu- lation size, ease of transportation, presence of a local university, and plenty of tech talent. Cities and towns jumped on the oppor- tunity, just as many have done in the past when NFL teams have come in search of a new home. In this case, a truly glittering prize of as many as 50,000 well-paid jobs and as much as $5 billion worth of local investment will go to the winner.40

From a list of more than 230 possibilities, a team of Amazon executives including founder and CEO Jeff Bezos sat down in early 2018 and selected 20 finalists for its shortlist. These included Atlanta, Austin, Denver, Nashville, Raleigh, New York,

and Washington DC. Toronto was the only finalist outside the United States.41

While some contestants kept their financial incentives confi- dential, several cities were known to have offered tax breaks worth $1 billion to $7 billion. And Amazon is hinting that nearly everyone could be a winner at some level. “All the proposals showed tremendous enthusiasm and creativity,” said the com- pany’s head of economic development. “Through this process we learned about many new communities across North American that we will consider as locations for future infra- structure investment and job creation.”42

But even given the payoff in jobs and infusions of capital, will the future home of HQ2 really be getting a good deal? Some economists have raised doubts about this kind of auction-like pro- cess, warning that giving huge tax breaks to incoming businesses does little more than rob cities of resources needed by arguably more important entities like their school, housing, and transporta- tion systems. All these systems could also need expensive upgrades and improvements to accommodate a hugely increased workforce after Amazon moves in, and existing businesses and individual taxpayers would end up footing the bill.43

One small-business owner, who already struggles to compete with Amazon, said of Jeff Bezos, “Why should the richest man in the history of the world get money to open his business?”44

YOUR CALL How would you advise local public officials to handle the mat- ter of tax incentives for business—especially if they are across the table from the shrewd negotiators representing a huge company such as Amazon? What obligations should a commu- nity expect of the companies located there?

The Amazon Spheres at its urban campus in the Belltown neighborhood. ©Paul Christian Gordon/Alamy Stock Photo

86 PART 2 The Environment of Management

8. Financial Institutions Want to launch a small company? Although normally reluctant to make loans to start-ups, financial institutions—banks, savings and loans, and credit unions—may do so if you have a good credit history or can secure the loan with property such as a house. You might also receive help from venture capitalists. Venture capital is money provided by investors to start-up firms and small businesses with high risk but perceived long-term growth potential, in return for an ownership stake.

During the Great Recession, when even good customers found loans hard to get, a new kind of financing emerged called crowdfunding, raising money for a project or ven- ture by obtaining many small amounts of money from many people (“the crowd”), using websites such as Kickstarter. We discuss crowdfunding further in Chapter 10.

Established companies also often need loans to tide them over when revenues are down or to finance expansion, but they rely for assistance on lenders such as commer- cial banks, investment banks, and insurance companies.

9. Government Regulators The preceding groups are external stakeholders in your organization since they are clearly affected by its activities. But why would govern- ment regulators—regulatory agencies that establish ground rules under which organiza- tions may operate—be considered stakeholders?

We are talking here about an alphabet soup of agencies, boards, and commissions that have the legal authority to prescribe or proscribe the conditions under which you may conduct business. To these may be added local and state regulators on the one hand and foreign governments and international agencies (such as the World Trade Organization, which oversees international trade and standardization efforts) on the other.

Such government regulators can be said to be stakeholders because not only do they affect the activities of your organization, they are in turn affected by it. The Federal Aviation Agency (FAA), for example, specifies how far planes must stay apart to prevent midair collisions. But when the airlines want to add more flights on certain routes, the FAA may have to add more flight controllers and radar equipment because those are the agency’s responsibility. Recently, the FAA has had to take on the heavy responsibility of regulating the use of drones, which could number well over a million by 2021.45

10. Special-Interest Groups In recent times, efforts to ban horse-drawn carriages that serve tourists wanting to take in urban sights have spread across the country, from Salt Lake City to Atlanta. In New York City, the 1,200 operators of horse-drawn carriage rides

Oprah Winfrey accepts the 2018 Cecil B. DeMille Award during the 75th Annual Golden Globe Awards. ©Paul Drinkwater/Handout/ NBCUniversal/Getty Images

The Manager’s Changing Work Environment and Ethical Responsibilities CHAPTER 3 87

were being pressured by opponents who insisted the horses weren’t equipped to handle city noise and traffic, as well as intense summer heat. Spurred by some highly publicized deaths and injuries to horses, many of the complaints came from animal-rights groups, such as People for the Ethical Treatment of Animals (PETA). In New York, however, two-thirds of city voters said they didn’t want the bans. Some visitors also said they liked “the clip-clop of the horse’s feet.”46

Special-interest groups are groups whose members try to influence specific issues, some of which may affect your organization. Examples are People for the Ethical Treatment of Animals, Mothers Against Drunk Driving, the National Organization for Women, and the National Rifle Association.

Special-interest groups may try to exert political influence, as in contributing funds to lawmakers’ election campaigns or in launching letter-writing efforts to officials. Or they may organize picketing and boycotts—holding back their patronage—of certain com- panies. Other groups have made striking visual statements, such as the many women attending the 2018 Golden Globe awards who wore black dresses in support of the #MeToo movement, which has exposed widespread sexual harassment of women in the entertainment industry.47

The General Environment Beyond the task environment is the general environment, or macroenvironment, which includes six forces: economic, technological, sociocultural, demographic, political–legal, and international.

You may be able to control some forces in the task environment, but you can’t con- trol those in the general environment. Nevertheless, they can profoundly affect your organization’s task environment without your knowing it, springing nasty surprises on you. Clearly, then, as a manager you need to keep your eye on the far horizon because these forces of the general environment can affect long-term plans and decisions. The “I’m Glad I . . . box provides a great illustration of how a brand manager at a mobile tire installation company stays ahead of competition by paying attention to the general environment.

Katie Lord works as a brand manager at a mobile tire installa- tion start-up company. Customers are able to schedule appoint- ments via the company’s phone line or website to have their tires replaced—in their own driveways! Rather than taking your vehicle to an automotive tire store to have your tires replaced and rotated, you can have an installer come directly to you.

Since the company Katie works for is one of the first of its kind, it is extremely important for management to keep an eye on the external environment while the company grows and takes shape.

“One of the things we keep a close eye on is the state legislature,” said Katie. “Our state does not have state inspections for vehicles, whereas the majority of other states do. That is one thing that is hurting us now. If someone has tires that are really worn down, there is no

law in place that says you have to replace them.” However, as the company grows and moves into other states, this is some- thing that could actually benefit other locations because driv-

ers will have to replace their tires if an inspection deems them unsafe for driving.

Aside from laws and policies already in place, Katie keeps an eye on legislature that might pass in the future. “They are looking to put laws in place in our state where you are unable to sell used tires or tires worn below a certain percentage,” said Katie. “This is important because, in certain areas of our state, there are a ton of used tire shops. So that hurts us a little right now—we have a lot of people calling and looking for used tires. But once that legislation passes, that will cer- tainly help us to gain more customers and capture more sales.”

I’m glad I… …kept current on my industry’s general environment.

Katie Lord Courtesy Katie Lord

88 PART 2 The Environment of Management

1. Economic Forces Economic forces consist of the general economic conditions and trends—unemployment, inflation, interest rates, economic growth—that may affect an organization’s performance. These are forces in your nation and region and even the world over which you and your organization probably have no control, as happened in the Great Recession and its aftermath. The “I Wish I…” box on page 83 shows an example of what can happen when U.S. managers fail to pay attention to economic forces that impact suppliers from China.

Are banks’ interest rates going up in the United States? Then it will cost you more to borrow money to open new stores or build new plants. Is your region’s unemployment rate rising? Then maybe you’ll have more job applicants to hire from, yet you’ll also have fewer customers with money to spend. (Currently, 43.1 million people in the United States are considered poor, according to the Census Bureau’s 2016 estimates; the poverty rate has fallen only to 14% from 19% in two generations.)48 Are natural resources getting scarce in an important area of supply? Then your company will need to pay more for them or switch to alternative sources.

One indicator that managers often pay attention to is productivity growth. Rising productivity leads to rising profits, lower inflation, and higher stock prices. In recent times, companies have been using information technology to cut costs, resulting in productivity in the nonfarm business sector growing at an annual rate of 2.6% from 2000 to 2007. From 2007 to 2016, a period that included the recession of 2008 and 2009 and the start of the recovery, productivity growth averaged a low 1.2%.49 In 2016, productivity declined slightly. Economists disagree on the reasons. They could signal reduced capital investment by businesses, a slowdown in the rate of innovation, busi- ness failure to take full advantage of the innovations that have occurred such as the Internet of Things, or simply a measurement problem that fails to accurately account for the business and consumer benefits of free products like social media and Internet search engines.50 Falling productivity affects a company’s costs, which in turn, of course, affects its profits.

2. Technological Forces Technological forces are new developments in methods for transforming resources into goods or services. The true age of technological innovation, suggests science writer Michael Hanlon, ran from about 1945 to 1971. “Just about every- thing that defines the modern world either came about or had its seeds sown during that time,” he writes. “The pill. Electronics. Computers and the birth of the Internet. Nuclear power. Television. Antibiotics. Space travel.”51 (Social sciences professor Robert Gordon has his own list: Electricity. The telephone. The combustion engine. Mass production. Indoor plumbing. The conquest of infectious diseases. The computer. Everything else— including the Internet and the smartphone—is simply a variation on these themes, in his view.)52

Hanlon thinks we have fewer truly significant technological innovations in the pres- ent. “Today, progress is defined almost entirely by consumer-driven, often banal improvements in information technology,” he says. “That’s not the same as being able to fly across the Atlantic in eight hours or eliminating smallpox.”53 Some, however, might disagree, as suggested by the examples.

Katie also stays up-to-date on cultural trends. “Our tar- get group is millennials, and we’ve done a lot of research on this group to be able to reach them. The millennial group is all about convenience and the experience versus the price or the actual product,” said Katie. The company markets to this target group through social media, and emphasizes a unique experience in an industry that has been around for a long time.

It is also important for the start-up company to stay cur- rent with technology trends. “Our company is totally disrupt- ing the automotive industry by using technology and coming to your doorstep. It’s like ordering from Amazon or Walmart. com instead of going to the physical store,” said Katie. The mobile tire installation company is able to leverage technol- ogy trends to compete with traditional automotive tire stores.

Courtesy of Katie Lord

The Manager’s Changing Work Environment and Ethical Responsibilities CHAPTER 3 89

The key fact about computer technology is its capacity for disruption—disruption of service industries, certainly, such as communication, music, and travel, but also disruption in the world’s access to knowledge, in health care, in energy sources, and in many other areas.

The Internet of Things. The Internet of Things (IoT) is a set of everyday devices like cars, refrigerators, medical devices, ther- mostats, and even toys that are connected to each other through the Internet, enabling them to collect and share data. It’s expected that soon blockchain, the encrypted digital ledger system, will also form a part of the Internet of Things.54 How does the IoT work? Your IoT refrigerator, for example, could rec- ognize that you are getting low on hot sauce, order it from the supermarket, and tell your bank to pay for it. One report sug- gests there will be 20 billion such “smart devices,” or nearly four for every person on Earth, by the time you read this.55 Security and privacy are big consumer concerns, however.56 Even toys can be hacked.57 Business leaders believe IoT is the most important new technology, and 9 in 10 (of 502 surveyed around the world) say it will play a major role in the future of their company.58

Driverless Cars. Self-driving cars being developed by companies such as Google and Tesla promise many benefits, including fewer traffic accidents and the freedom to complete other tasks (or even sleep) while commuting. By improving both safety and productivity, autonomous cars may even make it possible for more local governments to use congestion pric- ing (charging tolls in heavily trafficked areas or during peak driving times) to raise revenue for maintaining roads.59 A recent study showed that only about a quarter of U.S. adults say they trust self-driving cars, but Google’s Waymo project has logged 2 million miles with only one accident in which the autonomous car was at fault. Why are most accidents with self-driving cars caused by human drivers of other cars? Some say the reason is that self-driving cars are better at following the rules of the road, taking human drivers by surprise.60

YOUR CALL Which technological change do you think is apt to affect you personally during the next decade? What kind of strategies for change will managers have to adopt? What issues should be most important to them?

EXAMPLE Technology Changes Everything

3. Sociocultural Forces Sociocultural forces are influences and trends originating in a country’s, a society’s, or a culture’s human relationships and values that may affect an organization or industry. “With more access to social media,” says one account, “young people are driving less than they used to and evincing a lack of interest in cars (causing deep worry in the automotive industry).”61 Piano stores are closing as fewer children take up the instrument, the Associated Press reports; “people are interested in things that don’t take much effort,” a piano consultant believes.62 Gambling casinos are “bring- ing in tattoo studios, mixed martial arts competitions, and other offbeat attractions” to attract Millennial-age patrons, reports another AP story.63 These are three examples of industries affected by sociocultural forces.

Seismic changes are occurring in people’s views about sociocultural issues. A recent survey conducted by the Harris Poll, for example, showed that U.S. adults are less accepting of LGBTQ people for the first time since 2014. The term LGBTQ is a widely recognized acronym to represent lesbian, gay, bisexual, trangender, and questioning or queer.64 Diversity is discussed in detail in Chapter 11. Smoking marijuana is another sociocultural change. It is now legal for medical reasons in 29 states, and for recre- ational use in 9 (see Figure 3.2), reflecting the fact that about two-thirds of U.S. adults now support legalization. At the same time, however, federal laws that banned the sale and use of marijuana 80 years ago are still in effect.65

Entire industries have been rocked when the culture underwent a lifestyle change, most notably changes in approaches to health. Diet sodas, for instance, have gone through a nearly decade-long decline, causing major concerns for Coca-Cola and PepsiCo, because more Americans worry that artificial sweeteners are unhealthy, despite numerous studies that find them safe.66 Some killer diseases, such as measles, whooping cough, and meningitis, are creeping back because of an anti-vaccine move- ment based on philosophical and religious exemptions.67 With roughly 36.5% of U.S. adults being obese, health professionals and organizations are concerned about the

90 PART 2 The Environment of Management

rising medical costs associated with treatment. Estimates suggest that medical costs for “people who have obesity were $1,429 higher than [for] those of normal weight.”68 (Obesity can also alter one’s personal fortunes. People who are overweight are viewed as being less competent than normal-weight people in a workplace setting, and so it is harder for the overweight to get ahead.)69

These trends are affecting the fast-food industry, with a changing customer base call- ing for more food with ingredients free of additives and antibiotics, that focuses on regional flavors, that is influenced by fine-dining chefs, and that reflects principles of “mindful dining”—sustainability, reduction of food waste, and humane treatment of animals.70

4. Demographic Forces Demographics derives from the ancient Greek word for “people”—demos—and deals with statistics relating to human populations. Age, gender, race, sexual orientation, occupation, income, family size, and the like are known as demographic characteristics when they are used to express measurements of certain groups. Demographic forces are influences on an organization arising from changes in the characteristics of a population, such as age, gender, or ethnic origin.

We mentioned in Chapter 1 several instances of major shifts to come in racial and ethnic diversity. Among other recent changes: Marriage rates are down, more couples are marrying later, black–white and same-sex marriages are increasing, one-person households are growing, the decline in fertility rates is leveling off, divorce rates are down, secularism (being nonreligious) is up, more households are multigenerational, and the percentage of people living in rural areas is the lowest ever.71 By 2060, it’s pre- dicted, the U.S. population will soar to 417 million (from about 319 million today), and minorities are expected to reach 64.4% of the population by 2060.72 We consider demo- graphic and diversity matters in more detail in Chapter 9.

5. Political–Legal Forces Political–legal forces are changes in the way politics shape laws and laws shape the opportunities for and threats to an organization. In the United States, the currently dominant political view may be ref lected in the way the government addresses environmental and sustainability issues, such as those

CA

WA

Legalized recreational and medical marijuana

OR

NV

CO

MT

NMAZ

ND MN

IL

MI

OH

FL

AR

W V

NJ DE MD

PA

NY

NH

RI CT

MA

VT ME

AK

HI

Legalized medical marijuana

FIGURE 3.2 States where marijuana is legal Source: M. Robinson, “States Where Marijuana is Legal,” Business Insider, June 28, 2018.

The Manager’s Changing Work Environment and Ethical Responsibilities CHAPTER 3 91

we described in Chapter 1. For instance, should the government pursue an agenda of nationalism and isolation?73 Should coal mining be allowed on public lands?74 How should public money be spent on dealing with climate change and ocean warming?75

As for legal forces, some countries have more fully developed legal systems than oth- ers. And some countries have more lawyers per capita. (The United States reportedly has one lawyer for every 300 people versus one for every 1,400 people in France.)76 U.S. companies may be more willing to use the legal system to advance their interests, as in suing competitors to gain competitive advantage. But they must also watch that others don’t do the same to them.

6. International Forces International forces are changes in the economic, political, legal, and technological global system that may affect an organization.

This category represents a huge variety of influences. How does the economic inte- gration of the European Union create threats and opportunities for U.S. companies? What does the UK’s impending exit from the EU (nicknamed Brexit) mean for the rest of the EU and the world? Does it represent the start of a widespread rejection of global- ization, and if so what effect will that have on multinational businesses, their employ- ees, and their customers?77

U.S. companies that do significant business in Europe are subject to regulation by the European Union. For instance, in one antitrust case, several companies in Europe were able to get Google to change the way it displays its search results after they com- plained that, as one consumer rights advocacy group stated, Google could “stack its search results as suits itself.”78 Google is blocking certain of these results79 but is now preparing to fight the EU’s “right to be forgotten.”80

Uber is just one of the other U.S. companies to face difficulties overseas; it recently lost its license to operate on London’s streets after irregularities were found in its busi- ness and operating methods, to the relief of London’s cab drivers and other competi- tors. The company will continue operating while it appeals the British court’s decision.81

Meanwhile, for several reasons—including a strong U.S. dollar and strict visa requirements—foreign tourism to the United States has been declining for four or five years, alarming the domestic travel industry.82 The number of international students at U.S. universities has also dropped, due in part to the recent rise of nationalist sentiment in the United States and the lure of other countries. Nearly $40 billion of revenue from these students is at stake.83

How well U.S. businesspeople can handle international forces depends a lot on their training. Unfortunately, only 18% report speaking a language other than English, whereas 53% of Europeans, for example, can converse in a second language.84 Almost all U.S. high schools offer foreign languages, but fewer than 1% of U.S. adults are profi- cient in a foreign language they studied in a U.S. classroom.85

Another factor to keep in mind is the need for flexibility when dealing with other countries and cultures. Behaviors as habitual to U.S. employees as asking questions and expressing your unsolicited opinion might need to be tailored to fit new circumstances abroad, where they may seem overbearing. At the same time, behaviors like bribery and gift-giving can carry different meanings in different cultures, proving that there is no substitute for learning as much as possible about the countries with which you are dealing.86 ●

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3.4 The Ethical Responsibilities Required of You as a Manager

THE BIG PICTURE Managers need to be aware of what constitutes ethics, values, the four approaches to ethical dilemmas, and how organizations can promote ethics.

Would you take supplies from the office supply closet on leaving a job? (Twenty-six percent of workers said they would, 74% said they wouldn’t, in one survey.)87 That may be an easy decision. But how would you handle a choice between paying a client money under the table in order to land a big contract, for example, and losing your job if you didn’t? That’s a much harder matter.

One of a manager’s major challenges, as we stated in Chapter 1, is managing for ethi- cal standards. In business, most ethical conflicts are about choosing between economic performance and social performance.88 This is known as an ethical dilemma, a situation in which you have to decide whether to pursue a course of action that may benefit you or your organization but that is unethical or even illegal. Volkswagen managers, for instance, allowed software to be installed on diesel-powered cars that would cheat on emissions tests (so that the vehicles seemed more fuel efficient—perceived as an economic benefit) and spew more oxides into the air (adding more greenhouse gases and contributing to climate change—working against the intended social benefit).89

Following up a tip from puzzled researchers, the Environmental Protection Agency (EPA) discovered in 2014 that Volkswagen had deliberately installed cheating software in more than 500,000 diesel passenger cars sold in the United States. The software allowed the cars’ computers to sense when the vehicles were being tested for harmful emissions and to switch, undetected, to a driving mode that artificially reduced nitrogen oxide or NOx (linked to smog and lung cancer) so the cars could pass the test. Once back on the road, the computers adjusted the driving mode again, permitting drivers to experience the power and mileage the company was touting while allowing some cars to emit as much as 40 times the volume of pollutants permitted by law. Volkswagen had done the same in more than 10 million other cars sold around the world.90

The U.S. government’s case against VW resulted in a settle- ment of almost $15 billion and included massive repair and buy-back programs. Another $4.3 billion in civil and criminal penalties was levied against the company, some of which is to fund projects to reduce NOx in the air; eight high-ranking exec- utives were charged with crimes, and two received prison sen- tences. The company lost more than a quarter of its market value as its stock price plummeted.91

How did a venerable and successful company come to com- mit what one business publication called “a truly brazen act of

business malfeasance”92 in the first place? More stringent con- trols on NOx took effect in 1999, and of the two possible ways it could meet them, VW chose the one that did not require a costly reengineering of the interior of its cars. This might have seemed like the right business decision to make, but as a side effect, VW’s new NOx controls dramatically reduced the degree of fuel economy the company was advertising. It was appar- ently at this point that the decision to rig the cars to falsify emissions tests was made.93

Volkswagen’s financial performance has returned to pre- scandal levels even as the possibility remains that more huge fines will be levied, this time by European investigators.94 In early 2018, another scandal broke when the company was forced to apologize for exposing monkeys to engine fumes to research the effects of diesel exhaust. “We’re convinced the scientific methods chosen then were wrong,” said a company statement. “It would have been better to do without such a study in the first place.”95

YOUR CALL What is the fundamental ethical dilemma faced by Volkswagen’s managers? How well do you think Volkswagen is managing the balance between its economic and its social performance? What could it be doing better?

EXAMPLE Volkswagen Fails the Test

LO 3-4 Explain the importance of ethics and values in effective management.

The Manager’s Changing Work Environment and Ethical Responsibilities CHAPTER 3 93

Solving ethical dilemmas is an important skill, according to a recent study. An inves- tigation of 400 senior executives and 455 college students revealed that 62% of the stu- dents believed that they were well prepared to deal with ethical judgments whereas only 30% of executives see students as prepared.96 To help you develop this skill, we ask you to solve an ethical/legal dilemma at the end of each chapter.

Defining Ethics and Values A report from the Ethics Resource Center revealed that 41 percent of workers in the U.S. are likely to have witnessed some form of ethical misconduct at work. Sadly, most of this unethical behavior was committed by someone with managerial authority.97 Most of us assume we know what “ethics” and “values” mean, but do we? Let’s con- sider them.

Ethics Ethics are the standards of right and wrong that influence behavior. These stan- dards may vary among countries and among cultures. Ethical behavior is behavior that is accepted as “right” as opposed to “wrong” according to those standards.

Sometimes it’s hard to know whether something like a tip, a gratuity, or a gift is a token of appreciation or a bribe. For example, pharmaceutical companies have provided doctors with small gifts—pads with logos, tickets to sports events, free drug samples—to promote their drugs. However, in recent years, points out one editorial, “those trinkets have evolved into big money for doctors to speak to other doctors about new drugs,” as in presentations at dinner lectures.98 Do these behaviors represent marketing gifts or unethical attempts to influence the sales of drugs? Sometimes it is hard to tell the difference.

The Ethics Resource Center tried to clarify this issue by identifying the five most common unethical behaviors at work: They are:99

■ Misusing company time. Covering for others, taking long breaks, lying about being sick, altering time sheets, and doing personal business on company time all represent instances of this behavior. Electronic monitoring is one way to curtail such behaviors, and the practice is growing. According to Lewis Maltby, president of the National Workrights Insititute, “virtually every company con- ducts electronic monitoring.”100 Beware the next time you conduct personal business on company time.

■ Abusive behavior. An expert defined abusive supervision as “subordinates’ perceptions of the extent to which supervisors engage in the sustained display  of hostile verbal and nonverbal behaviors, excluding physical con- tact.”101 Examples include bullying, gossiping, backstabbing, and repeatedly calling people names like “loser,” “stupid,” or “worthless.” This type of behavior erodes employees’ self-esteem, engagement, job satisfaction, and performance.102

■ Employee theft. Estimates suggest that 75% of employees have stolen from an employer at least once, and such theft costs U.S. businesses about $50 billion annually.103 Although there are many reasons for stealing, often it is a form of retaliation for abusive supervision.104

■ Workplace cheating. Have you ever lied, scammed, or deceived someone to advance your self-interests? Workplace cheating is defined as “unethical acts that are intended to create an unfair advantage or help attain benefits that an employee would not otherwise be entitled to receive.”105 Workplace cheating is far too common among college students. A poll of 30,000 students revealed that about 61% admitted to cheating, and 16.5% don’t regret it.106 These behav- iors occur because it has “become easier and more widely tolerated, and both schools and parents have failed to give students strong, repetitive messages

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about what is allowed and what is prohibited,” according to The New York Times.107 They also occur in response to performance pressures to deliver results or face negative consequences.108

■ Violating corporate Internet policies. Are you a cyberslacker or cyberloafer? These terms describe people who surf the Web for personal reasons during work hours. It is both rampant and costly in terms of lost productivity. A sur- vey by Salary.com revealed that roughly 64 percent of U.S. employees are cyberslackers.109 We discuss this issue in more detail in Chapter 15.

Values Ethical dilemmas often take place because of an organization’s value sys- tem, the pattern of values within an organization. Values are the relatively permanent and deeply held underlying beliefs and attitudes that help determine a person’s behav- ior, such as the belief that “fairness means hiring according to ability, not family background.” Values and value systems are the underpinnings for ethics and ethical behavior.

Organizations may have two important value systems that can conflict: (1) the value system stressing financial performance versus (2) the value system stressing cohesion and solidarity in employee relationships.110

Example: A car dealership may hire an accounting firm to send an accountant to audit its books, and she works alongside employees of the car dealer for several weeks, establishing cohesion and solidarity. But when a task that she estimated would take 10 hours actually takes 15, the dealership’s employees might say, “You charged us more hours than you said you would,” and so she might report just 10 hours to her superiors at the accounting firm. This action makes the subordinate look good, and keeps the cli- ent happy, thereby improving social cohesion. But, of course, the accounting firm unknowingly takes a loss on financial performance.111 This kind of value system con- flict happens all the time.

Many people surf the internet for personal reasons during work hours. Is there anything wrong with this? Do you think this woman surfing at work is experiencing a value conflict? ©McGraw-Hill Education

The Manager’s Changing Work Environment and Ethical Responsibilities CHAPTER 3 95

Four Approaches to Resolving Ethical Dilemmas How do alternative values guide people’s decisions about ethical behavior? Here are four approaches, which may be taken as guidelines:

1. The Utilitarian Approach: For the Greatest Good Ethical behavior in the utilitarian approach is guided by what will result in the greatest good for the greatest number of people. Managers often take the utilitarian approach, using financial performance—such as efficiency and profit—as the best definition of what constitutes “the greatest good for the greatest number.”112

Thus, a utilitarian “cost–benefit” analysis might show that in the short run the firing of thousands of employees may improve a company’s bottom line and provide immedi- ate benefits for the stockholders. The drawback of this approach, however, is that it may result in damage to workforce morale and the loss of employees with experience and skills—actions not so readily measurable in dollars.

2. The Individual Approach: For Your Greatest Self-Interest Long Term, which Will Help Others Ethical behavior in the individual approach is guided by what will result in the individual’s best long-term interests, which ultimately are in every- one’s self-interest. The assumption here is that you will act ethically in the short run to avoid others harming you in the long run.

The flaw here, however, is that one person’s short-term self-gain may not, in fact, be good for everyone in the long term. After all, the manager of an agribusiness that puts chemical fertilizers on the crops every year will always benefit, but the fishing industries downstream could ultimately suffer if chemical runoff reduces the number of fish. Indeed, this is one reason why Puget Sound Chinook, or king salmon, has been threat- ened with extinction in the Pacific Northwest.113

3. The Moral-Rights Approach: Respecting Fundamental Rights Shared by Everyone Ethical behavior in the moral-rights approach is guided by respect for the fundamental rights of human beings, such as those expressed in the U.S. Constitution’s Bill of Rights. We would all tend to agree that denying people the right to life, liberty, privacy, health and safety, and due process is unethical. Thus, most of us would have no difficulty condemning the situation of immigrants illegally brought into the United States and then effectively enslaved—as when made to work seven days a week as maids.

The difficulty, however, is when rights are in conflict, such as employer and employee rights. Should employees on the job have a guarantee of privacy? Actually, it is legal for employers to listen to business phone calls and monitor all nonspoken personal communications.114

4. The Justice Approach: Respecting Impartial Standards of Fairness Ethical behavior in the justice approach is guided by respect for impartial standards of fairness and equity. One consideration here is whether an organization’s policies—such as those governing promotions or sexual harassment cases—are administered impartially and fairly regardless of gender, age, sexual orientation, and the like.

Fairness can often be a hot issue. For instance, many employees are loudly resentful when a corporation’s CEO is paid a salary and bonuses worth hundreds of times more than what they receive—even when the company performs poorly—and when fired is then given a “golden parachute,” or extravagant package of separation pay and benefits.

White-Collar Crime, SarbOx, and Ethical Training At the beginning of the 21st century, U.S. business erupted in an array of scandals rep- resented in such names as Enron, WorldCom, Tyco, and Adelphia, and their chief exec- utives went to prison on various fraud convictions. Executives’ deceits generated a great

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deal of public outrage, as a result of which Congress passed the Sarbanes–Oxley Act, as we’ll describe. Did that stop the raft of business scandals? Not quite.

Next to hit the headlines were cases of insider trading, the illegal trading of a compa- ny’s stock by people using confidential company information. The federal government launched a six-year crackdown on insider trading on Wall Street that resulted in 87 convictions (14 of which were dismissed or lost on appeal; one trial ended in acquit- tal).115 Among many other well-publicized cases, in 2016 three Chinese hackers used information they had stolen from top New York law firms to conduct insider trading deals and were extradited to the United States to face charges.116

Most recently, Martin Shkreli created a huge public outcry by acquiring and then unapologetically increasing the price of the life-saving drug Daraprim by 5,000% when he was head of Turing Pharmaceuticals. But what actually got Shkreli into legal trouble were acts of securities and wire fraud he committed while running two hedge funds he managed, MSMB Capital and MSMB Healthcare. He was convicted and sentenced for these offenses in 2017, at the age of 34.117

The Sarbanes– Oxley Reform Ac t The Sarbanes–Oxley Act of 2002, often shortened to SarbOx, or SOX, established requirements for proper financial record keeping for public companies and penalties of as much as 25 years in prison for non- compliance.118 Administered by the Securities and Exchange Commission (SEC), SarbOx requires a company’s chief executive officer (CEO) and chief financial offi- cer (CFO) to personally certify the organization’s financial reports, prohibits them from taking personal loans or lines of credit, and makes them reimburse the organi- zation for bonuses and stock options when required by restatement of corporate profits. It also requires the company to have established procedures and guidelines for audit committees.119 Recently, the agribusiness giant Monsanto paid the govern- ment $80 million in penalties under SarbOx for misstating earnings associated with a sales program for the herbicide Roundup.120

How Do People Learn Ethics? Kohlberg’s Theories U.S. business history is per- meated with occasional malfeasance, from railroad tycoons trying to corner the gold mar- ket (the 1872 Crédit Mobilier scandal) to 25-year-old bank customer service representatives swindling elderly customers out of their finances. Legislation such as SarbOx can’t head off all such behavior. No wonder that now many colleges and universities have required more education in ethics.

Martin Shkreli speaks to the press after the verdict in his court case. He was found guilty on three of eight counts of securities fraud and conspiracy to commit securities and wire fraud. Do you see any remorse in his facial expression? ©Drew Angerer/Getty Images

The Manager’s Changing Work Environment and Ethical Responsibilities CHAPTER 3 97

“Schools bear some responsibility for the behavior of executives,” says Fred J. Evans, dean of the College of Business and Economics at California State University at Northridge. “If you’re making systematic errors in the [business] world, you have to go back to the schools and ask, ‘What are you teaching?’”121

The good news is that more graduate business schools are changing their cur- riculums to teach ethics, although there is some question as to their effectiveness.122 The bad news, as discussed earlier, is that students across educational levels are still cheating.

Cheating extends to corporations. Goldman Sachs fired 20 analysts for cheating on internal training exams, while JPMorgan Chase fired 10 employees for similar lapses in judgment.123

Of course, most students’ levels of moral development are established by personali- ties and upbringing long before they get to college, with some being more advanced than others. One psychologist, Laurence Kohlberg, has proposed three levels of per- sonal moral development—preconventional, conventional, and postconventional.124

■ Level 1, preconventional—follows rules. People who have achieved this level tend to follow rules and to obey authority to avoid unpleasant consequences. Managers of the Level 1 sort tend to be autocratic or coercive, expecting employees to be obedient for obedience’s sake.

■ Level 2, conventional—follows expectations of others. People whose moral devel- opment has reached this level are conformist but not slavish, generally adher- ing to the expectations of others in their lives. Level 2 managers lead by encouragement and cooperation and are more group and team oriented. Most managers are at this level.

■ Level 3, postconventional—guided by internal values. The farthest along in moral development, Level 3 managers are independent souls who follow their own values and standards, focusing on the needs of their employees and trying to lead by empowering those working for them. Only about a fifth of American managers are said to reach this level.

What level of development do you think you’ve reached?

How Organizations Can Promote Ethics Ethics needs to be an everyday affair, not a one-time thing. This is why many large U.S. companies now have a chief ethics officer, whose job is to make ethical conduct a prior- ity issue.

There are several ways an organization may promote high ethical standards on the job, as follows.125

1. Creating a Strong Ethical Climate The first step is to foster an ethical climate, as discussed in the chapter-opening Manager’s toolbox. Managers can promote ethical climates through the policies, procedures, and practices that are used on a daily basis.

2. Screening Prospective Employees Companies try to screen out dishonest, irresponsible employees by checking applicants’ resumes and references. Some firms, for example, run employee applications through E-Verify, a federal program that allows employers to check for illegal immigrants. Some also use personality tests and integrity testing to identify potentially dishonest people.

3. Instituting Ethics Codes and Training Programs A code of ethics consists of a formal written set of ethical standards guiding an organization’s actions. Most codes offer guidance on how to treat customers, suppliers, competitors, and other stakeholders. The purpose is to clearly state top management’s expectations for all employees. As you might expect, most codes prohibit bribes, kickbacks,

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misappropriation of corporate assets, conflicts of interest, and “cooking the books”— making false accounting statements and other records. Other areas frequently cov- ered in ethics codes are political contributions, workforce diversity, and confidentiality of corporate information.

In addition, according to the Society for Human Resource Management, 81 percent of U.S. companies are providing ethics training, and 66 percent include ethical behavior as a measure of employee evaluations.126 The approaches vary, but one way is to use a case approach to present employees with ethical dilemmas. By clarifying expectations, this kind of training may reduce unethical behavior.127

4. Rewarding Ethical Behavior: Protecting Whistle-Blowers It’s not enough to simply punish bad behavior; managers must also reward good ethical behavior, as in encouraging (or at least not discouraging) whistle-blowers.

A whistle-blower is an employee, or even an outside consultant, who reports organi- zational misconduct to the public, such as health and safety matters, waste, corruption, or overcharging of customers.128 Photographer Simon Edelman is a good example (see Example box). Edelman’s case reinforces the point that whistle-blowers some- times risk their jobs by coming forward and thus need to be protected. For instance, the law that created the Occupational Safety and Health Administration (OSHA) gives “employees and their representatives the right to file a complaint and request an OSHA inspection of their workplace if they believe there is a serious hazard or their employer is not following OSHA standards. Workers do not have to know whether a specific OSHA standard has been violated in order to file a complaint.”129 In some cases, whistle-blowers may receive a reward; the Internal Revenue Service (IRS), for instance, is authorized to pay tipsters rewards as high as 30% in cases involving large amounts of money.130

Whistle-blowing has been on the rise since the Great Recession, and the number of whistle-blower tips received by the Securities and Exchange Commission, for example, is now nearly 4,000 a year.131 True whistle-blowing involves acts that are against the law. However, the principal kinds of misconduct reported in one study—misuse of company time, abusive behavior, and lying to employees—aren’t necessarily illegal, although they may create an offensive work environment, the leading reason people leave their jobs.132 Retaliation against whistle-blowers is also on the rise, ranging from giving them the cold shoulder to passing them over for promotion.

In early 2017, Department of Energy (DOE) photographer Simon Edelman, on routine assignment, took a photo of then- new Department Secretary Rick Perry in a bear hug with Robert E. Murray, an energy company executive who had been a major donor to the Trump campaign and to Perry’s own failed presi- dential bid. Another photo Edelman took that day showed the cover page of a confidential document Murray presented to Perry during their meeting, outlining a plan that would guide the DOE to make drastic staff reductions and restore policies favorable to the coal industry. In releasing the photos to a mag- azine a few months later, Edelman says he hoped to make the public aware of the close relationship between the two men

and the ease with which industry was exerting influence over a government department charged with regulating it. Less than a year after the meeting, The New York Times reported, nearly all the points in Murray’s plan had been achieved or were on track to completion.133

THE REPERCUSSIONS “It seemed like that was the right thing to do—exercising my First Amendment rights to get the information out there,” Edelman said of his decision. But a day after the photos were published, Edelman found himself placed on administrative leave and escorted out of the DOE building, forced to leave his personal laptop and

EXAMPLE The Whistle-Blowing Photographer

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In exposing unethical behavior, then, it’s important to be clear why you’re doing it (trying to help the company or just get someone in trouble), not report something for the wrong reason (discuss your concerns with someone who has similar values), and follow proper channels (like addressing the supervisor of the supposed culprit). Don’t try to report externally (lashing out on Facebook, for instance) without speaking to those who might resolve the problem.138

Some people view ethics in ideal terms, which means that ethical principles or stan- dards apply universally across situations and time. Others, however, take a relativistic view and believe that what is ethical depends on the situation. These differences can create conflict among managers trying to make decisions.

Consider the situation faced by a group of executives working with Angelo to make a decision about opening a new office overseas. Angelo was consulting with a global com- pany that was dealing with the issue of whether or not it should pay local officials for helping establish a new office overseas. Some executives in the meeting concluded that the company should pay these officials because it was a normal cost of doing business in this country. Others viewed the situation quite differently. They thought the pay- ments amounted to bribes and were totally against the idea. The company ultimately decided that it would not make the payments, which resulted in their inability to open the new office.

All told, it is important for you to learn more about your ethical tendencies. This will help you to behave in ways that are consistent with your values and beliefs. ●

expensive camera equipment behind. He was subsequently told his contract with the department would not be renewed as prom- ised—essentially he was fired—and he has filed a federal lawsuit seeking whistle-blower protection, reinstatement, and an ethics investigation into Perry and Murray for “public corruption.”134 Retaliation against whistle-blowers is against federal law; the DOE is calling Edelman’s accusations “ridiculous.”135

Whistlebloweraid.org is a nonprofit law firm that assists government whistle-blowers like Edelman with confidential free legal advice, especially if they witness lawbreaking when the evidence is classified and don’t know where to turn.136 Though he is working with the group, Edelman insists his

photos are in the public domain. “I’m definitely proud of what I did,” he says. “I know that I did the right thing. I just hope that more people take this as inspiration that they can also speak up and blow the whistle because it’s an important part of democracy.”137

FOR DISCUSSION What are some of the reasons someone might become a whis- tleblower? Why would someone choose not to be? Is that posi- tion defensible given the value of job attitudes like professional and ethical standards? Why or why not? What would you have done in Edelman’s position?

Assessing My Perspective on Ethics This survey is designed to assess your views about ethics. It provides feedback about your status on the Career Readiness “other characteristic” of professionalism/work ethic.

Please be prepared to answer these questions if your instructor has assigned Self-Assessment 3.1 in Connect.

1. Are your views more idealistic or more relativistic?

2. What do you think about students cheating on homework assignments in school? What about cheating on exams?

3. Are your answers consistent with your score? Explain.

4. What can you say during an interview to demonstrate an ethical orientation?

SELF-ASSESSMENT 3.1 CAREER READINESS

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3.5 The Social Responsibilities Required of You as a Manager

THE BIG PICTURE Managers need to be aware of the viewpoints supporting and opposing social responsibility and whether being and doing good pays off financially for the organization.

Is money the be-all and end-all in business? This is the concern behind the triple bot- tom line discussed earlier. For TOMS Shoes, profit must be balanced with the higher purpose of helping children in developing countries who lack belongings as simple as a pair of shoes. Founded more than 10 years ago with the simple idea to donate one pair of shoes to a child in need for every pair purchased by a consumer, the company has established a “one for one” model other companies have since adopted. For founder Blake Mycoski, who recently stepped down as CEO to focus on promoting the company as it expands into bags and eyewear, TOMS Shoes was always “mission with a company” rather than a company with a mission. “I think it’s incredibly sustainable,” he says of the firm. “Built into our cost structure is the intention to provide great ben- efit to our customers because they feel like they’re getting to be part of something more than just a transaction.”139

If ethical responsibility is about being a good individual citizen, social responsibility is about being a good organizational citizen. More formally, social responsibility is a man- ager’s duty to take actions that will benefit the interests of society as well as of the organi- zation. When generalized beyond the individual to the organization, social responsibility is called corporate social responsibility (CSR), the notion that corporations are expected to go above and beyond following the law and making a profit. Areas of CSR include the environment, philanthropy, and ethical labor practices.140

Corporate Social Responsibility: The Top of the Pyramid According to University of Georgia business scholar Archie B. Carroll, corporate social responsibility rests at the top of a pyramid of a corporation’s obligations, right up there with economic, legal, and ethical obligations. Some people might hold that a company’s first and only duty is to make a profit. However, Carroll suggests the responsibilities of an organization in the global economy should take the following priorities, with profit being the most fundamental (base of the pyramid) and corporate citizenship at the top:141

■ Be a good global corporate citizen, as defined by the host country’s expectations. ■ Be ethical in its practices, taking host-country and global standards into

consideration. ■ Obey the law of host countries as well as international law. ■ Make a profit consistent with expectations for international business.

These priorities are illustrated in the pyramid opposite. (See Figure 3.3.)

Is Social Responsibility Worthwhile? Opposing and Supporting Viewpoints In the old days of cutthroat capitalism, social responsibility was hardly thought of. A company’s most important goal was to make money pretty much any way it could, and the consequences be damned. Today, for-profit enterprises in the United States

LO 3-5 Describe the concept of social responsibility and its role in today’s organizations.

The Manager’s Changing Work Environment and Ethical Responsibilities CHAPTER 3 101

and Europe—but, increasingly, multinational firms from developing nations as well— generally make a point of “putting something back” into society as well as taking something out.142

Not everyone, however, agrees with these new priorities. Let’s consider the two viewpoints.

Against Social Responsibility “Few trends could so thoroughly undermine the very foundations of our free society,” argued the late free-market economist Milton Friedman, “as the acceptance by corporate officials of social responsibility other than to make as much money for their stockholders as possible.”143

Friedman represents the view that, as he said, “The social responsibility of business is to make profits.” That is, unless a company focuses on maxi- mizing profits, it will become distracted and fail to provide goods and services, benefit the stockhold- ers, create jobs, and expand economic growth—the real social justification for the firm’s existence.

This view would presumably support the efforts of companies to set up headquarters in name only in offshore Caribbean tax havens (while keeping their actual headquarters in the United States) in order to minimize their tax burden.

Be a good global corporate citizen

Do what is desired by global stakeholders

Do what is expected by global stakeholders

Do what is required by global stakeholders

Do what is required by global capitalism

Be ethical

Obey the law

Be profitable

Philanthropic Responsibility

Ethical Responsibility

Legal Responsibility

Economic Responsibility

FIGURE 3.3 Carroll’s global corporate social responsibility pyramid Source: A. Carroll, “Managing Ethically and Global Stakeholders: A Present and Future Challenge,” Academy of Management Executive, May 2004, p. 116.

Do you think social responsibility should be equally shared by companies and governments around the world? ©EyeEm/Getty Images

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For Social Responsibility “A large corporation these days not only may engage in social responsibility,” said famed economist Paul Samuelson, who passed away in 2009, “it had damned well better to try to do so.”144 That is, a company must be concerned for society’s welfare as well as for corporate profits.

Beyond the fact of ethical obligation, the rationale for this view is based on the belief that it is good for business, morally appropriate, or important to employees. That is, CEOs support CSR because they think it promotes sales, provides a favor- able public image that can help head off government regulation, or increases employees’ attachment to the firm.145

Marc Benioff speaks at the Salesforce keynote during Dreamforce 2015 at Moscone Center on September 16, 2015 in San Francisco, California. ©Tim Mosenfelder/Getty Images

EXAMPLE Corporate Social Responsibility: Salesforce.com Wants to Change the Way the World Works

There are all kinds of ways by which corporate social responsi- bility is expressed. Marc Benioff, founder and CEO of Salesforce.com, a San Francisco business software company, says, “Companies can do more than just make money, they can serve others. The business of business is improving the state of the world.”146 Here are some of the ways in which Salesforce.com does that.147

Operating with Integrity. Salesforce.com has adopted Business Conduct Principles and a Code of Conduct that, among other things, support ethical business practices, anti- corruption, antidiscrimination, and rejection of forced or invol- untary labor.

“1/1/1” Charitable Giving. When founder and CEO Marc Benioff set up Salesforce.com in 1999, he also created a foundation with a powerful but simple vision: Donate 1% of Salesforce.com resources, 1% of employees’ time, and 1% of  the firm’s technology to improving communities around the world. For instance, since 1999, the company has donated $65 million and 175,00 employee volunteer hours to education

in San Francisco and Oakland’s school districts. In San Francisco, the company has helped increased enrollment of girls in computer science courses by 2,000 percent.148

Journey toward Sustainability. Although Salesforce.com does no manufacturing or mining, it still strives to reduce carbon emissions in the operation of its data centers and office buildings, as well as in employee travel.

Fostering Employee Success. At Salesforce.com, says the company, “our goal is to deliver a dream job experience for our employees. We are intense, passionate people on a mission to change the way the world works.” Employees are so heavily compensated with stock options that the company hasn’t posted an actual profit for five years.149

YOUR CALL Do you believe corporate social responsibility really has bene- fits? Can you think of any highly profitable and legal businesses that do not practice any kind of social responsibility?

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One Type of Social Responsibility: Climate Change, Sustainability, and Natural Capital Nearly everyone is aware of the growing threat of climate change and global warm- ing, and the vast majority (64%) of U.S. adults in a 2016 poll said they were worried about global warming. Sixty-five percent put most of the blame on human activity, and 59% believe the impacts are already being felt.150 (Scientists say global warming is “unequivocal” and that it is extremely likely that humans are the primary con- tributors to it.)151 Climate change refers to major changes in temperature, precipita- tion, wind patterns, and similar matters occurring over several decades. Global warming, one aspect of climate change, refers to the rise in global average tempera- ture near the Earth’s surface, caused mostly by increasing concentrations in the atmo- sphere of greenhouse gases, such as carbon emissions from fossil fuels.152 Sustainability, as we said in Chapter 1, is economic development that meets the needs of the present without compromising the ability of future generations to meet their own needs. (For more about the social, political, and cultural responses to climate change, including dissenters, see Why We Disagree about Climate Change by Mike Hume.)153

The Benefits of Being Green “Coca-Cola has always been more focused on its economic bottom line than on global warming,” writes reporter Coral Davenport. But “as global droughts dried up the water needed to produce its soda,” its profits took some serious hits. Now the company “has embraced the idea of climate change as an economically disruptive force,” she writes, and is focused on water-conservation tech- nologies, along with other sustainability measures.154 Beyond water conversation, the Coca-Cola Company established 2020 sustainability goals in the following aspects of its business: agriculture, climate protection, giving back, human and workplace rights, packaging and recycling, and women’s economic empowerment.155

Today, going green has entered the business mainstream, where sustainability pro- grams are producing not only environmental benefits, but also cost savings, revenue growth, and competitive advantages.156 Carmaker Subaru of Indiana Automotive, for example, has proved that adopting environmentally friendly processes does not add to the cost of doing business but actually makes it more efficient (reducing water use by 50%, electricity by 14%, and so on).157 Dow Chemical, collaborating with the Nature Conservancy, an environmental group, is exploring coastal marsh and dune restoration (and paying nearby homeowners to replace lawns with native plants) to shield its Freeport, Texas, chemical complex from storm surges coming off the Gulf of Mexico.158

The Value of Earth’s Resources: Natural Capital Indeed, planet (of the triple bottom line people, planet, and profit) is now identified by the name natural capital (or natural capital accounting), which many scholars think should figure seriously in economic decision making. Natural capital is the value of natural resources, such as topsoil, air, water, and genetic diversity, which humans depend on. “We’re driving natural capital to its lowest levels ever in human history,” says Stanford University ecologist Gretchen Daily.159

According to this view, we are approaching the planet’s limitations, with human activity threatening to exceed the earth’s capacity to generate resources and absorb wastes. For example, the mountain of electrical waste disposed of annually worldwide— cell phones, laptops, appliances, anything with a battery or a cord—was projected to be nearly 50 million tons in 2018 and to grow by 5% a year.160 Nearly all such waste can be recycled, but worldwide only about 15 to 20% is.161 One United Nations report suggests climate change poses a risk to world food supplies, with output dropping perhaps 2% each decade, as rising temperatures make it harder for crops to thrive.162 The report

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also warns that waiting to cut carbon emissions could even outstrip technology’s ability to preserve the planet.163 Alarming predictions indeed.

Another Type of Social Responsibility: Undertaking Philanthropy, “Not Dying Rich” “He who dies rich dies thus disgraced,” 19th-century steel magnate Andrew Carnegie is supposed to have said, after he turned his interests from making money to philanthropy, making charitable donations to benefit humankind. Carnegie became well known as a supporter of free libraries.

When Bill Gates of Microsoft, one of the richest people in the world (with 2017 net worth of $92.9 billion) stepped down from day-to-day oversight of Microsoft, the com- pany he co-founded, he turned his attention to the Bill and Melinda Gates Foundation, through which he and his wife have pledged to spend billions on health, education, and overcoming poverty.164 The Gateses have been joined by 169 other billionaires from 22 countries, including Facebook founder Mark Zuckerberg and his wife, oil and gas financier T. Boone Pickens, Berkshire Hathaway chairman Warren Buffett, Chobani yogurt founder Handi Ulukaya, and others—in taking the Giving Pledge, a commitment to dedicate a majority of their wealth to philanthropy.165

Does Being Good Pay Off? We answered this question by reviewing relevant research. Our conclusion is that indeed it pays to be ethical or socially responsible. Supportive findings are shown in Table 3.1. ●

Marine pollution occurs when chemicals, particles, residential waste, industrial and agricultural waste enter the oceans or seas. This example comes from the sea in Spain. The majority of marine pollution comes from land. ©Perry van Munster/Alamy Stock Photo

The Manager’s Changing Work Environment and Ethical Responsibilities CHAPTER 3 105

Assessing Your Attitudes toward Corporate Responsibility This self-assessment assesses your attitudes toward corporate responsibility. It partially overlaps with the Career Readiness “other characteristic” of professional/work ethic. Please be prepared to answer these questions if your instructor has assigned Self-Assessment 3.2 in Connect.

1. Where do you stand on corporate social responsibility?

2. What life events have influenced your attitudes toward corporate social responsibility? Discuss.

3. Based on the three lowest-rated items in the survey, how might you foster a more positive attitude toward social responsibility? Explain.

4. What can you say during an interview to demonstrate a positive attitude toward corporate responsibility?

SELF-ASSESSMENT 3.2 CAREER READINESS

TABLE 3.1 Being Ethical and Socially Responsible Pays Off

OUTCOMES RESEARCH FINDINGS

Employees • Millennials more likely to stay with a company when management is committed to helping society.

• Millennials report higher job satisfaction when a company treats its employees and society in an ethical manner.166

Interpersonal relationships • Employees feel confident in doing the right thing when faced with an ethical situation when the organization has an effective ethics and compliance culture.

• Employees are less likely to retaliate against one another when the company has an effective ethics and compliance culture.167

Customers • Believe it’s important to purchase from socially responsible companies.

• Made past purchases and plan to spend more with socially responsible companies in the future.168

Revenue • Investing in responsible companies topped $8.7 trillion in 2017 and accounts for a fifth of professionally managed investments.169

• Quality service and ethical behavior are essential for long-term revenue growth.170

Stock price • Equifax stock price dropped nearly 18% after inappropriately handling a major security breach that affected nearly 143 million people in the U.S.171

• Wynn Resorts lost $3 billion in market value in 2018 following Steve Wynn’s alleged sexual misconduct.172

Profits • Companies ranked as “America’s Best Corporate Citizens” by Forbes, outperform their competition by 1 to 4 percentage points.

• Generate 3.5% higher 5-year return on invested capital.173

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3.6 Corporate Governance THE BIG PICTURE Corporate governance is the system of governing a company so that the interests of corporate owners and other stakeholders are protected. Company directors should be clearly separated in their authority from the CEO by insisting on strong financial reporting systems and more accountability.

What, you might ask, were the company boards of directors doing prior to 2001–2002 when Enron, WorldCom, Tyco, and Adelphia filed for bankruptcy amid allegations their CEOs were committing fraud—for which they later went to prison? Aren’t direc- tors elected by the stockholders to see that a company is run according to their inter- ests? Indeed, after the Enron and other scandals there was renewed interest in what is known as corporate governance, the system of governing a company so that the interests of corporate owners and other stakeholders are protected.

Ethics and Corporate Governance Is there any connection between ethics and corporate governance? Certainly, says scholar Henrik Syse. Corporate governance is about such matters as long-term strategies, sustain- able finances, accurate reporting, and positive work environment. All are obviously ethical because they are concerned with how a firm relates to stakeholders inside and out.174

How can members of the board of directors be chosen to act ethically? As men- tioned earlier, inside directors may be members of the firm, but outside directors are supposed to be elected from outside the firm. However, in some companies, the outside directors have been handpicked by the CEO—because they are friends, because they have a business relationship with the firm, or because they supposedly “know the indus- try.” In such instances, how tough do you think the board of directors is going to be on its CEO when he or she asks for leeway to pursue certain policies?

Now, more attention is being paid to strengthening corporate governance so that directors are clearly separated in their authority from the CEO. While, of course, direc- tors are not supposed to get involved with day-to-day management issues, they are now feeling more pressure from stockholders and others to have stronger financial reporting systems and more accountability.175

The Need for Trust In the end, suggests Fordham professor Robert Hurley, “We do not have a crisis of eth- ics in business today. We have a crisis of trust.”178 Customers or employees may well think that certain people or companies are ethical—that is, moral, honest, and fair—but that does not mean they should trust them. Trust, says Hurley, “comes from delivering every day on what you promise—as a manager, an employee, and a company. It involves constant teamwork, communication, and collaboration.”

Trust comes from asking how likely the people you’re dealing with are to serve your interests, how much they have demonstrated concern for others, how well they deliv- ered on their promises, how much they try to keep their word—and how effectively they communicate these skills.

Would you agree? ●

LO 3-6 Discuss the role of corporate governance in assessing management performance.

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in April 2017 of having paid several women sums totaling millions of dollars to quiet allegations of sexual harassment, advertisers fled his show, The O’Reilly Factor. Before the month was over, O’Reilly had been forced to resign. Could anything have looked worse for the company? Possibly the revelation, shortly after O’Reilly’s departure, that when they renewed his $25 million contract in February, top executives at the network’s parent company were already well aware of the payouts and, in particular, one made in January for $32 million.177 Neither O’Reilly nor Fox have admitted any wrong- doing to date.

YOUR CALL How would you compare the ethical values and standards that appear to be in place in each of these two companies?

EXAMPLE Corporate Governance, Good and Bad: HD Supply Holdings, Fox News

HD Supply. The report of a 2017 hacking attack at the credit- reporting firm Equifax, exposing untold amounts of personal data to cybercriminals, caused alarm and chaos among consumers and businesses alike. Though their company was not directly affected, the board of directors at HD Supply Holdings Inc., a large industrial distributor, knew immediately what they had to do. “Equifax triggered a reactive review of the thoroughness of our oversight and compliance and of our gaps,” recalls board member Betsy Atkins, “and we acted.” Working with the company’s management team, the board addressed its lack of formal procedures for dealing with hacking or ransom attacks. HD Supply’s new response plan included the opening of a bitcoin account with which to pay hackers ransom money if needed.176

Fox News. Cable television is used to scandal, but when Fox’s celebrity news commentator Bill O’Reilly was accused

The news has been filled with cases of sexual harassment. Sexual harassment consists of unwanted sexual attention that creates an adverse work environment. Why do you think the type of behavior depicted here continues to happen at work? ©Kaspars Grinvalds/Shutterstock

108 PART 2 The Environment of Management

3.7 Career Corner: Managing Your Career Readiness

LO 3-7 Describe how to develop the career readiness competency of professionalism/work ethic.

Figure 3.4 shows the model of career readiness we discussed in Chapter 1. We see one clear link between the content of this chapter and this model. It’s the Career Readiness competency of professionalism/work ethic. The relevant aspect of this competency for this chapter is “demonstrated integrity, ethical behavior, and concern for the greater good” (look back at Table 1.2).

Career readiness

Knowledge (K)

Soft skills (S)

Career outcomes

Attitudes (A)

Other characteristics

(O)

FIGURE 3.4 Model of career readiness ©2018 Kinicki and Associates, Inc.

Can you really develop integrity and ethical behavior? We think you can, even though this competency is partly based on stable characteristics like values, moral perspective, and religious beliefs that are all resistant to change. Our goal is not to suggest modifying these fundamental aspects of your life. Rather, we believe this competency is best devel- oped by engaging in activities that facilitate a habit of showing integrity, ethicality, and concern for the greater good. Doing so will give you behavioral examples of your professionalism/work ethic to discuss during job interviews.

Focus on the Greater Good and on Being More Ethical Experiment with implementing some of the following:

1. Reduce your carbon footprint. Activities include walking or using public trans- portation more frequently, turning off lights when you leave a room, unplug- ging devices that are not in use, purchasing a reusable water bottle, reducing your use of air conditioning, reusing glass jars, and annually servicing your air-conditioning/heating units.179

2. Foster positive emotions in yourself and others. Positivity and helping others beget positivity and helping behavior, thereby enhancing the greater good. Psychologist Barbara Fredrickson said it best, “Beyond the dance of positiv- ity between you and the person you helped, those who witness your good deed may well feel inspired, their hearts uplifted and elevated.”180 This self- reinforcing and perpetuating aspect of positive emotion, and of positivity

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more generally, is what leads to upward spirals of positivity, in which your positive behaviors and attitudes generate the same in others in an ongoing process. Focus on displaying the positive emotions of joy, gratitude, hope, pride, inspiration, and love. Start by thinking every day of one thing you are thankful for.

3. Spend time in nature. Research shows that people are more helpful, trusting, and generous when they have recently experienced natural beauty. This occurs because positive emotions are associated with time spent in nature.181 Get out- side and see for yourself.

4. Get the proper amount of sleep. Research shows that people are more likely to succumb to temptation to engage in unethical behavior when they are sleep- deprived.182 For better sleep, try going to bed at the same time each night and avoiding looking at electronic screens (phone, tablet, TV) for at least half an hour before.

5. Increase your level of exercise. Besides providing obvious health benefits, exer- cise can increase your feelings of virtuousness and pride.183 Pride enhances self-esteem, but it also provides a greater sense of responsibility, a key attitude associated with career readiness. Don’t like gyms? Go for a long walk a few times a week.

6. Expand your awareness of social realities. Watching documentaries such as Inequality for All, available on Netflix, and reading books by reputable com- mentators can increase your understanding of social issues that affect the greater good.184

7. Fulfill your promises and keep appointments. Failing to meet promises and com- mitments undermines your integrity. Use your phone to send yourself remind- ers of appointments and don’t allow yourself to shrug them off.

8. Avoid people who lack integrity. People make judgments about you based on those you choose to associate with. Socializing or working with individuals known to be unethical will detract from a positive personal image.185

Become an Ethical Consumer Try these suggestions:

1. Purchase Fair Trade items. Purchasing Fair Trade products increases the chances that your money will help provide a decent wage for the people who made them. Low prices often result from the producers’ paying low wages to their workers. Take a look at “Fair Trade USA” (https://www.fairtradecertified. org/) to discover where you might find clothing, alcohol, and home goods from producers who treat workers ethically.186

2. Bring your own grocery bags. You can lower your carbon footprint and reduce the price of goods sold by bringing your own reusable cloth or natural fiber bags when purchasing groceries.

3. Don’t purchase items that aren’t ethically made or sourced. Research where and how a company makes its products. You may pay more for your pur- chases, but passing on low prices to support more ethical companies sup- ports the greater good.187

4. Don’t buy knockoffs. Cheap counterfeit and illegal merchandise are often made in sweatshop conditions. Although forgoing the low prices on such items may hurt your pocketbook, it’s another way you can help the greater good. ●

110 PART 2 The Environment of Management

abusive supervision 93 clawbacks 85 climate change 103 code of ethics 97 competitors 83 corporate governance 106 corporate social responsibility

(CSR) 100 crowdfunding 86 customers 82 demographic forces 90 distributor 84 economic forces 88 ethical behavior 93 ethical climate 77 ethical dilemma 92 ethics 93

external stakeholders 82 general environment 87 global warming 103 government regulators 86 individual approach 95 insider trading 96 internal stakeholders 79 international forces 91 justice approach 95 LGBTQ 89 macroenvironment 87 moral-rights approach 95 natural capital 103 owners 79 philanthropy 104 political–legal forces 90 Sarbanes–Oxley Act of 2002 96

social audit 78 social responsibility 100 sociocultural forces 89 special-interest groups 87 stakeholders 79 strategic allies 84 supplier 83 task environment 82 technological forces 88 triple bottom line 78 utilitarian approach 95 value system 94 values 94 venture capital 86 whistle-blower 98 workplace cheating 93

Key Points

3.1 The Triple Bottom Line: People, Planet, and Profit

• Many businesses subscribe to a new standard of success—the triple bottom line, representing people, planet, and profit. It measures an organization’s social, environmental, and financial performance.

• Success in these areas can be measured through a social audit, a systematic assessment of a company’s performance in implementing socially responsible programs, often based on predefined goals.

• The triple bottom line has particular appeal to many young adults (Millennials) who are less concerned with finding financial success than with making a difference and achieving a meaningful life.

3.2 The Community of Stakeholders inside the Organization

• Managers operate in two organizational environments—internal and external—both made up of stakeholders, the people whose interests are affected by the organization’s activities.

• The first, or internal, environment includes employees, owners, and the board of directors.

3.3 The Community of Stakeholders outside the Organization

• The external environment of stakeholders consists of the task environment and the general environment.

• The task environment consists of 10 groups that present the manager with daily tasks to deal with. (1) Customers pay to use an organization’s goods and services. (2) Competitors compete for customers or resources. (3) Suppliers provide supplies—raw materials, services, equipment, labor, or energy—to other organizations. (4) Distributors help another organization sell its goods and services to customers. (5) Strategic allies join forces to achieve advantages neither organization can perform as well alone. (6) Employee organizations are labor unions and employee associations. (7) Local communities are residents, companies, governments, and nonprofit entities that depend on the organization’s taxes, payroll, and charitable contributions. (8) Financial institutions are commercial banks, investment banks, and insurance companies that deal with the organization. (9) Government regulators are regulatory agencies that establish the ground rules under which the organization operates. (10) Special- interest groups are groups whose members try to influence specific issues that may affect the organization.

• The general environment consists of six forces. (1) Economic forces consist of general economic conditions and trends—unemployment, inflation, interest rates, economic growth—that may affect an organization’s performance. (2) Technological forces are new developments in methods for transforming

Key Terms Used in This Chapter

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resources into goods and services. (3) Sociocultural forces are influences and trends originating in a country, society, or culture’s human relationships and values that may affect an organization. (4) Demographic forces are influences on an organization arising from changes in the characteristics of a population, such as age, gender, and ethnic origin. (5) Political–legal forces are changes in the way politics shapes laws and laws shape the opportunities for and threats to an organization. (6) International forces are changes in the economic, political, legal, and technological global system that may affect an organization.

3.4 The Ethical Responsibilities Required of You as a Manager

• Ethics are the standards of right and wrong that influence behavior. Ethical behavior is behavior that is accepted as “right” as opposed to “wrong” according to those standards.

• Ethical dilemmas often take place because of an organization’s value system. Values are the relatively permanent and deeply held underlying beliefs and attitudes that help determine a person’s behavior.

• Managers should strive for ethical leadership, defined as leadership that is directed by respect for ethical beliefs and values for the dignity and rights of others.

• There are four approaches to deciding ethical dilemmas. (1) Utilitarian—ethical behavior is guided by what will result in the greatest good for the greatest number of people. (2) Individual—ethical behavior is guided by what will result in the individual’s best long-term interests, which ultimately is in everyone’s self-interest. (3) Moral-rights—ethical behavior is guided by respect for the fundamental rights of human beings, such as those expressed in the U.S. Constitution’s Bill of Rights. (4) Justice— ethical behavior is guided by respect for the impartial standards of fairness and equity.

• Public outrage over white-collar crime (Enron, Tyco) led to the creation of the Sarbanes–Oxley Act of 2002 (SarbOx), which established requirements for proper financial record keeping for public companies and penalties for noncompliance.

• Laurence Kohlberg proposed three levels of personal moral development: (1) preconventional level of moral development—people tend to follow rules and to obey authority; (2) conventional level—people are conformist, generally adhering to the expectations of others; and (3) postconventional level—people are guided by internal values.

• There are three ways an organization may foster high ethical standards. (1) Top managers must support a strong ethical climate. (2) The organization may have a code of ethics, which consists of a formal written set of ethical standards. (3) An organization must reward ethical behavior, as in not discouraging whistle-blowers, employees who report organizational misconduct to the public.

3.5 The Social Responsibilities Required of You as a Manager

• Social responsibility is a manager’s duty to take actions that will benefit the interests of society as well as of the organization.

• The idea of social responsibility has opposing and supporting viewpoints. The opposing viewpoint is that the social responsibility of business is to make profits. The supporting viewpoint is that since business creates some problems (such as pollution), it should help solve them.

• One scholar, Archie Carroll, suggests the responsibilities of an organization in the global economy should have the following priorities: (1) Be a good global corporate citizen, (2) be ethical in its practices, (3) obey the law, and (4) make a profit.

• One type of social responsibility is sustainability, “going green,” or meeting humanity’s needs without harming future generations. A major threat is climate change, which refers to major changes in temperature, precipitation, wind patterns, and similar matters over several decades. Global warming, one aspect of climate change, refers to the rise in global average temperature near the Earth’s surface, caused mostly by increasing concentrations in the atmosphere of greenhouse gases, such as carbon emissions from fossil fuels.

• The component of the triple bottom line called planet is now identified by the name natural capital, which is the value of natural resources, such as topsoil, air, water, and genetic diversity, which many scholars think should figure seriously in economic decision making.

• Another type of social responsibility is philanthropy, making charitable donations to benefit humankind.

• Positive ethical behavior and social responsibility can pay off in the form of customer goodwill, more efficient and loyal employees, better quality of job applicants and retained employees, enhanced sales growth, less employee misconduct and fraud, better stock price, and enhanced profits.

3.6 Corporate Governance • Corporate governance is the system of governing a

company so that the interests of corporate owners and other stakeholders are protected.

• One way to further corporate governance is to be sure directors are clearly separated in their authority from the CEO by insisting on stronger financial reporting systems and more accountability.

3.7 Career Corner: Managing Your Career Readiness

• You can develop the competency of professionalism/ work ethic by engaging in activities that facilitate a habit of showing integrity, ethical behavior, and concern for the greater good.

112 PART 2 The Environment of Management

1. How would you explain the difference between internal and external stakeholders?

2. Among external stakeholders, what’s the difference between the task environment and the general environment?

3. Of the 11 groups in the task environment, which five do you consider most important, and why?

4. Of the six groups in the general environment, which one do you think has the least importance, and why?

5. Distinguish among the four approaches to deciding ethical dilemmas.

6. What’s the difference between insider trading and a Ponzi scheme?

7. How would you summarize Kohlberg’s levels of personal moral development?

8. What are four ways that organizations can promote ethics?

9. Describe the levels in Carroll’s corporate social responsibility pyramid. Where does trying to achieve sustainability fit in?

10. How would you explain the concept of corporate governance?

Understanding the Chapter: What Do I Know?

Who’s to Blame for College Basketball’s “Dark Underbelly”? The National Collegiate Athletic Association (NCAA) is “a member-led organization dedicated to the well- being and lifelong success of college athletes.”188 Founded in 1906, the NCAA “functions as a general legislative and administrative authority for men’s and women’s intercollegiate athletics” and “formulates and enforces the rules of play for various sports and the eligibility criteria for athletes.”189

One of the “bedrock principles” of the NCAA is maintaining the spirit of amateur competition. Students are not allowed to be professional athletes, education holds top priority, and all athletes receive a fair chance to compete.190 The NCAA outlines specific rules ath- letes must follow to maintain amateur status and, thus, eligibility to continue playing collegiate sports. Student athletes are, among other things, prohibited from publicly endorsing companies191 and from receiving a salary for athletic participation or benefits from prospective agents.192

Although NCAA guidelines prohibit corporate sponsorships at the individual-athlete level, college teams have benefited from such alliances since 1977, when shoe-company executive Sonny Vaccaro “signed several coaches he knew . . . to contracts with Nike.” According to Vaccaro, “‘the world changed’ in 1987, when Nike signed its first all-school deal” to sponsor all of the University of Miami’s athletic teams. With these deals, said Vaccaro, “you own everything in that school. That shoe company is now your business partner.”193

A BLURRY LINE BETWEEN AMATEURISM AND PROFESSIONALISM Benefits aside, strategic relationships between apparel companies and universities blur the line between

amateurism and professionalism for two reasons. The first is money flowing to universities. Companies such as Nike, Under Armour, and Adidas “pay tens of millions of dollars a year to equip (and, from a marketing standpoint, align themselves) with major university programs.”194 These alliances benefit universities due to increased revenues generated by the sponsorships, and they earn sports apparel companies not only exclusive rights to partner with large academic institutions, but also insider access to the country’s top athletic talent.

The second reason is money for college athletes. A particular challenge in NCAA basketball is the reality that some athletes don’t intend to graduate from college. Due in large part to the NBA’s “one-and-done” rule prohibiting athletes from playing professionally before their 19th birthday, elite players often attend classes for a year until they age into the NBA draft.195 Apparel sponsors are often overly eager to secure exclu- sive deals with elite athletes who may earn coveted spots in the NBA because these arrangements generate lots of money for the sponsors.

ASSISTANT COACHES AND FEDERAL INDICTMENTS Assistant coaches serve as the primary recruiters of top high-school talent and are expected to act as salesper- sons for their universities and build strong relationships with prize recruits.196 They are expected to follow NCAA guidelines, and they do not always do so.

In November 2017, four assistant college basketball coaches were among 10 individuals indicted by a fed- eral grand jury. Fortune described the lead-up to the indictments as “a detailed and clandestine FBI investi- gation that exposed alleged under-the-table payments to agents, coaches, and parents to influence talented athletes to choose particular colleges to play

Management in Action

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basketball.”197 Joon Kim, then the acting U.S. attorney for the Southern District of New York, portrayed “a two-part scheme: One involving bribes from managers to coaches for their assistance in securing future clients, and the other in which the sportswear firm and advisors would make ‘coach-requested’ payments to players and their families.”198

According to sports journalist Mark Titus, “dirty re- cruiting tactics were the worst-kept secret in college sports. Even the most naïve fan knew that a day of reck- oning was coming, when the house of cards built by apparel companies, agents, financial advisers, shady coaches, and handlers of big-time recruits would all come crashing down.”199 Some go so far as to charac- terize assistant college basketball coaches as downright unscrupulous. The New York Times reported that “the weeds of college basketball have long been filled with snakes, and assistant coaches have sometimes proved the most reptilian. The widely held presumption is that many successful head coaches are backed by a little- known assistant or two willing to do the dirty work—to bend the rules of recruitment, to tiptoe through the minefield of N.C.A.A. regulations.”200

According to Inside Higher Ed, “assistant coaches have historically been likeliest to do the dirty work that gets NCAA sports programs in trouble, even though critics often believe that the aides are acting with the implicit support of—if not under outright pressure from—their bosses, the head coaches.”201 Not a single head coach was charged in the 2017 federal indictments.

Also indicted in the scandal was Jim Gatto, director of global marketing for Adidas for basketball, who helped “facilitate six-figure payments to the families of high school basketball recruits in exchange for the re- cruits’ commitment to play at college basketball pro- grams sponsored by Adidas.”202 Gatto worked through assistant coaches to reach and incentivize high school recruits, and assistants accepted bribes from Gatto to funnel “significant cash payments” between Adidas and recruits.203 In exchange for the payments, recruits were expected to sign on with the Adidas-sponsored university and, eventually, to choose Adidas as their ex- clusive apparel sponsor once they made it to the NBA.

PRESSURE TO PERFORM While many attribute these scandals to assistant coaches’ moral shortcomings, other evidence speaks to at least three sources of intense pressure in the NCAA basketball environment worth noting.

First, assistant coaches are under extreme pressure to recruit top talent. In discussing whether hiring more ethical coaches could curtail the problem, University of Kansas head basketball coach Bill Self said, “You could say, ‘well, if everybody’s squeaky clean, then we wouldn’t have these problems.’ No no no, that’s not

true either. There would still be pressure to sign guys, there would still be coaches losing jobs, there would still be assistant coaches not having opportunities to move on to get better paying positions. There’s a lot of things going on that is dictated by how well you recruit.”204

Head basketball coaches represent a second source of pressure. Some suggest head coaches were aware of the schemes all along but were emboldened by an envi- ronment that provided them free rein to enable ethi- cally questionable behavior with little fear of permanent consequences. While none were explicitly named in the indictments, several head coaches lost their jobs because they were held accountable for the actions of their assistants. One was Louisville’s Rick Pitino, who was fired by the University of Louisville Athletics Association after the scandal came to light.205 Although Pitino said the allegations “come as a complete shock to me,”206 FBI phone records indicate Pitino made three phone calls to Jim Gatto prior to an unnamed recruit’s commitment to Louisville.207

Finally, consider pressures from the university and alumni community. According to ESPN, “division I football and basketball are multibillion-dollar indus- tries, paying coaches and administrators multimillion- dollar salaries while generating billions from media- rights deals and hundreds of millions from apparel deals with Adidas, Nike and Under Armour.”208 University of Kansas men’s coach Bill Self described “pressure from the alumni that expects certain things and have given a lot of money, and in order to make the bills meet you jack up ticket prices ridiculous, so now there’s pressure on coaches even from alums that say, ‘You’re not giving us the product we’re paying for.’”209

WHAT ABOUT THE NCAA? The NCAA exists to protect college athletes and the spirit of amateurism. So why didn’t it initiate an investi- gation before the federal government did? Some believe the NCAA knew about the behaviors and remained quiet because of pressure from apparel companies. According to Fortune, “while the NCAA enforcement staff has investigated coaches and recruiting violations for years, it has not been successful in rooting out this type of corruption, nor has it really tried because of the danger of cutting off the money. Previous punishments have been light, ineffective, and often slanted to protect high-profile coaches and players as much as possi- ble.”210 Further, “in simple terms, NCAA Division I men’s basketball is too big to fail and too important fi- nancially to the NCAA membership . . . it is the ultimate Catch-22. Coaches are solely judged on winning and losing, universities oftentimes value their high-profile intercollegiate athletic programs more than academic primacy and candidly, fans do not seem to care whether

114 PART 2 The Environment of Management

the athletes are students or being paid under the table. They just want to see the games. Thus, the reward far outweighs any risk, and the chances that the NCAA would address and attempt to stop a lucrative black market of player peddling the highest bidder stretches the limits of credibility. It can be hard to bite the hand that feeds you.”211

NOW WHAT? Justice Joon Kim described those indicted as “assis- tant coaches of major Division I schools with top-tier programs” who have “been in and around the game for a long time. All of them had the trust of players they recruited. Young men who looked up to them and be- lieved their coaches had their best interests at heart.”212 Kim described a scenario of coaches “taking cash bribes, managers and advisers circling blue-chip pros- pects like coyotes, and employees of a global sports- wear company funneling cash to families of high school recruits.”213 Kim added, “Month after month, the defendants exploited the hoop dreams of athletes around the country, allegedly treating them as little more than opportunities to enrich themselves through bribery and fraud schemes . . . The defendants’ alleged conduct not only sullied the spirit of amateur athletics, but it showed contempt for the thousands of players and coaches who follow the rules and play the game the right way.”214

As a result of the investigation and subsequent in- dictments, “the NCAA has established a Commission on College basketball” with members including “for- mer Secretary of State Condoleezza Rice, former Chairman of the Joint Chiefs of Staff Gen. Martin Dempsey, and former NBA stars David Robinson and Grant Hill.”215 Further, the federal courts have stated that these indictments are the first in a series of many that will come to light in the coming months. The FBI has set up a tip line where those with knowledge regard- ing these schemes can call and share information.216 Sources believe the ongoing probe will likely implicate additional college programs, sports apparel companies, and agents.217

There is hope that these indictments will send a strong message that these behaviors will not be toler- ated and will be punished to the fullest extent of the law. “With the federal government’s threat of serious punishment, coaches are more likely to operate within NCAA rules. At the very least, they will think twice, knowing that indictments, potential jail time and huge legal fees are on the table.”218

William Sweeney Jr., the Assistant Director-in- Charge of the FBI’s New York office, said the “arrests serve as a warning to others choosing to conduct busi- ness this way in the world of college athletics: We have your playbook.”219

FOR DISCUSSION Problem Solving Perspective

1. What is the underlying problem in this case from the federal government’s perspective?

2. Why do you think assistant coaches play such a sig- nificant role in these scandals?

3. How do you think the NCAA and the Commission on College basketball should move forward to prevent illegal behavior from occurring in the future?

Application of Chapter Content

1. How do you think the basketball teams’ task environ- ment, particularly competitors, allies, customers, reg- ulators, and media, played into the corruption in the NCAA?

2. Are the high school recruits who accepted bribes from apparel companies and coaches purely victims in this situation, or should their behavior also be con- sidered unethical? Explain your answer using one of the four approaches to deciding ethical dilemmas.

3. What might the NCAA do to promote higher ethi- cal standards among its schools, coaches, players, and allies?

4. How do you think the scandal has and will continue to affect customers, players’ attitudes on the court, and NCAA sales?

Should You Apply to Have Your Student Loans Forgiven? Student loan debt nearly tripled in the last decade, thanks to increased attendance at for-profit colleges along with rising college tuition and living expenses.220 For hundreds of thousands buried in student loan debt, a little known 1994 program called “Borrower

Defense” or “Defense to Repayment” sponsored by the Education Department offers a lifeline.

The program is available for those students who ob- tained loans from the government’s Direct Loan pro- gram. “The law says students are entitled to forgiveness of any existing debt—and, possibly, reimbursement of any repaid loans—if they can show that their school violated state law in getting them to take out the debt.

Legal/Ethical Challenge

The Manager’s Changing Work Environment and Ethical Responsibilities CHAPTER 3 115

(An example might be if a school lied in its advertise- ments about how many of its graduates landed jobs.) However, it’s not clear what documentation the bor- rower needs to prove fraud.”221

Thousands have applied to have their loans expunged under the program. In the first seven months of 2017, nearly 15,000 former students had applied to have stu- dent loans expunged.222 The U.S. Education Department has already agreed to cancel nearly $28 million in debt and indicated many more will likely get forgiveness.223

Assume that you recently graduated from a state university. You took the required courses for your bachelor’s degree and excelled in your studies. You made the Dean’s List each semester of your last two years and interned for a social services organization in your community. You hoped you’d be able to work in your chosen field of psychology and be able to pay off the debt a few years after graduation.

Like many students, you paid for the majority of your education with student loans. Three years after graduation, your career has not turned out as ex- pected. Instead of working in your chosen field of psy- chology, you have a low-paying job at a retail chain and wait tables on weekends to make ends meet.

You weren’t aware that psychology positions required a graduate degree. Your student loan debt remains unpaid, and you recently heard about the borrower defense program.

You are considering whether or not to apply for the Borrower Defense program.

SOLVING THE CHALLENGE What would you do?

1. Apply for loan forgiveness and hope that the broad language of the law will make an exception for your state college education and loan. Besides, what’s wrong with asking?

2. Apply for loan forgiveness. After all, you aren’t ben- efiting from your education, someone should have told you that you needed a graduate degree in psy- chology to get a good job, and there is no clear defi- nition of fraud.

3. Don’t apply. You were never promised a job and you made the decision to major in psychology. You could have chosen a field with more job opportunities.

4. Invent other options. Discuss.

Learn about the manner in which Uber interacts with its internal and external stake- holders. Assess your ability to apply concepts discussed in this chapter to the case by going to Connect.

Uber Continuing Case

This chapter covers the impact of globalization—the rise of the global

village, of one big market, of both worldwide megafirms and minifirms. We

also describe the characteristics of the successful international manager

and why and how companies expand internationally. We describe the

barriers to free trade and the major organizations promoting trade and the

major competitors. We discuss some of the cultural differences you may

encounter if you become an international manager, and conclude with a

Career Corner that focuses on how you can develop the career readiness

competency of cross-cultural awareness.

What’s Ahead in This ChapterFORECAST

4 After reading this chapter, you should be able to:

LO 4-1 Identify three influential effects of globalization.

LO 4-2 Describe the characteristics of a successful international manager.

LO 4-3 Outline the ways in which companies can expand internationally.

LO 4-4 Discuss barriers to free trade and ways companies try to overcome them.

LO 4-5 Explain the value to managers of understanding cultural differences.

LO 4-6 Describe how to develop your cross-cultural competency.

Global Management Managing across Borders

© O

livier Renck/Aurora/G etty Im

ages

Whether you travel abroad on your own or on a work assignment for your company, there are many ways to develop cultural awareness, a career readiness competency that can help ensure your international experience enhances your career success.1 The general idea is to be global in your focus but think in terms of your local environment.

Do Your Research Don’t wait until you arrive to start the process of familiarizing yourself with the culture of your new environment; start reading books and articles and watching videos well in advance. Study the geography and the transportation systems ahead of time. Talk to people who have been there, and before you leave, begin seeking out and contacting people from the local area who can help you now or in the future. A few general rules always apply when you are the outsider: Learn by listening more than you speak; follow the example of others; and be moderate, open-minded, and humble.

Check Your Attitude In a recent interview with Business Insider, Karoli Hinricks, CEO of Jobbatical, t h e i n t e r n a t i o n a l t e c h marketplace, offered some good advice about leaving biased attitudes at home. “Don’t move abroad if you’re looking to find things to be exactly like they were back home,” she says. “Only when you open your mind to the experience and grasp all the quirks that your new home has in store for you, will the journey boost your creativity and become positive.” Be ready to embrace the opportunity, and don’t let minor problems or the novelty of your experience throw you. Maintain a positive, can-do attitude and overcome the small stuff.

Learn the Appropriate Behavior Before you go, spend some time learning about patterns of interpersonal communication and interaction. A quick online search can clue you in about expectations in the particular country or areas where you’ll be living or working. Pay attention to social customs about such everyday behaviors as making introductions, being introduced, order of speaking in a meeting or group, use and nonuse of humor, dining etiquette, and the norms for

personal space, which can be very different from what you’re used to.

Become at Least Minimally Skilled in the Language Whatever foreign country you’re in, at the very least you should learn a few key phrases—such as “hello,” “please,” and “thank you”—in your host country’s language. The effort you make to do this will go a long way to enhancing your relationships with others, even if your grammar and accent aren’t perfect.

Pack Wisely Packing wisely means more than just bringing the right clothes for the climate, although you should do that, too. But also inform yourself about the attire that’s appropriate

for the places you’ll visit and the events you’ll attend. More conservative clothing is often the norm abroad, and you’ll want to be sensitive to your cultural surroundings. Consider, too, that living spaces are often smaller in other countries. Pack light, bring outfits that are versatile and easy to care for, and don’t anticipate a walk-in closet.

Finally, Be Prepared Get a head start on making sure all your paperwork is in order—a v a l i d p a s s p o r t ( w i t h a n expiration date at least several

months in the future), a visa and work permit if needed, debit and credit cards that are accepted in your host country, and health insurance that covers you outside the United States. Know your rights, too; working abroad is not the same as being a tourist. Be prepared for emergencies, such as running out of cash unexpectedly (though you should always have some in reserve), and have a plan that will help you stay calm and focused while you resolve the issue.

For Discussion One fashion photography intern working in London found herself spending the first month doing the very unglamorous work of painting and cleaning the studio, which had recently moved. Disappointed at first, she soon realized she was actually learning a great deal, including “how a photo studio is built from the ground up, how to support oneself, and make connections and contacts.”2 How would you manage your own attitudes and keep learning if your job overseas was not everything you thought it would be?

Working Successfully Abroad: Developing Cultural Awareness

There are important cross-cultural differences between Americans and people from the Middle East. ©Image Source/Getty Images

118 PART 2 The Environment of Management

4.1 Globalization: The Collapse of Time and Distance

THE BIG PICTURE Globalization, the trend of the world economy toward becoming a more interdependent system, is reflected in three developments: the rise of the “global village” and e-commerce, the trend of the world’s becoming one big market, and the rise of both megafirms and Internet-enabled minifirms worldwide.

Is everything for sale in the United States now made abroad? What does that mean for U.S. consumers and the economy? Although it is the third-largest exporter in the world, the United States imports more than it exports. In 2016, the nation imported $2.2 trillion in goods and $502 billion in services. Only the European Union imports more. Consumer goods account for almost $600 billion of U.S. imports, mostly consist- ing of cell phones, TVs, clothing, shoes, and drugs. Imported services include travel, transportation, and computer services, valued at just over $500 billion.3 Three in four U.S. consumers would like to buy products made at home if they could, but when forced to choose between a domestic product and a cheaper imported one, two-thirds say they would choose the cheaper option.4

Competition and Globalization: Who Will Be No. 1 Tomorrow? It goes without saying that the world is a competitive place. Where does the United States stand in it? What’s our report card?

The United States remained the world’s largest economy in 2017,5 but was it the most competitive? Actually, the World Economic Forum ranks the United States as No. 2, behind Switzerland. (See Table 4.1.)

Is the United States the richest nation? In terms of gross domestic product per cap- ita (the total value of all goods and services produced in the country divided by the population), the International Monetary Fund’s annual ranking for 2017 puts the United States at No. 12 in the world, behind San Marino, Hong Kong, Switzerland, United Arab Emirates, Kuwait, Norway, Ireland, Brunei, Singapore, Luxembourg, and in first place, Qatar.6

How about “most free”? Here Hong Kong, part of the People’s Republic of China, is No. 1. The United States is No. 17, according to criteria embraced by the 2017 Index of Economic Freedom (produced by the Heritage Foundation). Hong Kong is considered “free” by this standard; both Canada, at No. 7, and the United States are considered “mostly free.”7

There are many reasons the winners on these lists achieved their status, but one thing is clear: They didn’t do it all by themselves; other countries were involved. We are living in a world being rapidly changed by globalization—the trend of the world economy toward becoming a more interdependent system. Time and distance, which have been under assault for 150 years, have now virtually collapsed, as reflected in three important developments we shall discuss:8

1. The rise of the “global village” and electronic commerce.

2. The world’s becoming one market instead of many national ones.

3. The rise of both megafirms and Internet-enabled minifirms worldwide.

LO 4-1 Identify three influential effects of globalization.

1. Switzerland

2. United States

3. Singapore

4. Netherlands

5. Germany

6. Hong Kong SAR

7. Sweden

8. United Kingdom

9. Japan

10. Finland

11. Norway

12. Denmark

13. New Zealand

14. Canada

15. Taiwan, China

TABLE 4.1 Country Rankings for Competitiveness, 2016–2017

Source: “The Global Competitiveness Report, 2016-2017,” World Economic Forum, September 28, 2016, https://www.weforum.org/reports/ the-global-competitiveness- report-2016-2017-1.

Global Management CHAPTER 4 119

The Rise of the “Global Village” and Electronic Commerce The hallmark of great civilizations has been their great systems of communications. In the beginning, communication was based on transportation: The Roman Empire had its network of roads, as did other ancient civilizations, such as the Incas. Later, the great European powers had their far-flung navies. In the 19th century, the United States and Canada unified North America by building transcontinental railroads. Later the air- plane reduced travel time between continents.

From Transportation to Communication Transportation began to yield to the electronic exchange of information. Beginning in 1844, the telegraph ended the short existence of the Pony Express and, beginning in 1876, found itself in competition with the telephone. The amplifying vacuum tube, invented in 1906, led to commercial radio. Television came into being in England in 1925. During the 1950s and 1960s, as televi- sion exploded throughout the world, communications philosopher Marshall McLuhan posed the notion of a “global village,” where we all share our hopes, dreams, and fears in a “worldpool” of information. The global village refers to the “shrinking” of time and space as air travel and the electronic media have made it easier for the people around the globe to communicate with one another.

Then the world became even faster and smaller. When AT&T launched the first cellular communications system in 1983, it predicted there would be fewer than a million users by 2000. And by 2019, there will be almost 250 million smartphone users in the United States.9

The Net, the Web, and the World Then came the Internet, the worldwide computer-linked “network of networks.” Today, of the 7.5 billion people in the world, 52% are Internet users.10 The arrival of the web quickly led to the introduction of e- commerce, or electronic commerce, the buying and selling of products and services through computer networks. U.S. online sales of goods surpassed $409 billion in 2017, or 9% of that year’s total retail sales, and are projected to top $630 billion by 2022.11

EXAMPLE E-Commerce: Alibaba

The biggest U.S. e-commerce site is Amazon.com, which was started in 1994 by Jeffrey Bezos as an online bookstore and now offers an unimaginable stream of products and services that accounts for 50 cents of every dollar spent online in the United States.12 If there are any Amazon challengers left in online retail, they may be coming from overseas. Consider Alibaba, the Amazon of China. By some measures, it is already the world’s largest e-commerce company and, likely, the fastest growing.

Alibaba was founded about 20 years ago to serve as a hub for small businesses to sell online and has grown into a leading global wholesale and retail marketplace and provider of cloud competing, digital media, and entertainment services. In a coun- try with more than 600 million Internet users, the company sees itself as “the future infrastructure of commerce” and intends to last “at least 102 years” in order to span three centuries.13 Hundreds of millions of users frequent its three separate web- sites, participating in transactions worth about $248 billion a year, more than eBay and Amazon recently earned together.14 In addition to its e-commerce sites, Alibaba offers a payment app called Alipay, through which users can pay cab drivers or invest

in a money-market fund worth $87 billion. And it is planning to set up shop in the real world as well, with gigantic vending machines from which select customers can obtain a car for a three-day test drive and then either purchase it or try another one. The company plans to follow its two initial outlets with “ dozens” more.15

The leader of Alibaba’s founding group of 18, Jack Ma, is a former English teacher and now the richest man in China. Ma recently stepped down as CEO, but not before promising employees that Alibaba would always put customers before shareholders. “Most companies, when they’re doing good, they enjoy today’s wonderful life,” says Ma. “They don’t worry about five years later—but I worry about five years later.”

YOUR CALL Alibaba has a few data centers in the United States but so far has not done more than engage in exploratory talks with U.S. firms about joining its growing network of retailers.16 Do you think it makes sense for Alibaba to remain focused on its home market of China, and why or why not?

120 PART 2 The Environment of Management

One Big World Market: The Global Economy “We are seeing the results of things started in 1988 and 1989,” said Rosabeth Moss Kantor of the Harvard Business School, referring to three historic global changes.17 The first was in the late 1980s when the Berlin Wall came down, signaling the beginning of the end of communism in Eastern Europe. The second was when Asian countries began to open their economies to foreign investors. The third was the worldwide trend of gov- ernments deregulating their economies. These three events set up conditions by which goods, people, and money could move more freely throughout the world—a global economy. The global economy refers to the increasing tendency of the economies of the world to interact with one another as one market instead of many national markets.

It’s no secret the economies of the world are increasingly tied together, connected by information arriving instantaneously through currency traders’ screens, CNN news reports, Twitter feeds, text messages, and other technology. Money, represented by digi- tal blips, changes hands globally in a matter of keystrokes.

Positive Effects Is a global economy really good for the United States? “Most peo- ple see speedy travel, mass communications, and quick dissemination of information through the Internet as benefits of globalization,” says University College London his- torian Michael Collins.

Other positives are that there is now a worldwide market for companies and consum- ers who have access to products of different countries, and there is more influx of infor-

mation between two countries, more cultural intermingling, and often more openness and tolerance toward other people.18 Faster technological improve- ments can result from increased commu- nication and information sharing, and as we’ve seen, many products and services can be produced more cheaply.19

In addition, in some industries foreign firms are building plants in the United States, revitalizing some industrial areas. Thirteen foreign automakers have manu- facturing operations in the United States that produce more than 60 models of trucks and cars for domestic sale and export; they employ a total of 130,000 people.20 Employment in the auto indus- try is inching downward, however, thanks to falling sales and automakers’ desire to avoid building up expensive inventory.21

But will worldwide economic growth create “rising prosperity and higher living standards,” as some have predicted?22

Negative Effects The large-scale effects of the rise of global economy have included much-publicized job losses across the United States. Despite an apparent rise in protectionist sentiment in some of the world’s largest economies, some of those jobs will not return. Other negative effects of globalization are more closely tied to individual managers’ day-to-day challenges. These include potential threats to information security because data must be shared, possible loss of control over quality and standards because products or components are made hundreds or thousands of miles away, and the risk of hidden or unanticipated costs, especially transportation costs, that can offset some of the savings expected from moving manufacturing

Globalization. Coke and Pepsi already dominate India’s beverage market of 1.3 billion people, and now both companies are going after the fruit-juice market among India’s increasingly health- conscious consumers. Do you see any negative effects to this? ©Taylor Ross/SIPA/Newscom

Global Management CHAPTER 4 121

to countries with lower labor costs.23 The company’s work culture can be affected too, as employees adjust to changes in their workf low and responsibilities or watch co-workers being reassigned or laid off. And communication and cultural differences are a challenge managers can count on.24

Cross-Border Business: The Rise of Both Megamergers and Minifirms Worldwide The global market driven by electronic information “forces things to get bigger and smaller at the same time,” suggests technology philosopher Nicholas Negroponte. “There will be an increasing absence of things that aren’t either very local or very global.”25

If Negroponte is correct, this means we will see more and more of two opposite kinds of businesses: mergers of huge companies into even larger companies, and small, fast-moving, start-up companies.

Megamergers Operating Worldwide The last 20 years have seen a surge in mergers.26 More than 50,000 mergers and acquisitions were announced in the global economy in 2017, hitting a high for the third year in a row.27 Certain industries— automobiles, airlines, telecommunications, health care, and pharmaceuticals, for instance—aren’t suited to being midsize, let alone small and local, so companies in these industries are trying to become bigger and cross-border. The way to do this is to merge with other big companies. CVS Health, the retail pharmacy, has announced a merger with health insurer Aetna, for instance. While some in the health industry have discovered that size is not always an advantage, other mergers include Advocate Health Care and Aurora Health Care, UnitedHealth Group and DaVita Medical Group, and Catholic Health Initiatives and Dignity Health, all of which will create huge organizations serving millions of patients and bringing in revenues in the billions of dollars.28

Even companies that are already large are looking at mergers and acquisitions that can open doors into new markets. Amazon purchased the grocer Whole Foods, while Walmart, which already sells groceries online, bought the f lexible-pricing e-commerce company Jet.com.29 Dell merged with EMC in 2016, as did Microsoft and LinkedIn the same year. Intel reached overseas to purchase MobileEye, an Israeli start-up.30

Walmart says its purchase of Jet.com will speed its growth, better serve existing customers, help attract new ones, add people with vision to its management team, and “win the future of retail.” Not all observers think big mergers are a good idea, however. “The presence of a few dominant companies in an industry,” said one editorial, “makes it harder for entre- preneurs to start new businesses in that sector.”31 For instance, two giant beer makers—Anheuser-Busch InBev (Budweiser, Corona, Beck’s) and SABMiller (Miller, Coors)—consolidated distributors as a way of thwart- ing the advance of craft breweries, which now account for 11% of the beer market.32

Minifirms Operating Worldwide The Internet and the World Wide Web allow almost anyone to be global, with two important results:

1. Small companies can get started more easily. Because anyone can put goods or services on a website and sell worldwide, this wipes out the former competitive advantages of distribution and scope that large companies used to have.

2. Small companies can maneuver faster. Little companies can change direction faster, which gives them an advantage in terms of time and distance over large companies. ●

Craft beers. At Costco, craft beers account for 30% of the company’s beer sales. What kind of threat do you think the merger of giant breweries Anheuser-Busch InBev (makers of Budweiser, Corona, Beck’s) and SABMiller (Miller, Coors) represents to craft breweries? ©David Caudery/Future Publishing/Getty Images

122 PART 2 The Environment of Management

4.2 You and International Management THE BIG PICTURE Studying international management prepares you to work with foreign customers or suppliers, for a foreign firm in the United States, or for a U.S. firm overseas. Successful international managers aren’t ethnocentric or polycentric but geocentric.

Can you see yourself working overseas? It can definitely be an advantage to your career. “There are fewer borders,” says Paul McDonald, executive director of recruitment firm Robert Half Management Resources. “Anyone with international experience will have a leg up, higher salary, and be more marketable.”33 The recent brutal U.S. job market has also spurred more U.S. workers to hunt for jobs overseas. The following Example box explores how you might pursue a job overseas.

EXAMPLE Managing Your Career: Getting the Edge in the Global Job Market

According to one writer, “There’s an uptick in desire among millennial workers to move abroad for work. It’s no surprise either, as many millennials are perfectly positioned to pick up their life and start fresh in a new city or country.” A recent survey found that 70% of Millennials cite their desire to travel as the primary reason they work in the first place,34 and more than 4 in 10 want to live abroad. If you are someone who wants to work abroad, how can you increase your chances of landing the job?

1. Brush up your cultural awareness, and your foreign lan- guage skills (see the discussion later in this chapter). Be- ing able to converse freely in an overseas environment makes you valuable to employers of all kinds.

2. Demonstrate your flexibility, one of the most important skills you will take abroad with you. A corporate commu- nications intern who worked in Brussels had this to say about the need for flexibility: “I was on a team with peo- ple from all over Europe and Asia, so in addition to a slight language barrier, our ethics, ideas, and methods al- most never matched, which made for some challenges in communication. Working abroad taught me how to be

flexible, bend what I know about my field, and adapt it to fit any environment or client’s needs.”35

3. If you are already employed, find out whether your current company has positions overseas, and research the responsibilities and requirements of these jobs. See whether your boss will support you, or find a mentor in the company who will (this might be someone who currently holds or has recently returned from such an assignment).

4. Build your network of people who work for companies with overseas opportunities, and tell them what you’re looking for and what you can offer.

5. Look into jobs with entry requirements you may already meet, such as tutoring or teaching English abroad. These may not be the highest-paying openings, but once in a foreign country, you can more easily make local connections to ex- pand your opportunities and use your experience to move up.

YOUR CALL What are the key challenges in pursuing an international job after graduation?

Foreign experience demonstrates independence, resourcefulness, and entrepreneur- ship, according to management recruiters. “You are interested in that person who can move quickly and is nimble and has an inquiring mind,” says one. People who have worked and supported themselves overseas, she says, tend to be adaptive and inquisi- tive—valuable skills in today’s workplace.36 This outlook represents the career readiness competency of cross-cultural awareness, defined as the ability to operate in different cul- tural settings. This competency is expected to become more important over the next decade in response to our globally connected world. According to the Institute for the Future, “In a truly globally connected world, a worker’s skill set could see them posted

LO 4-2 Describe the characteristics of a successful international manager.

Global Management CHAPTER 4 123

in any number of locations . . . This demands specific content, such as linguistic skills, but also adaptability to changing circumstances and an ability to sense and respond to new contexts.”37 The Practical Action box (on page 146) provides insight into building true cross-cultural awareness.

Why Learn about International Management? International management is management that oversees the conduct of operations in or with organizations in foreign countries, whether it’s through a multinational corpora- tion or a multinational organization.

Multinational Corporations A multinational corporation, or multinational enterprise, is a business firm with operations in several countries. Our publisher, McGraw-Hill Education, is owned by Apollo Global Management, one such multinational. In terms of sales revenue, the largest American multinational corporations in 2015 were Wal-Mart Stores, ExxonMobil, Chevron, Berkshire Hathaway, Apple, McKesson, General Motors, Phillips 66, General Electric, and Ford Motor. The largest foreign firms were the oil companies SinoPec Group, Royal Dutch Shell (Netherlands), PetroChina, ExxonMobil (USA), and BP (Britain), followed by State Grid (utilities, China), Volkswagen (Germany), and Toyota Motor (Japan).38

Multinational Organizations A multinational organization is a nonprofit organiza- tion with operations in several countries. Examples are the World Health Organization, the International Red Cross, and the Church of Latter Day Saints.

Even if in the coming years you never travel to the wider world outside North America—an unlikely proposition, we think—the world will assuredly come to you. That, in a nutshell, is why you need to learn about international management.

More specifically, consider yourself in the following situations:

You May Deal with Foreign Customers or Partners While working for a U.S. company you may have to deal with foreign customers. Or you may have to work with a foreign company in some sort of joint venture. The people you’re dealing with may be outside the United States or visitors to it. Either way you would hate to blow a deal—and maybe all future deals—because you were ignorant of some cultural aspects you could have known about.

You May Deal with Foreign Employees or Suppliers You may have to purchase important components, raw materials, or services for your U.S. employer from a foreign supplier. And you never know where foreign practices may diverge from what you’re accustomed to. Many software developer jobs, for instance, have been moved outside the United States—to places such as India, New Zealand, and Eastern Europe. Among the U.S. tech companies with overseas subsidiaries (and plenty of cash there as well) are Apple, Microsoft, Cisco, Oracle, Alphabet, and Intel.39

You May Work for a Foreign Firm in the United States You may sometime take a job with a foreign firm doing business in the United States, such as an electronics, pharmaceutical, or car company. And you’ll have to deal with managers above and below you whose outlook is different from yours. For instance, Japanese companies, with their emphasis on correctness and face saving, operate in significantly different ways from U.S. companies.

Sometimes it is even hard to know that an ostensibly U.S. company actually has for- eign ownership. For example, among some classic U.S. brands that are now foreign owned are Anheuser-Busch, sold to InBev of Belgium in 2008; Ben & Jerry’s, owned by multinational giant Unilever; Burger King, purchased by Restaurant Brands International of Canada; Trader Joe’s, a subsidiary of German supermarket chain Aldi Nord;

124 PART 2 The Environment of Management

General Electric, owned by China’s Haier, the largest appliance company in the world; American Apparel, bought by Gildan Activewear, a Canadian clothier; and 7-Eleven, owned by the Japanese retail group Seven & i Holdings.40

You May Work for a U.S. Firm outside the United States—or for a Foreign One You might easily find yourself working abroad in the foreign operation of a U.S. com- pany. Most big U.S. corporations have overseas subsidiaries or divisions. On the other hand, you might also work for a foreign firm in a foreign country, such as a big Indian company in Bangalore or Mumbai.

The Successful International Manager: Geocentric, Not Ethnocentric or Polycentric Maybe you don’t really care that you don’t have much understanding of the foreign culture you’re dealing with. “What’s the point?” you may think. “The main thing is to get the job done.” Certainly there are international firms with managers who have this perspective. They are called ethnocentric, one of three primary attitudes among interna- tional managers, the other two being polycentric and geocentric.41

Ethnocentric Managers—“We Know Best” What do foreign executives fluent in English think when they hear Americans using an endless array of baseball, basket- ball, and football phrases (such as “out of left field” or “Hail Mary pass”). Ethnocentric managers believe that their native country, culture, language, and behavior are superior to all others. Ethnocentric managers tend to believe that they can export the managers and practices of their home countries to anywhere in the world and that they will be more capable and reliable. Often, the ethnocentric viewpoint is less attributable to prejudice than it is to ignorance because such managers obviously know more about their home environment than the foreign environment. Ethnocentrism might also be called parochialism—that is, a narrow view in which people see things solely through their own perspective.

Working for a foreign firm. If you think you might work for a foreign firm, either at home or overseas, what should you be doing now to prepare for it? ©CKDJ/Corbis/VCG/Getty Images

Global Management CHAPTER 4 125

Ethnocentric views also affect our purchasing decisions. Some people believe that we should only purchase products made in our home country.42 What are your views about being an ethnocentric consumer? You can find out by taking Self-Assessment 4.1.

Assessing Your Consumer Ethnocentrism This survey is designed to assess your consumer ethnocen- trism. Please be prepared to answer these questions if your instructor has assigned Self-Assessment 4.1 in Connect.

1. Are you surprised by the results? What do they suggest about your purchasing decisions? What are the pros and cons of being an ethnocentric consumer?

2. How do American companies, associations, and unions encourage us to be ethnocentric consumers?

SELF-ASSESSMENT 4.1

Polycentric Managers—“They Know Best” Polycentric managers take the view that native managers in the foreign offices best understand native personnel and practices, and so the home office should leave them alone. Thus, the attitude of polycentric manag- ers is nearly the opposite of that of ethnocentric managers.

Geocentric Managers—“What’s Best Is What’s Effective, Regardless of Origin” Geocentric managers accept that there are differences and similarities between home and foreign personnel and practices and that they should use whatever techniques are most effective. Clearly, being an ethno- or polycentric manager takes less work. But the payoff for being a geocentric manager can be far greater. ●

Jordin Hansen is a senior director of strategic opera- tions for a global information technology company. She experienced a clashing of cul- tures when her company developed nomenclature as part of a global business strategy.

An executive team in the United States was put together to develop a global business strategy for a new

business within a larger company. Part of the strategy involved deciding on company vocabulary. “When you run a global orga- nization, having consistent nomenclature in how you talk about things is extremely important, especially when you have global customers,” said Jordin.

The approach that was used to decide on the company nomenclature was a very top-down approach. The strategy team claimed they were listening to outside opinions but really moved forward with what they thought was the best decision.

What was not taken into consideration was that English was not the main language for a majority of the company’s global stakeholders. One of the terms chosen to be part of the company nomenclature was “solution.” As Jordin explained, this word means very different things to people of different cultures.

“The word ‘solution’ in our industry in the United States can mean a piece of a larger solution; whereas in Europe when you talk about solutions it usually means the full end-to-end supply chain or product,” said Jordin.

There may have been short-term benefits to quickly announc- ing and implementing company vocabulary, but the long-term effects were negative. The team had to rethink the strategy  several times, and the buy-in from stakeholders was minimal. “We took two steps forward just to take fourteen steps back,” said Jordin.

Perhaps the most negative impact of presenting company vocabulary that was not culturally sensitive was a loss of cred- ibility and trust among stakeholders. “This overstepped the opinions and the input of the global stakeholders. It ruined credibility for anything later down the road that we wanted to implement,” said Jordin. “In a world where relationships are everything, this is incredibly important.” Courtesy of Jordin Hansen

I Wish I… …considered the impact of ethnocentrism.

Jordin Hansen Courtesy Jordin Hansen

126 PART 2 The Environment of Management

4.3 Why and How Companies Expand Internationally

THE BIG PICTURE Multinationals expand to take advantage of availability of supplies, new markets, lower labor costs, access to finance capital, or avoidance of tariffs and import quotas. Five ways they do so are by global outsourcing; importing, exporting, and countertrading; licensing and franchising; joint ventures; and wholly owned subsidiaries.

Who makes Apple’s iPhone? The iPhone 6s is a good example of the complexity of Apple’s supply chain. The modem, battery, and wifi module come from three different Chinese suppliers; the radio frequency transceiver is made by Qualcomm, also of China; rare minerals for the circuitry, speakers, and screen colors come from California and China; and the processor’s parts come from South Korea and Taiwan. The RAM device is made by Samsung in South Korea, and the display and camera came from two

different suppliers in Japan. The chassis or body comes from China.43

Where is Netflix going for new business as its U.S. growth slows? Now that it is streaming con- tent in at least 130 countries around the world and in 20 different languages, the company has more international than U.S. subscribers.44

There are many reasons U.S. companies are going global. Let us consider why and how they are expanding beyond U.S. borders.

Why Companies Expand Internationally Many a company has made the deliberate deci- sion to restrict selling its product or service to just its own country. Is anything wrong with that?

The answer is: It depends. It would probably have been a serious mistake for NEC, Sony, or

Hitachi to have limited their markets solely to Japan during the 1990s, a time when the country was in an economic slump and Japanese consumers weren’t consuming. During that same period, however, some American banks might have been better off not making loans abroad, when the U.S. economy was booming but foreign economies were not. Going international or not going international—it can be risky either way.

Why, then, do companies expand internationally? There are at least five reasons, all of which have to do with making or saving money.

1. Availability of Supplies Mining companies, banana growers, sellers of hard woods—all have to go where their basic supplies or raw materials are located. For years oil companies, for example, expanded their activities outside the United States in seek- ing cheaper or more plentiful sources of oil.

2. New Markets Sometimes a company will find, as cigarette makers have, that demand for their product has declined domestically but they can still make money over- seas. Or sometimes a company will launch a concerted effort to expand into foreign

The Gross Domestic Product of Dubai has grown from 82 billion in U.S. dollars in 2008 to 382 billion in 2017. This tremendous economic growth has resulted in the development of the beautiful skyscrapers at the Dubai Marina in the United Arab Emirates. ©Boule/Shutterstock

LO 4-3 Outline the ways in which companies can expand internationally.

Global Management CHAPTER 4 127

markets, as Coca-Cola did under the leadership of legendary CEO Robert Goizueta. Apple expanded efforts to sell more iPhones and other products in India, as sales to China slowed.45 Swedish retailer IKEA did likewise, thinking India’s blossoming middle class was a good bet to buy “flat-pack dining tables, cotton dish towels, and Scandina- vian-sounding sofas.”46 Amazon is expanding to a new market, Australia.47

3. Lower Labor Costs The decline in manufacturing jobs in the United States is partly attributable to the fact that U.S. companies have found it cheaper to manufacture outside the States. For example, the rationale for using maquiladoras—foreign-owned man- ufacturing plants allowed to operate in Mexico with special privileges in return for employing Mexican citizens—is that they provide less expensive labor for assembling everything from appliances to cars. As another example, Ford Motor Company plans to move production of its Focus passenger car from the United States to China. Not only is China a key new market for the car, but starting in 2019 the Focus will be more spacious and stylish, and better equipped, but with a higher price tag. Ford hopes lower labor costs will help offset the cost of revamping the design and shipping cars back to the United States.48

Even professional or service kinds of jobs, such as computer programming, may be shipped overseas.

4. Access to Finance Capital Companies may be enticed into going abroad by the prospects of capital put up by foreign companies or subsidies from foreign governments. A sovereign wealth fund is a government-owned investment fund that often invests in foreign assets. China’s sovereign wealth fund, China Investment Company (CIC), hopes to increase its investments abroad, for instance, and especially in the United States, through investments in infrastructure projects, though it may face resistance from increasing nationalist and protectionist sentiment.49 “As CIC and China make more foreign investments, we’re seeing the rise of protectionism in some countries and regions, be it the U.S. or Europe. They’re making some protectionist moves, some spe- cifically targeting China,” said the fund’s president.50

5. Avoidance of Tariffs and Import Quotas Countries place tariffs (fees) on imported goods or impose import quotas—limitations on the numbers of products allowed in—for the purpose of protecting their own domestic industries. For example, Japan imposes tariffs on agricultural products, such as rice, imported from the United States. To avoid these penalties, a company might create a subsidiary to produce the product in the foreign country. General Electric and Whirlpool, for example, have for- eign subsidiaries to produce appliances overseas.

How Companies Expand Internationally Most companies don’t start out to be multinationals. Generally, they edge their way into international business, at first making minimal investments and taking minimal risks, as shown in the drawing. (See Figure 4.1.)

Let’s consider the five ways of expanding internationally shown in the figure.

Global outsourcing

Importing, exporting, &

countertrading

Licensing & franchising

Joint ventures

Wholly-owned subsidiaries

Lowest risk & investment

Highest risk & investment

FIGURE 4.1 Five ways of expanding internationally These range from lowest risk and investment (left) to highest risk and investment (right).

128 PART 2 The Environment of Management

EXAMPLE Global Outsourcing: Which Jobs Have Fallen Victim?

Workers in the United States are rightly concerned about the changing jobs picture, brought about in part by offshoring of work to low-wage countries such as China, India, and the Philippines. Companies look to reduce their production costs and, thereby, the prices they must charge their customers. Few of the approximately 14 million jobs that have been lost will be replaced, and according to the U.S. Bureau of Labor Statistics, just 8% of U.S. workers are employed in manufactur- ing today.54 In a recent survey of working adults, more than half said it would be “essential for them to get training and develop new skills throughout their work life in order to keep up with changes in the workplace,” and nearly half had taken a class to improve their work skills during the last year.55

More recently, the same trend—global outsourcing—has been siphoning off white-collar jobs. Among the top careers that

reportedly lost jobs to outsourcing in the last few years were those of computer programmers, accountants, lawyers, insurance sales agents, real estate agents, chemists, and physicists.56

Which Jobs Will Likely Remain in the United States? It is dif- ficult to predict which jobs will remain in the United States be- cause even the Bureau of Labor Statistics often can’t make accurate predictions. However, jobs that endure may share certain traits regardless of the industry they serve:57

• Face-to-face. Some jobs consist of face-to-face contact, such as being a salesperson with a specific territory or an emergency room doctor.

• Physical contact. Other jobs require physical contact, such as those of dentists, nurses, massage therapists, gardeners, and nursing-home aides.

1. Global Outsourcing A common practice of many companies, outsourcing is defined as using suppliers outside the company to provide goods and services. For exam- ple, airlines farm out a lot of aircraft maintenance to other companies. Management philosopher Peter Drucker believed that in the near future organizations might be outsourcing all work that is “support”—such as information systems—rather than reve- nue producing.

Global outsourcing extends this technique outside the United States. Global out- sourcing, or offshoring, is defined as using suppliers outside the United States to pro- vide labor, goods, or services. The reason may be that the foreign supplier has resources not available in the United States, such as Italian marble. Or the supplier may have special expertise, as do Pakistani weavers. Or—more likely these days—the supplier’s labor is cheaper than American labor. As a manager, your first business trip outside the United States might be to inspect the production lines of one of your outsourcing suppliers. The Example box below discusses jobs that are prone to outsourcing.

However, in a countertrend called “reshoring,” some companies are moving produc- tion back home in order to respond faster and more flexibly to consumer trends. For example, the fashion industry, one of the first to undertake outsourcing for its lower costs, has brought more than 17,000 jobs back to the United States since 2010, and more could follow. In South Baltimore, athletic wear maker Under Armour has acted on its “local for local” initiative to create a kind of incubator facility that puts engineers and product developers under the same roof. The goal is to speed innovation, support small-batch manufacturing and lower inventories, and shorten the supply chain. One result is that the interval between design and production has shrunk from 18 months51 to 4; another is the addition of potentially thousands of jobs. “We’re going to bring scale that allows us to bring manufacturing back,” said Under Armour’s president of product and innovation.52

2. Importing, Exporting, and Countertrading When importing, a company buys goods outside the country and resells them domestically. Nothing might seem to be more American than Caterpillar tractors, but they are made not only in the United States but also in Mexico, from which they are imported and made available for sale in the United States.53 Many of the products we use are imported, ranging from Heineken beer ( Netherlands) to Texaco gasoline (Saudi Arabia) to Honda snowblowers (Japan).

Global Management CHAPTER 4 129

• High-end products. High-end products that require inten- sive research, precision assembly, and complex technology need skilled workers and are good candidates for remain- ing in the U.S. labor market.

• Complex patterns. Other jobs rely on the human ability to recognize complex patterns, which is hard to automate, such as a physician’s ability to diagnose an unusual dis- ease (even if the X-rays are read by a radiologist in India). This characteristic also predominates in such jobs as teach- ing first grade or selling a mansion to a millionaire, and in jobs that demand an intimate knowledge of the United States, such as marketing to U.S. teenagers or lobbying members of Congress.

What Does the Future Look Like? Wage differences across countries are beginning to shrink, thanks in part to the United States’ slow recovery from the 2008 recession, and in part to the rising standard of living in many developing countries with educated, English-speaking workers who hold those out- sourced jobs.58 This means some service jobs, such as for call- center workers, may come back to the United States if the savings from outsourcing are eliminated. It is too early to tell

whether many U.S. companies will take advantage of lower corporate tax rates and other possible incentives to bring jobs back to the United States, or whether foreign companies will follow the lead of Japanese and German automakers to open production plants on U.S. shores. In the meantime, some workers may face a bigger threat from the increasing sophisti- cation of robots in the domestic workplace than from cheap labor oversees.

One fact remains clear, however: The more education you have, the more likely you are to keep your footing during times of economic change. LinkedIn recently analyzed member data about salary and education and found that those who complete four years of college earn an average median salary of almost $80,000 a year, compared to less than $52,000 for those who complete only high school.59 College graduates can expect to earn, on average, $1 million more over the course of their life- times than those without a degree.60

YOUR CALL What kind of job or jobs are you interested in that would seem to provide you with some hope of prevailing in a fast- changing world?

When exporting, a company produces goods domestically and sells them outside the country. The United States was ranked the number 1 exporter in the world in 2015, up from number 3 two years earlier. (See Table 4.2.) One of the great- est U.S. exports is pop culture, in the form of movies, music, and fashion. The United States is also a leader in exporting computers and other information technology.

Sometimes other countries may wish to import U.S. goods but lack the currency to pay for them. In that case, the export- ing U.S. company may resort to countertrading—that is, bar- tering goods for goods. When the Russian ruble plunged in value in 1998, some goods became a better medium of exchange than currency.

3. Licensing and Franchising Licensing and franchis- ing are two aspects of the same thing, although licensing is used by manufacturing companies and franchising is used more frequently by service companies.

In licensing, a company allows a foreign company to pay it a fee to make or distribute the first company’s product or ser- vice. For example, the Du Pont chemical company might license a company in Brazil to make Tef lon, the nonstick substance that is found on some frying pans. Thus, Du Pont, the licensor, can make money without having to invest large sums to conduct business directly in a foreign com- pany. Moreover, the Brazilian firm, the licensee, knows the local market better than Du Pont probably would.

Franchising is a form of licensing in which a company allows a foreign company to pay it a fee and a share of the profit in return for using the first company’s brand name

TABLE 4.2 Top 10 Exporting Countries, 1999 and 2016

RANK IN 1999 RANK IN 2016

1. United States China

2. Germany United States

3. Japan Germany

4. France Japan

5. Britain Netherlands

6. Canada Hong Kong

7. Italy France

8. Netherlands South Korea

9. China Italy

10. Belgium United Kingdom

Sources: “World Trade Statistical Review, 2016,” World Trade Organization, accessed February 19, 2018, https://www.wto.org/ english/res_e/statis_e/wts2016_e/wts2016_e.pdf; and “Top Ten Highest Exporting Countries in the World,” Wevio, March 6, 2015, www.wevio.com/general/top-10-highest-exporting-countries-in-the- world (accessed March 10, 2016).

130 PART 2 The Environment of Management

and a package of materials and services. For example, Burger King, Hertz, and Hilton Hotels, which are all well-known brands, might provide the use of their names plus their operating know-how (facility design, equipment, recipes, manage- ment systems) to companies in the Philippines in return for an up-front fee plus a percentage of the profits.

By now so-called U.S. stores are opening everywhere, and many franchise chains are experiencing the bulk of their growth overseas. Sonic Drive-In and Chick Fil-A are said to be considering opening restaurants abroad, joining other U.S. brands, including Cold Stone Creamery, with 50 outlets in Japan; Dale Carnegie Training, which has 120 loca- tions in Africa, Asia, Europe, and Latin America; and Massage Envy, with six stores in Australia and plans for dozens more.61

Volvo. Who owns what car brand these days? Formerly British brands Jaguar and Land Rover now belong to Tata of India. Volkswagen owns the formerly British Bentley and Italian Lamborghini. Volvo, whose cars and trucks are still made in Sweden, is owned by Chinese automaker Geely. Do you think the American companies General Motors and Ford could ever wind up under foreign ownership, as Chrysler has (owned by Fiat)? ©Gerlach Delissen/Corbis Sport/Getty Images

4. Joint Ventures Strategic allies (described in Chapter 3) are two organizations that have joined forces to realize strategic advantages that neither would have if oper- ating alone. A U.S. firm may form a joint venture, also known as a strategic alliance, with a foreign company to share the risks and rewards of starting a new enterprise together in a foreign country. For instance, General Motors operates a joint venture with Shanghai Automotive Industry Group to build Buicks in China (which are now being imported into the United States).62 Ford also has a joint venture in China with Changan Ford.63

Sometimes a joint venture is the only way a U.S. company can have a presence in a certain country, whose laws may forbid foreigners from ownership. Indeed, in China, this is the only way foreign cars may be sold in that country.

5. Wholly Owned Subsidiaries A wholly owned subsidiary is a foreign subsidiary that is totally owned and controlled by an organization. The foreign subsidiary may be an existing company that is purchased outright. A greenfield venture is a foreign subsidiary that the owning organization has built from scratch.

General Motors owns majority stakes in Adam Opel AG in Germany and Vauxhall Motor Cars Ltd. in the United Kingdom. ●

Global Management CHAPTER 4 131

4.4 The World of Free Trade: Regional Economic Cooperation and Competition

THE BIG PICTURE Barriers to free trade are tariffs, import quotas, and embargoes. Organizations promoting international trade are the World Trade Organization, the World Bank, and the International Monetary Fund. We discuss two major trading blocs, NAFTA and the EU, as well as the still to-be-approved Trans-Pacific Partnership. Major competitors with the United States are the “BRICS” countries—Brazil, Russia, India, China, and South Africa.

If you live in the United States, you see foreign products on a daily basis—cars, appli- ances, clothes, foods, beers, wines, and so on. Based on what you see every day, which countries would you think are our most important trading partners? China? Japan? Germany? United Kingdom? South Korea?

These five countries do indeed appear among the top leading U.S. trading partners. Interestingly, however, our foremost trading partners are our immediate neighbors— Canada and Mexico—whose products may not be quite so visible. (See Table 4.3.)

Let’s begin to consider free trade, the movement of goods and services among nations without political or economic obstruction.

Barriers to International Trade Countries often use trade protectionism—the use of govern- ment regulations to limit the import of goods and services—to protect their domestic industries against foreign competi- tion. The justification they often use is that this saves jobs. Actually, protectionism is not considered beneficial, mainly because of what it does to the overall trading atmosphere.

The devices by which countries try to exert protection- ism consist of tariffs, import quotas, and trade embargoes and sanctions.

1. Tariffs A tariff is a trade barrier in the form of a customs duty, or tax, levied mainly on imports. At one time, for instance, to protect the American shoe industry, the United States imposed a tariff on Italian shoes. Actually, there are two types of tariffs: One, called a revenue tariff, is designed simply to raise money for the government, such as a tax on all oil imported into the United States. The other, which concerns us more, is a protective tariff, which is intended to raise the price of imported goods to make the prices of domestic products more competitive.

In early 2018, the Trump administration imposed new tariffs and other trade restric- tions on solar panels and washing machines from China and was considering additional barriers on imported steel and aluminum. Observers were split about whether the tariffs on solar panels in particular would protect U.S. jobs or harm the domestic solar indus- try and cost it jobs by raising the price of clean energy.64

2. Import Quotas An import quota is a trade barrier in the form of a limit on the num- bers of a product that can be imported. Like a tariff, its intent is to protect domestic

TABLE 4.3 Top 10 U.S. Trading Partners in Goods, January 2016

TOP 10 NATIONS TOP 10 NATIONS THE U.S. THE U.S. EXPORTS TO IMPORTS FROM

1. Canada China

2. Mexico Mexico

3. China Canada

4. Japan Japan

5. United Kingdom Germany

6. Germany South Korea

7. South Korea United Kingdom

8. Netherlands India

9. Hong Kong Italy

10. Brazil France

Source: “Top Trading Partners, January 2018,” United States Census Bureau, https://www.census.gov/foreign-trade/statistics/highlights/ toppartners.html.

LO 4-4 Discuss barriers to free trade and ways companies try to overcome them.

132 PART 2 The Environment of Management

industry by restricting the availability of foreign products. Consumers in countries using tariffs and import quotas are likely to find price increases due to the reduction of imported products.65 In late 2017, China issued import quotas on crude oil to three inde- pendent refineries.

Quotas are designed to prevent dumping, the practice of a foreign company’s export- ing products abroad at a lower price than the price in the home market—or even below the costs of production—in order to drive down the price of the domestic product. The U.S. Commerce Department recently began an antidumping investigation into imports of aluminum sheet from China. The Department said the investigation was “based on information indicating that the United States price of common alloy sheet from China may be less than the normal value of such or similar merchandise and that imports of common alloy sheet from China may be benefitting from countervailable subsidies.”66

3. Embargoes and Sanctions For more than 50 years, a Cold War embargo pro- hibited anyone from importing Cuban cigars and sugar into the United States and pre- vented U.S. companies from doing business in Cuba. Then in 2014, President Barack Obama ordered the restoration of full diplomatic relations with Cuba, and in March 2016, he paid a visit to the island nation, the first U.S. president to do so in nearly 90 years.67 In 2017, however, the Trump administration began restoring prohibitions and restrictions on travel and trade with Cuba, “to channel economic activity away from the Cuban military and to encourage the government to move toward greater political and economic freedom for the Cuban people.”68

An embargo is a complete ban or prohibition of trade of one country with another so that no goods or services can be imported or exported from or to the embargoed nation. The key word here is complete, as in “complete ban.” In response to North Korea’s ramped-up testing of intercontinental ballistic missiles, for example, the Trump admin- istration has pressured China to completely cut off its sales of oil and oil products to North Korea.69 China is North Korea’s chief trading partner.70

The U.S. used import quotas against cars made in South Korea in the 1980s. Although these quotas are long gone, today the U.S. has import quotas on many products including steel, beef, and dairy. Do you think the use of import quotas is good over the longterm? ©Monty Rakusen/Getty Images

Global Management CHAPTER 4 133

An embargo is different from a sanction. A sanction is the trade prohibition on certain types of products, services, or technology to another country for specific reasons, including nuclear nonproliferation and humanitarian purposes. The key words here are certain types. Sanctions may be considered “partial embargoes,” since they restrict trade in cer- tain areas. For instance, the United States has trade sanctions with North Korea that prohibit the export of any material that would help North Korea in its nuclear program.71 In 2017, the U.S. Congress passed a nearly unanimous resolution to impose new eco- nomic sanctions on Russia in response to its suspected interference in the 2016 presiden- tial election. The Trump administration has so far not imposed these measures.72

Organizations Promoting International Trade In the 1920s, the institution of tariff barriers did not so much protect jobs as depress the demand for goods and services, thereby leading to the loss of jobs anyway—and the mas- sive unemployment of the Great Depression of the 1930s.73 As a result of this lesson, after World War II the advanced nations of the world began to realize that if all countries could freely exchange the products that each could produce most efficiently, this would lead to lower prices all around. Thus began the removal of barriers to free trade.

The three principal organizations designed to facilitate international trade are the World Trade Organization, the World Bank, and the International Monetary Fund. Table 4.4 summarizes the background on each organization.

TABLE 4.4 Organizations Promoting International Trade

ORGANIZATIONS PROMOTING INTERNATIONAL TRADE

PRINCIPAL ORGANIZATIONS

PURPOSE

ESTABLISHED

MEMBER COUNTRIES

IN THE NEWS

World Trade Organization (WTO)

To monitor and enforce trade agreements

1995 in Geneva to replace the General Agreement on Tariffs and Trade

164 In 2017, the EU contributed EUR 1 million to improve the trading capacity of developing countries and to help them play a more active role in trade.*

World Bank To provide low-interest loans to developing nations for improving transportation, education, health, and telecommunications

After WWII to help European countries rebuild

189 January 2018, World Bank’s Chief Economist Paul Romer stepped down after the World Bank came under fire when Chilean officials claimed it deliberately skewed the country’s economic data in its annual “Doing Business Report,” indicating massive deceleration in spite of a robust and booming economy.**

International Monetary Fund (IMF)

Designed to assist in smoothing the flow of money between nations

1945 189 In 2017, Morocco implemented a more flexible foreign exchange system recommended by the IMF that protects its economy from external forces and safeguards its reserves. The recommendations make the country more attractive to investors, and better able to service Africa with financial services. ***

*Source: “EU Gives EUR 1 Million to Enhance Trading Skills of Developing Countries,” World Trade Organization, accessed on February 19, 2018, https://www.wto.org/english/news_e/pres17_e/pr814_e.htm.

**Source: “UPDATE 1-Chile Slams World Bank for Bias in Competitiveness Rankings,” CNBC, accessed February 19, 2018, https://www.cnbc. com/2018/01/13/reuters-america-update-1-chile-slams-world-bank-for-bias-in-competitiveness-rankings.html.

***Source: U. Laessing, “UPDATE 1-Morocco’s Currency Move a Step in Right Direction – IMF,” CNBC, January 29, 2018, https://www.cnbc.com/2018/01/29/ reuters-america-update-1-moroccos-currency-move-a-step-in-right-direction--imf.html.

134 PART 2 The Environment of Management

Major Trading Blocs: NAFTA and the EU A trading bloc, also known as an economic community, is a group of nations within a geo- graphical region that have agreed to remove trade barriers with one another. The two major trading blocs we will consider are the NAFTA nations and the European Union.

1. NAFTA—The Three Countries of the North American Free Trade Agreement Formed in 1994, the North American Free Trade Agreement (NAFTA) is a trading bloc con- sisting of the United States, Canada, and Mexico, encompassing 444 million people. The agreement is supposed to eliminate 99% of the tariffs and quotas among these countries, allowing for freer flow of goods, services, and capital in North America. While many pre- dicted the pact would cost the United States thousands of jobs, it seems to have both lost and created employment, while some of the benefits that Mexico would have enjoyed, as the NAFTA partner with the lowest labor costs, went to China instead when that coun- try’s low-wage economy began to boom. It is difficult to isolate all the real effects of the trade agreement, given the many other factors in each country’s economy, but overall, the United States appears to have lost low-skilled manufacturing jobs and gained employment in autos and aerospace, according to the Economic Policy Institute.74

EXAMPLE What Will Brexit Mean for Britain and the EU?

Brexit is the planned British exit from the European Union, announced in 2016 following a bitterly contested public vote. Scheduled to occur in March 2019, the break will have profound effects not only on Great Britain, but also on the EU’s remaining 27 countries. Some are already being felt. Almost immediately after the decision was announced, for example, industries and compa- nies started making business decisions based on a future in which old trade, travel, and other barriers between the UK and the continent will once again be in place. The financial industry’s deci- sions will have major impacts.

Citigroup and Morgan Stanley are among several global U.S. banks that have announced they will move their EU headquarters from London, which had been the EU’s financial capital, to Frankfurt. Other banks are leaving London for Paris; still others, like Bank of America and Goldman Sachs, have not yet named their new hubs. Among the short-term effects of these departures: London could lose up to a quarter mil- lion financial-industry jobs, and related business losses might rise to almost $250 billion a year, representing well over 10% of the British economy.75 Britain has said it will ease some regulations on banks’ remaining London operations to avoid taking a drastic hit to one of its largest industries; the financial sector brings in $93 bil- lion a year in tax revenues for the British government.76

Despite dire predictions by opponents of Brexit, the UK econ- omy has so far continued to grow, though slowly (as are the econo- mies of other industrialized nations). How life in the UK and Europe

will change remains to be seen; the EU will remain a single market (if somewhat shaken by Britain’s departure and rising nationalist sentiment in member countries), but Britain and its citizens will become outsiders to it. The British government is in the process of deciding which EU laws will remain in effect for its population after Brexit and whether its exit will be “hard,” meaning it rejects com-

promise with the EU on issues like open travel and trade between Britain and EU coun- tries, or “soft,” meaning some portion of the EU’s intercountry cooperation and openness would remain.77

YOUR CALL The EU is more than a com- mon market. It not only elimi- nates tariffs and quotas on goods that members trade with each other (as a common market would do); it also has a common currency (the euro) and its own parliament, and it

allows services and money to flow and people to work and travel freely throughout the union, as if it were a single country. EU supporters have championed these economic and personal freedoms, while critics have pointed to the proliferation of rules, which they believe reduce each country’s independence, and to the unimpeded flow into wealthier countries of people from poorer ones. Do you think the advantages of a single mar- ket like the EU outweigh the disadvantages for member coun- tries? Why or why not?

Thousands of Pro-Europe protesters march in central London in opposition to Brexit, the planned British exit from the European Union. What are the pros and cons of Brexit for the people of the U.K? ©JUSTIN TALLIS/AFP/Getty Images

Global Management CHAPTER 4 135

TRADING BLOC COUNTRIES PURPOSES

Asia-Pacific Economic 21 Pacific Rim countries, most To improve economic and political Cooperation (APEC) with a Pacific coastline, including ties and to reduce tariffs and other the U.S., Canada, and China trade barriers across the Asia-Pacific region

Association of 10 countries in Asia, comprising To reduce trade barriers among Southeast Asian a market of 610 million people: member countries. A China-ASEAN Nations (ASEAN) Brunei, Cambodia, Indonesia, Free Trade Area was established in Laos, Malaysia, Myanmar (Burma), 2010, the largest free trade area in the Philippines, Singapore, Thailand, the world in terms of population. and Vietnam

Mercosur Largest trade bloc in Latin America, To reduce tariffs by 75% and achieve with 5 core members—Argentina, full economic integration. The alliance Brazil, Paraguay, Uruguay, and is also negotiating trade agreements Venezuela (currently suspended) with NAFTA, the EU, and Japan. —and 7 associate members: Bolivia, Chile, Colombia, Ecuador, Guyana,

Peru, and Suriname

Central America Costa Rica, the Dominican Republic, To reduce tariffs and other barriers to Free Trade Agreement El Salvador, Guatemala, Honduras, free trade (CAFTA-DR) Nicaragua, and the U.S.

TABLE 4.5 Four Other Important Trading Blocs

Source: Brian Williams.

The terms of the agreement are now the subject of ongoing negotiations among the three member countries that may last until 2019. The Trump administration has threat- ened to pull the United States out of NAFTA but has so far not taken that step.78

2. The EU—The 28 Countries of the European Union Formed in 1957, the Euro- pean Union (EU) consists of 28 trading partners in Europe, covering nearly 500 million con- sumers. In 2016, the United Kingdom narrowly decided to remove itself from the EU, a process that will likely take several years to complete (see Example box).

Nearly all internal trade barriers have been eliminated (including movement of labor between countries), making the EU a union of borderless neighbors and the world’s largest free market, with a gross domestic product of $16.487 trillion in 2016, compared to $18.625 trillion for the United States.79

Recently, the influx of thousands of refugees pouring out of war-torn and poverty-stricken nations in the Middle East and Africa, including many middle- class Syrians, has put more pressure on the European Union, including calls to either reduce or severely limit free movement across Europe’s borders. The EU also faces challenges to its founding principles from the apparent increase in pop- ulist and nationalist sentiments in some member countries. “We are seeing nationalism, populism and in a lot of countries a polarized atmosphere,” said Germany’s leader Angela Merkel in early 2018. “We believe that isolation won’t help us. We believe we need to cooperate, that protectionism is not the answer.”80

Four other trading blocs—APEC, ASEAN, Mercosur, and CAFTA—are described below. (See Table 4.5.)

The Trans-Pacific Partnership—11 Pacific Rim Countries Negotiated over seven years, the Trans-Pacific Partnership (TPP) is a trade agreement among 11 Pacific Rim countries. It was signed on February 4, 2016. The United States, originally a party to the agreement, withdrew from the pact under the Trump administration; remaining

136 PART 2 The Environment of Management

members are Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. The United States could rejoin the agreement in the future but is not currently expected to do so.81

Over time, the TPP will remove several further barriers to trade, including most tar- iffs, and set commercial rules for everything from labor and environmental standards to drug patents. A World Bank study found that Japan, Vietnam, and Malaysia would get a big economic boost (from increasing their exports) from the TPP, while the three North American countries would see much smaller gains.82

Most Favored Nation Trading Status Besides joining together in trade blocs, countries will also extend special, “most favored nation” trading privileges to one another. Most favored nation trading status describes a condition in which a country grants other countries favorable trading treatment such as the reduction of import duties. The purpose is to promote stronger and more stable ties between companies in the two countries.

Exchange Rates The exchange rate is the rate at which the currency of one area or country can be exchanged for the currency of another’s. Americans deal in dollars with each other, but beyond the U.S. border we have to deal with pounds in England, euros in Europe, pesos in Mexico, and yuan in China. Because of changing economic conditions, the values of currencies fluctuate in relation to each other, so that some- times a U.S. dollar, for example, will buy more goods and sometimes it will buy less.

Currency from around the world. It’s important to understand exchange rates when traveling internationally. ©Paul Maguire/Shutterstock

Get out much? The number of U.S. passports issued per year has grown steadily over the last several years, reaching more than 21.3 million for 2017 according to the Department of State. How does travel figure in your career plans? ©Ulrich Baumgarten/Getty Images

Global Management CHAPTER 4 137

EXAMPLE Dealing with Currency Exchange—How Much Are Those Jeans, Really?

Assume that $1 trades equal to 1 British pound, symbolized by £1. Thus, an item that costs 3 pounds (£3) can be bought for $3. If the exchange rate changes so that $1 buys £1.5, then an item that costs £3 can be bought for $2 (the dollar is said to be “stronger” against the pound). If the rate changes so that $1 buys only £0.5, an item that costs £6 can be purchased for $9 (the dollar is “weaker”).83 In early 2018, the dollar was stronger, buying £.72, whereas back in 2014, it was weaker, averaging £.59. (Stated another way, £1 bought $1.68 in April 2014 and $1.40 in February 2018.)

How the Exchange Rate Matters. As this is written, the dollar is strong and the pound is weak, so that $1 will buy £.72. Thus, staying in London became less expensive for U.S. travelers.

With this example, you can see why it’s important to under- stand how exchange rates work and what value your U.S. dollars actually have.

YOUR CALL Planning to visit Mexico, Canada, or any EU countries (Germany, France) that use the euro? Go online to www.x-rates.com and

A hotel room that rents for £100 cost a U.S. visitor $168 in 2014, but only $140 in 2016. Indeed, if during those years, 2014 to 2018, you were living in England working for a U.S. company and were paid in dollars, your standard of living went up.

The Varying Cost of Living for Different Cities. Prices also vary among countries and cities throughout the world, with the standard of living of London, say, being 29% more than that of Chicago.84 Table 4.6 provides a sense of what a U.S. visitor’s purchasing power is worth in London when $1 equals £72 (or £1 equals $1.40)—the exchange rate in February 2018—consider these prices for various goods in Chicago versus London (estimated in U.S. dollars, computed on www. expatistan.com):

figure out the exchange rate of the U.S. dollar and that coun- try’s currency. Then go to www.expatistan.com and figure out what things cost in that country’s principal city versus a U.S. city near you. Could you afford to go?

TABLE 4.6 Comparison of Prices in Chicago and London

AVERAGE COSTS FOR: CHICAGO* LONDON**

2-liter Coke $2.24 $2.53

Combo meal (Big Mac or similar) $8.00 $8.00

Monthly rent, furnished studio (expensive area)

$1458.00 $3235.00

Monthly Rent, furnished studio (average area)

$957.00 $2499.00

Pair of designer jeans $53.00 $102.00

Nike or similar sports shoes $90.00 $100.00

Monthly Internet 8mbps $44.00 $31.00

Starbucks latte $5.08 $4.59***

*Source: “Cost of Living in Chicago, Illinois, United States,” Expatistan, accessed February 19, 2018, https://www.expatistan.com/cost-of-living/chicago.

**Source: “Cost of Living in London, United Kingdom,” Expatistan, accessed February 19, 2018, https://www.expatistan.com/cost-of-living/ london?currency=USD.

***Source: B. Pemberton, “How Much Would YOU Pay for a Caffeine Fix on Holiday? The Price of a Starbucks Latte in 30 Countries Revealed (and You’ll Need Deep Pockets if You’re Off to Zurich),” Daily Mail, March 3, 2016, http://www.dailymail.co.uk/travel/travel_news/article-3473320/How-pay-caffeine-fix- holiday-price-Starbucks-latte-30-countries-revealed-ll-need-deep-pockets-Zurich.html.

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The BRICS Countries: Important International Competitors Coined by a financial analyst who saw the countries as promising markets for finance capital in the 21st century, the term BRICS stands for the five major emerging economies of Brazil, Russia, India, China, and South Africa.85 (See Table 4.7.)

TABLE 4.7 BRICS Countries, 2015

POPULATION

ECONOMY (GDP) (IN U.S. $)

GDP PER CAPITA (IN U.S. $)

GROWTH RATE

China 1.36 billion $19,510 billion $8,154 6.8%

India 1.25 billion $8,027 billion $1,808 7.3%

Brazil 204 million $3,208 billion $9,312 −3.0%

Russia 146 million $3,474 billion $8,184 −3.8%

South Africa 50 million $724 billion $5,902 1.4%

For comparison, U.S. 321 million $17,968 billion $56,421 2.6%

Sources: Internet World Stats, www.internetworldstats.com /stats8.htm; Knoema, and IMF World Economic Outlook, October 15, 2015, http://knoema.com/ nwnfkne/world-gdp-ranking- 2015-data-and-charts; Statistics Times, and IMF World Economic Outlook, April 18, 2015, http://statisticstimes.com/economy/ countries-by-projected-gdp-capita.php (all accessed March 12, 2016).

Though not a trading bloc as such, the BRICS are important because they hold 40% of the world’s population, represent about 20% of the world’s economic activity, and have established their own $100 billion reserve fund to rival the International Monetary Fund.86 By 2050, economists predict, they will join the United States in the exclusive club of the six largest economies in the world.87 Let’s consider the largest of these coun- tries in the order of their population size: China, India, and Brazil.

China China’s economy is now the second-largest in the world after that of the United States, and it may soon be the largest. Its share of the world’s middle class and its share of global manufacturing output skyrocketed from almost nothing in the 1990s to 16 percent and 25 percent by 2015, respectively. The World Bank, however, warns that nearly 8 in 10 jobs in China could be vulnerable to automation.88

India If China is well known for its manufacturing advantages, India’s have been its large English-speaking population, its technological and scientific expertise, and its reputation in services, such as “back office” accounting systems and software engineer- ing. Services, and especially IT, make up almost two-thirds of India’s GDP; its middle class now accounts for 8 percent of the world’s total, up from 1 percent in the 1990s.89 Whereas China’s working-age population began a steep decline in 2015, India’s working- age population is not expected to peak until about 2050.

Brazil With the eighth-largest economy in the world,90 benefiting from agriculture, mining, manufacturing, and services, Brazil experienced a decade of economic and social progress from 2003 to 2014, lifting 29 million people out of poverty.91 In 2016, however, the country suffered a recession, the worst economic slump in 25 years, brought about by worldwide declines in commodity prices, a domestic political crisis, and rising inflation.92 Its economic growth rate has been negative for the last few years.93 ●

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4.5 The Value of Understanding Cultural Differences

THE BIG PICTURE Managers trying to understand other cultures need to understand the importance of national culture and cul- tural dimensions and basic cultural perceptions embodied in language, interpersonal space, communication, time orientation, religion, and law and political stability.

Whether you are abroad or at home, you are likely to find yourself working with people whose cultural norms and traditions are very different from your own. What time you arrive for a business meeting, where you sit in the room, how you introduce yourself or introduce people to each other, whether you tip in a restaurant and how much, and even what you eat and whether you share it with others at the table are just a few behaviors inf luenced by culture. Your author, Angelo Kinicki, encountered several of these scenarios during several recent business trips to the United Arab Emirates. He was surprised to see men, who were very familiar with each other, touch noses when saying hello. He also realized that Arabs have a much different orientation toward time. It’s much more f luid and f lexible than in the United States. Angelo also had to adjust his style of introducing himself to women; no shaking hands unless a woman offered her hand. The start of business meetings is quite dif- ferent than in the United States. Arabs like to spend more time engaging in pleasant- ries before getting down to business.

LO 4-5 Explain the value to managers of understanding cultural differences.

Tipping point. The culture of tipping in restaurants varies from country to country. Some restaurants in the United States and Canada are eliminating tipping or adding an 18% “auto-gratuity” to the bill, but in most places, the customer is expected to add 15%–20% to the total bill as a standard tip (10% is considered insulting). However, in Japan and China, tips are not expected and are even considered inappropriate. In Hong Kong, it’s up to the diner’s discretion (a 10% service charge is already added to the bill). In Europe, hotels and restaurants add a 10% charge and tipping is expected only for exceptional service. In Latin America, a tip of 10% is customary in most restaurants, and you’re expected to hand it to the person directly, not just leave it on the table. All clear? ©AAGAMIA/The Image Bank/Getty Images

140 PART 2 The Environment of Management

Cultural differences affect businesses in many ways. As one example, Western manu- facturers of personal care products have faced an uphill battle to introduce deodorant products in China and other Asian countries, in part because people do not perceive sweating as embarrassing. Rather, it is seen as a normal aspect of human metabolism. “The traditional thinking [in China] is that sweating is good because it helps people detox,” said Unilever’s assistant manager for skin care. “There is a marketing barrier that is really hard to overcome.” Unilever’s cowboy- and boxer-themed ads also missed the mark for cultural reasons. “The series of advertisements we designed relied on the Western sense of humor,” said the company’s creative director. “Not many Chinese would understand this.”94

The Importance of National Culture A nation’s culture is the shared set of beliefs, values, knowledge, and patterns of behavior common to a group of people. We begin learning our culture starting at an early age through everyday interaction with people around us. This is why, from the outside look- ing in, a nation’s culture can seem so intangible and perplexing. As cultural anthropolo- gist Edward T. Hall puts it, “Since much of culture operates outside our awareness, frequently we don’t even know what we know. . . . We unconsciously learn what to notice and what not to notice, how to divide time and space, how to walk and talk and use our bodies, how to behave as men or women, how to relate to other people, how to handle responsibility. . . .”95 Indeed, says Hall, what we think of as “mind” is really inter- nalized culture.

And because a culture is made up of so many nuances, this is why visitors to another culture may experience feelings of discomfort and disorientation associated with being in an unfamiliar culture. These feelings are generally associated with “not understand- ing the verbal and non-verbal communication of the host culture” and the adaptability needed to accommodate “differences in lifestyles, living conditions and business prac- tices in another cultural setting.”96

Cultural Dimensions: The Hofstede and GLOBE Project Models Misunderstandings and miscommunications often arise in international business rela- tionships because people don’t understand the expectations of the other side. A per- son from North America, Great Britain, Scandinavia, Germany, or Switzerland, for example, comes from a low-context culture, in which shared meanings are primarily derived from written and spoken words. Someone from China, Korea, Japan, Vietnam, Mexico, or many Arab cultures, on the other hand, comes from a high-context culture, in which people rely heavily on situational cues for meaning when communicating with others, relying on nonverbal cues as to another person’s official position, status, or family connections.

One way to avoid cultural collisions is to have an understanding of various cultural dimensions, as expressed in the Hofstede model and the GLOBE project.97

Hofstede’s Model of Four Cultural Dimensions Thirty years ago, Dutch researcher and IBM psychologist Geert Hofstede collected data from 116,000 IBM employees in 53 countries and proposed his Hofstede model of four cultural dimensions, which identified four dimensions along which national cultures can be placed:  (1) individualism/collectivism, (2) power distance, (3) uncertainty avoidance, and (4)  masculinity/femininity.98

Individualism/collectivism indicates how much people prefer a loosely knit social framework in which people are expected to take care of themselves (as in the United States and Canada) or a tightly knit social framework in which people and organiza- tions are expected to look after each other (as in Mexico and China). Power distance

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refers to the degree to which people accept inequality in social situations (high in Mexico and India, low in Sweden and Australia). Uncertainty avoidance expresses peo- ple’s intolerance for uncertainty and risk (high in Japan, low in the United States). Masculinity/femininity expresses how much people value performance-oriented traits (masculinity: high in Mexico) or how much they embrace relationship-oriented traits (femininity: high in Norway). In general, the United States ranked very high on indi- vidualism, relatively low on power distance, low on uncertainty avoidance, and moder- ately high on masculinity.

The GLOBE Project’s Nine Cultural Dimensions Started in 1993 by Univer- sity of Pennsylvania professor Robert J. House, the GLOBE project is a massive and ongoing cross-cultural investigation of nine cultural dimensions involved in leadership and organizational processes.99 (GLOBE stands for Global Leadership and Organiza- tional Behavior Effectiveness.) GLOBE extends Hofstede’s theory and results and evolved into a network of more than 150 scholars from 62 societies. Most of these researchers are native to the particular cultures being studied. The nine cultural dimensions are as follows:

■ Power distance—how much unequal distribution of power should there be in orga- nizations and society? Power distance expresses the degree to which a society’s members expect power to be unequally shared.

■ Uncertainty avoidance—how much should people rely on social norms and rules to avoid uncertainty? Uncertainty avoidance expresses the extent to which a society relies on social norms and procedures to alleviate the unpredictability of future events.

■ Institutional collectivism—how much should leaders encourage and reward loyalty to the social unit? Institutional collectivism expresses the extent to which indi- viduals are encouraged and rewarded for loyalty to the group as opposed to pursuing individual goals.

■ In-group collectivism—how much pride and loyalty should people have for their family or organization? In contrast to individualism, in-group collectivism expresses the extent to which people should take pride in being members of their family, circle of close friends, and their work organization.100

■ Gender egalitarianism—how much should society maximize gender role differ- ences? Gender egalitarianism expresses the extent to which a society should minimize gender discrimination and role inequalities.

■ Assertiveness—how confrontational and dominant should individuals be in social relationships? Assertiveness represents the extent to which a society expects people to be confrontational and competitive as opposed to tender and modest.

■ Future orientation—how much should people delay gratification by planning and saving for the future? Future orientation expresses the extent to which a society encourages investment in the future, as by planning and saving.

■ Performance orientation—how much should individuals be rewarded for improve- ment and excellence? Performance orientation expresses the extent to which society encourages and rewards its members for performance improvement and excellence.

■ Humane orientation—how much should society encourage and reward people for being kind, fair, friendly, and generous? Humane orientation represents the degree to which individuals are encouraged to be altruistic, caring, kind, gener- ous, and fair.

Awareness of these dimensions helped Wenjing Yang while working with people from different national cultures (see the “I’m glad I ...” feature).

142 PART 2 The Environment of Management

Data from 18,000 managers yielded the GLOBE country profiles shown below. (See Table 4.8.)

Wenjing Yang works as a senior sourcing analyst in the procurement department for a health care organization. Her company implements several measures to ensure its employees are rooted in the company’s core values.

“We have a company value proposition, and it is being con- stantly communicated to us that the company expects everyone to exemplify values such as integrity, excellence, caring, and inspiration,” said Wenjing. “These values are the founda- tion of every award within the

company. Every employee has to complete annual mandated busi- ness conduct and integrity training that stresses these values and teaches us how to practice them in day-to-day work.”

While the values stressed by Wenjing’s company might be universal across cultures, it is important for Wenjing to under- stand various cultural dimensions that might impact her work relationships.

Wenjing is a Chinese citizen working for an American-based health care company. There are many areas in which Chinese

culture and American culture differ, and it is important for Wenjing to understand this when dealing with her co-workers.

“Growing up in a high-power distance culture in China, I guess I may be more tolerant and obedient to authority and power compared to my American peers,” said Wenjing. “For example, my manager once gave the team an aggressive project deadline, and I worked extremely hard and spent overtime to meet the deadline while some of my colleagues argued that the timeline was unattainable and that they needed more time.”

Another cultural dimension Wenjing must consider when working with co-workers from another culture is the concept of assertiveness. “Chinese culture promotes modesty, humble- ness, and harmonious social relationships. It discourages con- frontational or aggressive communication styles. In the United States, modesty is often considered as weakness, and humble- ness can be interpreted as incapability. U.S. culture encour- ages people to be confident and assertive when communicating themselves,” said Wenjing.

Wenjing must understand how her modest or humble behavior might be interpreted by her American colleagues, and her American colleagues must understand the same thing about how Wenjing might interpret their aggressive or asser- tive behavior. Without taking these cultural dimensions into account, Wenjing’s work relationships can be negatively affected by misconceptions and misunderstandings.

I’m glad I… …understood the GLOBE Project’s cultural dimensions.

Wenjing Yang Courtesy Wenjing Yang

TABLE 4.8 Countries Ranking Highest and Lowest on the GLOBE Cultural Dimensions

DIMENSION HIGHEST LOWEST

Power distance Morocco, Argentina, Thailand, Spain, Russia

Denmark, Netherlands, South Africa (black sample), Israel, Costa Rica

Uncertainty avoidance Switzerland, Sweden, Germany (former West), Denmark, Austria

Russia, Hungary, Bolivia, Greece, Venezuela

Institutional collectivism Sweden, South Korea, Japan, Singapore, Denmark

Greece, Hungary, Germany (former East), Argentina, Italy

In-group collectivism Iran, India, Morocco, China, Egypt Denmark, Sweden, New Zealand, Netherlands, Finland

Gender egalitarianism Hungary, Poland, Slovenia, Denmark, Sweden

South Korea, Egypt, Morocco, India, China

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TABLE 4.8 Countries Ranking Highest and Lowest on the GLOBE Cultural Dimensions (Continued)

DIMENSION HIGHEST LOWEST

Assertiveness Germany (former East), Austria, Greece, United States, Spain

Sweden, New Zealand, Switzerland, Japan, Kuwait

Future orientation Singapore, Switzerland, Netherlands, Canada (English speaking), Denmark

Russia, Argentina, Poland, Italy, Kuwait

Performance orientation Singapore, Hong Kong, New Zealand, Taiwan, United States

Russia, Argentina, Greece, Venezuela, Italy

Humane orientation Philippines, Ireland, Malaysia, Egypt, Indonesia

Germany (former West), Spain, France, Singapore, Brazil

Source: “How Cultures Collide,” Psychology Today, July 1976, p. 69.

Have you thought about how you stand in relation to various norms—in both your society and others? Would your views affect your success in taking an international job? The following self-assessment was created to provide feedback regarding these questions and to aid your awareness about your views of the GLOBE dimensions.

Assessing Your Standing on the GLOBE Dimensions This survey is designed to assess your values in terms of the GLOBE dimensions. Please be prepared to answer these ques- tions if your instructor has assigned Self-Assessment 4.2 in Connect.

1. What are your three highest and lowest rated dimensions? How might these beliefs affect your

ability to work with people from Europe, Asia, and South America?

2. How do your dimensional scores compare to the norms for Americans shown in Table 4.8?

3. What can you say during an interview to demonstrate that you possess the career readiness competency of cross-cultural awareness?

SELF-ASSESSMENT 4.2 CAREER READINESS

Recognizing Cultural Tendencies to Gain Competitive Advantage The GLOBE dimensions show a great deal of cultural diversity around the world, but they also show how cultural patterns vary. For example, the U.S. managerial sample scored high on assertiveness and performance orientation—which is why Americans are widely perceived as being pushy and hardworking. Switzerland’s high scores on uncertainty avoidance and future orientation help explain its centuries of political neutrality and world-renowned banking industry. Singapore is known as a great place to do business because it is clean and safe and its people are well educated and hardworking—no surprise, considering the country’s high scores on social collectivism, future orientation, and performance orientation. By contrast, Russia’s low scores on future orientation and performance orientation could foreshadow a slower-than-hoped-for transition from a centrally planned economy to free-enterprise capitalism. The practical lesson to draw from all this: Knowing the cultural tendencies of foreign business partners and competitors increases your career readiness and can give you a strategic competitive advantage.101

144 PART 2 The Environment of Management

GLOBE researchers also set out to find which, if any, attributes of leadership were universally liked or disliked. Throughout the world, visionary and inspirational leaders who are good team builders generally do the best; self-centered leaders who are seen as loners or face-savers receive a poor reception.102

Other Cultural Variations: Language, Interpersonal Space, Communication, Time Orientation, Religion, and Law and Political Stability How do you go about bridging cross-cultural gaps? It begins with understanding. Let’s consider variations in six basic culture areas: (1) language, (2) interpersonal space, (3) communication, (4) time orientation, (5) religion, and (6) law and political stability.

Note, however, that such cultural differences are to be viewed as tendencies rather than absolutes. We all need to be aware that the individuals we are dealing with may be exceptions to the cultural rules. After all, there are talkative and aggressive Japanese, just as there are quiet and deferential people in the United States, stereotypes notwithstanding.

1. Language More than 7,000 different languages are spoken throughout the world, and it’s indeed true that global business speaks English,103 although Chinese and Span- ish are spoken by more people globally.104

In communicating across cultures you have four options: (a) You can speak your own language. (b) You can use a translator. (Try to get one who will be loyal to you rather than to your overseas host.) (c) You can use a translation app, such as Google Translate, that turns a smartphone into an interpreter. (d) You can learn the local language—by far the best option.

It’s possible to gain some language proficiency online. Several free apps, like Duolingo and Memrise, can provide instruction and practice in many widely spoken languages, including Spanish, Chinese, Russian, French, Italian, Arabic, German, and more. Most of these apps are easy to use and customizable; you can choose the level at which you want to begin (so you can brush up on the language you studied in high school, for instance, or start a brand-new one), and you can test yourself with quizzes, flashcards, memory games, and more.105

2. Interpersonal Space It is common for men to hold hands in friendship in the Middle East, and it does not carry any sexual connotation.

People of different cultures have different ideas about what is acceptable interper- sonal space—that is, how close or far away one should be when communicating with another person. A global study of almost 9,000 people from 42 countries revealed some interesting patterns. (See Figure 4.2.) For instance, the people of North America and northern Europe tend to conduct business conversations at a range of 3.1 to 3.4 feet. For people in Asia, the range is about 3.6 to 4.2 feet. The average interpersonal space for social distance, personal distance, and intimate distance across the 42 countries was 4.43 feet, 3 feet, and 1 foot, respectively.106

3. Communication There is no question that awareness of cross-cultural communi- cation is important when interacting with people from other countries. For small com- panies doing business abroad, “the important thing to remember is that you don’t know what you don’t know,” says the head of a U.S. firm that advises clients on cross-cultural matters.107 Angelo has tried to deal with this issue by reading books targeted for specific countries. For example, Angelo read “Doing Business in the Middle East” to prepare him for a consulting project in the United Arab Emirates (UAE).108 While he learned much from the book, a big takeaway was not to take everything at face value. For instance, it was suggested that females would not actively participate in classroom

Global Management CHAPTER 4 145

discussions and presenters should not try to encourage group discussion by randomly calling on people. He found that both of these recommendations did not fit for his managerial audience in Abu Dhabi.

We consider communication matters in more detail in Chapter 15.

4. Time Orientation Time orientation is different in many cultures. For example, Americans are accustomed to calling ahead for appointments, but South Koreans believe in spontaneity. Thus, when Seoul erupted in protests over tainted American beef, Korean legislators simply hopped on a plane to the United States, saying they would negotiate with the U.S. government. “But since they failed to inform the Americans ahead of time,” says one report, “they were unable to meet with anyone of importance.”109

Anthropologist Hall makes a useful distinction between monochronic time and poly- chronic time:

■ Monochronic time. This kind of time is standard American business practice— at least until recently. That is, monochronic time is a preference for doing one thing at a time. In this perception, time is viewed as being limited, precisely segmented, and schedule driven. This perception of time prevails, for example, when you schedule a meeting with someone and then give the visitor your undi- vided attention during the allotted time.110

 Indeed, you probably practice monochronic time when you’re in a job inter- view. You work hard at listening to what the interviewer says. You may well take careful notes. You certainly don’t answer your cell phone or gaze repeat- edly out the window.

■ Polychronic time. This outlook on time is the kind that prevails in Mediterranean, Latin American, and especially Arab cultures. Polychronic time is a preference for doing more than one thing at a time. Here time is viewed as being flexible and multidimensional. This orientation can lead to work stress as people try to accomplish multiple things at once.111

 This perception of time prevails when you visit a Latin American client, find yourself sitting in the waiting room for 45 minutes, and then learn in the meet- ing that the client is dealing with three other people at the same time.

Social distance 3.1 feet Personal distance 2.3 feet Intimate distance 1.6 feet

United States

Social distance 3.2 feet Personal distance 2.3 feet Intimate distance 1.4 feet

Germany

Social distance 4.2 feet Personal distance 3.5 feet Intimate distance 3.2 feet

Saudi Arabia

Social distance 3.6 feet Personal distance 2.9 feet Intimate distance 1.9 feet

India

Social distance 3.8 feet Personal distance 2.8 feet Intimate distance 1.9 feet

China

Social distance 3.3 feet Personal distance 2.7 feet Intimate distance 1.8 feet

United Kingdom

Social distance 3.4 feet Personal distance 2.4 feet Intimate distance 1.5 feet

Russia

Social distance 3.4 feet Personal distance 2.8 feet Intimate distance 2.5 feet

Canada

Social distance 3.3 feet Personal distance 2.7 feet Intimate distance 2.2 feet

Mexico

FIGURE 4.2 Comfortable interpersonal space for different countries

Source: Data taken from A. Sorokowska, P. Sorokowski, P. Hilpert, K. Cantarero, T. Frackowiak, K. Ahmadi, et al, “Preferred Interpersonal Distances: A Global Comparison,” Journal of Cross-Cultural Psychology, March 2017, pp. 577–592.

146 PART 2 The Environment of Management

5. Religion Trying to get wealthy Muslim investors in Dubai to buy some of your bank’s financial products? Are you a Protestant doing business in a predominantly Catholic country? Or a Muslim in a Buddhist country? What are the most popular world religions, and how does religion influence the work-related values of the people we’re dealing with? (See Figure 4.3.)

About 7 in 10 U.S. adults identify as Christians, but almost 23% say they have no reli- gion,113 up from 18% in 2011. Slightly more than a quarter of them are atheists and agnos- tics; the others say they have no religion, though they may or may not believe in God. They tend to be predominantly male and white or Asian. Twenty-five percent of U.S. whites are without a religious affiliation, as are more than one in three Asian Americans.114

6. Law and Political Stability Every firm contemplating establishing itself abroad must deal with other countries’ laws and business practices, which frequently involves making calculations about political risk that might cause loss of a company’s assets or impair its foreign operations. Among the risks an organization might anticipate abroad are instability, expropriation, corruption, and labor abuses.

■ Instability. Even in a developed country a company may be victimized by politi- cal instability, such as riots or civil disorders, as happened in 2014 among Russian-speaking populations in Ukraine. In some developed nations, their very existence is threatened by separatist movements, with large sections clamoring

Meetings are a fact of life in most workplaces, and whether you are at home holding a virtual meeting or working abroad and dealing with people face to face, you’ll want to employ your cultural awareness skills, along with your time management and people skills, to run effective gatherings. The standard meeting rules in U.S. culture, which advise having a clear goal, distributing an agenda, starting and ending on time, encourag- ing everyone to speak, and summing up to be sure everyone knows what follow-up actions are expected, may not apply ev- erywhere or all the time. What will be different in an interna- tional setting, and how can you handle it successfully?

1. As in any setting where you will be speaking or making a presentation, know your audience. You can find out most of what you need to know by simply asking questions ahead of time. Does everyone have the background information they need to participate effectively in your meeting? Does anyone have a particular goal for the meeting or an item to add to the agenda? Are the participants decision makers, or will they need to defer to others and get back to you? What time differences do you need to consider when scheduling the meeting, especially if it’s virtual, so everyone can attend?

2. Be aware of participants’ cultural norms for personal interactions. In some cultures, people bow when intro- duced; in others they shake hands. In Japan and China, they exchange business cards, handling the cards with both hands and reading them carefully. Some cultures use first names on short acquaintance, while in others it’s considered disrespectful. Seating arrangements should consider cultural differences as well; some groups highly value status markers like a person’s position at the table.

3. Respect cultural differences in the perception of time in particular. In Sweden for instance, setting deadlines is acceptable and being on time is a sign of respect. In India time is measured in terms of what needs to be done, not in hours and minutes. In some Latin cultures, time is fluid and being late is not considered a problem. The same is true in parts of the Middle East.

4. Be ready to adapt. Some participants may arrive late or even early, some may bring guests, some may not consider it appropriate to speak up in front of others, or before oth- ers of higher rank have spoken, while others may interrupt. In some cultures, it’s considered rude to get right down to business, as U.S. employees are trained to do, so partici- pants may expect to socialize for a time before beginning. Some cultures may prefer not to have refreshments, while others may expect them and feel free to judge their quality.

5. Consider differences in decision-making styles. The British may sound like they’re still open to discussion, but they are actually announcing their decision. The Chinese prefer long- term decisions to short-term choices. Business managers in Sweden prefer compromise to debate, and decisions can be long in the making in India because it’s considered im- portant to get everyone’s input so the decision will last.

YOUR CALL If you were holding a virtual meeting so you and your col- leagues in the UK could present a sales proposal to a potential client in India, what questions would you want to ask partici- pants ahead of time?

How to Run an International Meeting112PRACTICAL ACTION

Global Management CHAPTER 4 147

to split off and become independent states—Quebec from Canada, Scotland from the United Kingdom, and Catalo- nia from Spain, for example—which could result in changes to the currency in use.

■ Expropriation. Expropriation is defined as a government’s seizure of a domestic or foreign company’s assets. In recent years the Venezuelan government has stepped up a cam- paign to seize land and businesses, such as a rice plant owned by Cargill, one of the United States’s largest privately owned companies. In a single recent week, Venezuela won three lawsuits brought by companies claiming losses from the government’s seizure of their property without compen- sating them. The companies were a U.S. oil driller from which Venezuela had seized 11 drilling rigs several years ago, two Spanish investors claiming Venezuela had violated their rights by illegally expropriating their food distribution business, and a bank based in Curacao seeking compensa- tion for $350 million worth of seized properties. In the lat- ter case, the International Centre for Settlement of Investment Disputes not only sided with Venezuela but ordered the plaintiffs to pay that nation court costs of $1.7 million, with interest. Said one international lawyer, “It was a good week for Venezuela but a bad week for investors who have had their property stolen. . . . it is time to further update the expropriation rules.”115

■ Corruption. Whether it’s called mordida (Mexico), huilu (China), or vzyatka (Russia), it means the same thing: a bribe. Although the United States is relatively free of such

Other 100 million

Judaism 14 million

Christianity 2.8 billion

Folk Religions

400 million Buddhism 500 million

Hinduism 1.1 billion

Una�liated 1.7 billion

Islam 1.8 billion

FIGURE 4.3 Current followers of the major world religions All population counts are estimated.

Sources: See “Major World Religions Populations Pie Chart Statistics List,” http://www.age-of-the-sage.org/mysticism/ world_religions_populations.htm, accessed June 8, 2018; https://www.israelnationalnews.com/News/News. aspx/221859; http://www.pewresearch.org/fact-tank/2017/04/07/why-people-with-no-religion-are-projected-to- decline-as-a-share-of-the-worlds-population/.

Prayer. The term “Muslim culture” covers many diverse groups—Middle Eastern, African, Asian Muslim, and European and American Muslims—each with its own customs. Muslims strive to pray five times a day, prostrating themselves on a prayer mat. The mat is supposed to face Mecca, the holy city of Islam. ©Purestock/Getty Images

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corruption, it is an acceptable practice in other countries. Among the countries where bribery is most common are Cambodia, Yemen, Kyrgyzstan, DR Congo, Ukraine, South Sudan, Bangladesh, Afghanistan, Myanmar, and Iraq.116

 U.S. businesspeople are prevented from participating in overseas bribes under the 1978 Foreign Corrupt Practices Act, which makes it illegal for employees of U.S. companies to make “questionable” or “dubious” contributions to political deci- sion makers in foreign nations. While this creates a competitive disadvantage for those working in foreign countries in which government bribery may be the only way to obtain business, the United Nations Global Compact is attempting to level the playing field by promoting anti-corruption standards for business.

■ Labor abuses. Overseas suppliers may offer low prices, but working conditions can be harsh, as has been the case for garment makers in Bangladesh, Cambodia, the Dominican Republic, Haiti, Mexico, Pakistan, and Vietnam. Despite widely publi- cized fatalities in some countries where substandard and dangerous working condi- tions exist, human rights groups say little tangible progress has been made. Fire exits and access to drinking water may be lacking, women can be discriminated against, sexually harassed, and underpaid, and workers who protest may be fired, beaten, or even killed. Western consumers’ desire for low-priced goods and “fast fashion” fuel some of the abuses because manufacturers can pressure suppliers in the developing world to keep production up and costs down.117 At least 20 million people across the world are said to be forced to work with no pay.118

U.S. Managers on Foreign Assignments: Why Do They Fail? The U.S. State Department estimated in 2016 that about 9 million U.S. citizens live abroad.119 These individuals are called expatriates—people living or working in a foreign coun- try. Many of them, perhaps 300,000, are managers, and supporting them and their families overseas is not cheap. A partner at one human resources consulting firm estimates that it costs twice an executive’s $300,000 salary to send him or her from the United States to Shanghai for a year.120 Are the employers getting their money’s worth? Not necessarily.

Early turnover is a common problem with expatriates. It can partially be reduced, how- ever, when the hiring company provides tangible sources of support. These might include offering seminars on cross-cultural differences, facilitating the establishment of social con- tacts, and other socialization activities.121 Unfortunately, problems continue when expatri- ates return home. “Studies suggest between 8% to 25% of managers may leave a company after returning to the U.S.,” says one report.122 Another study found that a failure to effec- tively manage the return of expatriates reduced a company’s return on investment. These studies underscore the importance of managing the repatriation process.123

Do you think you have what it takes to be an effective global manager? The following self-assessment can provide input to answering this question. It assesses your potential to be a successful global manager. ●

Assessing Your Global Manager Potential This survey is designed to assess how well suited you are to becoming a global manager. Please be prepared to answer these questions if your instructor has assigned Self-Assess- ment 4.3 in Connect.

1. What is your reaction to the results?

2. Based on considering your five lowest-rated survey items, what can you do to improve your global manager potential?

3. How might you let a recruiter know that you are interested in working overseas and managing people from a different culture?

SELF-ASSESSMENT 4.3 CAREER READINESS

Global Management CHAPTER 4 149

It may take a bit of effort to improve these competencies because they are firmly rooted in our experience and belief systems. A writer for Fast Company concluded that “our cultural influences are so deeply embedded in who we are that it is difficult for most of us to recognize them in our own behavior. As a result, we don’t think much about the cultural information expressed in many of the things we do or the fact that the vast majority of our behavior is shaped by our cultural surroundings. We just think of what we do as being natural.”125

We recommend the following activities to enhance the career readiness knowledge of cross-cultural competency:

1. Listen and Observe Try to take the perspective of a native when interacting with others in a new cultural context. Listening and observing are the foundations of this kind of perspective taking. If a behavior or statement seems odd or confusing to you, look for the cultural logic or set of values that may explain it. For example, Angelo’s international students rarely

4.6 Career Corner: Managing Your Career Readiness

You may think that this chapter does not offer much when it comes to career readiness if you have no plans to work overseas. Don’t make this assumption! We all live in a “hyper- connected world, where cultural borders have become blurred with the adoption of technol- ogy and the increase in diversity in the workplaces,” notes a business writer.124 Whether you work in the United States or abroad, workplace changes require us to understand, embrace, and use cultural awareness to enhance our personal and professional relationships.

Figure 4.4 shows the model of career readiness we discussed in Chapter 1. This chapter links with three of the KSAOs contained in this model. The most important is the knowledge factor, cross-cultural competency. The remaining two are the “other characteristics,” personal adaptability and self-awareness. Personal adaptability is important because it helps when interacting with diverse people and when living or working in another country. Self-awareness is essential for becoming more cultur- ally aware.

LO 4-6 Describe how to develop your cross-cultural competency.

Career readiness

Knowledge (K)

Soft skills (S)

Career outcomes

Attitudes (A)

Other characteristics

(O)

FIGURE 4.4 Model for career readiness

©2018 Kinicki and Associates, Inc.

150 PART 2 The Environment of Management

challenged him in the classroom. He felt they were not adequately contributing to class- room discussion due to a lack of confidence or inability to speak English. This assump- tion was wrong! Their behavior was caused by cultural values that grant tremendous respect and esteem to the role of professor. By understanding this cross-cultural per- spective, Angelo was able to encourage his international students to take a more critical and participative perspective during classroom activities. Remember, it is generally good practice to check your understanding by first asking questions of someone famil- iar with the context at hand.

2. Become Aware of the Context Context refers to the situational or environmental characteristics that influence our behav- ior.126 Understanding context gives you insights that let you correctly interpret the “what” and “why” of someone’s behavior. This in turn enables you to more effectively communicate with and influence others. You can develop awareness of context by “learning to read and adapt to the existing structure, rules, customs, and leaders in an unfamiliar situation,” according to Bruce Tulgan, an expert on developing soft skills. Tulgan recommends answering four questions about structure, rules, customs, and lead- ership to increase your contextual awareness:

■ “What do you know? ■ What don’t you know or understand? ■ What do you need to know or understand better? ■ How can you learn? What resources and support do you need?”127

Answering these questions increases your insights into the contextual effects of cul- ture and enhances your ability to fit comfortably in a particular context.

3. Choose Something Basic English is the generally accepted language of business. If you are a native speaker, it is still advisable to try and learn another language if you plan to work overseas or in a context where many people speak another language. Even a small effort shows respect and promotes cultural sensitivity.

A host of other activities can enhance your cross-cultural competency. Make it a goal to select several of them from the following list:128

■ Study the principles or values of another religion. ■ Participate in a sporting event related to a different culture (croquet, karate,

rugby, bocce, pétanque). ■ Learn about traditions and celebratory days from other countries. ■ Watch international films. ■ Try the cuisine of other countries. ■ Learn the history of dance forms in other countries. ■ Strive to interact with a wider set of culturally diverse students or

employees.129

■ Attend seminars or speeches by culturally diverse speakers. ■ Donate to global relief funds. ■ Organize a diversity celebration. ■ Follow world news on a regular basis. ■ Take courses in black history, women’s studies, Asian American studies,

Chicano studies, and Native American studies. ■ Take an anthropology class. ●

Global Management CHAPTER 4 151

Key Points

4.1 Globalization: The Collapse of Time and Distance

• Globalization is the trend of the world economy toward becoming more interdependent. Globalization is reflected in three developments: (1) the rise of the global village and e-commerce, (2) the trend of the world’s becoming one big market, and (3) the rise of both megafirms and Internet-enabled minifirms.

• The rise of the “global village” refers to the “shrinking” of time and space as air travel and the electronic media have made global communication easier. The Internet and the web have led to e-commerce, the buying and selling of products through computer networks.

• The global economy is the increasing tendency of the economies of nations to interact with one another as one market.

• The rise of cross-border business has led to megamergers, as giant firms have joined forces, and minifirms, small companies in which managers can use the Internet and other technologies to get enterprises started more easily and to maneuver faster.

4.2 You and International Management • Studying international management prepares you to

work with foreign customers or partners, with foreign suppliers, for a foreign firm in the United States, or for a U.S. firm overseas. International management is management that oversees the conduct of operations in or with organizations in foreign countries.

• The successful international manager is not ethnocentric or polycentric but geocentric. Ethnocentric managers believe that their native country, culture, language, and behavior are superior to all others. Polycentric managers take the view that native managers in the foreign offices best understand native personnel and practices. Geocentric managers accept that there are differences and similarities between home and foreign personnel and practices, and they should use whatever techniques are most effective.

4.3 Why and How Companies Expand Internationally

• Companies expand internationally for at least five reasons. They seek (1) cheaper or more plentiful supplies, (2) new markets, (3) lower labor costs, (4) access to finance capital, and (5) avoidance of tariffs on imported goods or import quotas.

• There are five ways in which companies expand internationally. (1) They engage in global outsourcing, using suppliers outside the company and the United States to provide goods and services. (2) They engage in importing, exporting, and countertrading (bartering for goods). (3) They engage in licensing (allow a foreign company to pay a fee to make or distribute the company’s product) and franchising (allow a foreign company to pay a fee and a share of the profit in return for using the first company’s brand name). (4) They engage in joint ventures, a strategic alliance to share the risks and rewards of starting a

context 150 countertrading 129 cross-cultural awareness 122 culture 140 dumping 132 e-commerce 119 embargo 132 ethnocentric managers 124 European Union (EU) 135 exchange rate 136 expatriates 148 exporting 129 expropriation 147 Foreign Corrupt Practices

Act 148 franchising 129 free trade 131

geocentric managers 125 global economy 120 globalization 118 global outsourcing 128 global village 119 GLOBE project 141 greenfield venture 130 high-context culture 140 Hofstede model of four cultural

dimensions 140 import quota 131 importing 128 joint venture 130 licensing 129 low-context culture 140 maquiladoras 127 monochronic time 145

most favored nation 136 multinational corporation 123 multinational organization 123 North American Free Trade

Agreement (NAFTA) 134 offshoring 128 outsourcing 128 parochialism 124 polycentric managers 125 polychronic time 145 sanction 133 tariff 131 trade protectionism 131 trading bloc 134 Trans-Pacific Partnership

(TPP) 135 wholly owned subsidiary 130

Key Terms Used in This Chapter

152 PART 2 The Environment of Management

new enterprise together in a foreign country. (5) They become wholly owned subsidiaries, or foreign subsidiaries that are totally owned and controlled by an organization.

4.4 The World of Free Trade: Regional Economic Cooperation and Competition

• Free trade is the movement of goods and services among nations without political or economic obstructions.

• Countries often use trade protectionism—the use of government regulations to limit the import of goods and services—to protect their domestic industries against foreign competition. Three barriers to free trade are tariffs, import quotas, and embargoes and sanctions. (1) A tariff is a trade barrier in the form of a customs duty, or tax, levied mainly on imports. (2) An import quota is a trade barrier in the form of a limit on the numbers of a product that can be imported. (3) An embargo is a complete ban on the import or export of certain products. A sanction is the trade prohibition on certain types of products, services, or technology to another country for specific reasons, including nuclear nonproliferation and humanitarian purposes.

• Three principal organizations exist that are designed to facilitate international trade. (1) The World Trade Organization is designed to monitor and enforce trade agreements. (2) The World Bank is designed to provide low-interest loans to developing nations for improving transportation, education, health, and telecommunications. (3) The International Monetary Fund is designed to assist in smoothing the flow of money between nations.

• A trading bloc is a group of nations within a geographical region that have agreed to remove trade barriers. We considered two major trading blocs: (1) the North American Free Trade Agreement (NAFTA: United States, Canada, and Mexico), and (2) the European Union (EU: 28 trading partners in Europe). Others are the Association of Southeast Asian Nations, Asia-Pacific Economic Cooperation, Mercosur, and the Central America Free Trade Agreement. Negotiated over seven years, the Trans- Pacific Partnership (TPP) is a proposed trade agreement among 12 Pacific Rim countries that can’t take effect until it is approved by the U.S. Congress and other parliaments in the bloc. Besides joining together in trade blocs, countries also extend special, “most favored nation” trading privileges—that is, grant other countries favorable trading treatment such as the reduction of import duties.

• When doing overseas trading, managers must consider exchange rates, the rate at which the currency of one area or country can be exchanged for the currency of another’s, such as American dollars in relation to Mexican pesos or European euros.

• The term BRICS stands for the five major emerging economies of Brazil, Russia, India, China, and South

Africa—five countries that make up 40% of the world’s population, represent about 20% of the world’s economic activity, and have established their own $100 billion reserve fund. The largest of these countries in the order of their population size are China, India, and Brazil.

4.5 The Value of Understanding Cultural Differences

• Misunderstandings and miscommunications often arise because one person doesn’t understand the expectations of a person from another culture. In low-context cultures, shared meanings are primarily derived from written and spoken words. In high- context cultures, people rely heavily on situational cues for meaning when communicating with others.

• Geert Hofstede proposed the Hofstede model of four cultural dimensions, which identified four dimensions along which national cultures can be placed: (1) individualism/collectivism, (2) power distance, (3) uncertainty avoidance, and (4) masculinity/femininity.

• Robert House and others created the GLOBE (for Global Leadership and Organizational Behavior Effectiveness) Project, a massive and ongoing cross- cultural investigation of nine cultural dimensions involved in leadership and organizational processes: (1) power distance, (2) uncertainty avoidance, (3) institutional collectivism, (4) in-group collectivism, (5) gender egalitarianism, (6) assertiveness, (7) future orientation, (8) performance orientation, and (9) humane orientation.

• A nation’s culture is the shared set of beliefs, values, knowledge, and patterns of behavior common to a group of people. Visitors to another culture may experience culture shock—feelings of discomfort and disorientation. Managers trying to understand other cultures need to understand six basic cultural perceptions embodied in (1) language, (2) interpersonal space, (3) communication, (4) time orientation, (5) religion, and (6) law and political stability.

• Regarding language, when you are trying to communicate across cultures you have three options: Speak your own language (if others can understand you), use a translator, or learn the local language.

• Interpersonal space involves how close or far away one should be when communicating with another person, with Americans being comfortable at 3–4 feet but people in other countries often wanting to be closer.

• Communication involves not only differences in understanding about words and sounds and their meanings but also in expectations about relationships and business concepts.

• Time orientation of a culture may be either monochronic (preference for doing one thing at a time) or polychronic (preference for doing more than one thing at a time).

Global Management CHAPTER 4 153

• Managers need to consider the effect of religious differences. In order of size (population), the major world religions are Christianity, Islam, Hinduism, Buddhism, Chinese traditional religions, primal-indigenous, and African traditional and diasporic religions.

• Every company must deal with other countries’ laws and business practices, which means weighing the risks of political instability; expropriation, or government seizure of a domestic or foreign

company’s assets; political corruption, including bribery; and labor abuses.

4.6 Career Corner: Managing Your Career Readiness

• You can develop your cross-cultural competency by engaging in three activities: (1) listen and observe, (2) become aware of the context, and (3) choose something basic.

1. What are three important developments in globalization?

2. What are some positives and negatives of globalization?

3. What are the principal reasons for learning about international management?

4. How do ethnocentric, polycentric, and geocentric managers differ?

5. What are five reasons companies expand internationally, and what are five ways they go about doing this expansion?

6. What are some barriers to international trade? 7. Name the three principal organizations designed to

facilitate international trade and describe what they do. 8. What are the principal major trading blocs, and what

are the BRICS countries? 9. Define what’s meant by “culture” and describe some

of the cultural dimensions studied by the Hofstede model and the GLOBE project.

10. Describe the six important cultural areas that international managers have to deal with in doing cross-border business.

Understanding the Chapter: What Do I Know?

The Growth and Stall of Didi Chuxing Chinese ridesharing company Didi Chuxing was formed from the 2015 merger of rival firms Didi Dache and Kuaidi Dache. The company currently provides transportation services for more than 450 million users across 400 cities in China, and it was valued at US $28 billion in 2016. Didi employs more than 7,000 people, of whom 40 percent are female. Its mission is to pro- vide “services including taxi hailing, private car hailing, Hitch (social ride-sharing), DiDi Chauffeur, DiDi Bus, DiDi Test Drive, DiDi Car Rental, DiDi Enterprise Solutions, DiDi Minibus, DiDi Luxe and bike-sharing to users in China via a smartphone application.”130

Didi Chuxing outmaneuvered Uber in China, finally purchasing Uber’s Chinese business in 2016. Didi is now the dominant player in China, but the mar- ket is saturated and the company’s growth has slowed. Cheng Wei, CEO of Didi Chuxing since the 2015 merger, is implementing a new strategy aimed at increasing growth. A company spokesperson described this strategy to Forbes as one in which “we will put more energy and resources in the international market to explore the frontier technology, innovate new

models of business, and seek like-minded partners.”131 The question is whether the company can achieve its strategy by expanding outside mainland China into territory dominated by its rival Uber.

DIDI’S EXPANSION OUTSIDE CHINA Things have not been going well for Uber, the world’s most valuable start-up (valued at $70 billion). Its con- troversial founder, Travis Kalanick, was sacked after a series of scandals. The company suffered from the leak of 57 million rider and driver records, was accused of spying on competitors, and has been enmeshed in costly litigation in several different countries.132 Didi is capitalizing on Uber’s setbacks while implementing its own growth strategies.

Didi’s growth strategy focuses on expanding across multiple continents at the same time. This is risky because of the cost and risk associated with expanding overseas, especially when you have entrenched compet- itors like Uber in North America, South America, and Europe. According to an analyst with Bloomberg News, Didi should start its overseas expansion in Southeast Asian markets like Vietnam and Malaysia, which don’t

Management in Action

154 PART 2 The Environment of Management

have as much entrenched competition.133 However, the company seems to want to make a bigger splash by expanding across multiple continents at once via differ- ent expansion models.

The expansion outside China is starting with a part- nership in the island neighbor of Taiwan. Didi is plan- ning to start operations there with the help of a Taiwanese partner named LEDI Technology, which will be Didi’s authorized franchisee in the country. Taiwan is a tricky market to enter because its lawmak- ers and its taxi industry have been successful in forcing organizations to conform to its transportation rules. Fines for illegally transporting passengers can be as high as $834,000 per infraction, and Uber reportedly racked up more than $30 million in fines in one month alone, causing the company to briefly suspend service across the country. Didi is trying to avoid making the same mistake. The company states that LEDI “is conducting market research and exploring extensive community partnerships in Taiwan” in addition to support for recruiting drivers.134

Didi is using another model of expansion in South America by purchasing existing companies. As Fortune reports, in 2018 Didi acquired Uber’s largest Brazilian rival, 99, “potentially creating a formidable rival to Uber in Latin America’s largest economy.” Cheng Wei stated that “globalization is a top strategic priority for Didi.”135 Globalization is not easy in the ridesharing industry because of competition from Uber. An analyst told The Wall Street Journal that “It’s a fight for brand,” and Didi doesn’t “have a global brand name that prob- ably has a same recognition level as Uber.”136

Didi has not been shy about expanding north of Brazil, even without significant brand recognition in the Americas. As Reuters reports, the company hopes to enter the Mexican market next year without the assis- tance of a Mexican partner. This would be the first overseas operation outside China without local partner management or the purchase of an existing organiza- tion. It would also allow Didi to utilize its own smart- phone app and recruit local drivers to its platform.137 This is especially significant in Mexico City, one of Uber’s busiest markets in the world.138 And the move

would mark Didi’s debut in North America, which puts it right on the United States’s doorstep. Trying to enter an Uber-dominated market that also includes Cabify (a Spanish rideshare company) without local partner support could be quite costly and risky. Consider what happened to Uber when it challenged Didi in China: It lost billions of dollars subsidizing drivers to keep its prices low, and in the end it still had to bow out.139 Is Didi ready for another price war in order to gain mar- ket share?

FOR DISCUSSION Problem-Solving Perspective

1. What is the underlying problem in this case from CEO Cheng Wei’s perspective?

2. What obstacles remain for Didi as it challenges Uber’s control of the ride-sharing industry?

Application of Chapter Content

1. Didi’s CEO Cheng Wei stated that globalization is a top strategic priority for the organization. Explain how Didi is utilizing major developments in globaliza- tion to its advantage.

2. If you were leading Didi’s expansion into the Ameri- cas, what type of international manager would you want to be—ethnocentric, polycentric, or geocentric? Explain your decision.

3. Based on Figure 4.1, which ways of expanding inter- nationally has Didi employed? Provide specific examples.

4. Didi is based in China and looking to expand to Bra- zil; China and Brazil are BRICS nations. Why is this significant?

5. Assume Didi is planning on entering the U.S. ride- sharing market. Based on GLOBE cultural dimen- sions, the United States scores lower than China on power distance, in-group collectivism, and uncer- tainty avoidance. With this in mind, how would you advise Didi, a Chinese company, to modify its prac- tices if it plans on entering the U.S. market?

Should Qatar Be Hosting the 2022 World Cup? In May 2015, seven Fédération Internationale de Football Association (FIFA) officials were arrested at the Hotel Baur au Lac in Zurich as they were preparing to attend the 65th FIFA Congress. The arrests were tied to a multiyear investigation by the United States into collusion between FIFA officials and international

marketing firms. The alleged collusion included the pay- ment of at least $150 million in bribes by the firms in exchange for lucrative broadcasting and hosting rights for prestigious soccer tournaments. More than 40 other officials, executives, and corporations around the world have since been charged. Many pleaded guilty and agreed to testify against others to secure leniency.140

Legal/Ethical Challenge

Global Management CHAPTER 4 155

This scandal has cast a spotlight on Qatar, the host of the 2022 soccer World Cup. Qatar’s selection to host the world’s most prestigious tournament has been tainted for a number of years by suspicions about the individuals who supported the bid of a rich nation that lacked facilities to host the event. The Chicago Tribune reported on an Argentine marketing executive who paid bribes for media rights and then made a deal with pros- ecutors to testify during the first trial of FIFA execu- tives in a U.S. courthouse. The Argentinian did not provide bribes for the Qatari World Cup bid, but he was told of the Qatari bribes by FIFA members. This executive noted that one of the FIFA members sold his vote for Qatar for a paltry $1.5 million and then com- plained that another voting member got tens of mil- lions more. Some voting members of FIFA have been charged as part of the corruption scandal but have yet to be extradited to the United States for trial. Another Argentine witness testified that a ledger of bribes, including payments of $750,000 and $500,000 to South American soccer federation presidents, was found. Though these presidents did not have World Cup host- ing votes, the payments were labeled “Q2022.”141

Qataris’ alleged bribing of FIFA officials could be cul- tural. Bribery in the Middle East continues to be more acceptable than in North America and Europe. Ernst & Young conducted a survey of 66 Middle East-based senior managers and directors to ascertain their thoughts on bribery and corruption. The results were that 20% of

respondents believed it was impossible to conduct busi- ness competitively in the Middle East without commit- ting fraud. Furthermore, 66% of those interviewed believed corruption was a major problem in the region.142

FIFA claims it has been unable to uncover evidence that would lead it to prevent Qatar from hosting the World Cup. Qatar also continues to deny it acted improperly or bought its right to host the tournament.

SOLVING THE CHALLENGE What option would you choose if you were running FIFA?

1. Qatar should be stripped of its right to host the 2022 World Cup. There is obviously evidence of bribery and such an important tournament should not be tainted.

2. So far, prosecutors have not uncovered anything directly tying the Qataris to the corruption scandal. Stripping Qatar of its hosting privileges while it is building the infrastructure to host the tournament will lead to millions, or possibly billions, of dollars in losses and a significant number of lost jobs. Do nothing.

3. FIFA should have a third party open its own investi- gation of the events leading up to Qatar’s being granted hosting privileges. The conclusion of this investigation should dictate what happens to the 2022 bid.

4. Suggest other options.

Learn about the strategies Uber used to globalize its business. The company learned that some of its practices were not well received in other countries. Assess your ability to apply concepts discussed in this chapter to the case by going to Connect.

Uber Continuing Case

FORECAST What’s Ahead in This Chapter We describe planning and its link to strategy. We define planning, strategy,

and strategic management and state why they are important. We deal with the

fundamentals of planning, including the mission, vision, and value statements,

and the three types of planning—strategic, tactical, and operational. We con-

sider goals, operating plans, and action plans; SMART goals, management by

objectives, and cascading goals; and finally the planning/control cycle. We

conclude with a Career Corner that focuses on how you can develop the ca-

reer readiness competency of proactive learning orientation.

PART 3 • PLANNING

5 After reading this chapter, you should be able to:

LO 5-1 Discuss the role of strategic management.

LO 5-2 Compare mission, vision, and value statements.

LO 5-3 Discuss the types and purposes of goals and plans.

LO 5-4 Describe SMART goals and their implementation.

LO 5-5 Outline the planning/control cycle.

LO 5-6 Describe how to develop the career readiness competency of proactive learning orientation.

Planning The Foundation of Successful Management

© O

livier Renck/Aurora/G etty Im

ages

The thought of starting a career (or switching to a new one) can be either intimidating or exciting. What’s the difference? Having goals and a plan.

Setting Goals and Making a Plan Here are some steps in the career-management process for you to consider as you set about building your career.1

1. Identify your options. Use the career readiness skill of self-awareness to write down areas and ideas that interest and are important to you and the functional, cross- cultural, computational, interpersonal, and other skills you can offer an employer. Then make a written list of the opportunities available to you through your networking, earlier work and volunteer experience, and other resources (don’t forget the alumni and placement offices at your school). Now match up the two lists to discover where you should focus your career-building efforts.

2. Explore conditions in your target field. The career readiness skill of understanding the business will guide you to identify important factors like the demand for new hires in your chosen field or fields, the competencies expected of incoming employees, the likely salary range and opportunities for advancement, and any geographic limitations or requirements in the industry to be aware of. If your field or industry is concentrated in one or two parts of the country, for instance, be ready to move.

3. Create your action plan. Using what you learned from steps 1 and 2, write a list of actions you can take to achieve your goal of breaking into a new career. You are more likely to achieve your goals if they are “SMART”— specific, measurable against clear criteria to show progress, attainable with a chance of 50% or higher, relevant to you, and time bound with target dates for completion. We discuss the process of writing SMART goals in Section 5.4. Try to keep your steps or goals to a manageable number; somewhere between three and five is recommended. Prioritize and schedule them to create your plan, and if it helps you to give each one a name, by all means do so.

4. Track your progress. You’ll see as you study this chapter that monitoring or controlling progress toward goals is an inherent part of the planning process. Each

time you get a result from one of your efforts, whether it’s positive or negative, that result constitutes feedback on how well you’ve selected your goals and how effective your plan is. If one step doesn’t work out as planned, don’t give up. Rely on your positive attitude and ability to adapt (more career readiness skills) and realize you have other opportunities to succeed. Try broadening your search, and begin again.

Staying Resilient during the Process Here are a few ideas about what else you can do to keep your hopes—and your finances—afloat during the career- building process.

1. Know that it takes time to find a job, especially one that’s a good fit for both you and the company that hires you. College graduates spend about six months, on average, landing their first job after graduation.2 If you are already working, even part-time, stay in the job while you pursue a new one. It’s always easier to find a job if you have one. If you are not working, consider taking a part-time or short-term job to generate some income. since you’ll want to avoid running up credit card debt.

2. Create a budget to be sure your income will cover your day-to-day expenses. This is a lifelong habit that will serve you well.

3. Avoid making any major financial commitments until you’ve actually landed your target job. You won’t know how much you can afford to pay for a car until you know your salary, for instance, and you may not want to be encumbered by a new lease if your dream job requires you to relocate. As long as you have an appropriate interview outfit, even splurging on a professional wardrobe can wait until you know the dress code at your new employer.

For Discussion What fields or industries are interesting or appealing to you as places to work? What news and information about these areas can you start tracking now, and how will you will do that? Is there anyone in your network who can help you increase your understanding of the way this industry works? If not, how could you find someone?

Making an Effective Plan for Starting Your Career

158 PART 3 Planning

5.1 Planning and Strategy? THE BIG PICTURE The first of four functions in the management process is planning, which involves setting goals and deciding how to achieve them and which is linked to strategy. We define planning, strategy, and strategic manage- ment. We then describe three reasons strategic management and strategic planning are important.

The management process, as you’ll recall (from Chapter 1), involves the four management functions of planning, organizing, leading, and controlling, which form four of the part divi- sions of this book. In this and the next two chapters, we discuss planning and strategy.

Planning, Strategy, and Strategic Management “Move fast and break things.”

Is that a plan or strategy? No, it’s a slogan. In fact, it used to be Facebook’s mantra to its software developers, suggesting that “moving quickly is so important that we were even willing to tolerate a few bugs in order to do it,” as Facebook CEO Mark Zuckerberg explained.3 (Then, he says, the company realized “that it wasn’t helping us to move faster because we had to slow down to fix these bugs.”)

Planning, which we discuss in this chapter, is used in conjunction with strategy and strategic management, as we describe in Chapter 6. Let’s consider some definitions.

Planning: Coping with Uncertainty As we’ve said (Chapter 1), planning is defined as setting goals and deciding how to achieve them. Another definition: planning is coping with uncertainty by formulating future courses of action to achieve specified results.4 A plan is a document that outlines how goals are going to be met. When you make a plan, you make a blueprint for action that describes what you need to do to realize your goals.

Example: One important type of plan is a business plan, a document that outlines a proposed firm’s goals, the strategy for achieving them, and the standards for measuring suc- cess. Here you would describe the basic idea behind your business—the business model, which outlines the need the firm will fill, the operations of the business, its components and functions, as well as the expected revenues and expenses. It also describes the industry you’re entering, how your product will be different, how you’ll market to customers, how you’re qualified to run the business, and how you will finance your business.

LO 5-1 Discuss the role of strategic management.

EXAMPLE Why Write a Business Plan?

More than 5 in 10 Millennials say that if they had the resources they need, they’d start their own business in the next year. Most are attracted to the idea of being their own boss and making a lot of money by opening a business of their own if they could.5 But planning and management control are critical to the success of small businesses as only 33 percent of them survive 10 years or more according to the Bureau of Labor Statistics.6

It was by planning, not by accident, that popular singer Rihanna recently launched a cosmetics business that got off to a spectacular start and was immediately named one of the “best inventions of 2017” by Time magazine. Her com- pany, Fenty Beauty (a brand of the luxury label LVMH), boasts a jaw-dropping 40 different shades of foundation in order to cater to women of every color and every skin type. In its first month in business alone, Fenty far outsold a rival

Planning CHAPTER 5 159

Strategy: Setting Long-Term Direction A strategy, or strategic plan, sets the long- term goals and direction for an organization. It represents an “educated guess” about what long-term goals or direction to pursue for the survival or prosperity of the organi- zation. We hear the word expressed in terms like “Apple’s ultimate strategy . . .” or “Visa’s overseas strategy . . .” or financial strategy, marketing strategy, and human resource strategy.

An example of a strategy is “Grow the business organically,” which means “Increase revenue from existing and new customers rather than from acquiring other companies.” However, strategy is not something that can be decided on just once. It generally is reconsidered every year because of ever-changing business conditions.

Strategic Management: Involving All Managers in Strategy In the late 1940s, most large U.S. companies were organized around a single idea or product line. By the 1970s, Fortune 500 companies were operating in more than one industry and had expanded overseas. It became apparent that to stay focused and efficient, companies had to begin taking a strategic-management approach.

Strategic management is a process that involves managers from all parts of the organi- zation in the formulation and the implementation of strategies and strategic goals. This definition doesn’t mean that managers at the top dictate ideas to be followed by people lower down. Indeed, precisely because middle managers in particular are the ones who will be asked to understand and implement the strategies, they should also help to for- mulate them.

As we will see, strategic management is a process that involves managers from all parts of the organization—top managers, middle managers, and first-line managers—in the formulation, implementation, and execution of strategies and strategic goals to advance the purposes of the organization. Thus, planning covers not only strategic plan- ning (done by top managers), but also tactical planning (done by middle managers) and operational planning (done by first-line managers).

Planning and strategic management derive from an organization’s mission and vision about itself, as we describe in the next section. (See Figure 5.1.)

Why Planning and Strategic Management Are Important An organization should adopt planning and strategic management for three reasons: They can (1) provide direction and momentum, (2) encourage new ideas, and above all (3) develop a sustainable competitive advantage.8 Let’s consider these three matters.

celebrity line, Kylie Cosmetics, which has earned hundreds of millions of dollars in its first two years. In its second month, Fenty sales were already up 34% and showing no signs of slowing.

Rihanna experimented with beauty products for years before finally deciding the void in the market—for products designed for hard-to-match skin tones—was hers to fill. Among the many business factors for which she had to plan in starting her company were the target market, women who are underserved by existing beauty lines but who spend gener- ously on makeup (averaging almost $500 a year); her promo- tional plan, which included outreach to her 60 million Instagram followers; and her financial plan, which relies on the backing of LVMH. To her knowledge of existing makeup lines,

Rihanna added close scrutiny of her chosen competitors, Kylie and KKW Beauty (Kim Kardashian West’s brand). And she explored her distribution options, choosing online sales and in-store distribution by Sephora. As Time reported, Fenty has become the brand to beat, as even established companies like L’Oreal begin launching marketing campaigns aimed at its long-neglected market.7

YOUR CALL Got an idea for a business? Think about your pre-launch plan- ning process. What questions about your product or service, your target market, your promotional plans, and your distribu- tion method would you need to answer before you made the leap?

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5. Maintain strategic control

4. Implement the strategy

3. Formulate the grand strategy & strategic, tactical, & operational plans

2. Assess the current reality

1. Establish the mission and vision and values

FIGURE 5.1 Planning and strategic management The details of planning and strategic management are explained in Chapters 5 and 6.

New Barbies. Mattel, maker of the famous Barbie doll, whose sales have been cut by rival brands, is adding tall, petite, and curvy dolls to its product line, trying to better connect with young girls. Parents and interested grassroots organizations have long been campaigning to make children’s toys less stereotypical, but social media have amplified their voices and forced companies to listen. Mattel and other companies are also bringing out inexpensive (under $400) 3-D printers that allow children to create their own plastic toys, including doll-like ones (monsters). Do you think Mattel should plan for the gradual elimination of Barbie? ©Mattel/Splash News/Newscom

1. Providing Direction and Momentum Some executives are unable even to artic- ulate what their strategy is.9 Others are so preoccupied with day-to-day pressures that their organizations can lose momentum. But planning and strategic management can help people focus on the most critical problems, choices, and opportunities.

If a broad group of employees is involved in the process, that can foster teamwork, promote learning, and build commitment across the organization. Indeed, as we describe in Chapter 8, strategy can determine the very structure of the organization—for example, a top-down hierarchy with lots of management levels, as might be appropriate for an electricity-and-gas power utility, versus a flat organization with few management levels and flexible roles, as might suit a fast-moving social media start-up.

Unless a plan is in place, managers may well focus on just whatever is in front of them, putting out fires—until they get an unpleasant jolt when a competitor moves out in front because it has been able to take a long-range view of things and act more quickly. In recent times, this surprise has been happening over and over as companies have been confronted by some digital or Internet trend that emerged as a threat—as Amazon.com was to Borders bookstores; as Uber has been to taxi cabs; as Google News, blogs, and citizen media were to newspapers.

Of course, a poor plan can send an organization in the wrong direction. Bad plan- ning usually results from faulty assumptions about the future, poor assessment of an

Planning CHAPTER 5 161

organization’s capabilities, ineffective group dynamics, and failure to use management control as a feedback mechanism.10 And it needs to be said that while a detailed plan may be comforting, it’s not necessarily a strategy.11

2. Encouraging New Ideas Some people object that planning can foster rigidity, that it creates blinders that block out peripheral vision and reduces creative thinking and action. “Setting oneself on a predetermined course in unknown waters,” says one critic, “is the perfect way to sail straight into an iceberg.”12

Actually, far from being a straitjacket for new ideas, strategic planning can help encourage them by stressing the importance of innovation in achieving long-range suc- cess. Management scholar Gary Hamel says that companies such as Apple have been successful because they have been able to unleash the spirit of “strategy innovation.” Strategy innovation, he says, is the ability to reinvent the basis of competition within existing industries—“bold new business models that put incumbents on the defensive.”13

Some successful innovators are companies creating new wealth in the food and restaurant industries, where Starbucks Coffee, Trader Joe’s, ConAgra, and Walmart, for example, developed entirely new grocery product categories and retailing con- cepts. Starbucks, when entering the Chinese market, decided not to threaten China’s tea-drinking culture and, instead, introduced drinks with green tea along with a chic restaurant interior that made young Chinese feel “cool and trendy.”14 GrubHub Seamless, an online takeout and delivery company, serves customers armed with cell phones and delivery apps, delivering pizzas and other foods anywhere they want—at the gym, in the park, on the playground.15 Vending machines are now serving every- thing from salads to smoothies to caviar, and supermarkets are experimenting with personalized pricing, using complex shopping data to ascertain the unique needs of individual customers.16

3. Developing a Sustainable Competitive Advantage Strategic management can provide a sustainable competitive advantage, which, you’ll recall (from Chapter 1), is the ability of an organization to produce goods or services more effectively than its competitors do, thereby outperforming them. We discuss the manner in which compa- nies create competitive advantage more thoroughly in Chapter 6. You will learn that companies must have products or services that are valuable, rare, and non-imitable, and an organization poised to exploit its strengths. In today’s global marketplace, competi- tive advantage can vary across countries. Uber is a good example.

Uber definitely had, and still has, competitive advantage when it comes to ride shar- ing in the U.S. It’s a different story when it comes to Africa. A start-up called Taxify created its own competitive advantage by being the first company to offer motorbike- hailing. Motorbikes, which are called boda bodas, were a hit because they were more nimble when traveling through congested streets and communities. Taxify’s success is clearly linked to its ability to localize it product offerings more quickly than larger firms like Uber. It also gained competitive advantage by paying drivers with mobile money, “a technology popular in Uganda and other emerging economies because it allows people to receive and immediately store funds using a mobile phone.”17 ●

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5.2 Fundamentals of Planning THE BIG PICTURE Planning consists of translating an organization’s mission and vision into objectives. The organization’s purpose is expressed as a mission statement, and what it becomes is expressed as a vision statement; both should represent the organization’s values, expressed in a values statement. From these are derived strategic planning, then tactical planning, then operational planning.

Are you hopeful? That’s a good thing. Students who have more hope reportedly have higher grades and are more apt to finish college.

“Hope is the belief that the future will be better than the present,” says columnist Elizabeth Bernstein, “and that you have some power to make it so.” People who are hopeful “don’t just have a goal or a wish, they have a strategy to achieve it and the moti- vation to implement their plan.”18

First, however, you must determine your “goal or wish”—that is, your purpose. An organization must determine its purpose, too—what’s known as its mission. And manag- ers must have an idea of where they want the organization to go—the vision. Both mis- sion and vision should express the organization’s values. The approach to planning can be summarized in the diagram below, which shows how an organization’s mission becomes translated into action plans. (See Figure 5.2.)

FIGURE 5.2 Making plans An organization’s reason for being is expressed in a mission statement. What the organization wishes to become is expressed in a vision statement. The values the organization wishes to emphasize are expressed in a values statement. From these are derived strategic planning, then tactical planning, and finally operational planning. The purpose of each kind of planning is to specify goals and action plans that ultimately pave the way toward achieving an organization’s vision.

Mission statement: “What is our reason for being?”

Vision statement: “What do we want to become?”

Values statement: “What values do we want to emphasize?”

Action plans

Strategic planning: Done by top managers for the next 1–5 years

Goals

Action plans

Tactical planning: Done by middle managers for the next 6–24 months

Goals

Operational planning: Done by first- line managers for the next 1–52 weeks

Goals

Action plans

LO 5-2 Compare mission, vision, and value statements.

Planning CHAPTER 5 163

Mission, Vision, and Values Statements The planning process begins with three attributes: a mission statement (which answers the question “What is our reason for being?”), a vision statement (which answers the question “What do we want to become?”), and a values statement (which answers the question “What values do we want to emphasize?”). (See Table 5.1.)

TABLE 5.1 Mission, Vision, and Values Statements

MISSION STATEMENTS: DOES YOUR COMPANY’S MISSION STATEMENT ANSWER THESE QUESTIONS?

1. Who are our customers? 2. What are our major products or services? 3. In what geographical areas do we compete? 4. What is our basic technology? 5. What is our commitment to economic objectives? 6. What are our basic beliefs, values, aspirations, and philosophical priorities? 7. What are our major strengths and competitive advantages? 8. What are our public responsibilities, and what image do we wish to project? 9. What is our attitude toward our employees?

VISION STATEMENTS: DOES YOUR COMPANY’S VISION STATEMENT ANSWER “YES” TO THESE QUESTIONS?

1. Is it appropriate for the organization and for the times? 2. Does it set standards of excellence and reflect high ideals? 3. Does it clarify purpose and direction? 4. Does it inspire enthusiasm and encourage commitment? 5. Is it well articulated and easily understood? 6. Does it reflect the uniqueness of the organization, its distinctive competence, what it stands for,

what it’s able to achieve? 7. Is it ambitious?

VALUES STATEMENTS: DOES YOUR COMPANY’S VALUES STATEMENT ANSWER “YES” TO THESE QUESTIONS?

1. Does it express the company’s distinctiveness, its view of the world? 2. Is it intended to guide all the organization’s actions, including how you treat employees,

customers, etc.? 3. Is it tough, serving as the foundation on which difficult company decisions can be made? 4. Will it be unchanging, as valid 100 years from now as it is today? 5. Does it reflect the beliefs of those who truly care about the organization—the founders, CEO, and

top executives—rather than represent a consensus of all employees? 6. Are the values expressed in the statement limited (five or so) and easy to remember, so that

employees will have them top-of-mind when making decisions? 7. Would you want the organization to continue to hold these values, even if at some point they

become a competitive disadvantage?

Sources: B. Nanus, Visionary Leadership: Creating a Compelling Sense of Direction for Your Organization (San Francisco: Jossey-Bass, 1992), pp. 28–29; “How to Write a Vision Statement,” Cleverism, March 2, 2017, https:// www.cleverism.com/write-vision-statement; P. M. Lencioni, “Make Your Values Mean Something,” Harvard Business Review, July 2002, pp. 113–117; and A Loehr, “6 Steps to Defining Your Organizational Values,” Rework, March 7, 2016, https://www.cornerstoneondemand.com/rework/6-steps-defining-your-organizational-values.

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©heromen30/Shutterstock

The Mission Statement—“What Is Our Reason for Being?” An organization’s mission is its purpose or reason for being. Determining the mission is the responsibility of top manage- ment and the board of directors. It is up to them to formulate a mission statement, which expresses the purpose of the organization.

“Only a clear definition of the mission and purpose of the organization makes possible clear and realistic . . . objectives,” said Peter Drucker.19 Whether the organization is for-profit or nonprofit, the mission statement identifies the goods or ser- vices the organization provides and will provide. Sometimes it also gives the reasons for providing them (to make a profit or to achieve humanitarian goals, for example).

The Vision Statement—“What Do We Want to Become?” A vision is a long-term goal describing “what” an organization wants to become. It is a clear sense of the future and the actions needed to get there. “[A] vision should describe what’s hap- pening to the world you compete in and what you want to do about it,” says one Fortune article. “It should guide decisions.”20

After formulating a mission statement, top managers need to develop a vision statement, which expresses what the organization should become, where it wants to go strategically.

With 500 brands, 21 of which are worth more than $1 billion dollars each, Coca-Cola is the world’s largest beverage com- pany. Consumers in nearly every country in the world con- sume a Coca-Cola–branded beverage every day, for a total of almost 2 billion servings. Headquartered in Atlanta, the company is more than 130 years old. It employs about 700,000 people worldwide and has received a 100% rating on the Human Rights Campaign’s corporate equality index for 11 years in a row. Some of its best-known brands are Coke, Coke Zero, Powerade, Schweppes, Dasani, Minute Maid, Fanta, Sprite, Vitamin Water, and Smart Water. Many of its beverages are available in low-calorie or no-calorie versions.21

The company’s website lists its mission, vision, and values, which comprise its “Roadmap for winning,” as follows.

Our Mission22 Our Roadmap starts with our mission, which is enduring. It declares our purpose as a company and serves as the standard against which we weigh our actions and decisions. • To refresh the world . . . • To inspire moments of optimism and happiness . . . • To create value and make a difference.

Our Vision Our vision serves as the framework for our Roadmap and guides every aspect of our business by describing what we need to accomplish in order to continue achieving sustainable, quality growth. • People: Be a great place to work where people are

inspired to be the best they can be. • Portfolio: Bring to the world a portfolio of quality beverage

brands that anticipate and satisfy people’s desires and needs.

• Partners: Nurture a winning network of customers and suppliers, together we create mutual, enduring value.

• Planet: Be a responsible citizen that makes a difference by helping build and support sustainable communities.

• Profit: Maximize long-term return to shareowners while being mindful of our overall responsibilities.

• Productivity: Be a highly effective, lean and fast-moving organization.

Live Our Values Our values serve as a compass for our actions and describe how we behave in the world.

EXAMPLE Mission, Vision, and Values at Coca-Cola

Planning CHAPTER 5 165

The concept of a vision statement also is important for individuals. Harvard pro- fessor Clayton Christensen believes that creating a personal life vision statement is akin to developing a strategy for your life. He finds that people are happier and lead more meaningful lives when they are directed by personal vision statements.23 Do you have a vision for your future career? Is it vague or specific? The following self-assessment was created to help you evaluate the quality of your career vision and plan.

The Values Statement—“ What Values Do We Want to Emphasize? ” Values, we said in Chapter 3, are the relatively permanent and deeply held underly- ing beliefs and attitudes that help determine a person’s behavior: integrity, dedica- tion, teamwork, excellence, compassion, or whatever. Values ref lect the qualities that represent an organization’s deeply held beliefs, highest priorities, and core guiding principles.

After formulating a vision statement, then, top managers need to develop a values statement, also called a core values statement, which expresses what the company stands for, its core priorities, the values its employees embody, and what its products contribute to the world.24 Values statements “become the deeply ingrained principle and fabric that guide employee behavior and company decisions and actions—the behaviors the com- pany and employees expect of themselves,” says former executive Eric Jacobsen. “Without a statement, the company will lack soul.”25

Are you a gamer? Have you played “World of Warcraft”? If yes, then you will appre- ciate the values that guide Blizzard Entertainment’s operations. Headquartered in Irvine, California, the company is a top developer and publisher of wildly popular

Assessing Career Behaviors and Future Career Identity This self-assessment is designed to help you reflect on the vision of your career identity. Please be prepared to answer these questions if your instructor has assigned Self-Assessment 5.1 in Connect.

1. What did you learn about your future career identity? Are you surprised by the results?

2. Write a personal mission and vision statement using ideas discussed in this section. Share it with a friend for feedback.

3. Based on your results, what might you do to enhance your future career identity? Explain.

4. What things can you say during an interview to demonstrate that you possess the career-readiness competency of Career Management.

SELF-ASSESSMENT 5.1 CAREER READINESS

• Leadership: The courage to shape a better future • Collaboration: Leverage collective genius • Integrity: Be real • Accountability: If it is to be, it’s up to me • Passion: Committed in heart and mind • Diversity: As inclusive as our brands • Quality: What we do, we do well

YOUR CALL What do you think of Coca-Cola’s mission, vision, and values? Are they explicit enough to guide employee behavior and com- pany actions? Why or why not? Could any of them apply equally well to other businesses? Why or why not?

166 PART 3 Planning

entertainment software, including the Warcraft, StarCraft, and Diablo series and the online-gaming service Battle.net. Its eight core values, described on the company web- site, are: Gameplay first, commit to quality, be nice—play fair, embrace your inner geek, every voice matters, think globally, lead responsibly, and learn and grow. These are unique values and they define what matters most to the company. Would you like to work at Blizzard?

Three Types of Planning for Three Levels of Management: Strategic, Tactical, and Operational Inspiring, clearly stated mission statements and vision statements provide the focal point of the entire planning process. Then three things happen:

■ Strategic planning by top management. Using their mission and vision state- ments, top managers do strategic planning—they determine what the organiza- tion’s long-term goals should be for the next one to five years with the resources they expect to have available. “Strategic planning requires visionary and direc- tional thinking,” says one authority.26 It should communicate not only general goals about growth and profits, but also ways to achieve them. Today, because of the frequency with which world competition and information technology alter marketplace conditions, a company’s strategic planning may have to be done closer to every one or two years than every five. Still, at a big company like Boeing or Ford or Amazon, top executives cannot lose sight of long-range, multiyear planning.

A lighthouse is a great metaphor for strategic planning. A lighthouse provides a navigational aid and it warns boats about dangerous or hazardous areas. A strategic plan similarly provide direction to both employees and shareholders. It defines what an organization is trying to achieve and signifies what markets or opportunities are not going to be pursued. ©George Diebold/Blend Images LLC

Planning CHAPTER 5 167

Coca-Cola recently announced progress made on five strategic actions it has taken to revamp its business:27

1. Focused on driving revenue and profit growth. In emerging markets, the focus was on increasing volume with affordable products, and in developed markets that meant improving profitability with more small and pre- mium packages.

2. Invested in our brands and business. More and better marketing was the goal of this strategy, which meant a boost of more than $250 million in the company’s media ad budget.

3. Became more efficient. “Zero-based work” assumes that organizational budgets begin at zero and must be justified every year. One result of adopting this budgeting strategy was realizing “more than $600 million in productivity improvements in 2015,” some of which was reinvested in the company and some of which went to shareholders.

4. Simplified our company. Coca-Cola eliminated one layer of management, streamlined some internal business pro- cesses, and connected its regional operations more closely to headquarters.

5. Refocused on our core business model. Among the company’s more than 500 brands are 20 that generate more than a billion dollars a year. To retain focus on these core products, the company has begun franchising out the 18% of its bottling operations that it still handled itself, aiming to reduce that amount to 3%.

A year later, in 2017, the company added a sixth strategy for “our way forward”:28

6. Keep people at the heart of our company. This means rethinking package sizes in all the company’s markets and more heavily promoting low- and no-sugar drinks in order to reduce sugar intake and help the global fight against obesity.

YOUR CALL Does it surprise you that a large company like Coca-Cola would frequently revisit and revise its strategic plans? Why or why not? Which of the first five goals listed here do you think best support(s) goal 6?

EXAMPLE Coca-Cola’s Five-Plus Strategies

■ Tactical planning by middle management. The strategic priorities and policies are then passed down to middle managers, who must do tactical planning—that is, they determine what contributions their departments or similar work units can make with their given resources during the next 6–24 months.

■ Operational planning by first-line management. Middle managers then pass these plans along to first-line managers to do operational planning—that is, they determine how to accomplish specific tasks with available resources within the next 1–52 weeks.

Josephine Schulte works as a procurement manager for a telecommunications company. The company had to change its process for onboarding vendors after acquiring another company. The company hit a lot of road bumps because of poor oper- ational planning while rolling out the new process.

“There has been a lot of change management around what the process is to get vendors on board and bring them onsite,”

said Josephine, “I wish we would have planned better up front in terms of the process of getting the correct information in front of the people who needed it so they could understand what needed to happen and the timeline involved with getting a vendor on board.”

The new process for onboarding vendors involves making sure the vendors have contracts in place if they need one and routing those contracts for signatures and internal approval. What the company did to implement the training of this new process was to schedule a few training sessions with managers from each business unit.

“We rolled the process out to a group of people with the intent that they would push it down through their business

I Wish My Manager… …and I put more effort into operational planning.

Courtesy Josephine Schulte

168 PART 3 Planning

FIGURE 5.3 Three levels of management, three types of planning Each type of planning has different time horizons, although the times overlap because the plans are somewhat elastic.

Top management chief executive o�cer, president, vice president, general managers, division heads

Middle management functional managers, product-line managers, department managers

First-line management unit managers, team leaders, first-line supervisors

Strategic planning: 1–5 years

Tactical planning: 6–24 months

Operational planning: 1–52 weeks

Make long-term decisions about overall direction of organization. Managers need to pay attention to environment outside the organization, be future oriented, deal with uncertain and highly competitive conditions.

Implement policies and plans of top management, supervise and coordinate activities of first-line managers below, make decisions often without base of clearly defined information procedures.

Direct daily tasks of nonmanagerial personnel; decisions often predictable, following well-defined set of routine procedures.

The three kinds of managers are described further in the following figure. (See Figure 5.3.) ●

units, but it is hard to get that to happen,” said Josephine. Each business unit had its own unique questions as to how the pro- cess would work for its specific groups. This made it difficult to present the same training to one group of representatives to relay back to each business unit.

“We are very decentralized, so it was hard to figure out who to talk to about rolling the process out. We originally spoke to  the facilities directors, but there wasn’t a good way for them to send the information out to the business units in their regions. Essentially, we presented this to about 12 people in a company of 100,000 employees—and of course, not every per- son needs to know about this process, but there are quite a few that do, and they are all in different business units in differ- ent locations throughout the country,” said Josephine.

One of the biggest hurdles the company had was making sure that all necessary employees were caught in the initial training so

they did not have to go back later and train some employees on an individual basis. This would save time and money.

In hindsight, Josephine had several suggestions for what the company could have done better when rolling this process out to the employees. “I would have sent a step-by-step slide deck out to the employees right away,” said Josephine. “I would have gotten as many people as possible across the business units and company to attend those virtual trainings. A recorded webi- nar would have been the best move up front because we were saying the same thing in every training session and it would have saved a lot of time to record one session.”

Josephine admits that the process could have been much smoother if only more planning had gone into the training and implementation of the new system before rolling it out.

Courtesy of Josephine Schulte

Planning CHAPTER 5 169

5.3 Goals and Plans THE BIG PICTURE The purpose of planning is to set a goal and then an action plan. There are two types of goals, short-term and long-term, and they are connected by a means-end chain. Types of plans include standing and single- use plans.

Whatever its type—long term or short term—the purpose of planning is to set a goal and then to formulate an action plan.

Long-Term and Short-Term Goals A goal, also known as an objective, is a specific commitment to achieve a measurable result within a stated period of time. Goals may be long-term or short-term.

Long-term goals are generally referred to as strategic goals. They tend to span one to five years and focus on achieving the strategies identified in a company’s strategic plan. An example is to increase revenue from new customers by 10% over the next 12 months.

Short-term goals are sometimes referred to as tactical or operational goals, or just plain goals. They generally span 12 months and are connected to strategic goals in a hier- archy known as a means-end chain.

A means-end chain shows how goals are connected or linked across an organization. For example, a low-level goal such as responding to customer inquiries in less than 24 hours is the means to accomplishing a higher-level goal of achieving 90% customer satisfaction.

As we will see later in Section 5.4, goals should be SMART—specific, measurable, attainable, results-oriented, and with target dates.

The Operating Plan and Action Plan Larry Bossidy, former CEO of both Honeywell International and Allied Signal, and global consultant Ram Charan define an operating plan as a plan that “breaks long-term output into short-term targets” or goals.29 In other words, operating plans turn strategic plans into actionable short-term goals and action plans.

An action plan defines the course of action needed to achieve a stated goal. Whether the goal is long-term or short-term, action plans outline the tactics that will be used to achieve a goal. Each tactic also contains a projected date for completing the desired activities (read about Amanda Lawrence’s experience in the I’m Glad . . . feature).

LO 5-3 Discuss the types and purposes of goals and plans.

Amanda Lawrence served as the president of a nonprofit orga- nization for women in business. She was in charge of planning a first annual fundraising event for her organization, and the action plan that she developed resulted in a successful event that has been running for almost 10 years.

Amanda began by looking at the big picture to get a better idea of the long-term goal of the project. Once she had

long-term goals in place, she was able to develop action plans and begin delegating tasks to others based on their skillsets.

“Planning was integral for an event that had never been done before. I had to start with the big picture of what the goals and objectives of the event were, and then figure out how to reach those goals and determine who was going to take care of each area of the event,” said Amanda.

I’m Glad I… …developed an action plan.

170 PART 3 Planning

There were several things that Amanda had to think about when organizing the event, from venue and keynote speakers to alternate weather plans.

“We had to find a venue based on how many people we expected would attend an event like this. We had to determine how much we wanted to charge for the tick- ets—did we want this to be a $20 per ticket event with a cash bar, or did we want this to be a $200 per chair black tie event? We deter-

mined we wanted to be somewhere in the middle of the road, about $50 per ticket with a good meal and a keynote speaker who would provide value to the event,” said Amanda.

“We also had a rainy day plan. We were in Phoenix, Arizona, so we planned to host the event in April so it would be warm but not too warm, but we still had to consider the possibility of rain. We planned an outdoor, covered dinner with an outdoor,

uncovered cocktail hour. We planned for people to have umbrellas to walk the guests from their cars to the venue if it rained,” said Amanda. “We talked through all of our contin- gency plans ahead of time.”

Once plans were in place, Amanda began to delegate a per- son to each area of the event. “I took on the venue and the catering, and then we discussed what each board member’s individual strengths were and what they felt they could help the most with,” said Amanda. “One of our board members had some experience with selling tickets for another event, so she took on the research to determine what the best way for us to sell tickets would be. We had someone else who felt comfort- able approaching some corporate females in the area to build our guest list. We had another person who was a marketer by day, so she handled the marketing calendar.”

The event sold out and raised $5,000 for Amanda’s organi- zation in the first year alone, and it has been running strong for almost 10 years. The event’s success can be attributed to Amanda’s strong planning skills.

Courtesy of Amanda Lawrence

Courtesy Amanda Lawrence

Ranking No. 8 among Fortune’s 2018 Most Admired Companies, a list on which it has appeared for 24 years in a row, Dallas-based Southwest Airlines has continually achieved its strategic goals and as of 2018 had been profitable for 45 consecutive years.30

Long-Term Strategic Goals. Employee engagement, cus- tomer satisfaction, and profit- ability have been key strategic goals for Southwest since its inception. Employee engage- ment is created through the company’s corporate culture, which focuses on employee satisfaction and well-being. The page of the company website announcing its vision and mission includes this cen- tral statement about its employees: “We are commit- ted to provide our Employees a stable work environment with equal opportunity for learning and personal growth. Creativity and innovation are encouraged for improving the effectiveness of Southwest Airlines. Above all, Employees will be provided the same concern, respect, and caring attitude within the orga- nization that they are expected to share externally with every Southwest Customer.”31 Employees were awarded a total of

$543 million in profit sharing in 2017, amounting to more than 5 weeks’ pay per person.32

The goal of Southwest’s top managers is to ensure that the airline is highly profitable, and for years it has followed the general strategy of (a) keeping costs and fares down, to appeal

to budget rather than business travelers, (b) offering a supe- rior on-time arrival record and squeezing more flights per day from every plane, and (c) keeping passengers happy with its cheerful cabin crew and staff. One of the most important strategic decisions Southwest made was to fly just one type of airplane— Boeing 737s, 692 of them—to hold down training, mainte- n a n c e , a n d o p e r a t i n g expenses.33 Competing head to head with legacy carriers,

Southwest now flies to key airports of major cities—and even on international routes, principally to Latin America and the Caribbean.

Short-Term Goals. Cutting costs and keeping fares low have traditionally been key operational goals for Southwest. To achieve its second operational goal, a superior on-time arrival

EXAMPLE Long-Term and Short-Term Goals at Southwest Airlines

Lookalikes. One key to the success of Southwest Airlines is that all the planes in its fleet have been the same type, Boeing 737s, which saves on maintenance and training costs. ©Charles Rex Arbogast/AP Images

Planning CHAPTER 5 171

Types of Plans: Standing Plans and Single-Use Plans Plans are of two types—standing plans and single-use plans. (See Table 5.2.) Standing plans cover activities that are repeated or occur frequently over time. A standing plan, for example, might direct the way employees in a retail store should handle returns. L.L.Bean recently changed its standing plan on returned items and will now accept them for only one year from purchase rather than indefinitely as it once did. Forever 21, which used to accept returns only for exchange or credit, now has a standing plan that offers refunds36 for returned items.

A single-use plan directs activity, such as a project, that is unlikely to be repeated. The successful 2018 launch of the Falcon Heavy, the rocket built by entrepreneur Elon Musk’s space exploration company SpaceX, was a program consisting of a number of activities37 and directed by a single-use plan. ●

PLAN DESCRIPTION

• Standing plan For activities that occur repeatedly over a period of time

• Policy Outlines general response to a designated problem or situation

• Procedure Outlines response to particular problems or circumstances

• Rule Designates specific required action

• Single-use plan For activities not likely to be repeated in the future

• Program Encompasses a range of projects or activities

• Project Has less scope and complexity than a program

record, the company did away with guaranteed seat reserva- tions before ticketing so that no-shows wouldn’t complicate (and therefore delay) the boarding process. To attract busi- ness travelers, Southwest changed the reservations policy slightly to ensure that passengers paying extra for “business select” fares would be placed at the front of the line. It also rewards “high-level” business travelers with what is called the “A-List” designation. These individuals get automatic check-in and are guaranteed to board with the A-group or immediately before the B-group starts boarding. In addition, the airline tries to turn planes around in exactly 20 minutes so that on-time departures are more apt to produce on-time arrivals.

The company plans to improve pre-tax revenue by about $200 million thanks to a new reservation system and to continue reduc- ing operating costs. It recently announced plans to add Hawaii to its many destinations.34 Said CEO Gary C. Kelly, “Overall, our strong financial performance, solid outlook, healthy balance sheet, and significantly lower federal income taxes, provide the cash flow to continue to reward our Employees, keep our costs and fares low for our Customers, reinvest in our business, return value to our Shareholders, and support our communities.”35

YOUR CALL Do you think the company will continue to achieve its strategic goals? Why or why not?

TABLE 5.2 Standing Plans and Single-Use Plans

There are three types of standing plans and two types of single-use plans.

172 PART 3 Planning

5.4 Promoting Consistencies in Goals: SMART Goals, Management by Objectives, and Goal Cascading

THE BIG PICTURE This section discusses SMART goals—goals that are specific, measurable, attainable, results-oriented, and have target dates. It also briefly discusses a technique for setting goals, management by objectives (MBO), a four-step process for motivating employees. Finally, it introduces the concept of goal cascading, which attempts to ensure that higher-level goals are communicated and aligned with the goals at the next levels down in the organizational hierarchy.

Anyone can define goals. But as we mentioned earlier, the five characteristics of a good goal are represented by the acronym SMART.

SMART Goals A SMART goal is one that is specific, measurable, attainable, results-oriented, and has target dates.

Specific Goals should be stated in specific rather than vague terms. The goal “As many planes as possible should arrive on time” is too general. The goal that “Ninety percent of planes should arrive within 15 minutes of the scheduled arrival time” is specific.

Measurable Whenever possible, goals should be measurable, or quantifiable (as in “90% of planes should arrive within 15 minutes”). That is, there should be some way to measure the degree to which a goal has been reached.

Of course, some goals—such as those concerned with improving quality—are not pre- cisely quantifiable. In that case, something on the order of “Improve the quality of cus-

tomer relations by instituting 10 follow-up telephone calls every week” will do. You can certainly quantify how many follow-up phone calls were made.

Attainable Goals should be challenging, of course, but above all, they should be realistic and attainable. It may be best to set goals that are quite ambitious so as to challenge people to meet high standards. Always, however, the goals should be achievable within the scope of the time, equipment, and financial support available. (See Figure 5.4.)

If too easy (as in “half the f lights should arrive on time”), goals won’t impel people to make much effort. If impossible (“all flights must arrive on time, regardless of weather”), employees won’t even bother trying. Or they will try and continually fail, which will end up hurting morale. Or they will cheat. (An example was the unrealistic goal of cutting wait times for appointments by more than half at Veterans Affairs hospitals, as revealed in ongoing scandals in which VA administrators were found to have falsi- fied figures.)38

Results-Oriented Only a few goals should be chosen—say, five for any work unit. And they should be results-oriented—they should support the orga- nization’s vision.

LO 5-4 Describe SMART goals and their implementation.

High

Low

P er

fo rm

an ce

Goal Di�culty

Low

Challenging

Impossible

Performance A Committed individuals with adequate ability B Committed individuals who are working at capacity C Individuals who lack commitment to high goals

A

B

C

Moderate

FIGURE 5.4 Relationship between goal difficulty and performance Source: Adapted from E. A. Locke and G. P. Latham, A Theory of Goal Setting and Task Performance (Englewood Cliffs, NJ: Prentice Hall, 1990).

Planning CHAPTER 5 173

In writing out the goals, start with the word “To” and follow it with action-oriented verbs—“complete,” “acquire,” “increase” (“to decrease by 10% the time to get passengers settled in their seats before departure”).

Some verbs should not be used in your goal statement because they imply activities— the ways used to accomplish goals (such as having baggage handlers waiting). For exam- ple, you should not use “to develop,” “to conduct,” “to implement.”

Target Dates Goals should specify the target dates or deadline dates when they are to be attained. For example, it’s unrealistic to expect an airline to improve its on-time arrivals by 10% overnight. However, you could set a target date—three to six months away, say—by which this goal is to be achieved. That allows enough time for lower-level managers and employees to revamp their systems and work habits and gives them a clear time frame in which they know what they are expected to do.

Snapchat’s user base grew slowly following its first public offer- ing of stock in early 2017, and investors became concerned that profits might dip. In response, Snapchat’s parent company, Snap Inc., announced that the app would be redesigned in order to make it easier for a wider audience to use, with the stated goal of increasing its user base in 2018. The announce- ment represented a change in the company’s main goal, which had been to provide an inviting home for chat and video for people looking for real connections, not to build a platform for billions of users such as Facebook and YouTube have become.

Some observers were doubtful that Snapchat could achieve its new goal with the specific design changes it announced. The plan to essentially lump messages and videos from friends together in a single hub, separate from content produced by publishers, didn’t convince everyone that the app would now be easier for new users. CEO Evan Spiegel’s explanation seemed off-target to some commentators, too. Spiegel spoke of the dangers of getting news and information from online sources that select from a narrow set of sources. Separating

“the social from the media,” as the company described it, isn’t necessary a bad idea, given the proliferation of fake news in social media, but how would it enlarge the app’s user base? Snapchat didn’t say.

By the fall of 2017, the company’s revenues were still run- ning below expectations, and costs and losses were higher than expected. Snap’s stock price seemed stuck at a point below its initial offering price of $17 a share. Five million new users had been added, but analysts had expected 8 million. Investors were thus still unclear what the company’s goal was—and how and even whether it would achieve it. When the updated Snapchat was rolled out in February 2018, initial reac- tions from users were largely negative, especially among younger fans who called the new version “twisted” and “super confusing.”40

YOUR CALL Do you think Snapchat’s goal was attainable? Was it communi- cated clearly? What could the company have done better?

EXAMPLE Setting Goals: Are Snapchat’s Goals Clear?39

Management by Objectives: The Four-Step Process for Motivating Employees First suggested by Peter Drucker in 1954, management by objectives has spread largely because of the appeal of its emphasis on converting general objectives into specific ones for all members of an organization.41

Management by objectives (MBO) is a four-step process in which (1) managers and employees jointly set objectives for the employee, (2) managers develop action plans, (3) managers and employees periodically review the employee’s performance, and (4) the manager makes a performance appraisal and rewards the employee according to results. The purpose of MBO is to motivate rather than to control subordinates.

Before we begin discussing these four steps, you may want to consider the quality of the goal-setting process in a current or former employer. Management by objectives and goal cascading will not work without an effective goal setting process. The following self-assessment was developed to provide insight into the quality of goal setting within an organization.

174 PART 3 Planning

1. Jointly Set Objectives You sit down with your manager and the two of you jointly set objectives for you to attain. Research shows that an assigned goal from your boss is just as effective as setting goals participatively. Moreover, people tend to set their own personal goals in response to receiving an assigned goal. A team of goal-setting experts noted that “the assignment of a goal encourages individuals to also set a personal performance goal, which in turn contributes to their performance.”42 It is important to remember what we learned about SMART goals. Managers garner greater acceptance to goal setting when employees believe the goal is attainable and they possess the skills and resources to achieve it.43 Managers tend to set three types of objectives, shown in the following table. (See Table 5.3.)

What Is the Quality of Goal Setting within a Current or Past Employer? This self-assessment is designed to assess the quality of goal setting in a company. Please be prepared to answer these questions if your instructor has assigned Self-Assessment 5.2 in Connect.

1. What are the strengths and weaknesses of goal setting in the company you selected?

2. Based on your results, what recommendations would you provide to senior management about improving the goal- setting process in this company? Explain.

3. What actions could you take to improve the goal-setting process in this company? Be specific.

SELF-ASSESSMENT 5.2

Jointly setting objectives. An important part of MBO is joint manager/subordinate participation in setting objectives. Have you ever held a job that featured this kind of process? ©Chris Ryan/age fotostock

Planning CHAPTER 5 175

We want to briefly focus on the career readiness competency of proactive learning orienta- tion because it fuels the achievement of learning objectives. Proactive learning orientation represents a desire to learn and improve one’s knowledge, soft skills, and other character- istics in pursuit of personal development. Employers value this attitude because it helps drive the creativity and innovation needed in today’s global economy. They also desire this competency because the “fast-paced business environment requires employees to refine and enhance their skills sets throughout their careers.”44 So where do you stand on this competency? Find out by taking the proactive learning orientation self-assessment.

Do I Have a Proactive Learning Orientation? This self-assessment is designed to assess the extent to which you possess a proactive learning orientation. Please be pre- pared to answer these questions if your instructor has assigned Self-Assessment 5.3 in Connect.

1. What is your level of learning orientation? How might it affect a recruiter’s perception of your employability?

2. Based on your results, what might you do to increase the career readiness competency of proactive learning orientation? Explain.

3. What things might you say during an interview to demonstrate that you possess this career readiness competency?

SELF-ASSESSMENT 5.3 CAREER READINESS

2. Develop Action Plan Once objectives are set, employees are encouraged to pre- pare an action plan for attaining them. Action plans may be prepared for both individu- als and work units, such as departments. For example, teams of employees at Tornier, a medical device manufacturer in Amsterdam, meet every 45, 60, and 90 days to create action plans for completing their goals. Implementation of the plans can take between six and 18 months depending on the complexity of the goal.45 Setting and using action plans also reduces procrastination. If this is sometimes a problem for you, break your goals into smaller and more specific subgoals.46 This will get you going.

3. Periodically Review Performance You and your manager should meet reason- ably often—either informally as needed or formally every three months—to review prog- ress, as should you and your subordinates. Indeed, frequent communication is necessary so that everyone will know how well he or she is doing in meeting the objectives.

PERFORMANCE OBJECTIVES

Focus Express the objective as an outcome or end-result. Examples “Increase sport utility sales by 10%.” “Reduce food spoilage by 15%.”

BEHAVIORAL OBJECTIVES

Focus Express the objective as the behaviors needed to achieve an outcome. Examples “Greet all potential automobile customers with a smile and offer to assist.” “Ensure food is stored in seal-proof containers.” “Attend five days of leadership training.” “Learn basics of Microsoft Office software by June 1.”

LEARNING OBJECTIVES

Focus Express the objective in terms of acquiring knowledge or competencies. Examples “Attend sales training class.” “Learn how the features in our sports utility vehicles compare to competitors.”

Source: These descriptions were based on G. Latham, G. Seijts, and J. Slocum, “The Goal Setting and Goal Orientation Labyrinth: Effective Ways for Increasing Employee Performance,” Organizational Dynamics, October–December 2016, pp. 271–277.

TABLE 5.3 Three Types of Objectives Used in MBO: Performance, Behavioral, and Learning

176 PART 3 Planning

During each meeting, managers should give employees feedback, and objectives should be updated or revised as necessary to ref lect new realities. Feedback is essential for improving performance.47 If you were managing a painting or landscap- ing business, for example, changes in the weather, loss of key employees, or a finan- cial downturn affecting customer spending could force you to reconsider your objectives.

4. Give Performance Appraisal and Rewards, If Any At the end of 6 or 12 months, you and your subordinate should meet to discuss results, comparing performance

with initial objectives. Deal with results, not personalities, emotional issues, or excuses.

Because the purpose of MBO is to motivate employ- ees, performance that meets the objectives should be rewarded—with compliments, raises, bonuses, promo- tions, or other suitable benefits. Failure can be addressed by redefining the objectives for the next 6- or 12-month period, or even by taking stronger measures, such as demotion. Basically, however, MBO is viewed as being a learning process. After step 4, the MBO cycle begins anew.

Cascading Goals: Making Lower- Level Goals Align with Top Goals For goal setting to be successful, the following three things have to happen.

1. Top Management and Middle Management Must Be Committed “When top-management

commitment [to MBO] was high,” said one review, “the average gain in productivity was 56%. When commitment was low, the average gain in productivity was only 6%.”48

2. The Goals Must Be Applied Organizationwide The goal-setting program has to be put in place throughout the entire organization. That is, it cannot be applied in just some divisions and departments; it has to be done in all of them.

3. Goals Must “Cascade”—Be Linked Consistently Down through the Orga- nization Cascading goals is the process of ensuring that the strategic goals set at the top level align, or “cascade,” downward with more specific short-term goals at lower levels within an organization, including employees’ objectives and activities. Top managers set strategic goals, which are translated into divisional goals, which are translated into departmental goals, which are translated into individual goals. The cascading process ends when all individuals have a set of goals that support the overall strategic goals. This process helps employees understand how their work contributes to overall corpo- rate success.

Example: The Vice President of the Claims Division of an automobile insurance company, which pays off requests (or claims) by customers seeking insurance payments to repair damage to their cars, may set the major goal (and SMART goal) of “increase customer satisfaction in Claims Division by 10%.” In the cascading goals process, the same goal would be embraced by the Assistant Vice President of Claims and the Recovery Director beneath him or her. Further down the hierarchy, the Recovery Unit Manager would reword the goal to be more specific: “Decrease the number of customer complaints about claims by 10% over last year’s average.” For the individual Recovery Analyst at the lowest level, the goal could become: “Return all customer phone calls

A good performance appraisal is like kicking a field goal. It feels good, is rewarding, and fosters continued motivation. Have you had good and bad reviews? What makes a performance review effective versus ineffective? ©Steven Puetzer/Getty Images

Planning CHAPTER 5 177

about claims within 24 hours.”49 Thus, all the subgoals in the organization are in align- ment with the major goal of top management.

The Importance of Deadlines There’s no question that college is a pressure cooker for many students. The reason, of course, is the seemingly never-ending deadlines. But consider: Would you do all the course work you’re doing—and realize the education you’re getting—if you didn’t have deadlines?

As we saw under the “T” (for “has target dates”) in SMART goals, deadlines are as essential to goal setting in business as they are to your college career. Because the whole purpose of planning and goals is to deliver to a client specified results within a specified period of time, deadlines become a great motivator, both for you and for the people working for you.

It’s possible, of course, to let deadlines mislead you into focusing too much on imme- diate results and thereby ignoring overall planning—just as students will focus too much on preparing for a test in one course while neglecting others. In general, however, dead- lines can help you keep your eye on the “big picture” while simultaneously paying atten- tion to the details that will help you realize the big picture. Deadlines can help concentrate the mind, so that you make quick decisions rather than put them off. Deadlines help you ignore extraneous matters (such as cleaning up a messy desk) in favor of focusing on what’s important—realizing the goals on time and on budget. Deadlines provide a mechanism for giving ourselves feedback. ●

Goal setting can seem like an intimidating process, but it’s both a necessary and a helpful one for the millions of small businesses in the United States. These firms, officially defined as having 500 or fewer employees, produce almost half of U.S. non-farm GDP and two-thirds of the nation’s new private-sector jobs.50 What are some typical goal-setting steps for a small business?51

1. Break large goals down into smaller ones. Anita-Maria Quillen is the owner and manager of Diversi- fied Engineering & Plastics (DER), a profitable auto parts manufacturer with 78 employees in Jackson, MI. She hopes to keep her small business profitable despite a recent drop in U.S. auto sales that will eventually affect sales of her company’s mirror brackets, pistons, and win- dow frames as car makers seek to cut their costs. Quillen is firmly focused on her bottom line; one of her business practices is to break her annual profit goal into monthly sales goals.

2. Track progress toward goals. DER tracks sales monthly sales and recently posted its most profitable month in several years.

3. Keep the goal in sight. One of Quillen’s goals is to increase her personal con- tacts in the industry in order to drive orders to the firm. “I need to be out meeting people, establishing those

relationships, getting those potential work opportunities in the door,” she said. She recently attended a business fair in Dearborn in order to meet buyers from potential customer firms like Fiat Chrysler and Toyota.

4. Accept that setbacks will come. Quillen sometimes meets with potential customers over the phone to pitch her company’s products. One recent phone meeting was a disappointment; DER had pre- sented a prototype of a new product, but the customer said her company would have to bid the order out to other suppliers before making a purchase. Because DER had invested money in developing its product, Quillen feared her price would be undercut in the bidding process.

5. Celebrate success. On learning her company had posted its most profitable month in several years, Quillen celebrated with a toast shared with company executives. Then it was back to work.

YOUR CALL What major goal of your own have you broken into smaller parts? If you have never done this, for what future goal do you think it would be an effective strategy for you?

Setting Goals for a Small BusinessPRACTICAL ACTION

178 PART 3 Planning

5.5 The Planning/Control Cycle THE BIG PICTURE The four-step planning/control cycle helps you keep in control, to make sure you’re headed in the right direction.

Once you’ve made plans, how do you stay in control to make sure you’re headed in the right direction? Actually, there is a continuous feedback loop known as the planning/ control cycle. (The “organizing” and “leading” steps within the Planning—Organizing— Leading—Controlling sequence are implied here.) The planning/control cycle has two planning steps (1 and 2) and two control steps (3 and 4), as follows: (1) Make the plan. (2) Carry out the plan. (3) Control the direction by comparing results with the plan. (4) Control the direction by taking corrective action in two ways—namely, by (a) correcting deviations in the plan being carried out or (b) improving future plans. (See Figure 5.5.) (We will see this model echoed later in Chapter 16 in the discussion of the Plan-Do-Check- Act cycle.)

The planning/control cycle loop exists for each level of planning—strategic, tacti- cal, and operational. The corrective action in step 4 of the cycle (a) can get a project back on track before it’s too late or (b) if it’s too late, can provide data for improving future plans. ●

LO 5-5 Outline the planning/ control cycle.

The Two Planning Steps

The Two Control Steps

Control the direction in two ways: (a) by correcting deviations in the plan being carried out (return to step 2), or (b) by improving future plans (go to step 1 to start over)

Make the plan Carry out the plan1 2

4 Control the direction by comparing the results with the plan

3

FIGURE 5.5 The planning/control cycle This describes a constant feedback loop designed to ensure plans stay headed in the right direction. Source: Robert Kreitner, Management, 8th edition.

Planning CHAPTER 5 179

By early 2018, Tesla’s Model 3, the electric-car company’s long anticipated, more affordable new vehicle (whose price begins at $35,000) had missed its announced production goals at least twice. In the summer of 2017, the company had promised to make 20,000 Model 3 vehicles by December, but it actually made fewer than 300 during that year’s third quarter, and orders placed at that time were not expected to be filled until the middle of 2018, a projection that was later pushed back to “late 2018 or early 2019.” The date by which the company would achieve its fore- casted production run of 5,000 cars a week was also moved, from the end of 2017 to the end of the second quarter of 2018, with the expectation that in the first quarter only 2,500 cars a week would come off the assembly line. According to Tesla, the change to a slower ramp-up was meant “to focus on quality and effi- ciency rather than simply pushing for the highest possible volume in the shortest period of time.”52

“Production bottle- necks” were blamed for t h e s e d i s a p p o i n t i n g results, along with the fact that some production systems were not running as quickly as the company had planned. The assembly line was less fully auto- mated than Tesla had wanted, for example, with human workers filling the gaps. The company plans to make production as fully automated as possible but hasn’t yet achieved that goal. Battery production has also been slower than hoped, after Tesla was forced to bring it back in house when outside suppliers failed to deliver. The company addressed that problem by creating auto- matic assembly lines for its batteries. But these lines were built in Germany, so they needed to be disassembled and shipped to the

United States to be put back together again, which apparently had still not happened by early 2018. “We view the 2,500 target in March, in particular, as extremely aggressive due to manage- ment’s acknowledgment of needing to get the robotic equip- ment in Germany disassembled, shipped to the US, and then reassembled and programmed in order to hit roughly 2,000 to 2,500 units per week,”53 said one market analyst.

Tesla’s CEO Elon Musk said he was confident that the differ- ence between projections and reality was “getting smaller with

each passing week.” But in the fourth quarter of 2017, only 2,425 units were made, and only 1,550 were delivered to c u s t o m e r s ( l e a v i n g almost 300,000 people still waiting for their cars).54 But almost 800 of those fourth-quarter cars had rolled off the line in a mere seven days, leading some to hope that Tesla had begun producing faster than its newly con- servative projections sug- gested. One possible reason was the compa- ny’s decision to pull workers off the produc- tion of two of the compa- ny’s other cars and assign

them to the Model 3. “The whole team is on it, we’ve got it covered, it’s just going to take us a few months longer than expected,” Musk said.55

YOUR CALL Some analysts believe Tesla would have been better off announcing less ambitious production plans for the Model 3 in the first place. Are they right? Do you think the company is doing a good job of making and controlling its paces for the Model 3? Why or why not?

EXAMPLE The Planning/Control Cycle: Tesla’s Long-Awaited Model 3

The Tesla model 3 has experienced tremendous production and logistics problems. One cause is that the company does not have the ability to custom-build the cars in a timely fashion to meet customer demand. This demand is partly driven by the car’s features and a competitive price of roughly $49,000. CEO Elon Musk has totally immersed himself in the production process in order to improve the planning/control process. ©Salwan Georges/The Washington Post/Getty Images

180 PART 3 Planning

Planning is not one of the career readiness competencies associated with the model shown below. (See Figure 5.6.) The reason is not that employers don’t value planning skills. Rather, it’s the fact that other Career Readiness competencies are foundational to good planning. The soft skill of critical thinking/problem solving is a prime example.

The competency of critical thinking/problem solving is defined as sound reasoning to analyze situations, make decisions, and solve problems. These are all critical activities associated with planning and require the ability to obtain, interpret, and analyze both qualitative and quantitative information. In turn, this competency is driven by another career readiness competency: proactive learning orientation. Let’s consider the link between planning, critical thinking, and proactive learning in more detail.

Critical thinkers don’t make quick or rash decisions during the planning process. Instead, they consider alternative solutions to problems and remain open-minded. They remain open-minded by obtaining and considering a wide range of information before making a judgment. This is precisely what happens when someone has a proactive learning orientation. Proactive learners seek information and knowledge so that they expand their knowledge base, which makes them more effective planners. The point is that good planning requires critical thinking, which in turn requires a proactive learning orientation. This process ultimately results in expanding the career readiness compe- tency of task-based/functional knowledge.

Effective planning requires you to be a proactive learner in areas beyond the techni- calities of your profession. It also applies to two additional career readiness competen- cies: understanding the business and networking. Organizations want all of us to stay abreast of what is happening in the industries and markets in which we work. Doing so enables us to consider a wider bandwidth of information when planning. For example, staying current about trends in higher education enables us as authors to do a better job in planning the revisions of this product. We also find that many people fail to keep their social and professional networks up to date over time. This is a mistake! Failing to proactively maintain such networks means that we are losing contacts and valuable information that can aid the planning process and our career progression. As authors, for instance, we rely on our social networks to get feedback about what students and educational institutions are looking for in a textbook. As you can see, effective planning is grounded in information that comes from staying current about events within the industry in which we work and with people in our social networks.

LO 5-6 Describe how to develop the career readiness competency of proactive learning orientation.

5.6 Career Corner: Managing Your Career Readiness

Career readiness

Knowledge (K)

Soft skills (S)

Career outcomes

Attitudes (A)

Other characteristics

(O)

FIGURE 5.6 Model of Career Readiness ©2018 Kinicki and Associates, Inc.

Planning CHAPTER 5 181

Becoming More Proactive Being “intentionally proactive” is the first step to becoming a proactive learner. “Being proactive means relying on your own choices instead of luck and circumstances. It’s about controlling the situation rather than simply waiting for the outcomes,” said one business writer.56 Lina Tinsley, a brand manager at MARS, put this recommendation into practice. “I give my 100 percent every day and I’m committed to be intentional in all I do. For me, work is an opportunity to live my purpose and bring my best, to deliver consistent results, and to positively influence the people around me,” she said.57 You can put Lina’s beliefs into practice by following four key recommendations:58

1. Focus on solutions rather than problems.

2. Take initiative and rely on yourself.

3. Set realistic goals and don’t overpromise.

4. Participate and contribute to personal and professional conversations.

Keeping an Open Mind and Suspending Judgment Keeping an open mind and suspending judgment are essential for developing a proac- tive learning orientation. This exercise was designed to assist you in this pursuit. Focus on your school work or a current job to practice the technique. You can repeat this process in the future whenever you desire to be open-minded.59

■ Step 1 Make a list of your current tasks, projects, or commitments at school or work.

■ Step 2 For each task listed in step one, identify the key moments it would be important to be open-minded and suspend judgment.

■ Step 3 For each of these moments, think of how you might apply the four key skills of being open minded:60

1. Question your beliefs. Many of us make decisions based on false beliefs and assumptions. You can check yourself by asking: What specific evidence supports my view? Is my knowledge based on facts or my experience? Why am I arguing with others who have more experience and knowledge? Am I offering an opinion or being opinionated? Based on answers to these ques- tions, you can either proceed in the discussion or take a step back and allow your mind to take in new information.

2. Pause and seek feedback. Observe how others respond to your opinions and recommendations. Don’t be married to a perspective. If the goal of a discussion is to conduct better planning and make better decisions, then it does not matter whether people agree or disagree with your views. Your goal is to arrive at better decisions and help people to grow.

3. Watch for communication blocks. Be aware of words, concepts, or com- munication styles that elicit emotional responses from you and others. Emotionality leads to defensiveness and the blocking of listening. Be aware of your emotions when talking with others.

4. Check the accuracy of your past judgments and predictions. If your judg- ments and predictions have been wrong, consider the reasons and adjust in the future. ●

182 PART 3 Planning

action plan 169 business model 158 business plan 158 cascading goals 176 goal 169 long-term goals 169 management by objectives

(MBO) 173 means-end chain 169 mission 164 mission statement 164 objective 169

operating plan 169 operational goals 169 operational planning 167 plan 158 planning 158 planning/control cycle 178 policy 171 procedure 171 program 171 project 171 rule 171 short-term goals 169

single-use plans 171 SMART goal 172 standing plans 171 strategic goals 169 strategic management 159 strategic planning 166 strategy 159 tactical goals 169 tactical planning 167 values statement 165 vision 164 vision statement 164

Key Terms Used in This Chapter

Key Points

5.1 Planning and Strategy • Planning is defined as setting goals and deciding

how to achieve them. It is also defined as coping with uncertainty by formulating future courses of action to achieve specified results.

• A plan is a document that outlines how goals are going to be met. One important type of plan is a business plan, a document that outlines a proposed firm’s goals, the strategy for achieving them, and the standards for measuring success. The business plan describes the business model, which outlines the need the firm will fill, the operations of the business, its components and functions, as well as the expected revenues and expenses.

• A strategy, or strategic plan, sets the long-term goals and direction for an organization.

• Strategic management is a process that involves managers from all parts of the organization in the formulation and implementation of strategies and strategic goals.

• An organization should adopt planning and strategic management for three reasons: They can (1) provide direction and momentum, (2) encourage new ideas, and above all (3) develop a sustainable competitive advantage.

5.2 Fundamentals of Planning • An organization’s reason for being is expressed in a

mission statement. • A vision is a long-term goal describing “what” an

organization wants to become. It is a clear sense of the future and the actions needed to get there. A vision statement expresses what the organization should become, where it wants to go strategically.

• Both mission and vision should express the organization’s values. A values statement, or core values statement, expresses what the company

stands for, its core priorities, the values its employees embody, and what its products contribute to the world.

• From these are derived strategic planning, then tactical planning, then operational planning. In strategic planning, managers determine what the organization’s long-term goals should be for the next 1–5 years with the resources they expect to have available. In tactical planning, managers determine what contributions their work units can make with their given resources during the next 6–24 months. In operational planning, they determine how to accomplish specific tasks with available resources within the next 1–52 weeks.

5.3 Goals and Plans • Whatever its type, the purpose of planning is to set a

goal and then formulate an action plan. • Goals are of two types: long-term and short-term. • Long-term goals are generally referred to as strategic

goals. They tend to span one to five years and focus on achieving the strategies identified in a company’s strategic plan.

• Short-term goals are sometimes referred to as tactical goals, operational goals, or just plain goals. They generally span 12 months and are connected to strategic goals in a hierarchy known as a means- end chain.

• A means-end chain shows how goals are connected or linked across an organization. The accomplishment of low-level goals is the means leading to the accomplishment of high-level goals or ends.

• Strategic goals are set by and for top management and focus on objectives for the organization as a whole. Tactical goals are set by and for middle managers and focus on the actions needed to achieve strategic goals. Operational goals are

Planning CHAPTER 5 183

set by first-line managers and are concerned with short-term matters associated with realizing tactical goals.

• An operating plan is a plan that breaks long-term output into short-term targets or goals. Operational plans turn strategic plans into actionable short-term goals and action plans.

• An action plan defines the course of action needed to achieve the stated goal. Whether the goal is long- term or short-term, action plans outline the tactics that will be used to achieve the goal. Each tactic also contains a projected date for completing the desired activities.

• The goal should be followed by an action plan, which defines the course of action needed to achieve the stated goal. The operating plan, which is typically designed for a one-year period, defines how you will conduct your business based on the action plan; it identifies clear targets such as revenues, cash flow, and market share.

• Plans may be either standing plans, developed for activities that occur repeatedly over a period of time, or single-use plans, developed for activities that are not likely to be repeated in the future.

• There are three types of standing plans: (1) A policy is a standing plan that outlines the general response to a designated problem or situation. (2) A procedure outlines the response to particular problems or circumstances. (3) A rule designates specific required action.

• There are two types of single-use plans: (1) A program encompasses a range of projects or activities. (2) A project is a single-use plan of less scope and complexity.

5.4 Promoting Consistencies in Goals: SMART Goals, Management by Objectives, and Goal Cascading

• The five characteristics of a good goal are represented by the acronym SMART. A SMART goal is one that is specific, measurable, attainable, results- oriented, and has target dates.

• Management by objectives (MBO) is a four-step process in which (1) managers and employees jointly set objectives for the employee, (2) managers develop action plans, (3) managers and employees periodically review the employee’s performance, and (4) the manager makes a performance appraisal and rewards the employee according to results. The purpose of MBO is to motivate rather than to control subordinates.

• For MBO to be successful three things have to happen. (1) The commitment of top management is essential. (2) The goals must be applied organizationwide. (3) Goals must cascade—be linked consistently down through the organization. Cascading goals is the process of ensuring that the strategic goals set at the top level align, or “cascade,” downward with more specific short-term goals at lower levels within an organization, including employees’ objectives and activities.

• Deadlines are essential to planning because they become great motivators both for the manager and for subordinates.

5.5 The Planning/Control Cycle • Once plans are made, managers must stay in control

using the planning/control cycle, which has two planning steps (1 and 2) and two control steps (3 and 4), as follows: (1) Make the plan. (2) Carry out the plan. (3) Control the direction by comparing results with the plan. (4) Control the direction by taking corrective action in two ways—namely, by (a) correcting deviations in the plan being carried out or (b) improving future plans.

5.6 Career Corner: Managing Your Career Readiness

• Planning requires the use of multiple career readiness competencies, including critical thinking/ problem solving, proactive learning orientation, task- based/functional knowledge, understanding the business, and networking.

• You can increase the competency of proactive learning orientation by becoming more proactive and keeping an open mind and suspending judgement.

1. What are planning, strategy, and strategic management?

2. Why are they important? 3. What is the difference between a mission and a

vision, a mission statement and a vision statement? 4. What are three types of planning? 5. What are two types of goals?

6. What are different kinds of plans? 7. What are SMART goals? 8. What is management by objectives? 9. What three things have to happen for MBO to be

successful? 10. Explain the planning/control cycle.

Understanding the Chapter: What Do I Know?

184 PART 3 Planning

Fender Rebrands to Stay in Tune with the Times Fender Musical Instruments Corporation produces some of the most recognized electric and bass guitars in the world. The organization was one of the first to mass produce guitars and has an illustrious history dat- ing back to the late 1940s. Fender’s guitars revolution- ized popular music by allowing smaller groups of musicians to play together.61

Today, these small groups include megastar custom- ers like Eric Clapton, Sheryl Crow, and U2. With stars of this caliber using Fender guitars on stage, you might imagine business is booming. Sadly, it is not. Fortune reports that Fender “spent the better part of the past decade struggling with debt and a lack of growth, and in 2012 abandoned an IPO, citing unfavorable market conditions.”62 Andy Mooney was hired as CEO in 2015 to turn around the company. Let’s consider his plan.

A NEW PLAN FOR AN UNRELIABLE CONSUMER Fender began its transformation by coming to terms with the high quit-rate of beginning guitar players. According to Mooney, “Almost everyone who picks up a guitar, about 90 percent, abandons it within the first year.”63 There are two main contributors to this dire statistic—the method of learning the instrument and the cost associated with doing so.

Fender’s plan focused on how amateur players pre- ferred to learn. Ethan Kaplan, Fender’s general man- ager of digital, noted that “The way that I learned piano when I was a kid is no longer the way most people learn. They sit at a computer. They sit on an iPhone. They do things in little bites versus sitting through hour-long lessons.”64 Mooney and Kaplan’s assessment of Fender’s current reality provided crucial insight into the cost of lessons. According to Fortune, “ . . . new players spend four times as much on lessons as they do on the instrument.”65

The company’s plan to overcome these challenges was based on experimenting with different apps. The plan strives to ensure that beginning guitar players can easily use digitized materials to quickly learn how to play guitar at a reasonable cost.

Fender’s first app was Fender Play. This subscrip- tion-based app can be used on a mobile device as a way to assist a “do-it-yourself” society learn how to quickly play the guitar. The app uses bite-sized, multi-angle video lessons focused on helping new players learn popular songs. A professional guitarist provides step-by- step lessons in the videos, and players can track their progress in the app. Beginners quickly learn how to play a familiar song from bands such as the Rolling Stones, Foo Fighters, Tim McGraw, and Coldplay.

They will be less likely to quit once they achieve this milestone and more likely to buy more Fender guitars in the future.66 Players will also be spending much less than they would have with private lessons, since the subscription costs only $20 a month.

The software may not be for everybody, though. As Business Insider reports, “No program of instruction will be perfect, and Fender Play isn’t going to work for everyone . . . And for those who don’t like it, there are many free options on the web, and you can always hire a real, live teacher!”67 Obviously, Fender cannot rely on a one-product-fits-all plan.

The company has developed additional apps to speed up the learning process. For example, Fender developed Fender Tune to teach players how to tune a guitar without having any level of proficiency. “When the kid plugs [the guitar] in for the first time, it doesn’t sound like a screaming cat when it comes out of an amp,” according to Mooney.68

Fender is also looking to release a practice-room app that can assist someone in playing any song in its music library. This provides an opportunity for amateur play- ers to practice and develop their skills.

Another app lets an amp emulate the sounds of famous guitarists. The company’s newest amp model will be able to connect to this app wirelessly, through Bluetooth, so players can alter and share sound effects.69

IMPACT ON THE BOTTOM LINE Although Fender has built guitars for Eric Clapton, Stevie Ray Vaughn, and Jimi Hendrix, its growth plan is based on the needs of amateur musicians. According to Kaplan, “We never really concentrated on those 45% of players who buy a guitar for the first time every year.” Even a slight improvement in that 90% abandon- ment statistic would be significant for the company. If Fender can get a 10% increase in the number of begin- ners who stick with their guitar, it could double the size of its instrument business.70

Fender also plans on tapping into an important evo- lution process with its digital products. If it can get play- ers hooked on cheap starter guitars, then have them upgrade to fancier guitars as they become more commit- ted to playing, it may be able to turn players into collec- tors. The company would be able to realize more revenue by following the lifecycle of its customers.71

Fender’s sales strategy goes beyond digital. The com- pany does almost all its business through traditional retailers, with online sales from its website making up less than 2% of North American sales. However, the National Retail Federation says that online sales hit a record $108.2 billion during the 2017 holiday season (a 14.7% increase from the year before).72 These statistics suggest that Fender’s strategy of using traditional retailers may be

Management in Action

Planning CHAPTER 5 185

outdated. Mooney doesn’t seem to be worried. “Players need to touch, feel, and play a guitar before they buy one,” he says. Fender, he says, prefers to use the Internet as a learning tool, rather than a sales mechanism.73

Some factors seem to be out of the company’s control. As Bloomberg reports, “Detractors have predicted the death of the electric guitar for years, pointing to the rise of rap and electronic music on pop charts.” Fender doesn’t seem overly concerned about this either. “More women are playing guitar these days,” says Mooney, a trend he credits to singer Taylor Swift. The company is also quick to point to rising guitar sales over the past decade. “The pendulum swings back and forth,” Mooney says.

Can Fender’s new digital strategy swing the pendu- lum in its direction?

FOR DISCUSSION Problem-Solving Perspective

1. What is the underlying problem in this case from Fender CEO Andy Mooney’s perspective?

2. What are some of the causes of this problem?

3. Do you believe Fender’s strategy and plans will turn around the company? Explain.

Application of Chapter Content

1. Using the steps in Figure 5.1, describe how Fender is transforming into a digital company.

2. Define one specific strategic, tactical, and operational plan that Fender can utilize for its transformation.

3. Develop a simple strategic goal, operational goal, and action plan for Fender Play: The goals need to be SMART. Then utilize a means-end chain to illustrate the relationship among the three.

4. Assume 8% of Fender’s current customers are women. Would it be wise for the company to set a strategic goal of increasing this number to 40% in the next 12 months? Why or why not? Explain your response using Figure 5.4.

5. Based on CEO Mooney’s standard for success in making sure beginners stick with their guitars, develop a planning/control cycle to make sure Fender is headed in the right direction.

Is Pfizer Putting Profits above Alzheimer’s Patients? Planning and strategy go together, and they flow from a company’s mission and vision. Decisions made in the pursuit of corporate strategy are challenging because they ultimately involve choices about how to spend valuable resources. U.S. pharmaceutical giant Pfizer is a good illustration.

Pfizer decided in January 2018 to no longer pursue new research and development (R&D) in treatments for Alzheimer’s disease, resulting in the loss of hun- dreds of jobs. Worse yet, the approximately 5.5 million U.S. adults with this neurological disease no longer have one of the biggest pharmaceutical companies in their corner.74 Pfizer made this challenging decision because of either low profitability or limited capacity.

With respect to profitability, Alzheimer’s research has proven to be costlier than most other R&D pur- suits. A neuroscientist at Edinburgh University told BBC Radio that “More than 99% of trials for Alzheim- er’s drugs have failed in past 15 years.”75 Investors thus are pressuring pharmaceutical companies to spend less on this research when they can pursue more prof- itable projects, such as treatments for anxiety disorders and erectile dysfunction.

Capacity becomes an issue in pharmaceutical research and development because it’s difficult to run

multiple large-scale R&D programs at the same time. This has led pharmaceutical companies to focus only on specific drugs. A former head of research and development at Pfizer told the Financial Times that “You can’t run several programmes of that size, even with a budget like Pfizer’s. . . . How many times can these companies take another shot when other parts of science like gene therapy are exploding, and when there’s a desperate need for new drugs to replace opi- oids? There are many more areas where you can see the goal lines.”76 Pfizer’s management team apparently agrees with this conclusion. The organization said in a statement that not pursuing Alzheimer’s research “was an exercise to reallocate [spending] across our portfo- lio, to focus on those areas where our pipeline, and our scientific expertise, is strongest.”77

Though Pfizer may be changing its strategy and its resource allocations, the company has kept its mis- sion statement the same: “To be the premier, innova- tive biopharmaceutical company.” Its values include “customer focus” and “integrity.”78 However, its latest decision is seen by some as contradictory to its mis- sion and values. Alzheimer’s Research UK says that companies should be encouraged to invest in research into neuroscience. For its part, the Alzheimer’s Soci- ety called Pfizer’s decision “disappointing” and a “heavy blow” to those living with dementia.79

Legal/Ethical Challenge

186 PART 3 Planning

Other big drug makers are not letting profit and limited capacity get in their way. A top scientist at Eli Lilly, one of Pfizer’s competitors, told Financial Times that “Taking care of Alzheimer’s patients is a huge economic cost to society and now is not the time to give up.” Eli Lilly’s most advanced Alzheimer’s drug failed in a large trial in 2016, but the company has vowed to continue Alzheimer’s treat- ment R&D.80 Another U.S. competitor, AstraZeneca, also remains committed to fighting the disease.

SOLVING THE CHALLENGE What would you do if you were Pfizer’s CEO?

1. Move on to other projects. Pfizer has an obligation to its shareholders not to throw money at projects that prove to be unsuccessful.

2. Continue funding Alzheimer’s R&D. As a global leader in the pharmaceutical industry, Pfizer has an obligation to society to find treatments for diseases affecting millions of people. This would also be in line with its mission statement and values.

3. Contribute to agencies such as the National Institutes of Health so they can continue their studies of Alzheimer’s.

4. Suggest other options.

Learn how Uber’s corporate strategies have changed from those pursued by founder and CEO Travis Kalanick to those identified by current CEO Dara Khosrowshahi. Assess your ability to apply concepts discussed in this chapter to the case by going to Connect.

Uber Continuing Case

We describe strategic positioning and three levels of strategy, and then

consider the five steps in the strategic-management process. In assessing

current reality, we describe the tools of SWOT analysis, VRIO, forecasting,

and benchmarking. When discussing corporate-level strategy, we review

three types of overall strategies, the BCG matrix, and diversification. In de-

scribing business-level strategy, we discuss Porter’s five competitive forces

and Porter’s four competitive strategies. Under execution and strategic

control, we discuss the importance of execution. We conclude with a Ca-

reer Corner that focuses on how to develop your strategic thinking.

What’s Ahead in This ChapterFORECAST

6 After reading this chapter, you should be able to:

LO 6-1 Identify the three principles underlying strategic positioning.

LO 6-2 Outline the five steps in the strategic- management process.

LO 6-3 Explain how an organization assesses the competitive landscape.

LO 6-4 Explain the three methods of corporate-level strategy.

LO 6-5 Discuss Porter’s five competitive forces and the four techniques for formulating strategy.

LO 6-6 Describe the role of effective execution in strategic management.

LO 6-7 Describe how to enhance your strategic thinking.

Strategic Management How Exceptional Managers Realize a Grand Design

© O

livier Renck/Aurora/G etty Im

ages

As part of their overall competitive strategy, organizations create and build memorable brands for their products and services. Among the world’s most valuable brands are Apple, Google, Microsoft, Coca-Cola, and Amazon, but brands don’t have to be global to have value. For her blog about getting kids to eat vegetables, London mom Mandy Mazliah created a brand name, Sneaky Veg, and asked an artist to design a logo and distinctive graphics to help her creation stand out from the crowd.1 Do you have your own personal brand? Do you need one? The answer is yes if you are pursuing a strategy to gain employment upon graduation.

Why You Need a Personal Brand Ceejay Dawkins, a tax manager at Deloitte, advises new college graduates thus:

Build your brand. Be known for something. Whether it’s being the first person at work in the morning or being the person that always asks intelligent questions—be known for something. Building that brand, building that solid reputation, will follow you through your career. People will notice that and will want you on their assignments.2

Quite simply, branding sells. Personal branding goes beyond having a résumé or a Twitter, LinkedIn, or Instagram profile.3 A strong personal brand lets potential employers learn about who you are, your passions, your areas of expertise, your relevant experience, and your aspirations. That’s why it’s a good idea for you to take control of the message you want to send employers about your career readiness, and the information you want them to see on social media.

How to Create Your Brand Your personal brand should have two components. The first reflects your unique identity and strengths, while the second conveys the fact that you are career ready.

Developing this type of brand increases your chances of obtaining a desired job and a rewarding career. Create and promote your personal brand with these steps:

1. Identify the core message of your brand. Consider any special training, education, talents, skills, family background, and special challenges overcome. Where do you see yourself in five years? Ten?

2. Write a personal branding statement. Your personal branding statement is a short paragraph describing who you are, what you stand for, and what you like to do. It emphasizes your unique knowledge and expertise.4

3. Develop a social media strategy.5 Choose the most appropriate platform for your message (Twitter and LinkedIn have very different audiences and purposes); polish your writing style; and make sure everything you share, whether in posts, comments, or a blog, is a good and truthful representation of your brand. Remember, everything an employer sees or reads about you tells a story about your brand. Consider registering your own domain name and creating a personal website for a professional-looking personal brand.

4. Start networking. Don’t wait until graduation to network; start now! Join groups and attend meetings for people in your field of interest. Meeting others in your industry, whether online or in person, can lead to great collaborative opportunities that will home your teamwork skills.

For Discussion Do you have a personal brand? If not, why are you waiting to create one? Using the preceding steps, how would you shift your social media presence to make it more appealing to potential employers?

Building Your Personal Brand

190 PART 3 Planning

Harvard Business School professor Michael Porter is recognized as one of the most influential business school professors. Fortune writer Geoffrey Colvin described him “as the all-time greatest strategy guru.”6

Is this high praise deserved? Certainly Porter’s status as a leading authority on com- petitive strategy is unchallenged. The Strategic Management Society, for instance, voted Porter the most influential living strategist. We refer to him repeatedly in this chapter.

Strategic Positioning and Its Principles According to Porter, strategic positioning attempts to achieve sustainable competitive advantage by preserving what is distinctive about a company. “It means,” he says, “ performing different activities from rivals, or performing similar activities in different ways.”7

Three key principles underlie strategic positioning.8

1. Strategy Is the Creation of a Unique and Valuable Position Strategic posi- tion emerges from three sources:

■ Few needs, many customers. Strategic position can be derived from serving the few needs of many customers. Example: Jiffy Lube provides only lubricants, but it provides them to all kinds of people with all kinds of motor vehicles.

■ Broad needs, few customers. A strategic position may be based on serving the broad needs of just a few customers. Example: Wealth management and invest- ment advisory firm Bessemer Trust focuses exclusively on high–net worth clients.

■ Broad needs, many customers. Strategy may be oriented toward serving the broad needs of many customers. Example: National movie theater operator Carmike Cinemas operates only in cities with populations of fewer than 200,000 people.

6.1 Strategic Positioning and Levels of Strategy THE BIG PICTURE Strategic positioning attempts to achieve sustainable competitive advantage by preserving what is distinc- tive about a company. It is based on the principles that strategy is the creation of a unique and valuable posi- tion, requires trade-offs in competing, and involves creating a “fit” among activities. There are three levels of strategy: corporate, business level, and functional.

LO 6-1 Identify the three principles underlying strategic positioning.

Strategy guru. Harvard Business School professor Michael Porter suggests that every company is subject to five forces: its current competitors, possible new competitors, the threat of substitutes for its products or services, the bargaining power of its suppliers, and the bargaining power of its customers. Operating within that five-forces framework, a company must choose the right strategy—or be beaten by competitors. Do you think there are other forces that are equally important in forming strategy? ©Adam Rountree/Bloomberg/Getty Images

Strategic Management CHAPTER 6 191

2. Strategy Requires Trade-Offs in Competing As a glance at the preceding choices shows, some strategies are incompatible. Thus, a company has to choose not only what strategy to follow but what strategy not to follow. Example: Neutrogena soap, points out Porter, is positioned more as a medicinal product than as a cleansing agent. In achieving this narrow positioning, the company gives up sales based on deodorizing; gives up large volume; and, accordingly, gives up some manufacturing efficiencies.

3. Strategy Involves Creating a “Fit” among Activities “Fit” has to do with the ways a company’s activities interact and reinforce one another. Example: A mutual fund such as Vanguard Group follows a low-cost strategy and aligns all its activities accordingly, distributing funds directly to consumers and minimizing portfolio turn- over. However, when the short-lived (1993–1995) Continental Lite airline tried to match some, but not all, of Southwest Airlines’s activities, it was not successful because it didn’t apply Southwest’s entire interlocking system.

Levels of Strategy Strategic management takes places at three levels, each supporting the other, as shown in Figure 6.1.

Level 1: Corporate-Level Strategy Corporate-level strategy focuses on the organi- zation as a whole. Executives at the most senior levels, generally referred to as the “C-Suite,” typically conduct this type of strategic planning. This analysis answers ques- tions such as “what business are we in?” and “what products and services shall we offer?” Strategic decisions at this level can involve acquisitions, such as Amazon’s acqui- sition of Whole Foods, joint ventures like the one between Volvo and Autoliv to develop software for driverless vehicles, and significant investments in plant and equipment.9

Level 2: Business-Level Strategy Business-level strategy focuses on individual business units or product/service lines. Senior-level managers below the C-Suite typically are responsible for this level of strategy. Issues under consideration flow from decisions made at the corporate level and involve considerations such as how much to spend on marketing, new-product development, product expansion or contraction, facilities

Corporation

Electronic Components Unit

Services Unit Retail Unit

Corporate-Level Strategy: What business or businesses should we be in?

Business-Level Strategy: How should we compete in this industry?

Functional-Level Strategy: How can business functions support the business-level strategies?

Finance Human Resources

Operations Marketing and Communications

FIGURE 6.1 Three levels of strategy

192 PART 3 Planning

expansion or reduction, equipment, pricing, and employee development. For example, the Education business unit of McGraw-Hill Education, the publisher of this product, and iFlipd, a weekly textbook rental platform, teamed up allow students to rent select McGraw-Hill titles in both digital and print versions. This strategy is aimed at growing revenue.10

Level 3: Functional-Level Strategy Functional-level strategy applies to the key functional departments or units within the business units. Functional managers lead plan- ning discussions at this level, and the focus is on more tactical issues that support business-level strategies. For example, McGraw-Hill’s decision to go into the textbook leasing business would require marketing managers to decide how to market the pro- gram, royalty managers to determine the formula for paying author royalties, and pro- duction managers to decide the best way to integrate digital and print versions of a product.

Does Strategic Management Work for Small as Well as Large Firms? Evidence reveals that the use of strategic management techniques and processes are asso- ciated with increased small business performance.11 Surprisingly, however, many small business owners do not engage in strategic planning.12 We suspect the cause is a short- term rather than long-term focus. Strategic planning requires a long-term orientation. ●

Evernote is a California-based company of about 325 people that makes apps and other products to help people collect and manage the information they need in their jobs and daily lives. The company recently found that it had been putting so much time and energy into creating a wide array of new features for its products that it risked losing sight of its core purpose. While most customers were happy with the small percentage of Evernote products they chose, it seemed that no one used the same products or had the same experience with the company. So, perhaps by falling prey to the tech industry’s pressure to innovate and constantly release new products, Evernote was expending a lot of its resources supporting features that each had only a very small user base. The goal of new CEO Chris O’Neill is to better align Evernote’s strategy with its core prod- uct by paring back some of its many other offerings.13

Another firm that hopes to refocus on its core strategy is using a slightly different path to get there. Groove HQ, which develops help desk and online customer support software for

small businesses, has fewer than 50 employees, all of whom work remotely. When the company decided to refocus its far- flung staff on core goals like trouble-shooting its long-term plans, finding new customers, and delivering growth for inves- tors, CEO Alex Turnbull decided to hire a business strategy coach. The results of the Groove team’s three-day huddle with its coach were promising in boosting their shared sense of accountability for achieving what they had planned and show- ing them formal business processes for getting there. The ses- sion was so productive that now Turnbull plans to get the team together more often for in-person leadership meetings and retreats.14

YOUR CALL Why do you think Evernote and Groove temporarily lost sight of their strategic goals? Do you agree with their CEOs about their plans for refocusing their respective companies? Why or why not?

EXAMPLE Evernote and Groove HQ Get Started with Strategic Planning

Strategic Management CHAPTER 6 193

6.2 The Strategic-Management Process THE BIG PICTURE The strategic-management process has five steps: Establish the mission, vision, and values statements. Assess the current reality. Formulate corporate, business, and functional strategies. Execute strategy. Main- tain strategic control. All steps may be affected by feedback that enables the taking of constructive action.

When is a good time to begin the strategic-management process? Often it’s touched off by some crisis.

As we’ll see later in the chapter, in 2009 and 2010 Toyota Motor encountered severe quality problems involving what seemed to be uncontrollable acceleration in its auto- mobiles. President Akio Toyoda concluded that these problems were partly due to the company’s “excessive focus on market share and profits,” requiring that the company reorient its strategy toward quality and innovation.15

The Five Steps of the Strategic-Management Process The strategic-management process has five steps, plus a feedback loop, as shown below. (See Figure 6.2.) Let’s consider these five steps, and, along the way, we’ll see how Macy’s has recently implemented each in its efforts to stave off “the retail apocalypse.”

Step 1: Establish the Mission, Vision, and Values Statements We discussed mission, vision, and values statements in Chapter 5. The mission statement, you’ll recall, expresses the organization’s purpose or reason for being. The vision statement states what the organization wants to become, where it wants to go strategically. The values statement describes what the organization stands for, its core priorities, the values its employees embody, and what its products contribute to the world. Macy’s has identified a number of core values, including abiding by ethical practices in every facet of busi- ness, protecting the interests of shareholders, practicing “open and honest communica- tions” with all stakeholders, providing customers with quality and value, treating others “as we want them to treat us,” and being good corporate citizens.16

Step 2: Assess the Current Reality The second step is to do a current reality assessment, or organizational assessment, to look at where the organization stands and see what is working and what could be different so as to maximize efficiency and effectiveness in achieving the organization’s mission. Among the tools for assessing the current reality are SWOT analysis, VRIO analysis, forecasting, and benchmarking, all of which we discuss in Section 6.3. Macy’s is a good example of a firm whose current reality has radically changed.

LO 6-2 Outline the five steps in the strategic-management process.

5. Maintain strategic control

Feedback: Revise actions, if necessary, based on feedback

4. Execute the strategies

2. Assess the current reality

1. Establish the mission, vision, and values statements

3. Formulate corporate, business, and functional strategies

FIGURE 6.2 The strategic-management process The process has five steps.

194 PART 3 Planning

The company was among several big retailers that reported lower 2016 sales despite a 4 percent increase in total retail spending during the holiday shopping season. The “retail apocalypse” predicted by some industry analysts appeared to have begun as customers increasingly preferred the convenience of online shopping to driving to a mall or store. As one writer put it, “growth is in the clicks not the bricks when it comes to retailing.” Like other retailers, Macy’s had fallen back on heavy discounting, which reduced revenues and led it to announce the planned closing, over the next few years, of 100 stores.17

Step 3: Formulate Corporate, Business, and Functional Strategies The next step is to translate the broad mission and vision statements into a corporate strategy, which, after the assessment of the current reality, explains how the organization’s mission is to be accomplished. Three common grand strategies are growth, stability, and defen- sive, as we’ll describe. Macy’s knew it had to “reset our business model to thrive in a future . . . driven by rapid evolution in consumer preferences and shopping habits.”18 This resetting included streamlining management decision making to enable faster responses to market changes, adding more exclusive merchandise to help differentiate the Macy’s

shopping experience and bring in 40 percent of sales rather than the previous 29 percent, tracking sales data better in order to improve price-cutting for unsold items, and finding ways to bring customers back to the physical store.19

Strategy formulation is the process of choosing among different strategies and altering them to best fit the organi- zation’s needs. Formulating strategy is a time-consuming process both because it is important and because the strat- egy must be translated into more specific strategic plans, which determine what the organization’s long-term goals should be for the next one to five years.

In Sections 6.4 and 6.5 we discuss the process by which managers create corporate-level strategy and business-level strategy, respectively.

Step 4: Execute the Strategy Putting strategic plans into effect is strategy implementation. Strategic planning isn’t effective, of course, unless it can be translated into lower-level plans. This means that top managers need to check on possible roadblocks within the organization’s structure and culture and see if the right people and control systems are available to execute the plans.20 Strategic imple- mentation is essential for success and is considered to elicit the greatest challenge for managers.21 “You have to create more reasons for consumers to come into our store,” Macy’s

outgoing CEO advised his successor. To achieve that, Macy’s set out to enhance the cus- tomer’s store experience, opening boutiques for brands like Apple and Best Buy and even making Etsy offerings available in some locations. Among other changes, customers can now check store inventory on a mobile app before they travel to the store, and they can order online and pick up at the store, which usually generates additional purchases.22

Step 5: Maintain Strategic Control: The Feedback Loop Strategic control con- sists of monitoring the execution of strategy and making adjustments, if necessary. To keep strategic plans on track, managers need control systems to monitor progress and take corrective action—early and rapidly—when things start to go awry. Corrective action con- stitutes a feedback loop in which a problem requires that managers return to an earlier step to rethink policies, redo budgets, or revise personnel arrangements. Macy’s had bet- ter-than-expected sales during the 2017 holiday shopping season and saved $300 million in annual expenses by closing some stores, capital it will reinvest in the business. The new

Macy’s store in Manhattan, New York, USA. ©Kord.com/ age fotostock/Getty Images

Strategic Management CHAPTER 6 195

CEO says the company is “focused on continuous improvement and will take the neces- sary steps to move faster, execute more effectively and allocate resources to invest in growth.”23,24

We describe strategic implementation and strategic control in Section 6.6. We discuss the details of the steps in the strategic-management process in the rest of

this chapter. You can get a good sense of this process by reading Maria Kato’s descrip- tion of the process at her employer (see I Wish… feature). ●

Maria Kato works as a marketing manager for a local meal kit delivery company. This small start-up company began with an opportunity to compete with larger meal kit delivery companies but struggled to maintain strategic control due to a lack of strategy formulation and execution.

Maria knew what her company’s mission was: “To provide customers with a convenient and healthy way to eat dinner.” However, this mission was not clearly communicated to the company’s employees.

“This was something that we didn’t tell our employees explicitly. With each new hire, we threw them into the culture and expected them to understand that this is how we deal with customers. There was no protocol in place for managing cus- tomer concerns,” said Maria. “Looking back, I would have liked to create a guide to help the customer service representa- tives deal with customers. Also, upon hiring, it would have been nice to have an orientation where we established our company mission and what our overall goals were.”

One of the start-up company’s biggest opportunities was to address the pain points that customers had with other meal kit delivery companies. “Some customers said they don’t like chopping or doing all of the prep work involved with cooking. Despite our competitors not being able to

address these customer pain points, the market was still growing. People were still looking for a convenient way to eat at home,” said Maria.

“Instead of sending a customer an entire head of cabbage, we would give them the perfect amount of cabbage chopped up already. If a customer were to make a slaw for dinner one night, we would have the vinaigrette made for them and the cabbage chopped up so that all he had to do was mix it in a

bowl. We changed our product constantly to meet customer demands,” said Maria.

U n f o r t u n a t e l y, t h e c o m p a n y ’s weaknesses and threats overcame their strengths and opportunities because they did not have a strategy in place to achieve their mission. “We just kind of threw our goals out there and didn’t hold anyone accountable for them,” said Maria. “We had a ‘pie in the sky’ goal, but we had no idea how

to get there.” After suffering financially and experiencing significant

employee layoffs, the start-up company was eventually bought out by a larger company that had the resources to execute on the plans and strategies that never came to fruition for the start-up. Today, the start-up’s employees are part of the larger company, learning from their missteps and using it to form sus- tainable strategies.

Courtesy of Maria Kato.

I Wish… …my company would have assessed its current reality before opening the doors for business.

Maria Kato Courtesy Maria Kato

Assessing Strategic Thinking This survey is designed to assess an organization’s level of strategic thinking. Please be prepared to answer these ques- tions if your instructor has assigned Self-Assessment 6.1 in Connect.

1. What is the level of strategic thinking? Are you surprised by the results?

2. If you were meeting with an executive from the company you evaluated, what advice would you provide based on the survey results and what you learned about assessing current reality?

SELF-ASSESSMENT 6.1

196 PART 3 Planning

6.3 Assessing the Current Reality THE BIG PICTURE To develop a grand strategy, you need to gather data and make projections, using tools such as SWOT analy- sis, VRIO analysis, forecasting, and benchmarking.

Figure 6.2 (and Chapter 5) demonstrate that the first step in the strategic-management process is to establish the organization’s mission, vision, and values statements. The second step in the strategic-management process, assess the current reality, looks at where the organization stands internally and externally—to determine what’s working and what’s not, to see what can be changed to create sustainable competitive advantage: Sustainable competitive advantage exists when other companies cannot duplicate the value delivered to customers. An assessment helps to create an objective view of everything the organization does: its sources of revenue or funding, its work-flow processes, its organizational structure, client satisfaction, employee turnover, and other matters.

Among the tools for assessing the current reality are SWOT analysis, VRIO analysis, forecasting, and benchmarking.

SWOT Analysis SWOT analysis is a good first step at gaining insight into whether or not a company has competitive advantage. SWOT analysis is a situational analysis in which a company assesses its strengths, weaknesses, opportunities, and threats. Results from a SWOT analysis provide you with a realistic understanding of your organization in relation to its internal and external environments so you can better formulate strategy in pursuit of its mission. (See Figure 6.3.)

LO 6-3 Explain how an organization assesses the competitive landscape.

INSIDE MATTERS—Analysis of Internal Strengths & Weaknesses

S—Strengths: inside matters Strengths could be work processes, organization, culture, sta , product quality, production capacity, image, financial resources & requirements, service levels, other internal matters.

O—Opportunities: outside matters Opportunities could be market segment analysis, industry & competition analysis, impact of technology on organization, product analysis, governmental impacts, other external matters.

W—Weaknesses: inside matters Weaknesses could be in the same categories as stated for Strengths: work processes, organization, culture, etc.

T—Threats: outside matters Threats could be in the same categories as stated for Opportunities: market segment analysis, etc.

OUTSIDE MATTERS—Analysis of External Opportunities & Threats

FIGURE 6.3 SWOT analysis SWOT stands for strengths, weaknesses, opportunities, and threats.

Strategic Management CHAPTER 6 197

Inside Matters: Analysis of Internal Strengths and Weaknesses Does your organization have a skilled workforce? a superior reputation? strong financing? These are examples of organizational strengths—the skills and capabilities that give the organi- zation special competencies and competitive advantages in executing strategies in pursuit of its vision.

Or does your organization have obsolete technology? outdated facilities? a shaky marketing operation? These are examples of organizational weaknesses—the drawbacks that hinder an organization in executing strategies in pursuit of its vision.

Outside Matters: Analysis of External Opportunities and Threats Is your organization fortunate to have weak rivals? emerging markets? a booming economy? These are instances of organizational opportunities—environmental factors that the orga- nization may exploit for competitive advantage.

Alternatively, is your organization having to deal with new regulations? a shortage of resources? substitute products? These are some possible organizational threats— environmental factors that hinder an organization’s achieving a competitive advantage.

S—STRENGTHS (INTERNAL STRENGTHS)

W—WEAKNESSES (INTERNAL WEAKNESSES)

•  Faculty teaching and research abilities •  High-ability students •  Loyal alumni •  Strong interdisciplinary programs

•  Limited programs in business •  High teaching loads •  Insufficient racial diversity •  Lack of high-technology infrastructure

O—OPPORTUNITIES (EXTERNAL OPPORTUNITIES)

T—THREATS (EXTERNAL THREATS)

•  Growth in many local skilled jobs •  Many firms give equipment to college •  Local minority population increasing •  High school students take college classes

•  Depressed state and national economy •  High school enrollments in decline •  Increased competition from other colleges •  Funding from all sources at risk

TABLE 6.1 SWOT Characteristics That Might Apply to a College

The world’s leading automaker and most valuable auto brand, Toyota has been making cars since 1937 and sells them in more than 170 countries. North America is one of its top two markets; the other is Japan, its headquarters. Along with the luxury Lexus brand, Toyota markets the Scion, Corolla, Camry, Avalon, Sienna, Rav-4, Highlander, 4Runner, and Prius, among other models. While the company plans big investments in automated driving and artificial intelligence and posted 2017 operating profits of $17.54 billion, it has been struggling, par- ticularly in North America, due to heavy competition and

discounting. Executive Vice President Osamu Nagata says of the North American market, “We still have a lot of work to do there.”25

If you were a top Toyota manager, what strengths, weak- nesses, opportunities, and threats would you identify in a SWOT analysis?

Internal Strengths The original “Toyota Way” stressed the values of continuous improvement and eliminating waste, from assembly line to boardroom. This innovative and much-copied

EXAMPLE SWOT Analysis: How Would You Analyze Toyota?

The SWOT analysis is divided into two parts: inside matters and outside matters— that is, an analysis of internal strengths and weaknesses and an analysis of external oppor- tunities and threats. The following table gives examples of SWOT characteristics that might apply to a college. (See Table 6.1.)

198 PART 3 Planning

philosophy helped Toyota develop a culture focused on plan- ning, identifying rather than hiding problems, and prizing team- work. The company’s continued focus on quality and reliability, called the Toyota Production System, has enhanced its image as a strong brand.26 Toyota models regularly make J.D. Power’s rankings for dependability; in 2017, the Avalon, Camry, Corolla, and Yaris were all among Most Dependable Sedans.27

Toyota is also known for its strong research and develop- ment, with 17 R&D facilities in eight countries and a research budget of nearly $10 billion. The company is outspent in R&D only by Volkswagen.28 Toyota’s research has led to innovations like its best-selling hybrid car, the Prius. The company also has solid cash reserves,29 and the enormous value of its brand is another strength.

Internal Weaknesses Beginning in 2000, Toyota suffered some widely publicized recalls, due to sticking accelerators (causing a U.S. criminal probe and $1.2 billion penalty) and an array of potential hazards i n c l u d i n g u n s t a b l e steering columns and faulty airbags. Things didn’t improve in 2016, when worldwide the company recalled millions more cars, including nearly 6 million for problems with Takata- branded airbags.30 In 2017, the airbag recall continued, and thousands of Tacoma, Lexus, and Prius models were also recalled for various problems. In early 2018, certain Sequoia, Tundra, Camry, Lexus, and Prius models were recalled as well.31 While recalls (including for faulty Takata airbags) are not unique to Toyota, they weakened its image in passenger safety and helped reduce sales.

Toyota currently sells more than half its cars in Japan and North America and earns almost two-thirds of its revenue from these two markets.32 In China, however, the largest car market in the world, Toyota has only 4.5% share, trailing competitors like General Motors and Volkswagen, which also offer many more brands than Toyota’s four.

External Opportunities It’s anticipated that demand for hybrid vehicles will only increase, which will help Toyota profit from the investment it has made in such autos. At the same

time, companies all over the world are exploring autonomous cars as the next big opportunity, in a market that could be worth $45 billion within 10 years. Even Google has joined Ford, Tesla, and others in developing the required technology.33 Toyota will need to be in this market as well.

The release of new models, with exciting designs and inno- vative features, represents a constant opportunity in all Toyota’s markets. The company is also moving aggressively in India, the world’s fifth-largest car market. Its initial forays there, with no-frills models, were unsuccessful, but the company has changed its strategy, targeting an expanding middle class with high-end vehicles like SUVs. “We are now a little successful in India, but it is not enough,” says Akito Tachibana, managing director of Toyota Kirloskar Motor.34

External Threats Fluctuations in currency exchange rates regularly threaten every global company, and Toyota is no exception. Its assembly lines in Japan have been halted

more than once when parts suppliers were hampered by earth- quake damage, which, along with flooding, remains an ever-pres- ent risk. The company could face U.S. tariffs on cars it makes in Mexico, raising prices in North America, if the Trump administration seeks changes in the North American Free Tr a d e A g r e e m e n t (NAFTA).35 And compet- itors have had time to catch up with Toyota on q u a l i t y a n d s a f e t y.

Finally, given the number of companies pushing ahead with electric and self-driving cars, and the possibility that the U.S. car market is reaching peak size, Toyota faces a con- tinuing threat from competitors36 and even the possibility of a saturated market.

YOUR CALL Which internal strengths could Toyota make better use of in the future? Which internal weaknesses are most important for it to address? Is Toyota situated to take advantage of all its current external opportunities? Which external threats should it priori- tize, and why?

A Toyota Yaris hybrid. ©Michele Eve Sandberg/Corbis Historical/Getty Images

Strategic Management CHAPTER 6 199

Using VRIO to Assess Competitive Potential: Value, Rarity, Imitability, and Organization Say you have an idea for a product or service, such as “Let’s develop a ride service for kids, similar to Uber and Lyft for adults.” Nick Allen started such a business in San Francisco in 2014 and called it Shuddle.37 How does someone determine whether a new idea like Shuddle might work? A VRIO analysis can help.

VRIO (pronounced by its letters, “V-R-I-O”) is a framework for analyzing a resource or capability to determine its competitive strategic potential by answering four questions about its value, rarity, imitability, and organization.38 The questions are shown in Figure 6.4.

VRIO is a way to analyze a firm’s competitive potential by asking four questions about value, rarity, imitability, and organi- zation. A yes answer to each question means the resource or capability—that is, the business idea—has a competitive advan- tage (see Figure 6.4).

Value: Is the Resource or Capability Valuable? Valuable means “Does the resource or capability allow your firm to exploit an opportunity or neutralize a threat?” If the answer is yes, the resource puts you in a competitive position. If no, then you’re at a competitive disadvantage.

Example: The idea of an on-demand ride service for unaccom- panied children provided by drivers in their personal cars exploits an opportunity—because some parents say they really need such a service.

Rarity: Is the Resource or Capability Currently Con- trolled by Only a Few Firms or No Other Firms? If the answer is yes, that status gives your firm at least some temporary competitive advantage. If the answer is no (several competing firms exist), you’re at least at equal competitive advantage, because you’re no worse than the competition.

Example: No other firms in your area are yet offering on- demand children’s ride services, but Uber and Lyft would love to drive the kids around town. This is not a competitive advantage.

Imitability: Is the Resource or Capability Costly for Other Firms to Imitate? If the answer is yes, that gives you a defi- nite competitive advantage. If no—because other firms can get into the market without much expense—that gives you only a tem- porary competitive advantage.

Example: Offering a children’s ride service with drivers using their own personal cars is probably not so costly that other firms might not try to imitate you. As we already said, Uber and Lyft can offer this service. Here you have no competitive advantage.

Organization: Is the Firm Organized to Exploit the Resource or Capability? If the answer is yes—that is, the firm has the necessary structure, culture, control systems, employee policies, and particularly financing—then, assuming yes answers on Value, Rarity, and Imitability, it would seem the firm has the competitive potential to go forward. If no, it may only have a temporary competitive advantage.

Is the resource or capability....

and is the Firm....

You have competitive disadvantage

Valuable? No

Yes

No

Yes

No

Yes

No

Yes

You are about equal competitively

Rare?

You have temporary competitive advantage

Costly to imitate?

You have unexploited competitive advantage

Organized to exploit value, rarity, imitability?

“Yes” to all four gives you sustained competitive advantage

FIGURE 6.4 Is the resource or capability . . . Source: Adapted from F. T. Rothaermel, Strategic Management: Concepts and Cases (New York: McGraw-Hill Education, 2012), p. 91.

200 PART 3 Planning

Example: San Francisco’s Shuddle began operating in fall 2014 with 350 independent- contractor drivers and soon grew to serve about 2,600 customers booking 7,000 rides a month. But the service was more expensive than Uber and Lyft (owing to higher expenses for more-extensive background checks and additional insurance for Shuddle drivers), with trips averaging $24 each. Unfortunately, Shuddle suffered from having not only too few riders but also too few drivers to reach an ideal balance between supply and demand. It also was unable to raise additional venture capital money. Clearly, then, it did not have everything needed to answer yes to the question of “organization.” All told, Shuddle did not have competitive advantage, and it went out of business in April 2016.39

Forecasting: Predicting the Future Once they’ve analyzed their organization’s Strengths, Weaknesses, Opportunities, and Threats, planners need to do forecasting for making long-term strategy. A forecast is a vision or projection of the future.

Lots of people make predictions, of course—and often they are wrong.47 In the 1950s, the head of IBM, Thomas J. Watson, estimated that the demand for computers would never exceed more than five for the entire world. In the late 1990s, many computer experts predicted power outages, water problems, transportation disruptions, bank shutdowns, and far worse because of computer glitches (the “Y2K bug”) associated with the change from year 1999 to 2000.

Who are now the lords of tech? Which giant companies control our digital life?

It’s generally agreed that the “frightful five” companies that dominate the Internet economy are Amazon, Apple, Facebook, Google, and Microsoft.40 These are the companies that power the virtual technology infrastructure that delivers “online search, messaging, advertising, applications, computing, and storage on demand,” says one report. “They own the digital equivalent of railroad lines just as the Web enters a new phase of growth,” rapidly expanding in cloud computing, mobile devices, social networks, and other services.41

The Big Five Platforms: Competitive Advantages The basic building blocks dominated by these five companies on which every other business depends are called platforms, points out technology writer Farhad Manjoo.42 Each platform also represents a company’s competitive advantage. Amazon has cloud computing, on which many start-ups run, as well as a shopping and shipping infrastructure.43 Apple controls one form of mobile phone operating system and the apps that run on it; Google controls another. Google (now part of parent com- pany Alphabet) also rules web search and has its own cloud infrastructure. Google and Facebook dominate the Internet advertising business, and Facebook “keeps amassing greater power in that most fundamental of platforms: human social relationships,” Manjoo writes. Microsoft still has Windows, the king of desktop operating systems, and has moved aggres- sively into cloud computing.

Who’s Up, Who’s Down? In the struggle for competitive advantage, the state of play is constantly shifting. “Not long ago people thought IBM, Cisco Systems, Intel, and Oracle were unbeatable in tech,” Manjoo observes. “They’re all still large companies, but they’re far less influential than they were once.”44 Meanwhile, Yahoo!, once a huge success story, may be running out of time. Its ad revenues are slipping far behind those of its rivals, and its decline is being hastened by the rise of mobile devices and social media.45

The Stack Fallacy. Why do some companies lose their competitive advantage? Venture capitalist Anshu Sharma sug- gests one possibility. Although a company may have the resources and brainpower to build “the next big thing,” it may subscribe to the stack fallacy—“the mistaken belief that it is trivial to build the layer above yours” in the stack that is the layer cake of technology.46 The reason, argues Sharma: the companies don’t have firsthand understanding of what custom- ers of the product one level above theirs in the stack actually want. Thus, Oracle, which is a database company, can’t seem to beat Salesforce in building database management software for customer relations because Oracle doesn’t truly understand how this kind of customer relations works.

YOUR CALL If you can visualize a “frightful 5” Internet company losing its competitive advantage, how do you think it would come about?

EXAMPLE Developing Competitive Advantage: Who Dominates the Internet Economy and Who’s Losing?

Strategic Management CHAPTER 6 201

Of course, the farther into the future one makes a prediction, the more difficult it is to be accurate, especially in matters of technology. Yet forecasting is a necessary part of planning.

Trend Analysis A trend analysis is a hypothetical extension of a past series of events into the future. The basic assumption is that the picture of the present can be projected into the future. This is not a bad assumption, if you have enough historical data, but it is always subject to surprises. And if your data are unreliable, they will produce erroneous trend projections.

An example of trend analysis is a time-series forecast, which predicts future data based on patterns of historical data. Time-series forecasts are used to predict long-term trends, cyclic patterns (as in the up-and-down nature of the business cycle), and seasonal variations (as in Christmas sales versus sum- mer sales).

Contingenc y Planning: Predic ting Alternative Futures Contingency planning—also known as scenario planning and scenario analysis—is the creation of alternative hypothetical but equally likely future conditions. For example, scenarios may be created with spreadsheet software such as Microsoft Excel to present alternative combinations of different factors—different economic pictures, different strategies by competitors, different budgets, and so on. The Example box illustrates contingency planning for firms affected by Hurricane Harvey.

The days of crystal balls are gone. Modern forecasting techniques rely on sophisticated mathematical simulation models analyzed on computers. ©Eric Audras/Getty Images

companies must have plans in place that direct employees to get parts, supplies, and other needs from other than their usual warehouse or distribution center. If the emergencies can be anticipated, as extreme storms often are, companies that are well prepared with contingency plans are able to move more quickly than their competitors and avoid both shortages and price increases.48 They can also protect employees’ safety if conditions call for a temporary shutdown.

Although CVS had to close almost a quarter of its stores in areas battered by Harvey, the drugstore chain’s contingency plan went into action. The company pre- pared its mobile pharmacy to move in as soon as it was deemed safe, and in the meantime, it was able to offer emer- gency prescriptions refills to customers who were not able to receive mail orders of their medications due to the tempo-

rary suspension of UPS, FedEx, and even postal service in the aftermath of the storm.49

FedEx had a contingency plan as well. After Harvey forced the closure of local airports and flooded many major roads, the

EXAMPLE Contingency Planning: How CVS, Walgreens, and FedEx Coped with Hurricane Harvey

Traffic on flooded roads in Houston, Texas. ©IrinaK/Shutterstock

Severe weather events like Hurricane Harvey, which flooded Houston and parts of Louisiana in 2017, demonstrate the critical need for organizations of all kinds to have contingency plans. Especially for maintaining their supply chains, for example,

202 PART 3 Planning

Because the scenarios try to peer far into the future—perhaps five or more years—they are necessarily written in rather general terms. Nevertheless, the great value of contin- gency planning is that it not only equips an organization to prepare for emergencies and uncertainty, it also gets managers thinking strategically.

Benchmarking: Comparing with the Best Benchmarking is a process by which a company compares its performance with that of high- performing organizations.53 Consulting firm Bain & Company notes that “the objective of benchmarking is to find examples of superior performance and understand the processes and practices driving that performance. Companies then improve their performance by tailoring and incorporating these best practices into their own operations—not by imitating, but by innovating.”54 Airlines, investment firms, and cities regularly use benchmarking. For example, Southwest might compare its on-time departures and lost bag statistics against key competitors and the industry as a whole. Cities similarly benchmark quality of life measures against other cities in the region, country, or world.55 ●

Benchmarking entails measuring and comparing performance across companies. Its effectiveness depends on comparing multiple companies on strategically relevant outcomes such as efficiency, customer service, or safety. Do you think companies would be reluctant to share their performance data with competitors? ©Ingram Publishing

package delivery company faced delays and disruptions in its service. It released a statement saying, “Our priority is always the safety of our team members and providing service to our customers. FedEx has implemented contingency plans to lessen the effect of Hurricane Harvey on operations and miti- gate potential service delays.”50 The company stepped in to offer support to relief organizations like the American Red Cross and Heart to Heart, which were working to get supplies to storm-ravaged communities.51

CVS’s competitor Walgreens was well prepared too and went into action before the storm arrived. “We began working on delivery alternatives before Hurricane Harvey hit,” its CEO said in

a statement. “We have called all patients in the affected areas and shipped medicines in advance to alleviate many issues ahead of time. The pharmacy also worked with select Walgreens stores in ‘safe areas’ to serve as depot locations to dispense medicines for those who are unable to get their medicine deliveries.”52

YOUR CALL How much do you think companies like FedEx and UPS can do to prepare in advance for a major weather event like a devas- tating hurricane? What other contingency plans could compa- nies like CVS and Walgreens put in place?

Strategic Management CHAPTER 6 203

6.4 Establishing Corporate-Level Strategy THE BIG PICTURE Common corporate-level strategies are growth, stability, or defensive strategies. The Boston Consulting Group (BCG) matrix and diversification considerations are used to formulate corporate strategy.

After assessing the current reality (Step 2 in the strategic-management process) it’s time to focus on corporate-level strategies. Three methods to understand corporate-level strategies are common grand strategies, the Boston Consulting Group (BCG) matrix, and diversification.

Three Overall Types of Corporate Strategy The three fundamental types of corporate strategies are growth, stability, and defensive.

1. The Growth Strategy A growth strategy is a grand strategy that involves expansion—as in sales revenues, market share, number of employees, or number of cus- tomers or (for nonprofits) clients served.

Often a growth strategy takes the form of an innovation strategy, growing market share or profits by innovating improvements in products or services (as in using an e- business approach in calculatedly disseminating information). We consider innova- tion further in Chapter 10.

Example: Etsy, a company based in Brooklyn, New York, runs an online marketplace for handmade and vintage goods—jewelry, housewares, T-shirts—for which it charges fees to sellers for use of its platform. Profits and revenues have grown multiple times over the last six years,56 and third-quarter revenues for 2017 were more than $106 mil- lion, 21.5 percent higher than the year before and higher than had been estimated for the quarter.57 What’s behind the surge? In part it was an increase in the number of buy- ers and sellers using the platform, including internationally.58 Another factor was the creation of a separate online enterprise called Etsy Manufacturing, a service that matches sellers with small manufacturers, many of which had been devastated by the shift of U.S. production generally to low-wage countries.59 The innovation allowed Molly Goodall, for instance, to evolve from sewing her quirky animal coats one at a time at her dining room table to using small manufacturers near her Texas home.

2. The Stability Strategy A stability strategy is a grand strategy that involves little or no significant change. Example: Without much changing their product, the makers of Timex watches decided to stress the theme of authenticity (“Wear it well”) over durabil- ity (the old slogan was “It takes a licking and keeps on ticking”). In an age of smartphones and other gadgets, when people don’t need a watch to tell the time, the new theme of authenticity makes sense, according to The New York Times, “as consumers watching what they spend seek out products with longevity whose ability to stand the test of time implies they are worth buying.”60 Most recently, the company has brought out a line of fashion watches with the theme “Share Your Style, #Take Time.”61

3. The Defensive Strategy A defensive strategy, or a retrenchment strategy, is a grand strategy that involves reduction in the organization’s efforts. Example: The “big sales numbers that have sustained the recorded music business for years are way down, and it is hard to see how they could ever return to where they were even a decade ago,” says one analysis. “The result is that the music industry finds itself fighting over pennies while waving goodbye to dollars.”62 Principal sources of revenue are now largely the

LO 6-4 Explain the three methods of corporate-level strategy.

204 PART 3 Planning

result of a 45% increase in streaming revenue, rather than from sales of CDs. There is also a growing but still special- ized market for vinyl records.63

Variations of the three strategies are shown below. (See Table 6.2.)

The BCG Matrix Developed by the Boston Consulting Group, the BCG matrix is a management strategy by which companies evalu- ate their strategic business units on the basis of (1) their busi- ness growth rates and (2) their share of the market. Business growth rate describes how quickly the entire industry is growing. Market share is the business unit’s share of the market in relation to competitors. The purpose of evaluat- ing each business unit in the company’s portfolio is to identify the most effective way to direct the company’s financial resources. In general, the BCG matrix suggests that an organization will do better in fast-growing markets in which it has high market share rather than in slow- growing markets in which it has low market share. These concepts are illustrated below. (See Figure 6.5.)64

A company should usually operate by investing profits from one or more successful but slow-growing units, called cash cows, into new products or services called stars that have demonstrated strong potential in growing markets and should be appropriately funded. Likewise, the BCG matrix will identify risky units with potential that may or may not produce revenue in the future and should be closely monitored. These are question marks. The final cat- egory, dogs, consists of units that are no longer succeeding and should be shut down or sold.

According to an analysis of Dell by the Boston Consulting Group, the PC continues to be a cash cow for the computer marker, despite slowing growth in the PC

TABLE 6.2 How Companies Implement Overall Corporate-Level Strategies

GROWTH STRATEGY

•   It can improve an existing product or service to attract more buyers.

•   It can increase its promotion and marketing efforts to try to expand its market share.

•   It can expand its operations, as in taking over distribution or manufacturing previously handled by someone else.

•  It can expand into new products or services. •  It can acquire similar or complementary businesses. •   It can merge with another company to form a larger

company.

STABILITY STRATEGY

•   It can go for a no-change strategy (if, for example, it has found that too-fast growth leads to foul-ups with orders and customer complaints).

•   It can go for a little-change strategy (if, for example, the company has been growing at breakneck speed and feels it needs a period of consolidation).

DEFENSIVE STRATEGY

•  I t can reduce costs, as by freezing hiring or tightening expenses.

•   It can sell off (liquidate) assets—land, buildings, inventories, and the like.

•  It can gradually phase out product lines or services. •   It can divest part of its business, as in selling off entire

divisions or subsidiaries. •  It can declare bankruptcy. •   It can attempt a turnaround—do some retrenching, with a

view toward restoring profitability.

High

High

Stars Have high growth, high market share—definite keepers

Cash cows Have slow growth but high market share— income finances stars and question marks

Question marks Risky new ventures— some will become stars, some dogs

Dogs Have low growth, low market share—should be gotten rid of

Market growth

rate

Market share

Low

Low

FIGURE 6.5 The BCG matrix Market growth is divided into two categories, low and high. Market share is also divided into low and high. Thus, in this matrix, “stars” are business units that are highly desirable (high growth, high market share), compared to “dogs,” which are not so desirable (low growth, low market share).

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market. Dell has substantial market share here, which means it is still earning profits from its personal computer unit that it can invest in its other products, particularly stars. Dell’s innovative ultrathin monitors have undergone some design changes, which is expected to allow them to develop into stars with strong growth and high market share in a market that is still growing. In the BCG matrix view, they may then eventually become cash cows. The company’s entry into cloud computing is seen as a question mark because it is a new venture in a market that is quickly filling up. Dell smart phones, on the other hand, were unable to compete against such titans as Apple; one analyst said the product did not meet customer needs and preferences. High investment combined with low return made this Dell product a dog.65

One drawback of the BCG matrix is that in practice it is fairly easy for managers to mischaracterize their business units, thereby erroneously drawing investment away from cash cows that still need it or writing off as dogs units or product lines that can yet flourish.

Now that you have learned about the tools companies use to create their grand strat- egies, what type of skills do you think managers need to use these tools? Do you think you possess those skills?

Diversification Strategy The strategy of moving into new lines of business, such as Amazon purchasing Whole Foods or CVS buying Aetna, is called diversification. Other examples include JAB Holdings, a European investment firm, acquiring bakery-café chain Panera Bread. This merger establishes a “formidable food-focused portfolio that includes Keurig Green Mountain, Krispy Kreme Doughnuts, Peet’s Coffee & Tea, and Caribou Coffee Company.” In addition to fitting in with JAB Holdings’ other business units, Panera was a good purchase because it has demonstrated steady sales growth during a period in which other chains were hurting.66

Companies generally diversify to either grow revenue or reduce risk. They grow rev- enue because the company now has new products and services to sell. When a company purchases a new business that is related to the company’s existing business portfolio, the organization is implementing related diversification. Examples are Disney’s purchase of 21st Century Fox and the combination of United Technologies and Rockwell Collins in the aviation industry. Companies sometimes attempt to reduce risk by using an unre- lated diversification strategy. Unrelated diversification occurs when a company acquires another company in a completely unrelated business. This strategy reduces risk because losses in one business or industry can be offset by profits from other companies in the corporate portfolio. Amazon’s purchase of Whole Foods is a good example, The deal provides Amazon with access to hundreds of physical stores and provides a solid entry into the food industry.67

Organizations can also pursue a diversification strategy through vertical integration. In vertical integration, a firm expands into businesses that provide the supplies it needs to make its products or that distribute and sell its products. For many years, Hollywood movie studios followed this model, not only producing movies, but also distributing them and even owning their own theaters.68 Today, Netflix follows the same path by producing and distributing its own entertainment programming. Starbucks has long fol- lowed a plan of vertical integration by buying and roasting all its own coffee and then selling it through Starbucks stores.69 ●

206 PART 3 Planning

6.5 Establishing Business-Level Strategy THE BIG PICTURE Business-level strategy begins with an assessment of Porter’s five competitive forces. Companies then are advised to select from one of four competitive strategies.

The creation of business-level strategy flows from the details contained in corporate strategies. The overall objective of strategy formulation at this level is to answer the question of how the company wants to compete in industries represented by the busi- ness units. Harvard professor Michael Porter is credited with devising the models and processes for establishing business-level strategies. We start by focusing on his analy- sis of his five competitive forces and then delve into a discussion of his four key com- petitive strategies.

Porter’s Five Competitive Forces What determines competitiveness within a particular industry? After studying several kinds of businesses, strategic-management expert Michael Porter suggested, in his Porter’s model for industry analysis, that business-level strategies originate in five primary competitive forces in the firm’s environment: (1) threats of new entrants, (2) bargaining power of suppliers, (3) bargaining power of buyers, (4) threats of substitute products or services, and (5) rivalry among competitors.70

1. Threats of New Entrants New competitors can affect an industry almost overnight, taking away customers from existing organizations. For example, since Starbucks found success by transforming expensive coffee drinks into an affordable necessity, other food chains like McDonald’s and Dunkin Donuts, which once focused on hamburgers and donuts, respectively, have stepped up promotion of their own coffee. They now regularly introduce new products to compete with Starbucks’ core offering. Dunkin Donuts is even considering dropping the word “Donuts” from its name to highlight its new focus on coffee.71

2. Bargaining Power of Suppliers Some companies are readily able to switch suppliers in order to get components or services, but others are not. Starbucks has actively diversified the supply chain for all the inputs it uses, from food and beverage ingredients to signage, packaging, and energy. In this way, the company limits the influ- ence of any one supplier on its ability to continue operations. It has also established a supplier diversity program; among other qualifications, “suppliers interested in doing business through Starbucks U.S./Canadian Supplier Diversity Program must be a U.S. or Canadian citizen or legal resident and 51% owned and operated by a women, minor- ity, veteran, person with disability, LGBTQ, or a socio-economically disadvantaged small business.”72

3. Bargaining Power of Buyers Informed customers become better negotiators. For example, use of the Internet enabled one of your authors to get a higher trade-in on his current vehicle and a lower sales price on a new car. Starbucks’ loyalty program lets customers earn “star” points that can be redeemed for discounts in their stores as well as at other locations. The company sweetened the program by starting a “gold level” program that comes with perks like free refills on coffee and tea and free food and drinks. It takes 30 stars over a 12-month period to earn this benefit.73

LO 6-5 Discuss Porter’s five competitive forces and the four techniques for formulating strategy.

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4. Threats of Substitute Products or Services Like all retailers, Starbucks must ensure that customers continue to prefer its products to the many options available, not only other brands of coffee (purchased in store, online, or in the supermarket), but also other kinds of drinks, which may be less expensive or have lower sugar content. Even the compa- ny’s innovative “third place” business model, which offers customers an alternative to office and home as a place to linger over an uninterrupted cup of coffee, is no longer unique, so customers can now make other choices for socializing with family friends as well.74

5. Rivalry among Competitors The preceding four forces influence the fifth force, rivalry among competitors. Think of the wild competition among food retailers and the enormous number of places you can get a cup of coffee, including at home. Once again, the Internet has intensified rivalries among all kinds of organizations.

An organization should do a good SWOT analysis that examines these five competi- tive forces, Porter felt. Then it was in a position to formulate effective strategy, using what he identified as four competitive strategies, as we discuss in the next section.

To what extent do you think that a current or past employer was good at strategic thinking? Based on past research, firms that are better at strategic thinking should out- perform those that are not.

Porter’s Four Competitive Strategies Porter’s four competitive strategies (also called four generic strategies) are (1) cost- leadership, (2) differentiation, (3) cost-focus, and (4) focused-differentiation. The first two strategies focus on wide markets, the last two on narrow markets. Time Warner, which produces lots of media and publications, serves wide markets around the world. Your neighborhood video store (if one still exists) serves a narrow market of just local customers.

Let’s look at these four strategies.

1. Cost-Leadership Strategy: Keeping Costs and Prices Low for a Wide Market The cost-leadership strategy is to keep the costs, and hence prices, of a prod- uct or service below those of competitors and to target a wide market.

This puts the pressure on R&D managers to develop products or services that can be created cheaply, production managers to reduce production costs, and marketing man- agers to reach a wide variety of customers as inexpen- sively as possible.

Firms implementing the cost-leadership strategy include Timex, IKEA, computer maker Acer, retailers Walmart and Home Depot, and pen maker Bic.

2. Differentiation Strategy: Offering Unique and Superior Value for a Wide Market The differen- tiation strategy is to offer products or services that are of unique and superior value compared with those of com- petitors but to target a wide market.

Because products are expensive, managers may have to spend more on R&D, marketing, and customer ser- vice. This is the strategy followed by Ritz-Carlton hotels and the makers of Lexus automobiles.

The strategy is also pursued by companies trying to create brands to differentiate themselves from competi- tors. Bottled water brands like Dasani and Poland Spring invest in differentiation strategies based on packaging, convenience, health benefits, and even appeals to status, though their products are essentially all the same.75

Focused differentiation. Ford Motor Co. is building 250 high- performance GT supercars a year costing $450,000 each. The cars are so exclusive that buyers have to convince the company, through writing and supporting videos and social media posts, of their enthusiasm for driving it. “We really want to find those customers who will use this car and drive this car and be true ambassadors for Ford,” says Henry Ford II, great-great grandson of the founder. The company clearly does not want the GT to become an object of the super wealthy to be stored away. ©Stephen Smith/Sipa USA/Newscom

208 PART 3 Planning

3. Cost-Focus Strategy: Keeping Costs and Prices Low for a Narrow Market The cost-focus strategy is to keep the costs, and hence prices, of a product or service below those of competitors and to target a narrow market.

This is a strategy often executed with low-end products sold in discount stores, such as low-cost beer or cigarettes, or with regional gas stations, such as the Terrible Herbst, Rotten Robbie, and Maverik chains in parts of the West. Red Box, originally a kiosk- based video rental company, has added an on-demand streaming service with low costs. But, says one analyst, “The upside is similarly limited, since the appeal will mainly be to its existing kiosk customers.”76

Needless to say, the pressure on managers to keep costs down is even more intense than it is with those in cost-leadership companies.

4. Focused-Differentiation Strategy: Offering Unique and Superior Value for a Narrow Market The focused-differentiation strategy is to offer products or services that are of unique and superior value compared to those of competitors and to target a narrow market.

Lush Ltd. is a UK-based brand of natural soaps and bath products for women who appreciate the company’s respect for social and corporate responsibility and enjoy the unique in-store experience it offers. The company’s products are handmade and never tested on animals. Lush has almost 4 million followers on Instagram and took in $530 million in North American sales in 2017. Says its director of brand communications for North America, “Lush’s customer experience is what sets us apart . . . In this age when digital sales are soaring, we truly believe nothing compares to the in-store experience where customers can touch, feel and play with our innovative products and engage with our knowledgeable and passionate staff.”77 ●

Core Skills Required for Strategic Planning This survey is designed to assess the skills needed in strategic planning. Please be prepared to answer these questions if your instructor has assigned Self-Assessment 6.2 in Connect.

1. Do you have what it takes? Are you surprised by the results?

SELF-ASSESSMENT 6.2 CAREER READINESS

2. Based on the results, what are your top two strengths and deficiencies when it comes to strategic planning?

3. What would you say during an interview to demonstrate that you possess the career readiness competencies associated with strategic thinking? Consider guidance found in the Career Corner.

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6.6 Executing and Controlling Strategy THE BIG PICTURE Strategic implementation is closely aligned with strategic control. Execution is a process that helps align these two phases of the strategic-management process.

Stage 1 of the strategic-management process was establishing the mission and the vision. Stage 2 was assessing the current reality. Stage 3 was formulate corporate, busi- ness, and functional strategies. Now we come to the last two stages—4, strategic execu- tion, and 5, strategic control.

Executing the Strategy Executing strategies entails putting strategic plans into effect. As we said, this means dealing with roadblocks within the organization’s structure and culture and seeing if the right people and control systems are available to execute the plans.

Often implementation means overcoming resistance by people who feel the plans threaten their influence or livelihood. This is particularly the case when the plans must be implemented rapidly because delay is the easiest kind of resistance there is (all kinds of excuses are usually available to justify delays). Thus, top managers can’t just announce the plans; they have to actively sell them to middle and supervisory managers.

Maintaining Strategic Control Strategic control consists of monitoring the execution of strategy and taking corrective action, if necessary. To keep a strategic plan on track, suggests Bryan Barry, you need to do the following:78

■ Engage people. You need to actively engage peo- ple in clarifying what your group hopes to accomplish and how you will accomplish it.

■ Keep it simple. Keep your planning simple, unless there’s a good reason to make it more complex.

■ Stay focused. Stay focused on the important things. ■ Keep moving. Keep moving toward your vision of the future, adjusting your

plans as you learn what works.

Execution: Getting Things Done In implementing strategy and maintaining strategic control, what we are talking about is effective execution. Larry Bossidy, former CEO of AlliedSignal (later Honeywell), and Ram Charan, a business adviser to senior executives, are authors of Execution: The Discipline of Getting Things Done.79 Execution, they say, is not simply tactics; it is a central part of any company’s strategy. It consists of using questioning, analysis, and

LO 6-6 Describe the role of effective execution in strategic management.

Occupying a sprawling campus in Cary, North Carolina, software maker SAS has always been ranked in the top positions on Fortune’s lists of “100 Best Companies to Work For” (No. 1 in 2010 and 2011, No. 2 in 2013 and 2014, No. 3 in 2012, and No. 4 in 2015). Its ability to execute effectively has also made it highly profitable and the world’s largest privately owned software company. Courtesy of SAS

210 PART 3 Planning

JJ Fairbanks is a senior consultant for a consulting firm’s supply chain ser- vice group. As a consultant, he is able to see things from his company’s per- spective and the customer’s perspec- tive since he is constantly working with clients.

“One of the things my company has done well is to always look at how we can provide more services to the clients we already have,” said JJ. “It’s hard to find new clients; it’s eas- ier to find new ways to serve our

existing clients. This is a growing shift in our strategy: finding new ways to sell products to the same customers.”

JJ’s company has recently adjusted its strategy to take advantage of this opportunity. Rather than continue with the same business model of finding new clients, they are leverag- ing their existing strengths and clients to rethink their strategy. While many companies need to adjust their strategy when things go wrong, JJ’s company is adjusting their strategy to fur- ther its strategic control and continue to grow.

“One of the ways we are changing our business model is to include more groups within the company to service the clients. If

follow-through to mesh strategy with reality, align people with goals, and achieve results promised.

How important is execution to organizational success in today’s global economy? A survey of 769 global CEOs from 40 countries revealed that “excellence in execution” was their most important concern—more important than “profit growth,” “customer loyalty,” “stimulating innovation,” and “finding qualified employees.”80 In 2017, Ford’s CEO Mark Fields left the company after the board of directors said it had lost confi- dence in his leadership and ability to implement the company’s strategy. The company made about $9 billion in profits in 2017, but during Field’s not quite three-year tenure as CEO it had lost market share and seen its share price drop 40 percent. In announc- ing Fields’ successor, Ford said it did not plan any immediate changes in its strategy.81

Bossidy and Charan outline how organizations and managers can improve the ability to execute. Effective execution requires managers to build a foundation for execution within three core processes found in any business: people, strategy, and operations.82 Consider how JJ Fairbanks’ company is executing on a strategic goal of increasing rev- enue growth.

JJ Fairbanks Courtesy JJ Fairbanks

more people are involved—different technology groups, different functional groups, different strategy groups—it’s easier to find new projects and also deliver more value to the client,” said JJ.

Company leadership communicated this business model change to the rest of the company via a team phone call. “We had an ‘All Hands Call’ for everyone in the supply chain service line—which is several hundreds of employees. Everyone was included in this two-hour call to introduce the improvement to our own operating model to create more working areas,” said JJ.

It was also communicated that the goal of this new strategy is top line growth as well as profit margin growth based on year under year improvement, which JJ feels is a challenging but attainable goal that will help to keep employees focused, although not all employees can directly impact revenue growth.

“I think this is the right move for the company. It is also incor- porating technology in every aspect of our service offerings. We cannot continue our supply chain work without the incorporation of technology. Instead of having technology as a separate group, we’re working arm-in-arm more than we used to,” said JJ.

So far, the company has been successful in the implementa- tion of the new strategy and hopes to continue monitoring it so they can make further adjustments as needed in the future.

Courtesy of JJ Fairbanks

I’m Glad… …my company adjusts its strategy as we go.

The Three Core Processes of Business: People, Strategy, and Operations A company’s overall ability to execute is a function of effectively executing according to three processes: people, strategy, and operations. Because all work ultimately entails some human interaction, effort, or involvement, Bossidy and Charan believe that the people process is the most important.

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The First Core Process—People: “You Need to Consider Who Will Benefit You in the Future” “If you don’t get the people process right,” say Bossidy and Charan, “you will never fulfill the potential of your business.” But today, most organi- zations focus on evaluating the jobs people are doing at present, rather than consider- ing which individuals can handle the jobs of the future. An effective leader tries to evaluate talent by linking people to particular strategic milestones, developing future leaders, dealing with nonperformers, and transforming the mission and operations of the human resource department. Costco Wholesale is No. 12 on Inc. magazine’s list of 50 best places to work.83 Unlike some of its competitors in the discount retail mar- ket, it offers employees generous salaries and benefits, including for part-time workers.84

The Second Core Process—Strategy: “You Need to Consider How Success Will Be Accomplished” In most organizations, the strategies developed fail to con- sider the “how” of execution. According to the authors, a good strategic plan addresses nine questions. (See Table 6.3.) In considering whether the organization can execute the strategy, a leader must take a realistic and critical view of its capabilities and competencies. If it does not have the talent in finance, sales, and manufacturing to accomplish the vision, the chances of success are dras- tically reduced. One of Costco’s most successful strat- egies is to promise—and deliver—the best deal on the brand-name and store-brand products it offers. It also makes shopping a fun experience by offering plenty of product samples and strategically placing merchandise to encourage customers to shop the whole store.85

The Third Core Process— Operations: “You Need to Consider What Path Will Be Followed” The strategy process defines where an organization wants to go, and the people process defines who’s going to get it done. The third core process, opera- tions, or the operating plan, provides the path for peo- ple to follow. The operating plan, as we described in Chapter 5, should address all the major activities in which the company will engage— marketing, production, sales, revenue, and so on—and then define short-term objectives for these activities to provide targets for people to aim at. Costco’s membership model (in which customers pay a nominal annual fee for admission to the store), its unique shopping experience, and its carefully selected array of high-quality products at whole- sale prices have allowed it to remain competitive even in an increasingly online retail world.86 We also discuss operations management in Chapter 16.

How Execution Helps Implement and Control Strategy Many executives appear to have an aversion to execution, which they associate with bor- ing tactics—with the tedium of doing, as opposed to the excitement of visioning—and which they hand off to subordinates. Further, there are many organizational obstacles to effective execution, and many of these are associated with organizational culture. Organizational culture is a system of shared beliefs and values within an organization that guides the behavior of its members. In this context, effective execution will not occur unless the culture supports an emphasis on getting quality work done in a timely manner. Chapter 8 presents 12 ways managers can attempt to create an execution- oriented culture.87

TABLE 6.3 Necessary Answers: What Questions Should a Strong Strategic Plan Address?

1. What is the assessment of the external environment? 2. How well do you understand the existing customers and

markets? 3. What is the best way to grow the business profitably, and what

are the obstacles to growth? 4. Who is the competition? 5. Can the business execute the strategy? 6. Are the short term and long term balanced? 7. What are the important milestones for executing the plan? 8. What are the critical issues facing the business? 9. How will the business make money on a sustainable basis?

Source: From Execution by Larry Bossidy and Ram Charan, Crown Business, a division of Random House, Inc., 2002.

212 PART 3 Planning

Building a Foundation of Execution The foundation of execution is based on leadership (as we dis- cuss in Chapter 14) and organizational culture (discussed in Chapter 8). The Harvard Business Review (HBR) surveyed se- nior managers about the importance of various abilities, and execution ranked first among 16.88 Bossidy and Charan sug- gest that there are seven essential types of leader behaviors that are needed to fuel the engine of execution. Managers are advised to engage in seven kinds of behaviors, as follows.

Know Your People and Your Business: “Engage Intensely with Your Employees” In companies that don’t execute, leaders are usually out of touch with the day-to-day realities. Now that you are becoming familiar with the career readiness skills we’ve been describing in this book, including knowing the business, you won’t be surprised that Bossidy and Charan insist leaders must engage intensely and personally with their organization’s people and its businesses. They cannot rely on secondhand knowledge through other people’s observations, assessments, and recommendations.

Insist on Realism: “Don’t Let Others Avoid Reality” Many people want to avoid or shade reality, hiding mistakes or avoid- ing confrontations. Making realism a priority begins with the leaders being realistic themselves, and making sure realism is the goal of all dialogues in the organization. Being “clear and methodical” was one of the stand-out behaviors that improved execution in HBR’s survey of thousands of performance reviews.89

Set Clear Priorities: “Focus on a Few Rather Than Many Goals” Leaders who execute focus on a very few clear pri- orities that everyone can grasp. It’s also helpful for goals and plans to be simple; they should not have an overwhelming number of steps, nor be vague and lack appropriate details.90

Follow Through: “Establish Accountability and Check on Results” Failing to follow through is a major cause of poor execution. “How many meetings have you attended where people left without firm conclusions about who would do what and when?” Bossidy and Charan ask. Accountability and follow- up are important and reflect mastery of the career readiness skill of integrity.

Reward the Doers: “Show Top Performers That They Matter” If people are to produce specific results, they must be rewarded accordingly, making sure that top performers are rewarded far better than ordinary performers. To advocate for these team members, you’ll rely on your career readiness skills of decision making and leadership.

E x p a n d Pe o p l e’s C a p a b i l i t i e s : “ D e v e l o p t h e Talent” Coaching is an important part of the executive’s job, providing useful and specific feedback that can improve perfor- mance. HBR’s survey of performance reviews found that “lead- ers who are great executors are skilled at giving feedback,” especially positive feedback.91

Know Yourself: “Do the Hard Work of Understanding Who You Are” Leaders must develop “emotional fortitude” based on honest self-assessments. Four core qualities are au- thenticity, self-awareness, self-mastery, and humility. Self- awareness is another of the career readiness skills we discuss in this book, along with self-efficacy and openness to change.

YOUR CALL Which behavior is probably the most difficult for you to adopt personally?

Do you think your current or a past employer is or was good at execution? What obstacles may have impaired the compa- ny’s ability to execute?

PRACTICAL ACTION

Assessing the Obstacles to Strategic Execution This survey is designed to assess the obstacles to strategic execution that may be impacting an organization’s ability to execute. Please be prepared to answer these questions if your instructor has assigned Self-Assessment 6.3 in Connect.

SELF-ASSESSMENT 6.3

1. How does the company stand with respect to execution?

2. Based on the results, what are the company’s strengths and weaknesses when it comes to execution?

3. What advice would you give to senior management about improving the company’s ability to execute based on the results? Be specific.

In conclusion, by linking people, strategy, and operating plans, execution allows executives to direct and control the three core processes that will advance their strategic vision. ●

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Why Is Strategic Thinking Important to New Graduates? Although you are unlikely to be hired as a strategic planner after graduation, don’t be fooled into thinking that this skill is not important. A writer for the Harvard Business Review noted that strategic thinking “can, and must, happen at every level of the organi- zation; it’s one of those unwritten parts of all job descriptions. Ignore this fact and you risk getting passed over for a promotion.”93 Employers still value this skill in new gradu- ates for four reasons.

1. Thinking strategically requires you to be forward-looking, and employers want people who are prepared to solve future problems that are difficult to predict.

2. The ability to see the big-picture helps people connect the dots about what needs to get done in order to complete today’s tasks and projects that support strategic goals.

3. Strategic thinkers pay attention to what is happening in business and society at large. This skill essentially makes you a more informed employee, and employ- ers truly value such people.

4. Strategic thinkers are more likely to have a worldly perspective, an orientation that fits today’s global economy.94

Developing Strategic Thinking There are four key activities for developing your ability to think more strategically: understand the business, broaden your task and functional knowledge, set aside time to reflect, and engage in lateral thinking.

LO 6-7 Describe how to enhance your strategic thinking.

6.7 Career Corner: Managing Your Career Readiness

Strategic thinking is not one of the competencies in the career readiness model shown below. The reason is not that employers don’t want you to have this skill. Rather, it’s because other more specific competencies drive your ability to think strategically. Strategic thinking is defined as “envisioning what might happen in the future and then applying that to our current circum- stances.”92 There are four career readiness competencies that drive your ability to think strategi- cally: Understanding the business, task-based functional knowledge, critical thinking/problem solving, and decision making.

FIGURE 6.6 Model of career readiness ©2018 Kinicki and Associates, Inc.

Career readiness

Knowledge (K)

Soft skills (S)

Career outcomes

Attitudes (A)

Other characteristics

(O)

214 PART 3 Planning

Understand the Business This career readiness competency reflects the extent to which you understand a potential or current employer’s business and strategies. This can be learned by studying a company’s web page and annual report. You can look for any published SWOT analyses on a company or conduct one on your own. Once you are hired, you can also extend your knowledge by networking with current employees, proactively seeking mentoring from experienced employees, attempting to participate in a job rotation program, and attending as many cross-functional or business meetings as possible. You also might consider joining industry groups or other professional associa- tions affiliated with the type of work you are doing.95

Broaden Your Task and Functional Knowledge Strategic thinking requires making connections between concepts, ideas, people, and events. The more ideas and experiences you have, the greater the ability to make connections. For example, interna- tional travel has enhanced our understanding about the nuances of cross-cultural behav- ior, which in turn has helped in writing about cross-cultural management. Make it a goal to try new things, visit new places, meet new people, and read about new topics. All of these activities will stimulate your mind and expand your base of knowledge. Some experts suggest that strategic thinkers have a knowledge base that represents a “T.” The top of the “T” reflects your breadth of knowledge and the stem reflects the depth of understanding about your primary area of expertise.96 So in addition to trying and reading about new things, it would help to learn about the finer aspects of your employer’s industry. Here again, it would be useful to attend industry or functional con- ferences. The goal of doing this is twofold: learn about the industry or work function and network.

Set Aside Time to Reflect Strategic thinking involves connecting dots between things that others overlook. This takes time and reflection, which requires you to make a commitment to slow down and reserve time in your schedule for this activity. We recom- mend that you set aside time every week to engage in thinking. You might do it while going for a walk or sitting in a quiet environment. The key is to allocate the time and then use it to think rather than for planning how to get more things done on your task list.

Engage in Lateral Thinking The concept of lateral thinking was developed by Dr. Edward De Bono to encourage creativity and insight. It relies on what De Bono called the Six Thinking Hats. Individuals and teams are encouraged to mentally wear and switch “hats” during meetings. The six hats consist of the following:97

■ The White Hat calls for gathering the facts known or needed. ■ The Yellow Hat focuses on positivity and optimism. Here you explore and

probe for the value of whatever you are discussing. ■ The Black Hat entails judgment. When wearing this hat, you explore the rea-

sons “why something may not work.” Look for the dangers or difficulties asso- ciated with the issue at hand. This can be formalized by using a devil’s advocate. This individual is given the role of providing a counterargument to what is being proposed.

■ The Red Hat concentrates on feelings and intuition, which is discussed in Chapter 7. Try on this hat by discussing emotions, feelings, fears, hunch, likes, and dislikes.

■ The Green Hat focuses on creativity. Explore new ideas, concepts, alternatives, and perceptions.

■ The Blue Hat is the control function. It is used to ensure that all six hats are being used. ●

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BCG matrix 204 benchmarking 202 business-level strategy 191 contingency planning 201 corporate-level strategy 191 cost-focus strategy 207 cost-leadership strategy 207 current reality assessment 193 defensive strategy 203 differentiation strategy 207 diversification 205 execution 209 focused-differentiation strategy 208

forecast 200 functional-level strategy 192 growth strategy 203 innovation strategy 203 organizational opportunities 197 organizational strengths 197 organizational threats 197 organizational weaknesses 197 Porter’s four competitive

strategies 207 Porter’s model for industry

analysis 206 related diversification 205

scenario analysis 201 stability strategy 203 strategic control 194 strategic positioning 190 strategy formulation 194 strategy implementation 194 sustainable competitive

advantage 196 SWOT analysis 196 trend analysis 201 unrelated diversification 205 vertical integration 205 VRIO 199

Key Terms Used in This Chapter

Key Points

6.1 Strategic Positioning and Levels of Strategy • Strategic positioning attempts to achieve sustainable

competitive advantage by preserving what is distinctive about a company.

• Strategic positioning is based on the principles that strategy is the creation of a unique and valuable position, requires trade-offs in competing, and involves creating a “fit” among activities so that they interact and reinforce each other.

• The three levels of strategy are corporate, business, and functional.

• Strategic management works for both large and small firms.

6.2 The Strategic-Management Process • The strategic-management process has five steps

plus a feedback loop. • Step 1 is to establish the mission, vision, and values

statements. The mission statement expresses the organization’s purpose or reason for being. The vision statement states what the organization wants to become and where it wants to go strategically. The values statement describes what the organization stands for, its core priorities, the values its employees embody, and what its products contribute to the world.

• Step 2 is to do a current reality assessment, to look at where the organization stands and see what is working and what could be different so as to maximize efficiency and effectiveness in achieving the organization’s mission. Among the tools for assessing the current reality are SWOT analysis, VRIO analysis, forecasting, and benchmarking.

• Step 3 is to formulate corporate, business, and functional strategies. This means translating the company’s broad mission and vision statements into

a corporate strategy, which, after the assessment of the current reality, explains how the organization’s mission is to be accomplished. Three common grand strategies are growth, stability, and defensive.

• Step 4 is strategy execution—putting strategic plans into effect.

• Step 5 is strategic control, monitoring the execution of strategy and making adjustments.

• Corrective action constitutes a feedback loop in which a problem requires that managers return to an earlier step to rethink policies, budgets, or personnel arrangements.

6.3 Assessing the Current Reality • Step 2 in the strategic-management process, assess

the current reality, looks at where the organization stands internally and externally—to determine what’s working and what’s not, to see what can be changed so as to increase efficiency and effectiveness in achieving the organization’s vision.

• An assessment helps to create an objective view of everything the organization does: its sources of revenue or funding, its work-flow processes, its organizational structure, client satisfaction, employee turnover, and other matters.

• Among the tools for assessing the current reality are SWOT analysis, VRIO analysis, forecasting, and benchmarking.

• Organizational strengths are the skills and capabilities that give the organization special competencies and competitive advantages. Organizational weaknesses are the drawbacks that hinder an organization in executing strategies. Organizational opportunities are environmental factors that the organization may exploit for competitive advantage. Organizational threats are

216 PART 3 Planning

environmental factors that hinder an organization’s achieving a competitive advantage.

• SWOT is a tool for assessing current reality. It entails an evaluation of an organization’s internal and external environments to detect early signs of opportunities and threats that may influence the firm’s plans.

• VRIO is a framework for analyzing a resource or capability to determine its competitive strategic potential by answering four questions about its value, rarity, imitability, and organization.

• Forecating is another tool for assessing current reality. Two types of forecasting are (1) trend analysis, a hypothetical extension of a past series of events into the future, and (2) contingency planning, the creation of alternative hypothetical but equally likely future conditions.

• Benchmarking is a process by which a company compares its performance with that of high- performing organizations.

6.4 Establishing Corporate-Level Strategy • Three common corporate-level strategies are (1) a

growth strategy involving expansion—as in sales revenues or market share—and one form of growth strategy is an innovation strategy, growing market share or profits by innovating improvements in products or services; (2) a stability strategy, which involves little or no significant change; and (3) a defensive strategy, which involves reduction in the organization’s efforts.

• The BCG matrix is a means of evaluating strategic business units on the basis of (1) their business growth rates and (2) their share of the market. In general, organizations do better in fast-growing markets in which they have a high market share rather than slow-growing markets in which they have low market shares.

• A diversification strategy pertains to deciding whether to expand or grow into other businesses. There are two types of diversification strategies: related and unrelated diversification.

6.5 Establishing Business-Level Strategy • Formulating the business-level strategy makes use of

Porter’s five competitive forces and his four competitive strategies.

• Porter’s model for industry analysis suggests that business-level strategies originate in five primary competitive forces in the firm’s environment: (1) threats of new entrants, (2) bargaining power of suppliers, (3) bargaining power of buyers, (4) threats of substitute products or services, and (5) rivalry among competitors.

• Porter’s four competitive strategies are as follows: (1) The cost-leadership strategy is to keep the costs, and hence the prices, of a product or service below those of competitors and to target a wide market.

(2) The differentiation strategy is to offer products or services that are of unique and superior value compared with those of competitors but to target a wide market. (3) The cost-focus strategy is to keep the costs and hence prices of a product or service below those of competitors and to target a narrow market. (4) The focused-differentiation strategy is to offer products or services that are of unique and superior value compared with those of competitors and to target a narrow market.

6.6 Executing and Controlling Strategy • The last two steps of the strategic-management

process are strategy execution and strategic control. • Strategy execution is putting strategic plans into

effect, dealing with roadblocks within the organization’s structure and culture, and seeing if the right people and control systems are available to execute the plans.

• Strategic control consists of monitoring the execution of strategy and taking corrective action, if necessary. To keep a strategic plan on track, you should engage people, keep your planning simple, stay focused, and keep moving.

• Execution is not simply tactics; it is a central part of any company’s strategy; it consists of using questioning, analysis, and follow-through to mesh strategy with reality, align people with goals, and achieve results promised.

• Three core processes of execution are people, strategy, and operations. (1) You have to evaluate talent by linking people to particular strategic milestones, developing future leaders, dealing with nonperformers, and transforming the mission and operations of the human resource department. (2) In considering whether the organization can execute the strategy, a leader must take a realistic and critical view of its capabilities and competencies. (3) The third core process, operations, or the operating plan, provides the path for people to follow. The operating plan should address all the major activities in which the company will engage and then define short-term objectives for these activities, to provide targets for people to aim at. By linking people, strategy, and operating plans, execution allows executives to direct and control the three core processes that will advance their strategic vision.

6.7 Career Corner: Managing Your Career Readiness

• Four career readiness competencies—understanding the business, task-based functional knowledge, critical thinking/problem solving, and decision making—drive your ability to think strategically.

• There are four key activities for developing the ability to think more strategically: understand the business, broaden your task and functional knowledge, set aside time to reflect, and engage in lateral thinking.

Strategic Management CHAPTER 6 217

1. What is strategic positioning, and what are the three principles that underlie it?

2. What are the five steps in the strategic management process?

3. What are the tools that can help you assess a company’s current reality?

4. Based on the SWOT of Toyota contained in this chapter, what advice would you give to CEO Akio Toyoda?

5. How is VRIO different from a SWOT analysis? 6. What are the three overall types of corporate strategy? 7. Describe how the BCG matrix and diversification

are used to establish corporate-level strategy. 8. What are Porter’s five competitive forces? 9. Explain Porter’s four competitive strategies. 10. In execution, what are the three core processes of

business?

Understanding the Chapter: What Do I Know?

General Electric’s Evolving Strategy General Electric (GE) is one of the largest companies in the world. It has almost 300,000 employees and op- erates in more than 170 countries.98 The multinational conglomerate traces its roots to the 19th century and is responsible for technology that has revolutionized daily life. GE has invented or commercialized a wide variety of products, starting with light bulbs in 1892 and transi- tioning to radio, television, and even jet engines. The organization also ventured into financial services and oil and gas.

GE was led by CEO Jack Welch from 1981 to 2001. The company’s market value increased by 4,000 percent during Welch’s tenure.99 It had a value of over $396 billion in 2002 when Welch retired and Jeffrey Immelt took over as CEO.100 Sadly, the financially successful firm Immelt inherited did not last.

GE’s market value dropped to $261 billion by 2015.101 The organization lost another 46 percent of its value between 2017 and 2018. This $120 billion loss oc- curred while the stock market was up 41 percent. Poor financial performance caused the company to cut its dividend in half in late 2017, which led analysts to lower their estimates of GE’s earnings.102 An analyst at Deutsche Bank told CNBC he believed GE could be re- moved from the Dow Jones Industrial average, even though it was an original member of the 30-company index over 120 years ago.103 Let’s examine the corpo- rate strategies underlying GE’s decline.

GE’S STRATEGY UNDER JEFF IMMELT Immelt’s grand strategy was to acquire or develop high- growth businesses instead of relying on GE’s traditional businesses like lighting and plastics. He started by

purchasing Amersham, a British medical company, for $10 billion in 2003. Amersham specialized in making contrast agents that were injected into the body before medical scanning. GE Medical Systems was already the leading maker of imaging machines,104 and Immelt’s plan was to double down on what he believed was a growing industry by manufacturing both medical equip- ment and its supporting products.

Immelt simultaneously started to sell off low-growth divisions. For example, he sold GE’s life and mortgage insurance business in 2005 and then sold GE Plastics to a Saudi Arabian chemical company for $11.6 billion in 2007.105 This sale was quite controversial because GE Plastics had been a reliable source of revenue for the organization since the 1970s. Immelt wanted to in- vest funds from these sales into high-growth markets such as software.

Immelt established GE Digital in 2011. The hope was that this division would develop a software lan- guage that could handle information transfer between next-generation industrial machines. Bloomberg re- ported that Immelt wanted to make GE a “top 10 soft- ware company.”106 GE invested $4 billion in this effort but faced technical problems and delays with its soft- ware platform. These issues hurt GE’s reputation in a fast-moving digital market.107

GE then purchased French gas company Alstom for over $10 billion in 2015. At the time of the purchase Immelt said, “The completion of the Alstom power and grid acquisition is another significant step in GE’s transformation.”108 This investment in a natural gas company occurred at the same time renewable energy was lifting off and oil and gas prices were dropping. The result was a $3 billion reduction in GE’s cash flow.109

Management in Action

218 PART 3 Planning

Immelt’s strategies may have been misguided in that they focused on investing in products and services that were not market-leading themselves but supported market-leading products. For example, GE had experi- enced tremendous success as a world-leading producer of commercial jet engines since the 1970s.110 On the other hand, it had not seen great success in the leasing, financing, and servicing of these engines, which is a support function. A Forbes analyst commented on GE’s strategies by noting that GE should be “investing in the very few things in which [it] must be either best-in-class or world class and decisively simplifying or outsourcing the things that need be only good enough.” This analyst was suggesting that one of GE’s strategic errors was that many of its businesses had individual strategies, but the conglomerate did not have an overarching one. He believed this level of complexity underscored the need to split up the company.111

Part of GE’s poor performance also stemmed from leadership and organizational culture, according to The Wall Street Journal. The Journal reported that Immelt seemed to ignore the company’s performance and pre- sented a positive view, stating, “This is a strong, very strong company,” in May 2017. The newspaper further reported that “this culture of confidence trickled down the ranks and even affected how those gunning to suc- ceed Mr. Immelt ran their business units, some of these people said, with consequences that included unreach- able financial targets, mistimed bets on markets and sometimes poor decisions on how to deploy cash.”112

Welch, Immelt’s predecessor, had an overarching strategy. It was to keep things simple. Welch reduced employees and closed businesses that were underper- forming so they would not be a drag on profitable busi- nesses. Growth had to be profitable. GE’s vision under Welch’s leadership was “Fix it, close it, or sell it.”113 Welch has taken notice of Immelt’s strategy and GE’s performance. Fox Business reports that he blames GE’s poor performance on “Immelt’s…inability to grow busi- nesses while keeping costs down.”114

A NEW CEO, A NEW STRATEGY In 2017, GE replaced Immelt with John Flannery. Flannery came from GE Capital and is known as a “fix- it” man. His first move was to stop large-scale acquisi- tions such as the one with Alstom in 2015. He also announced that GE Digital would be scaled back and have a basic strategy. The subsidiary will now sell lim- ited software to existing GE customers only. “Complexity hurts us…complexity has hurt us,” says Flannery.115

Some investment analysts believe that complex con- glomerates like GE are a 20th-century entity that has outlived its expiration date. One analyst told Forbes that

“only closely integrated, focused companies can thrive.”116 GE seems to be heeding this advice. Flannery’s strategy is to focus on fewer businesses do- ing fewer things. He wants to sell divisions that make up a significant part of the company’s assets but are not growing profits. These include large operations in loco- motive building and industrial light manufacturing.117 The company instead plans to focus on streamlined manufacturing of jet engines and medical equipment. “If all goes well, GE will become a more mundane brand,” according to a Bloomberg report. “It will be less about spreading the gospel of innovation, managerial excellence, or digital disruption and more about…sell- ing as many units as possible…”118

Critics say that Flannery’s strategy is too short term and misses the big picture. GE is a symbol of U.S. in- novation and dominance. Instead of downsizing, it should find operational synergies across multiple in- dustries. 3D printing is one way that GE can achieve this. It recently spent $200 million on creating a “bril- liant factory” in India that can make products for mul- tiple divisions. Flexible 3D printers allow the factory to quickly switch lines. If industrial lighting is not selling but air travel is in demand, the plant can switch produc- tion lines to jet engines. GE Digital can support this by interconnecting suppliers and manufacturers via soft- ware. Another Forbes analyst says, “Now is exactly the wrong time for GE to break up.” This analyst believes a longer-term perspective, based on streamlining instead of downsizing, will prove successful.119

Will Flannery’s strategy help GE rebound?

FOR DISCUSSION Problem-Solving Perspective

1. What is the underlying problem in this case from CEO John Flannery’s perspective?

2. What are some of the causes of this problem?

3. Can GE survive as one organization? Explain why or why not.

Application of Chapter Content

1. Explain how GE is creating a “fit” among its activi- ties at its factory in India.

2. Using the steps in Figure 6.1, describe how GE should be transforming the way it does business.

3. Develop a SWOT analysis for GE.

4. Is CEO Flannery employing a growth, innovation or stability strategy? Is this different than Immelt’s strat- egy? Explain.

5. Which of Michael Porter’s four competitive strategies is GE trying to follow? Explain.

Strategic Management CHAPTER 6 219

Is Your School Selling You Bank Accounts? Colleges and universities typically earn revenue from tuition, state taxes, and donations. The contribution from state taxes has been decreasing, creating a fund- ing problem for many colleges and universities. This challenge focuses on a new source of revenue for cam- puses around the United States: the selling of bank ac- counts to students. Wells Fargo, U.S. Bank, and other financial institutions have signed a number of deals with schools in order to promote their banking ser- vices. The strategy is for banks to come to campus and pitch their services to students, with schools receiving royalties from the banks based on the number of new accounts students open. These royalties can some- times be as high as hundreds of thousands of dollars annually, according to The Wall Street Journal.120 Do you think the schools are working on behalf of their students or the banks?

Banks may be eager to pay royalties to schools because they represent a lucrative target market—young adults often strapped for cash. Students may not have enough in their accounts to cover nonacademic expenses like trips and off-campus meals. Banks often provide overdraft protection when student accounts are a bit short. This protection actually works like a high-cost loan, and banks can raise substantial revenue from the interest and fees they charge. In fact, the Con- sumer Financial Protection Bureau estimates that con- sumers pay $17 billion in bank fees annually.121 Students at community colleges and regional public universities tend to pay the highest average fees, with some forking over more than $70 a year.122

Students are receiving benefits for these fees. Many schools allow then to conveniently link their campus identification cards to banking services. Others actu- ally allow a contracted bank to open a location on campus.

These strategic relationships also allow the banks to offer special accounts for students. For example, a U.S. Bank spokesperson said the bank wants to build long-term relationships with students “by providing them with the best student banking account in the marketplace.”123 The bank does offer a student

checking account with no monthly fees, but students still incur overdraft charges and non-U.S. Bank ATM fees after the first four transactions.124

Banks claim that schools benefit from the arrange- ment just as their students do. “Schools are looking for funding,” says the head of PNC’s university bank- ing program. Schools receive that funding in return for allowing banks to set up tables at campus events, advertise their products in mailings to students, and be known as the school’s preferred banking option. The Wall Street Journal found that 112 U.S. colleges received nearly $18.7 million in 2017 for these types of activities. Much of it was in the form of royalties, but some schools even receive a cut of the banks’ fees.125

Consumer watchdogs are concerned about schools receiving any sort of incentive from banks in return for promoting them. This concern is magnified by the troubled history of banks and universities. In the early 2000s, some financial aid offices were steering stu- dents toward loan packages that provided kickbacks to administrators. Other schools were suspected of pitch- ing credit cards with deceptive offers or illegal incen- tives.126 New laws were passed to address this bad behavior, but most do not extend to checking or debit accounts.127

SOLVING THE CHALLENGE What would you do if you were a university president and a bank approached you?

1. Sign a contract that provides the university with an incentive for each account opened. Both the univer- sity and bank are providing students with special ben- efits. So it is all right if the school is compensated based on volume.

2. Sign a f lat-fee contract only. Schools should not receive an incentive for each account opened, but they should be compensated for allowing the bank to have an increased presence on campus.

3. Refuse to sign a contract. Schools should be neutral parties and not be promoting banks.

4. Invent other options.

Legal/Ethical Challenge

Learn about the process Uber uses to implement strategies and an assessment of its current reality in this case. Assess your ability to apply concepts discussed in this chap- ter to the case by going to Connect.

Uber Continuing Case

LEARNING MODULE 1

Entrepreneurship

After reading this chapter, you should be able to:

LM 1-1 Define entrepreneurship and discuss its importance across the world.

LM 1-2 Identify how entrepreneurs get started.

So You Want to Start a Business? We would not be surprised if you answered yes, given the data shown in Figure LM 1.1. You can see that the number of start-ups has been growing since 2000, particularly in the last few years. An exit occurs when an establishment goes from having one employee to having none, and the business remains closed for one year. All told, the growth of small businesses continues to add net new jobs to the U.S. economy. Speaking from experience, we can tell you that owning your own business can be highly rewarding, but it’s no picnic. As one Forbes writer noted, “Entrepreneurship is more than dreaming and innovating, it’s a way of life. It’s enduring long hours and late nights and the uncertainty over making ends meet. It’s risk taking, mistake- making and change embracing.”1 Still interested in starting your own business? Below are five issues to consider if you desire to start your own business:

1. Identify your motives. Are you running away from something or running toward a goal? Either is okay, but it’s important to understand your motives. If you are moving toward a goal, be specific about what you want and stay open to change. For example, when your author Angelo Kinicki began his consulting activities, he started with the goal of running a sole proprietorship, and he kept his job at the university. This goal changed, as did the business decisions, when he

and his wife Joyce decided to incorporate. Joyce quit her job and served as president, running the company, and Angelo took a leave of absence from his university job. After growing the business to about nine employees and traveling around the world, they realized they were unhappy and needed a change. After discharging all but one employee, Angelo went back to the university and

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2000 2008 2016

Start-ups Exits

FIGURE LM 1.1 Business start-ups and exits in the United States Source: “Small Business Profile,” U.S. Small Business Administration Office of Advocacy, 2017, https://www.sba.gov/sites/default/files/advocacy/United_ States_1.pdf.

Entrepreneurship LEARNING MODULE 1 221

This learning module considers entrepreneurship. We begin by exploring the foundation and im-

portance of entrepreneurship, with emphasis on the personal characteristics of entrepreneurs

and explaining it’s important around the world. We then explore the process of starting a busi-

ness. We review the basics of writing a business plan, choosing an appropriate legal structure,

obtaining financing, and creating the “right” type of organizational culture and design.

What’s Ahead in This Learning Module

FORECAST

Joyce continued to run the business with only one additional employee. The business has continued to operate this way for many years, and everybody is happy.

2. Build clients. If you are currently working and have a business idea, we encourage you to find a market or clients before quitting your job. After all, your business idea won’t work if you can’t find people who want your product or service. Consider providing it free until you build up market interest.2 A friend of Angelo’s is doing this as she attempts to market a new app. Her plan is to give it away, create demand, and then charge a nominal amount.

3. Practice humility. Don’t assume you have all the answers. Seek input from others who have started businesses, regardless of the industry. You also might consider contacting the Small Business Association for advice and coaching. It’s the mission of this organization to help small businesses to start and grow.

4. Surround yourself with the right people. Consider what Steve Jobs, cofounder of Apple, had to say about hiring the right people. “When you’re in a start-up,

the first ten people will determine whether the company succeeds or not. Each is ten percent of the company. So why wouldn’t you take as much time as necessary to find all A-players?”3 We couldn’t agree more. Hire people who complement your skills and abilities by providing value differently than you do. Don’t make the mistake of hiring only friends and family. They may be cheap and share your vision, but the company won’t grow if they can’t add value beyond your skill set.4

5. Learn the basics of accounting. All owners need to understand financial statements. These tools are discussed in Chapter 16. For now, recognize the need to understand how to create and adhere to a budget and how to read a balance sheet and income statement. We also encourage you to hire a good accountant.5 And yes, those Introduction to Accounting courses are important!

For Discussion Have you ever thought about starting your own business? What excites you about the opportunity of starting a business, and what fears get in the way of your doing so? Explain.

Entrepreneurs drive innovation and growth around the world. According to Inc., the 11 most famous entrepreneurs of all time include Oprah Winfrey, Walt Disney, J. K. Rowling, Steve Jobs, Andrew Carnegie, Benjamin Franklin, and Bill Gates.6 These indi- viduals started with an idea or passion and turned it into great wealth via hard work and entrepreneurial thinking. Elon Musk is a great example.

1.1 Entrepreneurship: Its Foundation and Importance

THE BIG PICTURE Entrepreneurship, a necessary attribute of business, means the taking of risks to create a new enterprise. It can increase the standard of living around the world.

LM 1-1 Define entrepreneurship and discuss its importance across the world.

222 PART 3 Planning

Multiple entrepreneur. South African–born Elon Musk was a cofounder of PayPal, which provides payment processing for online vendors. He went on to shake up the auto business with Tesla Motors, which builds electric cars; develop SpaceX, a space exploration company; and retool the energy sector with SolarCity, a residential solar energy provider. He was said to be worth $20.1 billion in 2017.7 Musk reached an agreement with the Securities and Exchange Commission to step down as Chairman of Tesla after abandoning his effort to take Tesla private in 2018. © Chen Boyuan/ Imaginechina/AP Images

Musk, born in South Africa in 1971, taught himself com- puter programming when he was 12. After receiving degrees in economics and physics, he pursued a doctoral degree in applied physics and material sciences at Stanford. He dropped out and started his foray into entrepreneurship. It began with cofounding Zip2, a software company acquired by Compaq for $340 million. He then founded X.co, an online payment company that merged with Confinity, which turned into PayPal, which was purchased by eBay for $1.5 billion in 2002. Great start, but it was just the beginning.

Musk used his income from these transactions to found or cofound five more companies: SpaceX, Tesla Inc., Open AI, Neuralink, and Boring Co. Like many entrepreneurs, he has a grand vision and goals. He has said that “the goals of SpaceX, Tesla, and SolarCity revolve around his vision to change the world and humanity. His goals include reducing global warm- ing through sustainable energy production and consumption, and reducing the ‘risk of human extinction’ by establishing a human colony on Mars.”8 Whether you agree with or admire Musk’s ambitions, he exemplifies the characteristics of an entrepreneur.

This section defines entrepreneurship and explains how it is different from self-employment. We then examine the research

on characteristics of entrepreneurs and conclude by exploring why entrepreneurship is important around the world.

Entrepreneurship: It’s Not the Same as Self-Employment Most small businesses originate with entrepreneurs, the people with the idea, the risk takers. The most successful entrepreneurs become wealthy and make the covers of busi- ness magazines: Oprah Winfrey (Harpo Productions); Fred Smith (Federal Express); Larry Page and Sergey Brin (Google). Failed entrepreneurs may benefit from the expe- rience to return and fight another day—as did Henry Ford, twice bankrupt before achiev- ing success with Ford Motor Co.

What Is Entrepreneurship? Although many definitions have been proposed, experts acknowledge three components of entrepreneurship. Entrepreneurship is a pro- cess of (a) recognizing opportunities for new venture creation or new value creation, (b) deciding to exploit these opportunities, and (c) “exploiting the opportunities by the way of new venture creation or new value creation . . . for realization of some desired value.”9 There are two types of entrepreneurs:

■ An entrepreneur is someone who “organizes and operates a business or busi- nesses, taking on greater than normal financial risks in order to do so.”10 Entre- preneurs start new businesses because they perceive an opportunity to introduce, change, or transform a product or service potentially desired by the market place. Steve Jobs, for example, invented the iPod and iPhone before there was any market demand.

■ An intrapreneur is someone working inside an existing organization who sees an opportunity for a product or service and mobilizes the organization’s resources to realize the idea. This person might be a researcher or a scientist but could also be a manager who sees an opportunity to create a new venture that might be profitable.

Entrepreneurship LEARNING MODULE 1 223

EXAMPLE

If being an intrapreneur sounds more attractive than being a manager, consider this: Managers are vital to supporting the intrapreneur’s efforts. Microsoft’s in-house researchers, for instance, have brought forth many truly cutting-edge ideas, often beating out Apple and Google. The problem, says one analysis, is that such intrapreneurs were “not getting the buy-in from management to turn their discoveries into products,” a difficulty that Microsoft’s new CEO, Satya Nadella, has been urged to address.11

Backing In-House Risk Taking. Richard Branson, CEO of the Virgin Group, who says his 200 companies (including music and airline businesses) were built on the efforts of “a steady stream of intrapreneurs who looked for and developed oppor- tunities,” understands the importance of management support. In his view, CEO should stand for “chief enabling officer,” to nurture in-house experimentation.12

Intel’s Dr. Bell. Intel Corporation, best known for its computer chips but now anxious to move in other directions, certainly appreciates the infusion of new ideas. Indeed, it has hired anthropologist Genevieve Bell as its “director of user experi- ence research” at Intel Labs, where she leads some 100 social

scientists and designers who explore how people use technol- ogy in their homes and in public. “The team’s findings help inform the company’s product development process,” says one report, “and are also often shared with the laptop makers, automakers, and other companies that embed Intel processors in their goods.”13

For example, to find out how people shift back and forth between the built-in technologies in their cars and the personal mobile devices they carry, Bell and a fellow anthropologist have traveled around the world examining, photographing, and describing the contents of people’s cars. They learned that, despite the fact that automakers have installed voice-command systems and other technology in their vehicles for the purpose of reducing distracted driving, drivers in traffic—especially when bored—often picked up their handheld personal devices anyway. This has led Intel to join with Jaguar Land Rover to find ways for consumers to better synchronize their personal devices with their cars.

YOUR CALL Do you think most companies truly support intrapreneurship? Why would they not?

An Intrapreneur: Intel’s Anthropologist Genevieve Bell

How Is Entrepreneurship Different from Self-Employment? Entrepreneurs and self-employed individuals share the commonality of owning a business, but they execute this role in very different ways. Let’s explore these similarities and differences, starting with a definition of self-employment.

Self-employment is a way of working for yourself “as a freelancer or the owner of a business rather than for an employer.”14 As textbook writers, we are self-employed. We work for ourselves and hire contractors to help get things done. The same is true for many doctors, dentists, accountants, insurance agents, electricians, and general con- tractors. Self-employed people are frequently experts in their fields and recognized members of their communities. In contrast, recall that entrepreneurs are motivated to introduce, change, or transform a product or service potentially desired by the market place. They are more interested in innovation and business growth than self-employed individuals. Let’s consider five points of comparison:

1. Self-employed people work for themselves and sometimes hire others to assist in getting things done. The success of the business lies on the shoulders of the owner. When the owner retires or quits, the business generally closes. In con- trast, entrepreneurs have people who work with them. Employees work together as a team to accomplish the entrepreneur’s vision. Success at electric car com- pany Tesla, for example, is dependent on everyone, not just Elon Musk. This is why a company outlives the participation or ownership of an entrepreneur. Tesla will continue with or without Musk at the helm.15

2. Self-employed people tend to stay in one geographic area, work virtually, and prefer to avoid taking risks. Entrepreneurs, on the other hand, are global thinkers who understand the need to take and manage risk. They won’t grow the business without taking calculated risks.16 Entrepreneurs are not afraid

224 PART 3 Planning

of failure or challenges. Musk’s SpaceX program experienced quite a few failures and setbacks in its pursuit of launching the Falcon Heavy, “the fourth-highest capacity rocket ever built . . . and the most powerful rocket in operation as of 2018. The inaugural mission carried a Tesla Roadster belonging to Musk as a dummy payload.”17

 3.  Self-employed owners and entrepreneurs have dif- ferent mindsets. Self-employed people tend to do much of the work themselves, partly because they are experts and want to save costs to maximize profits. Your authors certainly fall into that camp. Entrepreneurs like Elon Musk, however, realize “that they can’t do everything so they delegate responsibilities to people they trust, who are smarter and more experienced than them in those areas, but still keep people accountable for their actions.”18

4. There are a number of operational differences. Although both entrepreneurs and self-employed individuals are required to create a legally recognized orga- nization, there are a number of differences. Self-employed can incorporate or file as sole proprietors. Entrepreneurs, in contrast, have a broader set of legal requirements and insurance and tax considerations.19

5. The final point of comparison involves scope of interests and influence. Entre- preneurs have broader aspirations aimed at influencing industries, markets, and greater numbers of people. Elon Musk, for example, wants to change the world. Self-employed individuals are more focused on operating a business in a specific geographic area and market. Their aspirations, interests, and scope of influence are much smaller.

Characteristics of Entrepreneurs Being an entrepreneur is what it takes to start a business; being a manager is what it takes to grow or maintain a business. As an entrepreneur or intrapreneur, you initiate new goods or services; as a manager you coordinate the resources to produce the goods or services— including, as we mentioned, the efforts of the intrapreneurs. Some of the examples of success we mentioned earlier—Oprah Winfrey (Harpo Productions) and Larry Page (Google)—are actually both entrepreneurs and effective managers. Other people, however, find they like the start-up part but dislike the management part. For example, Stephen Wozniak, entrepreneurial cofounder with Steve Jobs of Apple Computer, abandoned the computer industry completely and went back to college. Jobs, in contrast, went on to launch and manage another business, Pixar, which among other things, became the animation factory that made the movies Toy Story and Finding Nemo.

Do you think being an entrepreneur and being a manager require different skills? Researchers interested in this question typically compare personal characteristics of entrepreneurs with those of managers, and their answer is yes, the jobs require different skills. Although a long list of potential characteristics of entrepreneurs exists, nine are believed to be most important.20 They are shown in Figure LM 1.2.

■ Risk propensity. Risk taking is foundational to entrepreneurship. Managers must believe in themselves and be willing to make decisions; however, this statement applies even more to entrepreneurs. Precisely because they are will- ing to take risks in the pursuit of new opportunities—indeed, even to risk

Launch preparation for the SpaceX Falcon Heavy rocket. © NASA/SpaceX

Entrepreneurship LEARNING MODULE 1 225

personal financial failure—entrepreneurs need the confidence to act decisively. They prefer moderate levels of risk.

■ Generalized self-efficacy. Generalized self-efficacy is a person’s level of confi- dence about succeeding in different demanding situations. While managers and entrepreneurs both perform better when they have high self-efficacy, this characteristic is particularly important for entrepreneurs. They need confi- dence to achieve goals in a broader set of activities such as attracting custom- ers, handling technical problems, obtaining financial funding, and adhering to governmental rules and regulations.

■ Need to achieve. Both entrepreneurs and managers have a high need for achievement. However, entrepreneurs certainly seem to be motivated to pursue moderately difficult goals through their own efforts in order to realize their ideas and, they hope, financial rewards. Managers, by contrast, are more moti- vated by promotions and organizational rewards of power and perks.

■ Need for autonomy. Although many of us prefer the freedom to act as opposed to being told what to do, entrepreneurs have a higher need for autonomy. They prefer to work for themselves, or with those they respect and admire, and they have a strong preference for shaping their own destiny. They are willing to forgo the security and comfort of working for an organization that provides stable salary and benefits. All told, entrepreneurs possess a greater need for autonomy than managers.

■ Big Five personality dimensions. The Big Five are characteristics that psy- chologists have concluded define the core of our personality: they are dis- cussed in detail in Chapter 11. The Big Five are extroversion (the quality of being outgoing, talkative, and sociable), agreeableness (being good-natured and cooperative), conscientiousness (being dependable, responsible, and per- sistent), emotional stability (being relaxed, secure, and even-keeled), and openness to experience (being imaginative, curious, and broadminded). Entre- preneurs tend to be more extroverted, conscientious, emotionally stable, and open to experiences than managers. They also are less agreeable than managers.

■ Tolerance for ambiguity. Every manager needs to be able to make decisions based on ambiguous—that is, unclear or incomplete—information. However, entrepreneurs must have more tolerance for ambiguity because they are trying to do things that haven’t been done before.

FIGURE LM 1.2 Research-based characteristics of entrepreneurs

Risk propensity

Generalized self-e cacy

Need to achieve

Need for autonomy

Big five personality

Tolerance for ambiguity

Proactivity

Internal locus of control

Innovative/ creative

Entrepreneurial motives, attitudes,

and traits

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■ Proactivity. Proactivity is a forward-looking perspective in which an individual is looking for opportunities to provide value beyond what others expect. This characteristic is desired by all organizations, but it is critical for entrepreneurs. You can’t be entrepreneurial without being proactive. One academic concluded that entrepreneurial proactivity consists of “introducing new products and ser- vices ahead of the competition and acting in anticipation of future demand to create change and shape environment, thereby creating a first move advantage vis-a-vis competitors.”21

■ Internal locus of control. If you believe “I am the captain of my fate, the master of my soul,” you have what is known as an internal locus of control, the belief that you control your own destiny and that external forces will have little influ- ence. (External locus of control means the reverse—you believe you don’t control your destiny but that external forces do.) Although both entrepreneurs and managers like to think they have personal control over their lives, entrepre- neurs were found to have higher levels of internal locus than managers.22

■ Innovative/creative ability. Innovation leads to the creation of something new that makes money, while creativity produces new ideas about products, ser- vices, processes, and procedures. These definitions highlight that both innova- tion and creativity are fundamental to entrepreneurship. Entrepreneurs are generally more innovative and creative than others.23

So where do you stand? Do you think you would like to be an entrepreneur? The fol- lowing self-assessment was created to provide you with feedback about your entrepre- neurial orientation, should your instructor assign it to you.

To What Extent Do You Possess an Entrepreneurial Spirit? Please be prepared to answer these questions if your instructor has assigned Self-Assessment LM1.1 in Connect.

How motivated are you to be an entrepreneur, to start your own company? Do you have the aptitudes and attitudes pos- sessed by entrepreneurs? This self-assessment allows you to compare your motivations, aptitudes, and attitudes with those found in a sample of entrepreneurs from a variety of industries. Go to connect.mheducation.com and take the self- assessment. When you’re done, answer the following questions:

1. To what extent are your motives, aptitudes, and attitudes similar to those of entrepreneurs? Explain.

2. Based on your results, where are you most different from entrepreneurs in individual motives, aptitudes, and attitudes?

3. What do these gaps suggest about your entrepreneurial spirit? Discuss.

4. What things might you say during a job interview to demonstrate that you possess entrepreneurial characteristics? Explain.

SELF-ASSESSMENT LM1.1 CAREER READINESS

Entrepreneurship Matters across the Globe Entrepreneurship continues to be an economic generator across industries and coun- tries around the world. The United States was recently ranked the best environment for cultivating entrepreneurship across 138 countries, according to the Global Entrepreneurship and Development Index.24 In this section, we discuss the importance of entrepreneurship from the perspective of start-ups, innovation, job creation, and global experience.

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Start-Ups Generate Wealth and Economic Development Most of the get-rich stories we hear these days are about technology start-ups, such as Facebook, Yelp, Four- square, and Uber. A start-up is a newly created company designed to grow fast.25 But all kinds of new endeavors are constantly being launched. Not all rely on technology, and not all are intended to quickly become big. What all new start-ups do have in common is that they are driven by an individual or group that relies on entrepreneurial thinking.

Here are some of the best new start-ups from 2017.26 Essential, founded by Andy Rubin (who created Android), was started to compete with Apple’s iPhone and Samsung’s Galaxy. Brandless, headquartered in San Francisco, is an e-com- merce company selling consumer packaged goods under its own label for a single price of $3. The company is betting that people care more about price than about brand names. Nomadic VR is creating virtual reality arcades. Based in San Rafael, California, the founders believe VR will become a big draw for consumers’ entertainment spending. DeepMap, founded by a group of ex- Googlers, is building maps for self-driving vehi- cles. VoiceOps, founded by Nate Becker, Daria Evdikimova, and Ethan Barhydt, “designed a machine learning-powered system that monitors calls made by enterprise sales teams.”27 It enables managers to engage in customized sales coaching.

While these businesses have so far remained small, others have experienced rapid growth. Business Insider identified 15 start-ups that began operating after 2011 and are now valued at over $1 billion each. They include Udacity’s nanodegree programs, Vox Media, the Internet of Things company Uptake, fantasy sports site DraftKings, Amazon wannabe Jet, and health insurance company Oscar. Skilled entrepreneurship is driving the success of each firm.28

Entrepreneurship Drives Innovation Innovation is the fuel for economic devel- opment, and it represents the foundation of entrepreneurial activities. Entrepreneurs and entrepreneurial firms propose and create new products and services sold around the world. Patents, licenses with which the government authorizes a person or com- pany to exclude others from making using or selling an invention for a time, protect innovations. Small businesses, defined by the U.S. Small Business Administration (SBA) as those having fewer than 500 employees, are the form of business with which most entrepreneurs enter a market.29 Small firms in turn are the primary source of patent creation in the United States. They generated 16.5 times as many patents as large firms in 2007, according to the SBA.30 This is probably one reason for the increased sales and profitability growth of U.S. small businesses in both 2016 and 2017.31 Table LM1.1 reveals some interesting facts about small businesses in the United States.

Entrepreneurship Drives Job Creation How often do we hear politicians run on a platform promising job creation? It’s standard these days because job creation is good for citizens, communities, states, and countries. Historical figures show that small busi- nesses employ about 50 percent of all private-sector employees, and they created 63.3 percent of net new jobs from 1992 to 2013.32 This data confirms the importance of entrepreneurial firms.

Apple world headquarters in Cupertino, California. © Valeriya Zankovych/Alamy Stock Photo

228 PART 3 Planning

• 36.3% of small businesses are owned by women.

• 19.3% of small businesses are family owned.

• 50% of small businesses are home-based.

• 80% of entrepreneurs use their own money to start their business.

• 39.2% of small business owners have at least a bachelor’s degree.

• 19% of small business owners work at least 60+ hours per week.

• 64% think it is their duty to have a positive social and economic impact.

• 62% of the U.S.’s 585 billionaries are self-made.

• 23 million small businesses in the U.S. have no employees.

• 99.9% of all firms in the U.S. are small businesses.

• 66% of firms survive two years; 50% survive five years; and 33% survive 10 years.

• 30% of all new small businesses are started by immigrants.

Source: Data taken from “U.S. Small Business Administration: Office of Advocacy,” Frequently Asked Questions, June 2016; H. Kanapi, “15 Entrepreneurship Statistics That You Should Know,” Fit Small Business, July 30, 2017, https:// fitsmallbusiness.com/entrepreneurship-statistics/; G. Schmid, “17 Statistics Every Business Owner Needs to Be Aware Of,” Fundera Leger, July 19, 2017, https://www.fundera.com/blog/small-business-statistics; and A Furnham, “Why Immigrants Make Such Good Entrepreneurs,” The Wall Street Journal, November 27, 2017, p. R4.

TABLE LM 1.1 Factoids about Small Businesses

Entrepreneurship Improves the World’s Standard of Living The standard of living is the level of “necessaries, comforts and luxuries which a person is accustomed to enjoy.”33 Clearly, entrepreneurial job creation improves standards of living around the world by transferring profits from the business to employees (in the form of pay) and thus to communities as employees are better able to make purchases that maintain or improve their material life. So what is the status of entrepreneurial activity around the globe? The annual Global Entrepreneurship Monitor (GEM) has been studying global entrepreneurship for 18 consecutive years. Its 2017 report is a summary of more than 200,000 interviews with people from 54 countries. The good news is that entrepre- neurial activity is positively perceived and actively pursued around the world. About 70 percent of respondents to the survey report that entrepreneurs are well regarded and enjoy high status in their countries. Most people also believe that starting a busi- ness is a good career choice. These two statistics suggest that people around the world are interested in starting a business. In support of this conclusion, the report shows that roughly 13.5 percent of adults have started or have been running a business in the last 3.5 years.34

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LM 1-2 Identify how entrepreneurs get started.

Have you ever had an idea for a product that did not exist? Many of us do in the course of life as we encounter situations in which some device would help us accomplish a task or make us happy. Lowell Wood is a good example. He became the most prolific inven- tor in U.S. history when he received his 1,085th patent from the U.S. Patent and Trademark Office in 2015.

Wood is an astrophysicist, a self-taught paleontologist, and a computer scientist. He works hard at being creative. He told Bloomberg Businessweek that he “often failed or received the lowest score on the first exam given in a particular course and improved his marks through repetition and intense effort.” He credits his ability to come up with new ideas and find creative solutions to problems to the amount of reading he does. He religiously reads three dozen academic journals from varying fields of study, a habit he learned from chemist and author Linus Pauling. Wood asked Pauling how he comes up with all his great ideas. Pauling said, “There’s really nothing to it all. You just read, and you remember what you read.”35 Wood is currently working on developing a one-time universal vaccine. He hopes such a vaccine would enable us “to grab a newborn— literally right out of the uterus—pinch its thigh and push the stuff in, and all their pedi- atric vaccinations are done.”36

Businesses Start with an Idea Some people might not be as creative as Lowell Wood, but we all have the potential to come up with a viable business idea. The following actions can assist any aspiring entre- preneur to uncover a business idea.

1. Identify your passions, skills, and talents. Your author Angelo Kinicki and his wife Joyce started a consulting business that built on their passions, skills, and experience. The idea was conceived from their love of teaching and helping others to learn and develop. Joyce had extensive experience and skills in human resource management, and Angelo was a proven academic who could easily explain complicated concepts to managers. They put their skills together to offer services targeted at assisting companies in developing and achieving strategic plans. They also engage in leadership development programs for aspiring managers. The company has operated for more than 30 years. The takeaway is that your past experience and in-depth knowledge about an indus- try are great sources of new business ideas.37

2. Identify a problem or frustration. Chris Tidmarsh started Green Bridge Grow- ers, “a commercial greenhouse in north central Indiana that provides herbs, lettuces and nasturtiums to local restaurants, and sunflowers and cosmos to florists,” with his mother and cofounder Jan Pilarski. Tidmarsh has three col- lege degrees from Hope College: chemistry, environmental studies, and French. He was diagnosed with autism during preschool and struggled to find meaning- ful employment after college. He started the company because his job as an environmental researcher ended due to his difficulty communicating with oth- ers, and he wanted to use his passion and knowledge about agriculture. The

1.2 Starting a Business

THE BIG PICTURE Businesses start with an idea for a new product or service. Entrepreneurs then undertake a series of activi- ties to build the foundation for getting the business off the ground. These activities include writing a busi- ness plan, choosing the company’s legal structure, and arranging for financing. Once this foundation has been built, the job of building an organizational culture and design further helps the business take off.

Lowell Wood © Alex Wong/ Getty Images News//Getty Images

230 PART 3 Planning

problem was finding an employer and work role that benefited from his back- ground and interpersonal style. To make it work, Tidmarsh’s mom does the administrative activities like accounting, marketing, and sales. “He perfects the spacing between rows of kale and spinach, and keeps close tabs on water chem- istry and soil acidity. He spends hours researching natural and effective pesti- cides to deal with aphids. The solution: 4,500 ladybugs.” The company is doing well, with revenue of $80,000 and profit of $30,000 in fiscal year 2018. Tid- marsh plans to expand so he can reach his goal of $220,000 in sales by 2020.38

3. Identify an opportunity or need. Do you see any opportunities associated with the $1.2 billion people spend online? Brothers Patrick and John Collison did. They started Stripe Inc. in 2010 to help companies process their online trans- actions. The brothers built “software that businesses could plug into websites and apps to instantly connect with credit card and banking systems and receive payments. The product was a hit with Silicon Valley start-ups. Businesses such as Lyft, Facebook, DoorDash, and thousands that aspired to be like them turned Stripe into the financial backbone of their operations,” according to Bloomberg Businessweek.39 The company processes close to 50 billion online transactions annually, charging a small fee for each one. Patrick (28) and John (26) are among the youngest billionaires in the world.

Finding opportunities takes time, focus, and motivation. You first have to be looking for them. Jeff Bezos, who was a stock market researcher and hedge fund manager, fol- lowed Internet usage as part of his job. He decided to start Amazon when he realized that the surge in Internet usage provided an opportunity for online retailing. You can also find opportunities by considering markets that are not being served. Pay attention to current events and societal trends.40 For instance, the development of mobile devices

triggered an opportunity for Uber’s founders Garret Camp and Travis Kalanick. While searching for a cab in Paris, they realized the need to create an app that would hail a vehicle. The rest is history.

 4.  Study customer complaints. Customer complaints are a warning sign that something is wrong with a prod- uct or service. Thus they represent an opportunity to improve the offering. Consider Apple’s response to the way iPhone batteries degraded as the product aged. To prolong the devices’ lives, Apple used soft- ware controls to slow them down. Users were furi- ous! The company decided to replace batteries in older phones for a reduced price instead and to pro- vide more information about battery life within iOS.41 We suspect this problem has also made its way to the design engineers working on the issue of bat- tery life. Perhaps it will lead to a breakthrough idea.

Writing the Business Plan A business plan is much more than a funding plan. It also answers critical questions such as, “What business are we in?” “What is our vision and where are we going?” and “What will we do to achieve our goals?” Harvard Business Review noted that “A plan helps detail how the opportu- nity is to be seized, what success looks like, and what resources are required, and it can be key to the investment decisions of angel investors, banks, and venture capital- ists.”42 A good plan also attracts high-quality talent.43

Are you a glass half full or half empty kind of person? Entrepreneurs are more likely to see opportunity when others see challenges. ©Elenathewise/ Getty Images

Entrepreneurship LEARNING MODULE 1 231

There are two camps regarding the value of creating a business plan. The first believes that entrepreneurs “learn by doing” and that planning is a waste of time because it takes effort away from doing, improvising, and pivoting. The idea is that the future is ever changing and unknown, and planning doesn’t lead to more control. The other camp, in contrast, believes structured planning provides the foundation entrepreneurs need to launch a business, organize resources, hire employees, and achieve results.44 Which perspective sounds more reasonable to you?

Researchers have addressed this question. A recent six-year study of 1,000 would- be U.S. entrepreneurs compared planning practices and firm performance across one group that wrote formal plans and a second group that did not. The groups were balanced so that they were “statistical twins.” Findings showed that entrepre- neurs who planned were 16 percent more likely to survive than their identical non- planning cohorts. Entrepreneurs tended to plan when the company was a high-growth-oriented start-up and when they were seeking funding.45 All told, it pays to plan.

The components of a business plan vary, and people disagree about the level of detail to be included. Some suggest a one-page plan,46 but the general sentiment is that a longer plan is needed to cover the following areas:47

■ Executive summary. This section is like a two-minute elevator speech about the business. It provides conclusions and wraps up everything else in the plan. People generally write this section last so it can include important information from other sections.

■ Business description. The business description helps people connect with your vision by outlining the business, its mission, vision, product or service, and the reason you started it. You should also conduct an analysis of your strengths, weaknesses, opportunities, and threats (SWOT analysis, discussed in Chap- ter 6). It’s also recommended that you identify the principals in the business and the legal structure you will use.

■ Market analysis. The market analysis reviews information about the market you are trying to enter, your competitors, where you fit in the market, how your product or service is unique, and the level of market share you expect to obtain. You should also analyze trends in your market area and industry and discuss profiles of “ideal” customers and any additional market research that supports the validity of your idea.

■ Organization and management. It’s time to show off the talent of the manage- ment team and any special employees, such as a well-known technical expert, in the section on organization and management. Investors want to understand the talents of key team members and their previous successes. It’s also useful to discuss the type of organizational culture and structure you think best posi- tions the business for success.

■ Sales strategies. The section on sales strategies reviews your ideas for market- ing or promoting the product or service, your pricing strategy, your strategies for using the web and social media, and other activities for building brand awareness.

■ Funding requirements. Now it’s time to ask for the money you need to get this business running or to expand. Be realistic when you outline your funding requirements, and set a range if you are unsure about exact future costs. Pro- vide a timeline that links funding to expansion activities. You want to provide investors with realistic expectations.

■ Financial projections. Finally, develop revenue projections and conduct a cash flow statement. It’s critical to identify your current financial needs and those expected in the future. Your revenue growth should be based on other informa- tion contained in the plan such as market trends, sales strategies, and human resource needs.

232 PART 3 Planning

Choosing a Legal Structure Your choice of a legal structure is one of the most important you will make as an entre- preneur. The reason is that this decision affects everything from the taxes you’ll pay to your legal liability and control over the company. As we review the options, keep in mind that your choice depends on your personal and financial goals. Let’s consider the four basic business entities: sole proprietorship, partnership, corporation, and limited liability (LLC).48

Sole Proprietorship The Internal Revenue Service defines a sole proprietor as “someone who owns an unincorporated business by himself or herself.”49 It’s the simplest form of business structure. The sole proprietor gets to make all the decisions and has total control over the business. The key drawback, however, is that the owner has unlim- ited liability. If someone sues, the owner’s personal and business assets are put at risk. Angelo Kinicki uncovered one key downside to this structure. It was hard to get finan- cial backing for his consulting business when it operated as a sole proprietorship. Banks did not like the liability risk and would not lend them money to grow the business.

Partnership The Internal Revenue Service defines a partnership as a relationship “between two or more persons who join to carry on a trade or business. Each person con- tributes money, labor or skill, and expects to share in the profits and losses of the busi- ness.”50 Partnerships generally begin with a common interest or experience. François Pelen is a good example. He left his position as a VP at Pfizer to start Groupe Point Vision with Patrice Pouts and Raphael Schnitzer, two fellow MBA students at HEC Paris. Forbes reported that these three “built the business plan for Groupe Point Vision within the HAC incubator, and now have 25 centers, over a million patients, and annual revenue of more than $60 million.”51

A partnership is an unincorporated business and there are two types: general and limited. In a general partnership, the partners equally share all profits and losses. In limited partnerships, “only one partner has control of its operation, while the other per- son or persons simply contribute to and receive only part of the profit.”52 This structure works well when you want to start a business with a family member or a friend. The drawbacks are the unlimited liability of the partners and the risk of disagreements between them. Income and losses are “passed through” to the partners’ individual tax- able incomes.

Corporation A corporation is an entity that is separate from its owners, meaning “it has its own legal rights, independent of its owners—it can sue, be sued, own and sell prop- erty, and sell the rights of ownership in the form of stocks.”53 There are two key types of corporations: C corporations and S corporations.

■ C corporations are owned by shareholders and are taxed as separate entities. The Internal Revenue Service (IRS) states that this type of corporation “real- izes net income or loss, pays taxes and distributes profits to shareholders. The profit of a corporation is taxed to the corporation when earned, and is taxed to the shareholders when distributed as dividends. This creates a double tax.”54 The benefit to the entrepreneur is that the legal entity and thus any liability exist separately from any individual owner of the business.

■ S corporations “are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the f low-through of income and losses on their personal text returns and are assessed at their individual income tax rates. This allows S corporations to avoid double taxation on the corpo- rate income.”55 The benefit of an S corporation is that owners have limited

Entrepreneurship LEARNING MODULE 1 233

liability and don’t incur corporate tax. S-corps were the legal structure most frequently used by entrepreneurs in 2017, according to the National Small Business Association.56

Limited Liability Company (LLC) A limited liability company (LLC) is a hybrid struc- ture that combines elements of sole proprietor, partnership, and corporation. Each state may have different regulations regarding an LLC. “Limited liability means that its own- ers, also called members, are usually not personally responsible for the LLC’s debts and lawsuits. . . . In the eyes of the IRS, LLC taxes usually resemble a sole proprietorship or partnership. The LLC does not pay income taxes itself: instead, the owners list business profits and losses on their personal tax returns.”57 Benefits of LLCs include fewer recordkeeping and reporting requirements than for corporations. LLCs were the sec- ond most frequently employed legal structure in 2017.58

Conclusions You should not make a decision about the legal structure of a new business by yourself. The preceding information does not provide enough details for you to decide on your own. You want to obtain professional advice. The Kinickis, for instance, relied on the combined advice of their accountant and their attorney when deciding to transition their consulting company from a sole proprietorship to an S cor- poration. Our discussion here is not intended to provide all the information you need to start a business. We want to provide enough detail to enable you to ask good questions should you consider entrepreneurship.

Obtaining Financing Whether they need equipment to start a small landscape business or a large invest- ment to drive growth for a financial software firm like the Collison brothers’ Stripe Inc., all entrepreneurs must eventually obtain financing. The amount depends on the nature of the business. An estimate by the Wells Fargo Business index, for example, put average start-up cost at $10,000, whereas the Kauffman Firm Survey suggests that $80,000 is a more accurate assessment.59

The availability of financing to start or grow a business can make the difference between pursuing an entrepreneurial dream and giving up. The National Association of Small Businesses (NBSA), for example, found that 28% of businesses surveyed in 2017 were not able to receive adequate financing to run.60 The lack of funding adversely affected 47% of these businesses.61

Below is a summary of financing options for start-ups:62

■ Personal funding. A large percentage of entrepreneurs use their own sav- ings or credit cards to initially fund a business. Banks like to see entrepre- neurs invest in their own firms before they ask for a loan.

■ Family and friends (aka “love money”). Friends, parents, and other relatives are another common source of funding. You should expect to repay these loans as the business grows. Be careful when borrowing from or going into business with family and friends because people often have a hard time separating per- sonal and business relationships.

■ Bank loans. Bank loans were the most frequently used source of financing in 2017, according to the NBSA, used by 64 percent of surveyed entrepreneurs. Banks generally want to see a good business plan and personal guarantees before they will lend. Entrepreneurs frequently use their homes as collateral for bank loans. The Small Business Association is another good source of loan financing. The mission of the SBA is to help “Americans start, build and grow businesses. Through an extensive network of field offices and partnerships with public and private organizations, SBA delivers its services to people

How much money do you think it takes to start a business? Census data show that 40% of new businesses were started with under $5,000. ©Palto/Shutterstock

234 PART 3 Planning

throughout the United States, Puerto Rico, the U.S. Virgin Islands and Guam.”63 The SBA provides loans, “loan guarantees, contracts, counseling ses- sions and other forms of assistance to small businesses.” It provides “an array of financing from the smallest needs in microlending—to substantial debt and equity investment capital (venture capital).”64

■ Venture capital. Venture capitalists (VCs) exchange funds for an ownership share in the company. They generally look for high-growth potential in industries like information technology, biotechnology, and communication and desire a high return on their investment. VCs essentially invest money for a share in control- ling the company. This can include “the right to supervise the company’s man- agement practices” and “often involves a seat on the board of directors and assurance of transparency.”65

Making a pitch to VCs is critical for those entrepreneurs needing a larger investment. The process begins with a business plan and a formal presentation. Lakshmi Balachandra worked at two VC firms and observed a number of these entrepreneurial presentations. She wondered why some proposals looked so good on paper and then turned into nonstarters based on presentations. She spent 10 years studying these dynamics.

Dr. Balachandra is now a professor at Babson College and is publishing insights from her research. They include the following:

1. Entrepreneurs are more successful getting financing when they laugh during pitches.

2. Entrepreneurs are more likely to get financing when they have friends or acquaintances in common with the VCs.

3. Judges prefer a calmer demeanor then over-the-top passion and excitement. People apparently equate calmness with effective leadership.

4. Interest in a start-up was due more to the entrepreneur’s character and trust- worthiness than to perceptions of competence.

5. Gender stereotypes play a role in investment decisions. People displaying ste- reotypically female behaviors such as warmth, sensitivity, and expressiveness were less likely than others to get funded.66

■ Angels. Angel investors are wealthy individuals or retired executives who invest in small firms. “They are often leaders in their own field who do not only con- tribute their experience and network of contacts but also their technical and/or management knowledge. Angels tend to finance the early stages of the business with investments in the order of $25,000 to $100,000.”67 They like to mentor would-be entrepreneurs and thus prefer those who are responsive to feedback.68

■ Crowd investing. Crowd investing allows a group of people—the crowd—to invest in an entrepreneur or business online. The investors can take either an equity position in which they exchange money for stock or ownership in the company, or they can engage in debt investing by making a loan to the business.69

Creating the “Right” Organizational Culture and Design At this stage in starting a business, the entrepreneur has a viable idea for a new or improved product and service, an established legal structure, a physical location in which to operate, and some level of financing. It’s now time to decide on the type of organizational culture and design to adopt. These are important decisions because they

Entrepreneurship LEARNING MODULE 1 235

affect employee behavior and performance across the individual, group, and organiza- tional levels.

All entrepreneurs learn that they can’t complete all tasks alone. They need people. At the early stages of a business, entrepreneurs tend to hire people they trust or who have values similar to their own. This group frequently includes family, friends, or experts in the industry. People generally get along and the excitement and interest in the new business drives motivation and performance. As the business grows, however, the founder or founders need to hire people with different skills, who may bring with them values and beliefs a little different from those of the current workforce. This is where organizational culture and design start to exert their inf luence on the business’s success.

Organizational culture, discussed in detail in Chapter 8, helps the business articulate its own values and beliefs, which generally flow from the founder’s. There are different types of organizational culture, and the entrepreneur needs to identify the type that best fits the organization’s vision and strategies, and his or her leadership style.70 The busi- ness’s evolving culture matters because it will influence employees’ work attitudes and performance outcomes such as level of customer satisfaction, market share, operational efficiency, product/service quality, innovation, and financial performance.71

Organizational design, discussed in Chapter 8, is the process of designing the optimal structure of accountability and responsibility an organization will use to execute its strategies. In many small firms, the structure tends to form haphazardly and is rather simple. People pick up tasks as needed and there are no clear reporting relationships. This is feasible at first, but it quickly becomes dysfunctional as the business grows.

Growth brings the need for better organization and decision making. Like its culture, an organization’s structure needs to fit the vision and strategies the business is pursu- ing. Chapter 8 discussed eight different organizational designs entrepreneurs might choose to organize the business. In the end, this decision can be difficult for entrepre- neurs because they now must contend with sharing power, control, and decision making.

The Example box reviews the process Amanda Johnson used when transitioning from being an hourly employee to starting her own business. It illustrates many of the decisions entrepreneurs make as they start and grow a business.

EXAMPLE Amanda Johnson Starts and Grows a Business

My dream was to be a big-time writer, so I majored in journal- ism at Arizona State University. In preparation for my writing career, I had a part-time job and freelanced whenever possible. Then life happened.

I got married during my last semester at school, purchased a home, and thought I’d settle into freelancing as the thing I’d be doing for the rest of my life. Then my husband was laid off and we found we were expecting our first child. I felt the weight of growing bills and lack of health care. Did I want to give up freelancing and my flexible schedule to try to find something more stable, only to have to take maternity leave? Would I be able to work and afford day care? Did I really want to go into a full-time career while my daughter was little? Should I give up on my dream of being independent?

I’d always been creative and used those skills while work- ing in a flower shop during college. I now found myself won- dering whether I could turn back to flowers and somehow turn

that passion into a viable source of income. We certainly needed the money.

Local shops were hiring but wanted only “designers” with years of experience. One shop admitted it was cautious about bring- ing me on since I’d be having a baby in the spring and might not be able to work on Valentine’s Day! I started thinking about opening my own flower shop.

I knew what I loved about the flower shop I’d worked in during college: weddings, proms, and events. I loved the creative chal- lenge and fun designs. I knew, too, what I didn’t love: working holidays such as Valentine’s Day and Mother’s Day. Customers Courtesy Amanda Johnson

236 PART 3 Planning

can be grouchy, and flowers have been getting more expensive. I also knew starting a flower shop required a lot of overhead— renting a space, hiring employees—and I didn’t have a lot of money to spend.

Frustrated after trying to find work in a shop and weighing the pros and cons of being away from home while caring for our daughter, I decided to start my business. Strategically, I decided to focus only on wedding and event design. I kept the operation small by working with couples having small wed- dings so that I could easily design in the kitchen of my home. I invested in a small floral cooler. I named my company Butterfly Petals.

I’d always loved butterflies and, after an exhaustive search of available business names, I found “Petals” was the only flo- ral-related word left! I started as a sole proprietorship. I didn’t know the ins and outs of the business side at the time, and this was the fastest way to get up and running. I registered my busi- ness name and contacted floral suppliers to set up wholesale accounts. I knew from planning my own wedding that there were local bridal-focused magazines and websites. I started with free wedding websites and basic profiles. I purchased flowers and created fun, desert-inspired bouquets. I took my own photos and put together a very basic website. Then I hus- tled. I brought arrangements to venues, dropped my cards in bridal salons.

There was a lot on the line since I was using my personal income to finance this new venture. I met clients at my dining room table or drove to various coffee shops to meet them during their lunch breaks. It took time and a few trusting cli- ents, but I had my first bookings shortly after my daughter was born.

I realized I needed help managing taxes and other business issues, so I hired a professional bookkeeper. One of the recom- mendations was to switch from a sole proprietorship to an LLC in order to protect myself personally from the company’s debts. The company grew over the next few years. I started creating events for clients with large wedding parties and higher table counts. The flowers and supplies took over, and I could no lon- ger keep the work in my home. I had to decide whether I wanted the overhead of a studio space and employees to help with the demand. I was worried that my little company could not support me and the additional costs.

On the other hand, I thought revenue would grow if I brought on extra team members because we could take on multiple weddings and events on the same weekend. I also believed moving the com- pany out of my house would lead wedding and event professionals to take me more seriously, creating a bigger pipeline of custom- ers. I thus decided to rent my first studio, purchase additional inventory, and hire part-time employees. By this time, the business was able to support the costs and still provide me with income. After two years, it was time to look for another, larger space!

This will be our 13th year. I’m operating out of my third and largest studio space. I have a massive rental inventory of vases, containers, and candle holders. We design multiple events every weekend and have corporate clients and standing orders throughout the week. I learned to delegate and share my design knowledge with key members of my team so we can take on larger-scale work and more events to keep the com- pany afloat during the off-season. It’s been an incredible ride. I never thought my little idea to bring in some extra income would become this successful business. Courtesy of Amanda Johnson

Entrepreneurship LEARNING MODULE 1 237

angel investors 234 corporation 232 crowd investing 234 entrepreneurship 222 entrepreneur 222

intrapreneur 222 limited liability

company (LLC) 233 partnership 232 patents 227

self-employment 223 sole proprietor 232 standard of living 228 start-up 227 venture capitalists (VCs) 234

Key Terms Used in This Learning Module

Key Points

LM1.1 Entrepreneurship: Its Foundation and Importance

• Entrepreneurship, a necessary attribute of business, is the process of recognizing and exploiting opportunities.

• Two types of entrepreneurship are entrepreneurs and intrapreneurs.

• Entrepreneurship is different from self-employment. • Nine research-based characteristics of

entrepreneurs are risk propensity, generalized self-efficacy, need to achieve, need for autonomy, Big Five personality, tolerance for ambiguity, proactivity, internal locus of control, and innovative/creative ability.

• Entrepreneurship matters around the globe because it (1) generates wealth and economic development, (2) drives innovation, (3) drives job creation, and (4) improves the world’s standard of living.

LM1.2 Starting a Business • All businesses start with an idea. Ideas come from

four sources: (1) the entrepreneur’s passions,

skills, and talents; (2) a problem or frustration; (3) an opportunity or need; and (4) customer complaints.

• Business plans help set the direction of a new business. They answer questions such as “What business are we in?” “What is our vision and where are we going?” and “What will we do to achieve our goals?”

• A business plan is used in the process of obtaining funding.

• There are four fundamental legal structures entrepreneurs can use when starting a business: sole proprietorship, partnership, corporation, and limited liability company (LLC).

• There are a variety of funding sources entrepreneurs use to start and grow their new business. They include personal funding, loans from family and friends, bank loans, venture capital, angel investors, and crowd investing.

• Entrepreneurs need to establish an organizational culture and design that fit the vision and strategies being pursued by the new business.

7 After reading this chapter, you should be able to:

LO 7-1 Compare rational and nonrational decision making.

LO 7-2 Explain how managers can make decisions that are both legal and ethical.

LO 7-3 Describe how evidence-based management and business analytics contribute to decision making.

LO 7-4 Compare four decision-making styles.

LO 7-5 Identify barriers to rational decision making and ways to overcome them.

LO 7-6 Outline the basics of group decision making.

LO 7-7 Describe how to develop the career readiness competencies of critical thinking/problem solving and decision making.

Individual and Group Decision Making How Managers Make Things Happen

© O

livier Renck/Aurora/G etty Im

ages

FORECAST What’s Ahead in This Chapter We begin by distinguishing between rational and nonrational decision

making, and we describe two nonrational models. We next discuss

ethical decision making. We then consider evidence-based decision

making and the use of analytics. Next we describe general decision-

making styles. We follow by considering how individuals respond to

decision situations and nine common decision-making biases. We then

shift gears by examining group decision making and group problem-

solving techniques. We conclude with a Career Corner that focuses on

how you can develop the career readiness competencies of critical

thinking/problem solving and decision making.

“If we’re not making mistakes, we’re not trying hard enough.” Those are the words with which Coca-Cola’s new CEO, James Quincey, recently addressed his rank-and-file managers.1 Making mistakes is always a possibility, but that can’t stop you from making decisions. And you can learn from the result, which will help you hone your career readiness competencies of critical thinking/problem solving and decision making. So how do you make good decisions? This chapter will discuss several kinds of decisions and different models for decision making. But here are a few general guidelines that apply to any formal or informal decision process.

Keep Your Mind Open If you make prejudgments about a situation rather than keeping an open mind, you risk acting on your biases rather than on the facts. As one business writer says about decision making, “Without maintaining an open mind any formal process that you use will amplify the old adage, ‘garbage in, garbage out.’ ”2 In other words, to make good decisions you need to be ready to take in all valid information, even if it contradicts or questions your own beliefs and experience. (Just because you don’t agree with something, that doesn’t make it wrong.) The same writer also counsels avoiding the logical flaw called “information bias,” in which you consider only information that supports assumptions you’ve already made. Use your communication skills to become a good and patient listener and, with your proactive learning orientation, load up on new facts and information. Don’t decide the outcome ahead of time, either. It’s sometimes easy to assume a decision will not turn out well, or a problem will remain unsolved. Taking a positive approach instead can only improve your decision making.3

Prioritize Your Decisions Sometimes you may have to make multiple decisions, and all within a limited time. Some may be large and some small. How do you effectively manage this task? Here are four steps to help you prioritize decisions and get to the important ones first.4

1. List the decisions you need to make over the relevant time period. Perhaps over the next six months you need to decide where and how to begin your job search, whether to buy a new car, and what to do with the belongings you left at home when you moved to your dorm or apartment. Make sure your list is complete and that you’ve identified

the information you need to make each decision, such as the size of your budget for buying a car and the average price for the model you want.

2. Characterize each decision according to its complexity and magnitude. Who or what is affected by each, and how much do you need in terms of tools and information to make your choice? The more ramifications and the more information needed, the larger and more complex the decision.

3. Organize your decisions into three categories: Strategic decisions, like deciding how to frame your job search, will require the most time and attention, can affect the largest number of people, and probably also require you to gather the most information. Significant decisions demand less energy and information but are still important. Whether to buy a new car might fit into this category. Finally, quick decisions are the least complex you face, require the least input, and can often be resolved if you apply a simple rule. Deciding what old belongings to keep, throw out, or give away falls into this category.

4. Note the timing for each decision. If you’ve done the first three steps, this one should be easy. For instance, you may need to complete (not just start) your job search before you can buy a car or even know whether you need one.

Move on from Your Mistakes If a decision doesn’t turn out as well as you’d hoped, start by forgiving yourself. Solving problems and making decisions are skills everyone can practice and get better at. Next, review the steps you took to arrive at your decision, and if it’s not already clear what went wrong, try to identify the weak spot in your process. Did you get too little information, or fail to consider opposing viewpoints? Did you spend too much time on quick decisions and not enough on strategic or significant ones? If the problem is one you can remedy, congratulations. You’ve just learned something, and you’ve improved your career readiness skills too. Now move on!

For Discussion Are you able to make the tough decisions effective managers have to make? What other kinds of decision-making tools do you think would be helpful to you? Can you describe an instance in which you were badly mistaken about something or someone? What did you do?

How to Make Good Decisions

240 PART 3 Planning

7.1 Two Kinds of Decision Making: Rational and Nonrational

THE BIG PICTURE Decision making, the process of identifying and choosing alternative courses of action, may be rational, but often it is nonrational. Four steps in making a rational decision are (1) identify the problem or opportunity, (2) think up alternative solutions, (3) evaluate alternatives and select a solution, and (4) implement and evaluate the solution chosen. Two examples of nonrational models of decision making are (1) satisficing and (2) intuition.

The subject of decisions and decision making is a fascinating one that is at the heart of what managers and leaders do. A writer for Forbes noted that “you cannot separate leadership from decisioning . . . the outcome of a leader’s choices and decisions can, and usually will, make or break them.”5 And this is why decision making is one of the KSAOs you will need to be career-ready.

A decision is a choice made from among available alternatives. Decision making is the process of identifying and choosing alternative courses of action.

If your company’s product is in first place in its market and making a lot of money, is that a sign of great decision making? Consider the decisions that framed success at Starbucks.

LO 7-1 Compare rational and nonrational decision making.

EXAMPLE Crisis Leading to the Strategic-Management Process: Starbucks Reclaims Its Soul

Among the many things that Starbucks has going for it is this: It survived a near-death experience.6

Starbucks’ executive CEO, Howard Schultz, joined the Seattle-based company as marketing director in 1982, when it was a small chain selling coffee equipment. Over nearly two decades, he gained control of the firm and, inspired by the coffee houses of Europe, transformed it into a comfortable “third place” between home and work, a place with a neigh- borhood feel selling fresh-brewed by-the-cup lattes and cap- puccinos. By 2000, Starbucks (named for the first mate of the

whaling ship in Herman Melville’s Moby Dick) had become the world’s largest specialty coffee retailer, with 3,501 stores, 78 percent of them in the United States.7

Shultz Steps Down the First Time Schultz stepped down as CEO in 2000 (remaining the board’s chair), and for a while the business continued to thrive. Then two things happened that provoked a crisis. First, the company “lost a certain soul,” says Schultz, as management became more concerned with profits than with store atmosphere and company values and extended existing product lines rather than creating new ones. Second, during the recession that began in 2007, tight-fisted consumers abandoned specialty coffees, causing the stock price to nosedive. In January 2008, after an eight-year absence, Schultz returned as CEO.

The Reinvention Begins “I didn’t come back to save the company—I hate that description,” Schultz told an interviewer. “I came back to rekindle the emotion that built it.”8

Among the risks he took to restore the company’s luster, he closed 800 U.S. stores, laid off 4,000 employees, and let go most top executives. As a morale booster, he flew 10,000 store managers to New Orleans, recently destroyed by hurricane Katrina. Along with attending strategy sessions, they bonded in community-service activities, contributing thousands of volun- teer hours to helping to restore parts of the city. “We wanted to give back to that community post-Katrina,” says Schultz, “and remind and rekindle the organization with the values and guiding principles of our company before we did a stitch of business.”

Starbucks in India The world’s biggest coffee chain launched its first Indian outlet in October 2012 in an upscale part of Mumbai. ©Punit Paranjpe/AFP/Getty Images

Individual and Group Decision Making CHAPTER 7 241

Decision Making in the Real World Sometimes we are able to make thoughtful decisions, making rational choices among well-defined alternatives. But that is not always the way it works in the real world.

Two Systems of Decision Making In Thinking, Fast and Slow, psychologist Daniel Kahneman, winner of the 2002 Nobel Prize in economics, describes two kinds of think- ing, which he labels System 1 and System 2:14

■ System 1—intuitive and largely unconscious: System 1 operates automatically and quickly; it is our fast, automatic, intuitive, and largely unconscious mode, as when we detect hostility in a voice or detect that one object is more distant than another.

■ System 2—analytical and conscious: System 2 is our slow, deliberate, analytical, and consciously effortful mode of reasoning, which swings into action when we have to fill out a tax form or park a car in a narrow space.

“System 1 uses association and metaphor to produce a quick and dirty draft of real- ity,” says one explanation, “which System 2 draws on to arrive at explicit beliefs and reasoned choices.”15

Why don’t we use the more deliberate and rational System 2 more often? Because our brain can be lazy and tires easily, so instead of slowing things down and analyzing them, it is content to accept the easy but unreliable story that System 1 feeds it.

The “Curse of Knowledge” Why do some engineers design electronic products (such as DVD remote controls) with so many buttons, devices ultimately useful only to other engineers? Why are some professional investors and bankers prone to taking excess risks?16 Why are some employees so reluctant to adopt new processes? The answer may be what’s known as the curse of knowledge. As one writer put it about engi- neers, for example, “People who design products are experts cursed by their knowledge, and they can’t imagine what it’s like to be as ignorant as the rest of us.”17 Specialization improves efficiency, suggests another writer, but it also leads to tunnel vision and blind spots.18 In other words, as our knowledge and expertise grow, we may be less and less able to see things from an outsider’s perspective—hence, we are often apt to make irra- tional decisions.

Let us look at the two approaches managers may take to making decisions: They may follow a rational model or various kinds of nonrational models.

The Payoff After a couple of years, the company turned around, the result of better operations, modernized technol- ogy, a reinvigorated staff, and several innovations: It offered new coffee products, switched to a cold-brew process for iced coffee instead of simply brewing hot coffee and then chilling it, acquired (and then later closed) the La Boulange bakery chain, opened (and then closed) Teavana “tea bars,” enabled custom- ers to pay for coffee via a mobile-payment app, and even launched alcohol sales.9 By early 2016, it had 23,921 stores in 64 countries, and its revenues had risen 146 percent over the last decade, while earnings grew more than fivefold.10 Starbucks’ 2017 revenues reached $21.3  billion, built on serv- ing 90 million customers a day, and the company planned to achieve $35 billion by 2021 while opening 12,000 new stores, most of which were to be in China.11

Schultz Steps Down Again In 2017, Schultz stepped down once again, this time to become executive CEO. The company’s prospects are considered bright as it adds to its product line, adds to the utility of its mobile app, and remains a popular customer choice, particularly in the coveted youth market.12

YOUR CALL Starbucks’ premium-priced coffee drinks are often called an “affordable luxury.” If we can’t afford a McMansion or a Lexus, says one observer, we may be “willing to make that $5 splurge at Starbucks simply because it makes us feel a bit better about our- selves.”13 Assuming this is true, do you think another economic downturn could alter Starbucks’ fortunes in spite of its product innovations, attempts to rekindle the cozy neighborhood café, and emphasis on positive social values,? Why or why not?

242 PART 3 Planning

Rational Decision Making: Managers Should Make Logical and Optimal Decisions The rational model of decision making, also called the classical model, explains how man- agers should make decisions; it assumes managers will make logical decisions that are the optimal means of furthering the organization’s best interests.

Typically there are four stages associated with rational decision making. (See Figure 7.1.) These are also the steps in the standard model of problem solving. As step 1 in the figure shows, for example, a decision is often an opportunity to solve a problem, which is a gap between an actual and a desired state.

Stage 4

Implement & evaluate the solution chosen.

Stage 2

Think up alternative solutions.

Stage 1

Identify the problem or opportunity.

Stage 3

Evaluate alternatives & select a solution.

FIGURE 7.1 The four steps in rational decision making

Stage 1: Identify the Problem or Opportunity— Determining the Actual versus the Desirable As a manager, you’ll probably find no shortage of problems, or difficulties that inhibit the achievement of goals: customer complaints, supplier breakdowns, staff turnover, sales shortfalls, competitor innovations, low employee motivation, and poor quality.

However, you’ll also often find opportunities—situations that present possibilities for exceeding existing goals. It’s the farsighted manager, however, who can look past the steady stream of daily problems and seize the moment to actually do better than the goals he or she is expected to achieve. When a competitor’s top salesperson unexpect- edly quits, that creates an opportunity for your company to hire that person away to promote your product more vigorously in that sales territory.

Whether you’re confronted with a problem or an opportunity, the decision you’re called on to make is how to make improvements—how to change conditions from the present to the desirable. This is a matter of diagnosis—analyzing the underlying causes.

Stage 2: Think Up Alternative Solutions— Both the Obvious and the Creative Employees burning with bright ideas are an employer’s greatest competitive resource. “Creativity precedes innovation, which is its physical expression,” says Fortune maga- zine writer Alan Farnham. “It’s the source of all intellectual property.”19

After you’ve identified the problem or opportunity and diagnosed its causes, you need to come up with alternative solutions.

Stage 3: Evaluate Alternatives and Select a Solution— Ethics, Feasibility, and Effectiveness In this stage, you need to evaluate each alternative not only according to cost and quality but also according to the following questions: (1) Is it ethical? (If it isn’t, don’t give it a second look.) (2) Is it feasible? (If time is short, costs are high, technology

Individual and Group Decision Making CHAPTER 7 243

unavailable, or customers resistant, for example, it is not.) (3) Is it ultimately effective? (If the decision is merely “good enough” but not optimal in the long run, you might reconsider.)

Stage 4: Implement and Evaluate the Solution Chosen With some decisions, implementation is usually straightforward (though not necessarily easy—firing employees who steal may be an obvious decision, but it can still be emotion- ally draining). With other decisions, implementation can be quite difficult; when one company acquires another, for instance, it may take months to consolidate the depart- ments, accounting systems, inventories, and so on.

Successful Implementation For implementation to be successful, you need to do two things:

■ Plan carefully. Especially if reversing an action will be difficult, you need to make careful plans for implementation. Some decisions may require written plans.

■ Be sensitive to those affected. You need to consider how the people affected may feel about the change—inconvenienced, insecure, even fearful, all of which can trigger resistance. This is why it helps to give employees and customers latitude during a changeover in business practices or working arrangements.

Now that you understand the four stages of the rational model, to what extent do you think you use them when making decisions? Would you like to improve the career readi- ness competency of decision making? If yes, then you will find the following self- assessment valuable. It assesses your problem-solving skills.

Assessing Your Problem-Solving Potential This survey is designed to assess your approach to problem solving. Please be prepared to answer these questions if your instructor has assigned Self-Assessment 7.1 in Connect.

1. What is the status of your problem-solving skills? Are you surprised by the results?

2. Based on identifying the four lowest scored items on the assessment, what can you do to improve your problem- solving skills? Explain.

3. What things would you say during an interview to demonstrate that you possess this career readiness competency?

SELF-ASSESSMENT 7.1 CAREER READINESS

Evaluation One “law” in economics is the Law of Unintended Consequences— things happen that weren’t foreseen. For this reason, you need to follow up and evaluate the results of any decision.

What should you do if the action is not working? Some possibilities:

■ Give it more time. You need to make sure employees, customers, and so on have had enough time to get used to the new action.

■ Change it slightly. Maybe the action was correct, but it just needs “tweaking”— a small change of some sort.

■ Try another alternative. If Plan A doesn’t seem to be working, maybe you want to scrap it for another alternative.

■ Start over. If no alternative seems workable, you need to go back to the draw- ing board—to stage 1 of the decision-making process.

244 PART 3 Planning

What’s Wrong with the Rational Model? The rational model is prescriptive, describing how managers ought to make decisions. It doesn’t describe how managers actually make decisions. Indeed, the rational model makes some highly desirable assumptions—that managers have complete information, are able to make an unemotional analysis, and are able to make the best decision for the organization. (See Table 7.1.) We all know that these assumptions are unrealistic.

• Complete information, no uncertainty: You should obtain complete, error-free information about all alternative courses of action and the consequences that would follow from each choice.

• Logical, unemotional analysis: Having no prejudices or emotional blind spots, you are able to logically evaluate the alternatives, ranking them from best to worst according to your personal preferences.

• Best decision for the organization: Confident of the best future course of action, you coolly choose the alternative that you believe will most benefit the organization.

TABLE 7.1 Assumptions of the Rational Model

Nonrational Decision Making: Managers Find It Difficult to Make Optimal Decisions Nonrational models of decision making explain how managers make decisions; they assume that decision making is nearly always uncertain and risky, making it difficult for managers to make optimal decisions. The nonrational models are descriptive rather than prescriptive: They describe how managers actually make decisions rather than how they should. Two nonrational models are (1) satisficing and (2) intuition.

1. Bounded Rationality and the Satisficing Model: “Satisfactory Is Good Enough” During the 1950s, economist Herbert Simon—who later received the Nobel Prize—began to study how managers actually make decisions. From his research he proposed that managers could not act truly logically because their rationality was bounded by so many restrictions.20 Called bounded rationality, the concept suggests that the ability of decision makers to be rational is limited by numerous constraints, such as complexity, time and money, and their cognitive capacity, values, skills, habits, and unconscious reflexes. (See Figure 7.2.)

FIGURE 7.2 Some hindrances to perfectly rational decision making

■ Complexity: The problems that need solving are often exceedingly complex, beyond understanding.

■ Time and money constraints: There is not enough time or money to gather all relevant information.

■ Different cognitive capacity, values, skills, habits, and unconscious reflexes: Managers aren’t all built the same way, of course, and all have personal limitations and biases that affect their judgment.

■ Imperfect information: Managers have imperfect, fragmentary information about the alternatives and their consequences.

■ Information overload: There is too much information for one person to process.

■ Different priorities: Some data are considered more important, so certain facts are ignored.

■ Conflicting goals: Other managers, including colleagues, have conflicting goals.

Because of such constraints, managers don’t make an exhaustive search for the best alternative. Instead, they follow what Simon calls the satisficing model—that is, manag- ers seek alternatives until they find one that is satisfactory, not optimal. While “satisficing” might seem to be a weakness, it may well outweigh any advantages gained from delaying making a decision until all information is in and all alternatives weighed.

Individual and Group Decision Making CHAPTER 7 245

However, making snap decisions can also backfire. Example: In the fall of 2014, Amazon.com was about to release its new voice-controlled smart speaker (what came to be called the Echo), but there was one lingering uncertainty: the choice of “wake word” that, when spoken, would cue the device to take voice commands. (Because of technical limitations, a wake word cannot be just any sound.) One possibility was “Echo.” Another was “Alexa.” Amazon CEO Jeff Bezos thought the best word was “Amazon.” However, the difficulty with Bezos’s choice, according to Amazon’s engi- neers, as reported in Bloomberg Businessweek, was that “the speakers would wake upon hearing Amazon ads on television and, because it connects to a Wi-Fi network, could start buying stuff from the Internet.”22 In the end Bezos agreed with his engineers that the wake word would be “Alexa”—a satisfactory, if not optimal, solution for him.

2. The Intuition Model: “It Just Feels Right” Small entrepreneurs often can’t afford in-depth marketing research and so they make decisions based on hunches—their subcon- scious, visceral feelings. For instance, Ben Hugh, 32, decided to buy I Can Has Cheezburger?— a blog devoted to silly cat pictures paired with viewer-submitted quirky captions—when it linked to his own pet blog and caused it to crash from a wave of new visitors. Putting up $10,000 of his own money and acquiring additional investor financing, he bought the site for $2 million from the Hawaiian bloggers who started it. “It was a white-knuckle decision,” he said later. But he expanded the Cheezburger blog into an empire that now includes 53 sites.23

“Going with your gut,” or intuition, is making a choice without the use of conscious thought or logical inference.24 Intuition that stems from expertise—a person’s explicit and tacit knowledge about a person, a situation, an object, or a decision opportunity—is known as a holistic hunch. Intuition based on feelings—the involuntary emotional response to those same matters—is known as automated experience. It is important to try to develop your intuitive skills because they are as important as rational analysis in many decisions.25 The Example box illustrates how Tesla CEO Elon Musk uses intuition.

Nonrational decision making? When gasoline prices fall, Americans do two things:21 They buy more gas but they also buy higher-octane gas. Thus, instead of saving money by buying their previous gallons and grades, they opt to go fancy on their fill-ups. Why do you suppose this is? How do you deal with this kind of nonrational decision? ©NithidPhoto/Getty Images

EXAMPLE The Power of Intuition

You might be wishing that you could make all difficult decisions not after a long consideration of data and consequences, but in an “aha!” moment in which you spontaneously recognize the answer to the problem. This recognition is called an epiphany— that instant when something clicks in the brain, a mental light bulb goes on, and the road ahead becomes crystal-clear. Epiphanies are unfortunately rare, but the intuition that often leads to them can be carefully honed.

Elon Musk, the entrepreneurial founder of Tesla Motors, PayPal, and Space X, makes many decisions by relying on a form of the scientific method,26 which consists of careful obser- vation and information gathering, formulation of a hypothesis, prediction based on the hypothesis, and experimenting to test the hypothesis. But Musk is also known for acting on his intu- ition, as when he envisioned commercial space flight and reus- able rockets, and when he started work on an electric car. When he recently came up with a way to increase efficiency on a production line, Musk called it “the biggest epiphany that I’ve had this year.”27 And after the successful launch of SpaceX’s innovative Falcon Heavy Rocket in 2018, Musk marveled at the out-of-the-box thinking behind it: “Crazy things can come true,” he said.28 Musk’s method for thinking intuitively (yes, there is a

method) relies on breaking a problem down into its most basic components and questions in order to give his thinking a com- pletely fresh start; see the Practical Action box for more.

Musk is not alone in harnessing the power of intuitive ideas. A well-known story about the origins of Amazon credits founder Jeff Bezos’s intuitive recognition that if, as he’d just read, the Internet was growing at 2,300 percent a year, it was worth quit- ting his job on Wall Street and starting an online bookstore to take advantage of that opportunity.29 Stephen Jobs, the late founder of Apple, believed “intuition is a very powerful thing, more powerful than intellect.”30 He also said, in a speech he made at Stanford University, “You have to trust in something, your gut, destiny, life, karma, whatever. This approach has never let me down, and it has made all the difference in my life.”31 And yet another genius, the physicist Albert Einstein, once said, “All great achievements of science must start from intuitive knowledge. At times I feel certain I am right while not knowing the reason.”32

YOUR CALL Have you ever relied on your intuition to make an important decision or solve a big problem? How did your solution come to you, and how pleased were you with the result?

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As a model for making decisions, intuition has at least two benefits. It can speed up decision making, useful when deadlines are tight.33 It also helps managers when resources are limited. A drawback, however, is that it can be difficult to convince others that your hunch makes sense. In addition, intuition is subject to the same biases as those that affect rational decision making, as we discuss in Section 7.5.34 Finally, says one senior executive, intuition is fine for start-ups but “often deceives CEOs as their businesses become more complex.”35 Still, we believe that intuition and rationality are complementary and that managers should develop the courage to use intuition when making decisions.36 Some suggestions for improving your intuitive skills are presented in the following Practical Action box. ●

How can you improve your intuition and encourage “aha” moments of the kind Tesla and SpaceX founder Elon Musk has (see the preceding Example box)? Here are some steps that draw on Musks’s own experience.37

1. Immerse yourself in data and facts. Intuition does not thrive in an information vacuum. Read, ask questions, study, and discuss. The more you know, the more likely that two or three pieces of related information you’ve acquired will surface in an insight that leads you to “aha.”

2. Practice “first principles thinking.” As Musk explains, to adopt this pattern of thinking you need to “boil things down to their fundamental truths and reason up from there, as opposed to reasoning by analogy.”38 Reasoning by analogy builds on existing assumptions; first principles thinking, however, questions all those assumptions and starts over from scratch. Try identifying all your assump- tions first and putting them aside; then state your prob- lem in its most basic terms. Instead of assuming, “We can’t help it if our product is expensive,” for instance, think about what is in the product and where or how you

could get the components more cheaply. That’s first prin- ciples thinking.

3. Be mindful and open to insights. Try meditating, even informally, and spend quiet time thinking about the problem in need of solving. Try to visualize a solution, and activate your insight by letting your thoughts freely flow for a time.

4. Test your intuition. It’s useful to adopt a rational decision- making step here and test or challenge your intuitive solu- tion. Consider your own track record with intuitive decisions you’ve made in the past. Ask others what they think about your current idea, and challenge your own thoughts with counterarguments. Test the counterarguments.

5. Reward your intuitions. Finally, when you have a flash of intuition or an epiphany, honor the process and reward yourself, to encourage and reinforce the kind of thinking that got you there.39

YOUR CALL How can you use these five tips to improve your performance at school? Do you see any drawbacks to being more intuitive?  Discuss.

How to Improve Your IntuitionPRACTICAL ACTION

Assessing Your Level of Intuition This survey is designed to assess the extent you use intuition in your current job. Please be prepared to answer these questions if your instructor has assigned Self-Assessment 7.2 in Connect.

1. Are you intuitive at work? Did the results surprise you?

2. What can you do to increase the amount of intuition you use at work? Describe.

3. What things might you say during a job interview to demonstrate that you possess the career readiness competency of critical thinking/problem solving?

SELF-ASSESSMENT 7.2 CAREER READINESS

Would you like to increase your level of intuition? It can be done, but first you need to know where you stand with respect to using intuition. Find out by taking Self-Assessment 7.2.

Individual and Group Decision Making CHAPTER 7 247

Some unethical behaviors like sexual harassment have morphed into their own logo. ©Ing. Andrej Kaprinay/ Shutterstock

7.2 Making Ethical Decisions THE BIG PICTURE A graph known as a decision tree can help one make ethical decisions.

The ethical behavior of businesspeople, as we discussed at length in Chapter 3, has become of increasing concern in recent years, brought about by a number of events.

The Dismal Record of Business Ethics Banks and others in the financial world furnished some of the worst recent examples of poor behavior by top management, such as profiting from mortgage loans made to unqualified buyers. These “subprime” loans led to a wave of housing foreclosures and helped push the country into a recession. Those ethical scandals were followed by cor- porate Ponzi schemes, insider trading, and safety violations that led to fatal accidents in U.S. workplaces and sweatshop-style factories abroad. Excessive profiteering made the news when a pharmaceutical company raised the price of one medication from $13.50 a pill to an astonishing $750.40

The #MeToo movement brought down prominent men in a wide range of industries over allegations of sexual misconduct, beginning with Harvey Weinstein, founder of a successful Hollywood film studio that bore his name, and going on to envelope dozens of politicians, business executives, sports figures, and popular and classical artists. The founder of Uber was forced to step down after revelations of a sexually charged work environment, allegations of theft of trade secrets, and a criminal probe into the company’s use of software designed to avoid the law.41 Public lying did not go unpunished; a legislative aide to one of Florida’s state representatives was quickly fired for falsely claiming that students who protested lax gun laws after 17 of their peers and teachers were killed in a high school shooting were paid actors.42

A recent survey reports that CEOs are more likely than ever before to be ousted for ethical violations and that such cases are accounting for an increasing share of corporate successions at some of the largest publicly owned companies in the world, especially in the United States and Canada. The Harvard Business Review suggests five rea- sons for this trend: (1) the public is “less forgiving” of poor behavior by executives, (2) regulations are more stringent, (3) companies are expanding operations into developing countries where ethical risks may be higher and laws less protective, (4) digital communi- cations increase exposure to risk from both hackers and whistle- blowers, and (5) “the 24/7 news cycle and the proliferation of media in the 21st century publicizes and amplifies negative infor- mation in real time.”43

Recent research sheds additional light on why unethical behavior occurs. One study demonstrated that unethical behavior is more apt to be tolerated when it comes from a high rather than a low performer.44 Sadly, it seems that some organizations prefer per- formance over ethics. Other studies show that individual differences play a role in unethical behavior. For example, compassionate people were found to engage in proso- cial lying, such as to prevent others from feeling hurt or embarrassed or to help others financially. Prosocial lying helps others rather than yourself.45

On the other side of the ledger, about 170 of the world’s billionaires have pledged, along with Microsoft founder Bill Gates, his wife Melinda, and mega-investor Warren Buffet, to give away more than half their money to charitable causes like

LO 7-2 Explain how managers can make decisions that are both legal and ethical.

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“poverty alleviation, refugee aid, disaster relief, global health, education, women and girls’ empowerment, medical research, arts and culture, criminal justice reform and environmental sustainability.”46 The Giving Pledge has been signed by billionaires from 22 countries in every age cohort from 30 to 90.47

Ethical concerns have forced the subject of right-minded decision making to the top of the agenda in many organizations. Indeed, many companies now have an ethics officer, someone trained about matters of ethics in the workplace, particularly about resolving ethical dilemmas. More and more companies are also creating values statements to guide employees as to what constitutes desirable business behavior.48 As a result of this raised consciousness, managers now must try to make sure their decisions are not just lawful but also ethical.49

Danielle Williams is a marketing director in the technology indus- try. It is very important for her to filter new clients to look for the ones who are searching for a partnership rather than a con- tract. The motivation behind these decisions must be ethical rather than financial.

“The company I work for develops custom software. We work with some really large com- panies, and we work directly with their IT management depart- ment. One of the things we do to

filter our clients before we decide to partner with them is deter- mine whether that business is willing to do a partnership with us rather than have a contract relationship,” said Danielle.

Danielle explains that each type of relationship is com- pletely different. “If you partner with someone, you’re able to innovate on their behalf and they are willing to listen to your suggestions. Whereas, with a contract, you’re getting lined items: they tell us what they want, we execute and hand it over to them.”

Danielle Williams Courtesy Danielle Williams

While there might be opportunities for Danielle’s company to gain recognition by signing contracts with some of these larger companies, she understands that doing so could disrupt company culture. “We’ve had to make that ethical decision, to not disrupt our organizational culture, and say no to some really big contracts that would help our revenue growth dra- matically,” said Danielle.

The positive financial impact of signing contracts with these large companies is outweighed by the negative effects these working relationships can have on employees. “It really takes away employee freedom to work with these compa- nies. They would have a lot of outlined tasks which become monotonous. When we’re looking to hire the top talent in the industry, that really deters people from wanting to work with us if they’re not really getting to think outside the box and stretch what they can do,” said Danielle. “The way we like to do business is to be able to truly innovate and find the best solutions for our clients.”

Danielle and her team have to constantly weigh financial benefits and reputation against the practical implications of securing talent and maintaining company culture. For Danielle, employee well-being and culture are far more important than marketing prestige.

Courtesy of Danielle Williams

I’m Glad I… …found an employer who cares about ethics more than just making money.

Road Map to Ethical Decision Making: A Decision Tree Undoubtedly, the greatest pressure on top executives is to maximize shareholder value, to deliver the greatest return on investment to the owners of their company. But is a deci- sion that is beneficial to shareholders yet harmful to employees—such as forcing them to contribute more to their health benefits, as IBM has done—unethical? Harvard Business School professor Constance Bagley suggests that what is needed is a decision tree to help with ethical decisions.51 A decision tree is a graph of decisions and their possible conse- quences; it is used to create a plan to reach a goal. Decision trees are used to aid in mak- ing decisions. Bagley’s ethical decision tree is shown in Figure 7.3.

When confronted with any proposed action for which a decision is required, a manager works through the decision tree by asking the following questions.

Individual and Group Decision Making CHAPTER 7 249

1. Is the Proposed Action Legal? This may seem an obvious question. But, Bagley observes, “corporate shenanigans suggest that some managers need to be reminded: If the action isn’t legal, don’t do it.”

2. If “Yes,” Does the Proposed Action Maximize Shareholder Value? If the action is legal, one must next ask whether it will profit the shareholders. If the answer is “yes,” should you do it? Not necessarily.

3. If “Yes,” Is the Proposed Action Ethical? As Bagley points out, though direc- tors and top managers may believe they are bound by corporate law to always maximize shareholder value, the courts and many state legislatures have held they are not. Rather, their main obligation is to manage “for the best interests of the corporation,” which includes the interests of the larger community.

Thus, says Bagley, building a profitable-but-polluting plant in a country overseas may benefit the shareholders but be bad for that country—and for the corporation’s relations with that nation. Ethically, then, managers should add pollution-control equipment.

4. If “No,” Would It Be Ethical Not to Take the Proposed Action? If the action would not directly benefit shareholders, might it still be ethical to go ahead with it?

Not building the overseas plant might be harmful to other stakeholders, such as employees or customers. Thus, the ethical conclusion might be to build the plant with pollution-control equipment but to disclose the effects of the decision to shareholders.

As a basic guideline to making good ethical decisions on behalf of a corporation, Bagley suggests that directors, manag- ers, and employees need to follow their own individual ideas about right and wrong.52 There is a lesson, she suggests, in the response of the pension fund manager who, when asked whether she would invest in a company doing business in a country that permits slavery, responded, “Do you mean me, personally, or as a fund manager?” When people feel entitled or compelled to compromise their own personal ethics to advance the interests of a business, “it is an invitation to mischief.”53

To learn more about your own ethics, morality, and/or values (while contributing to scientific research), go to www.yourmorals.org.54 ●

Is the proposed action legal?

yes

no

Does it maximize shareholder value?

Do it but disclose the e�ect of the action to shareholders.

yes

no

Is it ethical? (To answer, weigh the e�ect on customers, employees, the community, the environment, and suppliers against the benefit to the shareholders.)

yes

no

Would it be ethical not to take the action? (To answer, weigh the harm or cost that would be imposed on shareholders against the costs or benefits to other stakeholders.)

yes

no

Do it.

Don’t do it.

Don’t do it.

Don’t do it.

FIGURE 7.3 The ethical decision tree: What’s the right thing to do? Source: Data from “The Ethical Leader’s Decision Tree,” by C. E. Bagley, February 2003, Harvard Business School Publishing Corporation.

Buy a pair, give a pair. Warby Parker (named after two characters in a journal by 1950s Beat Generation writer Jack Kerouac) was established in 2010 by four former Wharton School students. The company operates on two premises: (a) Designer glasses can be sold at a fraction of the price of the hugely marked-up luxury alternatives. (b) For every pair of glasses sold, a pair could be distributed among the hundreds of thousands of people in need. “Glasses are one of the most effective poverty- alleviation tools in the world,” says one of the founders. “They increase one’s income by 20%, which is equivalent to adding a full extra day of work a week.”50 Are you more inclined to buy from companies like Warby Parker or shoe seller TOMS (which gives away a pair of shoes to a needy person for every pair sold) that tie sales of their products to helping impoverished people around the world? ©Astrid Stawiarz/WireImage/Getty Images

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7.3 Evidence-Based Decision Making and Analytics

THE BIG PICTURE Evidence-based decision making, which depends on an “attitude of wisdom,” rests on three truths. This section describes seven principles for implementing evidence-based management. We also describe why it is hard to bring this approach to bear on one’s decision making. Finally, we describe analytics and its three key attributes.

“How do you build better bosses?” That’s what Google Inc. wanted to know when it embarked on a plan code-named

Project Oxygen. After a year of work, statisticians produced eight rules for becoming an effective Google manager, as shown below. (See Table 7.2.)

LO 7-3 Describe how evidence- based management and business analytics contribute to decision making.

1. Be a good coach.

2. Empower your team, don’t micromanage.

3. Express interest in team members’ success and personal well-being.

4. Don’t be a “sissy”: Be productive and results oriented.

5. Be a good communicator and listen to your team.

6. Help your employees with career development.

7. Have a clear vision and strategy for the team.

8. Have key technical skills so you can help advise the team.

Source: J.C. Spender and B. A. Strong, Strategic Conversations: Creating and Directing the Entrepreneurial Workforce (Cambridge, MA: Cambridge University Press, 2014), p. 141.

TABLE 7.2 What the Evidence Shows: Google’s Eight Rules for Being a Better Manager Rules are listed in order of importance.

A few years later, in 2018, Google revisited the list, slightly modifying items 3 and 6 and adding two completely new items:

9. Collaborate across Google.

10. Be a strong decision maker.55

Some of these directives may seem obvious. What’s important here, however, is how Google arrived at changes in its list of eight rules. The company analyzed and inter- preted information from performance reviews, employee surveys, nominations for top- manager awards, and other sources. Said one report of the original project, “The result was more than 10,000 observations of manager behaviors. The research team compli- mented the quantitative data with qualitative information from interviews.”56 And in 2018, the company revisited the list, wrote new survey questions based on internal research and feedback, and did more testing. Its new analysis showed that, “The two new behaviors were highly correlated with manager effectiveness and the updated list of ten Oxygen behaviors was even more predictive of team outcomes like turnover, satis- faction, and performance than our original list of eight.”57 In other words, Google looked at the evidence.

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Evidence-Based Decision Making “Too many companies and too many leaders are more interested in just copying others, doing what they’ve always done, and making decisions based on beliefs in what ought to work rather than what actually works,” say Stanford professors Jeffrey Pfeffer and Robert Sutton. “They fail to face the hard facts and use the best evidence to help navigate the competitive environment.”58 Companies that use evidence-based management—the translation of principles based on best evidence into organizational practice, bringing rationality to the decision-making process, as we defined it in Chapter 2— routinely trump the competition, Pfeffer and Sutton suggest.59

Seven Implementation Principles Pfeffer and Sutton identify seven implementa- tion principles to help companies that are committed to doing what it takes to profit from evidence-based management:60

■ Treat your organization as an unfinished prototype. Leaders need to think and act as if their organization were an unfinished prototype that won’t be ruined by dangerous new ideas or impossible to change because of employee or management resistance. Example: Some Internet start-ups that find their original plan not working have learned to master “the art of the pivot,” to fail gracefully by cutting their losses and choosing a new direc- tion—as did the founders of Fabulus, a review site and social network that attracted no users, so they launched a high-end e-commerce site called Fab. com.61 (Unfortunately, Fab CEO Jason Goldberg was inclined to pivot the business rather than solve basic problems. “You can change a business once or twice,” says one former employee, “but after that you’re drown- ing.”62 After creating and losing 500 jobs and creating and losing $850 mil- lion, Fab ended and was bought for a fraction of its value by another company.)

■ No brag, just facts. This slogan is an antidote for over-the-top assertions about forthcoming products, such as “the deafening levels of managed hype across much of Silicon Valley,” as one reporter characterized it.63 Other companies, such as DaVita, which operates dialysis centers, take pains to evaluate data before making deci- sions. So does SAS Institute, the pri- vately owned software company that ranks as No. 2 on Fortune’s 2017 “Best Places to Work For Millennials” list.64 As we’ve seen, Google has used data to find out what makes a better boss.65

■ See yourself and your organization as outsiders do. Most managers are afflicted with “rampant optimism,” with inflated views of their own talents and prospects for success, which causes them to downplay risks and con- tinue on a path despite evidence that things are not working. “Having a blunt friend, mentor, or counselor,” Pfeffer and Sutton suggest, “can help you see and act on better evidence.”

Evidence-based decisions. Google used evidence-based analysis to find out what makes a better boss. Like this photo, the company found that what employees value most are even-keeled bosses who take an interest in employees’ lives and careers, who make time for one-on-one meetings, and who help people work through problems by asking questions instead of dictating answers. Would you expect a “just-the-facts” approach to be normal in high-tech businesses or unusual? ©Cole Burston/Bloomberg/Getty Images

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■ Evidence-based management is not just for senior executives. The best organiza- tions are those in which everyone, not just the top managers, is guided by the responsibility to gather and act on quantitative and qualitative data and share results with others.

■ Like everything else, you still need to sell it. “Unfortunately, new and exciting ideas grab attention even when they are vastly inferior to old ideas,” the Stanford authors say. “Vivid, juicy stories and case studies sell better than detailed, rigorous, and admittedly dull data—no matter how wrong the stories or how right the data.” To sell an evidence-based approach, you may have to identify a preferred practice based on solid if unexciting evidence, then use vivid stories to grab management attention.

■ If all else fails, slow the spread of bad practice. Because many managers and employees face pressures to do things that are known to be ineffective, it may be necessary for you to practice “evidence-based misbehavior”—that is, ignore orders you know to be wrong or delay their implementation.

■ The best diagnostic question: What happens when people fail? “Failure hurts, it is embarrassing, and we would rather live without it,” the authors write. “Yet there is no learning without failure. . . . If you look at how the most effective systems in the world are managed, a hallmark is that when something goes wrong, people face the hard facts, learn what happened and why, and keep using those facts to make the system better.”66 From the U.S. civil aviation system, which rigorously examines airplane accidents, near misses, and equip- ment problems, to mall owners who look for new uses for space, like apart- ments and medical offices, as malls fall from favor and anchor stores like Sears and Macy’s depart, evidence-based management makes the point that failure is a great teacher.67 This means, however, that the organization must “forgive and remember” people who make mistakes, not be trapped by preconceived notions, and confront the best evidence and hard facts.

What Makes It Hard to Be Evidence Based Despite your best intentions, it’s hard to bring the best evidence to bear on your decisions. Among the reasons:68 (1) There’s too much evidence. (2) There’s not enough good evidence. (3) The evidence doesn’t quite apply. (4) People are trying to mislead you. (5) You are trying to mislead yourself. (6) The side effects outweigh the cure. (Example: Despite the belief that social promotion in school is a bad idea—that is, that schools shouldn’t advance children to the next grade when they haven’t mastered the material—the side effect is skyrocketing costs because it crowds schools with older, angrier students who demand more resources.) (7) Stories are more persuasive, anyway.

In Praise of Analytics Perhaps the purest application of evidence-based management is the use of analytics, or business analytics, the term used for sophisticated forms of business data analysis. One example of analytics is portfolio analysis, in which an investment adviser evaluates the risks of various stocks. Another example is the time-series forecast, which predicts future data based on patterns of historical data.

Some leaders and firms have become exceptional practitioners of analytics. Gary Loveman, CEO of the Harrah’s gambling empire, wrote a famous paper, “Diamonds in the Data Mine,” in which he explained how data-mining software was used to analyze vast amounts of casino customer data to target profitable patrons.69 Marriott International, through its Total Hotel Optimization program, has used quantitative data to establish the optimal price for hotel rooms, evaluate use of conference facilities and catering, and develop systems to optimize offerings to frequent customers.70 To aid in recruitment, Microsoft studies correlations between its successful workers and the schools and companies they arrived from.71

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EXAMPLE Analytics in Athletics: The Personal “Moneyball” Takeover of Sports

After her first set during a recent Bank of the West Classic at Stanford, California, pro tennis player Angelique Kerber called her coach over for a 90-second conference. Referring to his data-laden iPad, as well as his courtside observations, the coach told Kerber that her opponent was serving to her back- hand nearly every time. With this knowledge Kerber went on to defeat her competitor, and then another opponent, to win the tournament and her fourth title of the year.72

Better Indicators of Player Success The obsession with ana- lytics in professional sports is the logical result of the Moneyball phenomenon. The Brad Pitt film of that name was adapted from a book by Michael Lewis called Moneyball: The Art of Winning an Unfair Game. The book described how the Oakland Athletics, then one of the poorest teams in Major League Baseball (with a payroll about a third the size of the New York Yankees), managed to go to the playoffs five times in seven years against better- financed contenders. The Athletics accom- plished this by avoiding the use of traditional baseball statistics and finding better indicators of player success in data such as on-base percentage, slugging percentage, and the like. For a time, this creative use of analytics enabled the managers of the California club to concentrate their limited payroll resources on draft picks who were primarily talented college players rather than veteran professionals.73 The team continues to rely on analytics to improve its odds, and the Houston Astros have taken the strategy to another level, hiring a NASA engineer to help them with data analysis.74

Analytics in Pro Sports Since then, analytic measures have been used to find better ways to value players and strategies in all major sports. In basketball, the application of data and ana- lytics reached its zenith with the Golden State Warriors, the National Basketball Association’s defending champion. A group of data-loving Silicon Valley investors bought the floundering team a few years ago for $450 million (it’s now worth $2 billion) and proceeded to fix it by asking the question “What would happen if you built a basketball team by ignoring every orthodoxy of building a basketball team?” One unusual idea: Focus less on recruiting big men who could stuff the basket and more on players who could make three-point shots.75

Delving into the statistics, the executives began to rebuild the team around star three-point shooters Stephen Curry and Klay Thompson and other players, which helped the Warriors make a higher percentage of three-pointers than any other team in the league. “We’re lightyears ahead of probably every other team in structure, in planning, in how we’re going to go about things,” says Golden State majority owner Joe Lacob.

“We’re going to be a handful for the rest of the NBA to deal with for a long time.”76 The Warriors won the NBA champion- ship in 2015 and again in 2017.

Data drives the NFL as well. Among the most enthusiastic teams are the Atlanta Falcons, whose website calls modern analytics “a priority.” “We’ve become more and more intellec- tual as far as how we’re looking at things and presenting things to [coach] Dan [Quinn] and how we sit down and talk a lot about the players we’re looking at,” says general manager Thomas Dimitroff. “[We’re] using the comparatives, which are big for our process. We’re a big comparative team when we start look- ing at our own players, how they stack against the players that are potentially in the draft.”77 The team even monitors its play- ers’ sleep habits and patterns, using an outside firm to collect data about how much sleep they get and find ways for them to get more restorative rest.78

In hockey, the Chicago Blackhawks credit their use of statis- tics with helping find hockey players “whose skill sets and style of play mesh well with the players who are already here and our style of play.” Says their general manager Stan Bowman, “That’s where I think the value of analytics comes in.” The team has won three Stanley Cups in the last seven seasons.79

YOUR CALL Executives and human resource professionals often make deci- sions as the old sports traditionalists did, relying on résumé, degree, years of experience, and even looks in evaluating job applicants. What other, more quantifiable measures might be used instead when hiring new college graduates?

Four time NBA All-Star Klay Thompson from the Golden State Warriors driving to the basket against the Portland Trail Blazers. ©David Blair/ ZUMA Press, Inc./Alamy Stock Photo

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Thomas H. Davenport and others at Babson College’s Working Knowledge Research Center studied 32 organizations that made a commitment to quantitative, fact-based analysis and found three key attributes among analytics competitors: use of modeling, multiple applications, and support from top management.80

1. Use of Modeling: Going beyond Simple Descriptive Statistics Compa- nies such as Capital One look well beyond basic statistics, using data mining and predictive modeling to identify potential and most profitable customers. Predictive modeling is a data-mining technique used to predict future behavior and anticipate the consequences of change. Thus, Capital One conducts more than 30,000 experiments a year, with different interest rates, incentives, direct-mail packaging, and other vari- ables to evaluate which customers are most apt to sign up for credit cards and will pay back their debt.

2. Multiple Applications, Not Just One UPS (formerly United Parcel Service) applies analytics not only to tracking the movement of packages, but also to examining usage patterns to try to identify potential customer defections so that salespeople can make contact and solve problems. More recently, as e-commerce has required UPS to make lots of single-package deliveries throughout neighborhoods, it has invested in a same-day deliv- ery startup called Deliv Inc., hoping to prevail in the so-called last-mile delivery, considered the priciest part of an order’s journey.81 The company is also exploring the use of drones to deliver life-saving medicines.82 Analytics competitors “don’t gain advantage from one killer app [application], but rather from multiple applications supporting many parts of the busi- ness,” says Davenport.

3. Support from the Top “A companywide embrace of analytics impels changes in culture, processes, behavior, and skills for many employees,” says Davenport. “And so, like any major transition, it requires leadership from executives at the very top who have a passion for the quantitative approach.”83

Big Data: What It Is, How It’s Used A recent study says the store of the world’s information will reach 163 zettabytes in size by 2025, 60 percent of which will be generated and managed by businesses.84 (Just 1 zettabyte is equal to the contents of 20 million four-drawer file cabinets—multiplied by a million.85) This has led to a phenomenon known as Big Data, stores of data so vast that conventional database management systems cannot handle them and so very sophisti- cated analysis software and supercomputing-level hardware are required.86 Big Data includes not only data in corporate databases, but also web-browsing data trails, social network communications, sensor data, and surveillance data.87

“One of the most extraordinary features of Big Data is that it signals the end of the reign of statistics,” suggests technology writer Michael Malone. “For 400 years, we’ve been forced to sample complex systems and extrapolate. Now, with Big Data, it is pos- sible to measure everything, from the movement of billions of stars to every beat of the human heart [our emphasis added].”88 The concept of Big Data has been dubbed “the next frontier for innovation, competition, and productivity.”89 In a 2018 survey of nearly 60 large firms in the financial, pharmaceutical, and other industries, 97% of respon- dents said they are currently investing in Big Data and artificial intelligence (AI) projects, and 73% said they have already seen measurable results from these efforts.90 Big Data analytics is the process of examining large amounts of data of a variety of types to uncover hidden patterns, unknown correlations, and other useful information. Among some of the uses of Big Data analytics are the following:91

■ Analyzing consumer behavior and spurring sales. Online behavior can be analyzed “to create ads, products, or experiences that are most appealing to

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consumers—and thus most lucrative to companies,” says one technology journalist. “There’s also great potential to more accurately predict market fluctuations or react faster to shifts in consumer sentiment or supply chain issues.”92 Target used big data analytics to more accurately market product offers to a specific category of shopper by linking its Guest ID program with its baby shower registry. In this way the retailer was able to identify other items often purchased by expectant moms in addition to gifts they registered for.93

■ Improving hiring and human resource management. JetBlue applies people analyt- ics to hiring for all the airline’s positions, which helps the company sort through the 125,000 job applications it receives each year.94 One surprising conclusion the airline drew from this practice was that hiring flight attendants based on their helpfulness was more important than hiring them because they were “nice.”95 Some firms are using Big Data to figure out which employees might get sick, based on “the prescription drugs workers use, how they shop, and even whether they vote,” in an effort to contain health costs, according to one description.96

■ Tracking movie, music, TV, and reading data. HP Labs researchers have used Twitter data to accurately predict box-office revenues of Hollywood movies.97 Record collectors and the music industry use Discogs.com to keep track of records and their various releases and to identify sources of royalties where copyrighted songs are played.98 Television networks use new ways of pinpoint- ing audience data to pitch live programs to advertisers.99 Jellybooks, a reading analytics company based in London, hopes to use data about people’s reading habits to reshape the way publishers acquire, edit, and market books.100

■ Advancing health and medicine. Data for Health, a project of Bloomberg Philanthropies, strives to help countries make better health policy decisions for their citizens by improving the collection and recording of birth and death data. The project team notes that nearly 30 million deaths each year are not recorded, leaving governments without critical basic information.101 Britain’s

Down on the farm. This server farm, or data center, contains thousands of computers storing terabytes of information on everyone and everything—“Big Data” that can be subjected to data analytics to work on large-scale projects. With data centers like this, you can see why everything you enter online, whether via e-mail, Facebook, texting, or twittering, no matter how innocuous, can be stored and used later to try to sell you things. Are you okay with this? ©Ben Torres/Bloomberg/Getty Images

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National Health Service collected data about treatments and drugs from 53 million patients and saved $784 million by comparing cost and effective- ness, a savings expected to nearly double by the end of 2018.102 New internal and external monitoring devices are helping medical researchers gather enor- mous quantities of health data, helping us to understand, for instance, the effects of external influences on autism, what changes in lifestyle (social media usage, diminishing movement) can produce depression, or what procedures are more apt to lead to malpractice claims.103

■ Aiding public policy. Two-thirds of the 11 million people detained in local U.S. jails are suffering from mental illness. The Data-Driven Justice Initiative was launched by the Obama administration to use data “to identify and proactively break the cycle of incarceration” and to “use data-driven, validated, pre-trial risk assessment tools to inform pre-trial release decisions.” Another goal of the bipartisan group of more than 60 city, county, and state governments is to help provide law enforcement officers and first responders with tools to help people in mental health crises get help instead of getting arrested.104 Boston mayor Marty Walsh relies on dozens of data charts and graphs to indicate whether the city is fulfilling its goals, such as achieving quicker ambulance response times. Analytics can tackle large-scale public-sector problems such as traffic congestion, train passenger commute patterns, and handling of federal funds in child welfare.105 ●

EXAMPLE Data, Hacking, and Privacy: Who’s Stealing My Data?!

Big Data and analytics clearly have enormous benefits. But half the people in a Pew Research Center survey said they felt they had little or no control over their personal data. Indeed, two- thirds of adults said they were not confident that online video sites, search engine providers such as Google, or social media sites such as Facebook protected their information.106 Are they right to be concerned?

In September 2017, the credit rating company Equifax admit- ted that its data had been breached by hackers that summer and that a huge online data store of 143 million customers’ names, addresses, birthdates, and Social Security numbers had been hacked on its site. A few months later, the company revealed that even more information than it first reported, such as tax IDs and the state and issue date of driver’s licenses, may also have been compromised by the hackers. Senator Elizabeth Warren echoed the sentiments of many customers when she reacted to the news: “As your company continues to issue incomplete, confusing and contradictory statements and hide information from Congress and the public, it is clear that five months after the breach was publicly announced, Equifax has yet to answer this simple question in full: What was the precise extent of the breach?”107

Equifax had experienced problems safeguarding customers’ information for several years before the 2017 hack, fending off class-action suits that accused it of deliberately ignoring “known weaknesses in its data security, including prior hacks.” Some of these known weaknesses included outdated software for running the site and the use of customer passwords that were too easy to crack.108

Equifax came under widespread public criticism after the 2017 attack, not only for failing to report it until six weeks afterward, but also for making itself vulnerable to hacking in the first place. The company had neglected to apply a correc- tive patch to its software that was available months before and that might have prevented the problem. “This vulnerability was disclosed back in March,” said the maker of the software pro- gram Equifax used. “The fact that Equifax was subsequently attacked in May means that Equifax did not follow that advice [to install the manufacturer’s update]. Had they done so this breach would not have occurred.”109

The company was also attacked for its poor response to the crisis. Its efforts to assist customers by letting them tem- porarily “freeze” their credit reports on the site were difficult to access, hard to use, and unreliable. As customers struggled to assess their risk of identity theft and fraud as a result of the hack, government investigations of the breach were begun but then slowed,110 while the Social Security Administration continued to rely on a user-verification system devised by the discredited firm.111

YOUR CALL Some say Big Data is overrated and that “our gut will always be part of decision making.”112 Do you agree? Do you think risks to data, like those exposed by the Equifax breach, are worth the potential gains from the widespread use of Big Data? Why or why not?

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7.4 Four General Decision-Making Styles THE BIG PICTURE Your decision-making style reflects how you perceive and respond to information. It could be directive, analytical, conceptual, or behavioral.

A decision-making style reflects the combination of how an individual perceives and responds to information. A team of researchers developed a model of decision-making styles based on the idea that styles vary along two different dimensions: value orienta- tion and tolerance for ambiguity.113

Value Orientation and Tolerance for Ambiguity Value orientation reflects the extent to which a person focuses on either task and techni- cal concerns or people and social concerns when making decisions. Some people, for instance, are very task focused at work and do not pay much attention to people issues, whereas others are just the opposite.

The second dimension pertains to a person’s tolerance for ambiguity. This individual difference indicates the extent to which a person has a high need for structure or con- trol in his or her life. Some people desire a lot of structure in their lives (a low tolerance for ambiguity) and find ambiguous situations stressful and psychologically uncomfort- able. In contrast, others do not have a high need for structure and can thrive in uncer- tain situations (a high tolerance for ambiguity). Ambiguous situations can energize people with a high tolerance for ambiguity.

When the dimensions of value orientation and tolerance for ambiguity are com- bined, they form four styles of decision making: directive, analytical, conceptual, and behavioral. (See Figure 7.4.)

LO 7-4 Compare four decision- making styles.

High Analytical

Directive

Conceptual

Behavioral

Tolerance for ambiguity

Task & technical concerns

Value orientation

People & social concerns

Low

FIGURE 7.4 Decision-making styles

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1. The Directive Style: Action-Oriented Decision Makers Who Focus on Facts People with a directive style have a low tolerance for ambiguity and are oriented toward task and technical concerns in making decisions. They are efficient, logical, practical, and systematic in their approach to solving problems, and they are action oriented and deci- sive and like to focus on facts. Jeff Bezos fits this pattern. In a recent letter to Amazon shareholders, he said, “Most decisions should probably be made with somewhere around 70% of the information you wish you had. If you wait for 90%, in most cases, you’re prob- ably being slow.”114 In their pursuit of speed and results, however, these individuals can tend to be autocratic, to exercise power and control, and to focus on the short run.

2. The Analytical Style: Careful Decision Makers Who Like Lots of Information and Alternative Choices Managers with an analytical style have a much higher tolerance for ambiguity and respond well to new or uncertain situations. Ginni Rometty, CEO of IBM (and holder of a bachelor’s degree in engineering), seems to have this style. Her decision to refocus the company on cloud-based technology and artificial intelligence puts it squarely in uncharted territory where it faces a great deal of uncertainty, especially given that rev- enue has declined for several years and success is not assured.115 Analytical managers like to consider more information and alternatives than those adopting the directive style. They are careful decision makers who take longer to make decisions, but they may also tend to overanalyze a situation.

3. The Conceptual Style: Decision Makers Who Rely on Intuition and Have a Long-Term Perspective People with a conceptual style have a high tolerance for ambiguity and tend to focus on the people or social aspects of a work situation. They take a broad perspective to prob- lem solving and like to consider many options and future possibilities.

Conceptual types adopt a long-term perspective and rely on intuition and discus- sions with others to acquire information. They also are willing to take risks and are good at finding creative solutions to problems. As discussed earlier in this chapter, Elon Musk, founder of Tesla and SpaceX, fits this description well. However (although this is not true in Musk’s case), a conceptual style can foster an indecisive approach to decision making.

4. The Behavioral Style: The Most People-Oriented Decision Makers The behavioral style is the most people-oriented of the four styles. People with this style work well with others and enjoy social interactions in which opinions are openly exchanged. Behavioral types are supportive, are receptive to suggestions, show warmth, and prefer verbal to written information. Madeline Bell, CEO of Children’s Hospital in Philadelphia, is a good example. “With any big decision,” she says, “I create a stake- holder map of the key people who need to be on board. I identify the detractors and their concerns, and then I think about how I can take the energy that they might put into resistance and channel it into something positive. I make it clear to people that they’re important to the process and they’ll be part of a win.”116 Although they like to hold meetings, some people with this style have a tendency to avoid conflict and to be concerned about others. This can lead them to adopt a wishy-washy approach to decision making and to have a hard time saying no.

Ginny Rometty is chairman, president, and CEO of IBM. She is the first woman to head the company. ©Ethan Miller/ Getty Images

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Which Style Do You Have? Research shows that very few people have only one dominant decision-making style. Rather, most managers have characteristics that fall into two or three styles, and there is not a best decision-making style that applies to all situations. Studies also reveal that decision-making styles affect our purchasing decisions and leadership style.117

You can use knowledge of decision-making styles to increase your career readiness competencies in the following three ways.

Know Thyself Knowledge of styles helps you to understand yourself. Awareness of your style assists you in identifying your strengths and weaknesses as a decision maker and facilitates the potential for self-improvement.

Influence Others You can increase your ability to influence others by being aware of styles. For example, if you are dealing with an analytical person, you should provide as much information as possible to support your ideas.

Deal with Conflict Knowledge of styles gives you an awareness of how people can take the same information yet arrive at different decisions by using a variety of decision- making strategies. Different decision-making styles are one likely source of interper- sonal conflict at work.

What style of decision making do you prefer? Would you like to learn how to use all of the styles more effectively? The following self-assessment can help. ●

What Is Your Decision-Making Style? This survey is designed to assess your decision-making style. Please be prepared to answer these questions if your instructor has assigned Self-Assessment 7.3 in Connect.

1. What is your dominant decision-making style?

2. What are the pros and cons of your style?

3. What might you say to a recruiter during a job interview to demonstrate your awareness regarding your decision- making style?

SELF-ASSESSMENT 7.3 CAREER READINESS

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7.5 Decision-Making Biases and the Use of Artificial Intelligence

THE BIG PICTURE Managers should be aware of nine common decision-making biases. They will also face issues raised by the growing application of artificial intelligence.

If someone asked you to explain the basis on which you make decisions, could you even say? Perhaps, after some thought, you might come up with some “rules of thumb.” Scholars call them heuristics (pronounced “hyur-ris-tiks”)—strategies that simplify the pro- cess of making decisions. This section reviews these heuristics and discusses the growing application of artificial intelligence (AI). You will learn about the pros and cons of AI.

Nine Common Decision-Making Biases: Rules of Thumb, or “Heuristics” Despite the fact that people use rules of thumb all the time when making decisions, that doesn’t mean they’re reliable. Indeed, some are real barriers to high-quality deci- sion making. Among those that tend to bias how decision makers process information are (1) availability, (2) representativeness, (3) confirmation, (4) sunk cost, (5) anchoring and adjustment, (6) overconfidence, (7) hindsight, (8) framing, and (9) escalation of commitment.118

1. The Availability Bias: Using Only the Information Available If you had a perfect on-time work attendance record for nine months but were late for work four days during the last two months because of traffic, shouldn’t your boss take into account your entire attendance history when considering you for a raise? Yet managers tend to give more weight to more recent behavior. The reason is the availability bias—the use of information readily available from memory to make judgments.

The bias, of course, is that readily available information may not present a complete picture of a situation. The availability bias may be stoked by the news media, which tend to favor news that is unusual or dramatic. Thus, for example, because of the efforts of interest groups or celebrities, more news coverage may be given to AIDS or to breast cancer than to heart disease, leading people to think the former are the bigger killers, when in fact the latter is.

2. The Representativeness Bias: Faulty Generalizing from a Small Sample or a Single Event As a form of financial planning, playing state lotteries leaves something to be desired. When, for instance, in 2018 the U.S. Powerball jackpot stood at $570 million, the fifth largest in the game’s history, the odds of winning it were put at 1 in 292.2 million. (A person would have a far greater chance of being struck by an asteroid, with odds of 1 in only 1.9 million.)119 Nevertheless, millions of people buy lottery tickets because they read or hear about a handful of fellow citi- zens who have been the fortunate recipients of enormous winnings. This is an exam- ple of the representativeness bias, the tendency to generalize from a small sample or a single event.

The bias here is that just because something happens once, that doesn’t mean it is representative—that it will happen again or will happen to you. For example, the fact that you hired an extraordinary sales representative from a particular university doesn’t mean the same university will provide an equally qualified candidate next time. Yet managers make this kind of biased hiring decision all the time.

LO 7-5 Identify barriers to rational decision making and ways to overcome them.

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3. The Confirmation Bias: Seeking Information to Support Your Point of View The confirmation bias occurs when people seek information to support their point of view and discount data that do not support it. Though this bias is so obvious you may think it should be easy to avoid, we practice it all the time, listening to the information we want to hear and ignoring the rest. “We typically focus on anything that agrees with the out- come we want,” suggests economist Noreena Hertz. “We need to be aware of our natu- ral born optimism. . . . We need to acknowledge our tendency to incorrectly process challenging news and actively push ourselves to hear the bad as well as the good.”120

4. The Sunk-Cost Bias: Money Already Spent Seems to Justify Continuing The sunk-cost bias, or sunk-cost fallacy, occurs when managers add up all the money already spent on a project and conclude it is too costly to simply abandon it.

Most people have an aversion to “wasting” money. Especially if large sums have already been spent, they may continue to push on with an iffy-looking project to justify the money already sunk into it. The sunk-cost bias is sometimes called the “Concorde” effect, referring to the fact that the French and British governments continued to invest in the Concorde supersonic jetliner even when it was evident there was no economic justification for the aircraft.

5. The Anchoring and Adjustment Bias: Being Influenced by an Initial Figure Managers will often give their employees a standard percentage raise in salary, basing the decision on whatever the workers made the preceding year. They may do this even though the raise is completely out of alignment with what other companies are paying for the same skills. This is an instance of the anchoring and adjustment bias, the ten- dency to make decisions based on an initial figure.

The bias is that the initial figure may be irrelevant to market realities. This phenom- enon is sometimes seen in real estate sales. Before the 2008 crash in real estate markets, many homeowners might have been inclined at first to list their houses at an extremely high (but perhaps randomly chosen) selling price. These sellers were then unwilling to come down in price to match buying offers that reflected what the marketplace thought the house was really worth.

6. The Overconfidence Bias: Blind to Our Own Blindness The overconfidence bias is the bias in which people’s subjective confidence in their decision making is greater than their objective accuracy. Overconfidence, it’s suggested, may be behind the reasons for the BP Deepwater Horizon drilling rig explosion and disaster in 2010 that flooded the Gulf of Mexico with 200 million gallons of oil. Because technology often works flawlessly, BP ignored warning signs that included a dead battery, a leaky cement job, and loose hydraulic fittings.121

“Overconfidence arises because people are often blind to their own blindness,” says behavioral psychologist Daniel Kahneman. For instance, with experienced investment advisors whose financial outcomes simply depended on luck, he found “the illusion of skill is not only an individual aberration; it is deeply ingrained in the culture of the industry.”122 In general, he advises, we should not take assertive and confident people at their own evalu- ation unless we have independent reasons to believe they know what they’re talking about.

7. The Hindsight Bias: The I-Knew-It-All-Along Effect The hindsight bias is the tendency of people to view events as more predictable than they really are, as when at the end of watching a game we decide the outcome was obvious and predictable, even though in fact it was not. Sometimes called the “I-knew-it-all-along” effect, this occurs when we look back on a decision and try to reconstruct why we decided to do something.

8. The Framing Bias: Shaping the Way a Problem Is Presented The framing bias is the tendency of decision makers to be influenced by the way a situation or problem is presented to them. For instance, customers have been found to prefer meat that is framed as “85% lean meat” instead of “15% fat,” although they are the same thing.123 In general, people view choices more favorably when they are framed in terms of gains

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rather than losses.124 You would be more likely to invest in a product that had a 60 per- cent chance of success rather than a 40 percent chance of failure. Try framing your decision questions in alternate ways to avoid this bias.

9. The Escalation of Commitment Bias: Feeling Overly Invested in a Decision If you really hate to admit you’re wrong, you need to be aware of the escalation of com- mitment bias, whereby decision makers increase their commitment to a project despite negative information about it.

Would you invest more money in an old or broken car? The Drug Enforcement Administration and the Pentagon continued to spend on a spy plane for use in Afghanistan that was supposed to be completed in 2012 at a cost of $22 million, even though the project had missed every projected delivery date. As of early 2018, it was “not yet complete and is no longer intended to fly in Afghanistan,” according to a review by the Justice Department. Total payouts had reached $86 million.125

To reduce the escalation of commitment, researchers recommend that decision mak- ers set minimum targets for performance and then compare their performance results with their targets. Managers should also be rotated in key positions during a project, and decision makers should be encouraged to become less ego-involved with the work. Finally, decision makers should be made aware of the costs of persistence.126

The Decision-Making Potential of Artificial Intelligence It certainly seems possible that, thanks to the power of artificial intelligence (AI), we will soon have robots, drones, driverless cars, and even home appliances and other devices that can make their own decisions and act independently of human oversight and direction. This clearly would reduce the use of decision-making biases. There is no question that one of the most promising applications of AI is in aiding human decision making. How far has AI come in this direction, what applications may be most promis- ing, and what potential drawbacks should managers be aware of?

You still have at least one big advantage over artificial intelligence: AI “can’t read a textbook and understand the questions in the back of the book,” says Oren Etzioni, who runs Microsoft’s Allen Institute for Artificial Intelligence. “It is devoid of common sense.” Paul Allen, cofounder of Microsoft, agrees. He is doubling the Allen Institute’s budget over the next three years to try to change that situation, primarily by closing the gap between humans’ and machines’ understanding of the world. It may take a while, however. A project called Cyc, working in collaboration with several big tech firms and the U.S. government, has been trying for some time to develop a “common sense engine” that can grasp such simple truths as the impossibility of being in two places at the same time. Thirty years and hundreds of millions of dollars later, the goal remains elusive.127

But that doesn’t mean AI doesn’t have valuable applications in aiding human decision making, often by drilling through data that is itself generated by human decisions. When it comes to building and evaluating models and simulations to make predictions, machines guided by AI are more powerful than humans and much, much faster. PricewaterhouseCooper (PwC), the global professional services company, uses a model of financial and purchasing decisions based on data drawn from multiple sources, includ- ing the U.S. Census, that describes characteristics of 320 million U.S. consumers. By creating realistic pictures of “someone like you” and “your future self,” the model can evaluate common consumer behaviors like using credit cards, taking out loans, and buy- ing insurance, thus predicting for its clients the way consumer choices and buying deci- sions might change over time and under different kinds of assumptions about both the larger economy and the individual (though hypothetical) consumer.128

Today’s cars are already using AI applications. Though well short of being self-driving, AI-equipped cars are becoming increasingly safe and convenient. Sensors that alert drivers to potential accidents, accessory video cameras that do the same, and even adaptive cruise controls that automatically slow a car as it approaches a slower vehicle are among the appli- cations already available. On a larger scale, commercial AI systems are churning through

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vast amounts of information culled from decisions by consumers, manufacturers, and taxi and ride-share operators to predict future conditions in the automotive and transportation industries. The models these systems develop can allow business managers to better choose marketing and pricing strategies and even the most profitable business models to adopt.129

Medicine is no stranger to AI. Google’s parent company, Alphabet, says its DeepMind Health initiative, based in London, is helping save lives. The program uses AI to monitor hospital patients closely enough to alert doctors about those at risk of death two days earlier than can currently be done by other means. Doctors get a 48-hour head start on choosing treatments to stabilize and save these patients.130

Notice, however, that it’s still business managers choosing their strategies and doc- tors deciding what their patients need. According to Harvard Business Review, advances in AI’s decision-making capabilities will not reduce our reliance on human decision making but rather will enhance it.131 “Economic theory suggests that AI will substan- tially raise the value of human judgment. People who display good judgment will become more valuable, not less,” says a recent article. The reason is that while artificial intelligence is helpful in rapidly analyzing vast stores of data to make predictions, it does not have the capability to assess the costs and benefits of decisions and weigh the trade-offs. That’s where human judgment steps in. Google already learned the value of human judgment the hard way, when it had to correct its photo recognition capability after the program tagged black people as gorillas.132

Another potential limitation from AI’s lack of ability to make judgments or apply common sense is the possibility for it to make mistakes. Many people working in AI acknowledge that it remains difficult to program machine learning systems—essentially AI applications that can learn from experience by receiving virtual rewards—to act in ways that are desired and predictable. Sometimes, for instance, what machine learning systems learn from experience is how to cheat. Coding the rewards for even simple tasks is already immensely difficult and not yet perfected. One AI system that was supposed to learn to play a boat racing game called CoastRunners “learned” that the easiest way to score points was to drive around in circles rather than playing the course set out in the game.133 The challenges in developing machine learning systems remain great.

And yet, says Anand Rao, of PwC Data & Analytics, “There’s an immense opportu- nity to use AI in all kinds of decision making.”134 Most experts see three distinct areas in which AI can be applied to decision making. The most basic, assisted intelligence, simply automates basic tasks, making it faster and cheaper for humans to accomplish them. Next is augmented intelligence, which describes most of the applications discussed above. Here, in a kind of “symmetry,” according to Rao, an augmented intelligence system learns from human inputs in order to assist humans in making better decisions. The third type of AI application to decision making includes self-driving cars. In this use of autono- mous intelligence, humans have given operational control to the machine.135

Pros and Cons of Artificial Intelligence A recent report by the consulting firm Accenture calls artificial intelligence “a new fac- tor of production,” alongside the traditional factors of labor, capital, entrepreneurship, and natural resources, and predicts that by 2035 its increasing use will boost labor pro- ductivity by up to 40% and double economic growth. The changed nature of work, if these predictions are accurate, will “enable people to make more efficient use of their time.”136 Although he admits to some worries about “superintelligence,”137 Bill Gates, Microsoft’s cofounder, says that with AI, “certainly we can look forward to the idea that vacations will be longer at some point. The purpose of humanity is not just to sit behind a counter and sell things. More free time is not a terrible thing.”138

On the plus side, humans could be relieved of some of the drudgery of work—and even some of the time commitment today’s jobs often require—as more tasks could be safely assigned to AI applications or machine learning systems. The struggle to find work–life balance or to accommodate the conflicting needs of boss and family could become a thing of the past. AI-assisted traffic lights that adjust to congested roads, bad weather, and accidents could make commuting in your self-driving car a breeze.

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Consumers’ privacy and personal data could be better safe- guarded as AI systems monitor—and deflect—the activities of hackers. Companies could build more personal approaches to their customers by using AI to learn what they really want and then recommending products to suit.139 San Francisco’s Museum of Modern Art, for example, can text art lovers an image of one of its 35,000 works by using AI to match key- words texted with the request, “Send me.” The service is free.140

Many business and personal tasks could become cheaper, allowing money to be put to other uses. And, by integrating AI into human resource strategies, managers might even be able to use AI to identify and eliminate human bias from hir- ing and promotion decisions, performance evaluation, bene- fits administration, and disciplinary or corrective actions. “We can be freed up to do what we should be doing,” says Ashley Wilczek of Justice AV Solutions, “improving our peo- ple and their experiences at our company.”141

But AI is not without its critics. Among some of the most outspoken are giants of the tech industry, such as Elon Musk of Tesla and SpaceX. The eminent physicist Stephen Hawking, who passed away in 2018, also warned of the dan- gers of weaponized artificial intelligence and the possibility that “AI could be the worst event in the history of our civili- zation.”142 In addition to the risk of errors noted above and

the practical challenges that remain in making AI practical and reliable, these and other observers worry that AI can be put to malicious uses.

For instance, an airborne AI drone has already been cobbled together, inexpensively and from easily available parts, that can actually stalk someone. Meant to be simply entertaining, it could conceivably become something much worse. A New York Times writer called it an “automated bloodhound.”143 More worrying, perhaps, a recent report by a group of U.S. and British AI researchers warns AI developers against widely sharing their work.144 “Less attention has historically been paid to the ways in which artificial intelligence can be used maliciously,” the report says. Among those ways: AI can make it faster and easier to hack other systems, rather than protect them, and to do so more effectively. The report also cautions against the possibility that autonomous weapons could be developed and deployed, and that AI systems could undermine “truthful public debates,” the hallmark of democracies, by expanding surveillance in authoritarian ways. Finally, according to the report, AI systems also learn in ways we do not yet understand, and it is already possible to use them to generate convincing—but false—images and sounds. As the New York Times reports, “deepfake” AI technology makes it possible to splice any face onto a random body in a video (most often pornography to date) or to show someone—such as a government official—saying things he or she never said.145

Elon Musk says AI presents “vastly more risk than North Korea” and believes “people should be really concerned about it,” calling it “a fundamental risk to the existence of human civilization.”146 OpenAI, a nonprofit lab for which he provides some funding, has teamed up with Google’s AI unit called DeepMind to address ways to enhance the safety of AI applica- tions. One way the two organizations are exploring to prevent AI from going the way of HAL, the misbehaving computer of 2001, is to perfect a machine learning system that takes its cues from humans rather than inventing its own unexpected solutions.147

The common denominator identified by AI critics is that the technology has the capacity to exceed human capabilities, a risk for which, in their view, society is not suf- ficiently prepared. But Steve Wozniak, who once counted himself among those con- cerned about an AI-assisted future, has changed his mind because AI lacks the simple ability of a two-year-old child to, say, recognize what a dog is after one viewing. Says Apple’s cofounder now, “Artificial intelligence doesn’t scare me at all.”148 ●

This AI drone is being used in Champagne, France to monitor vineyards. Drone likes this help growers to get a better idea of what is happening in the vineyard. They can provide information regarding water saturation and pest damage, and ultimately help improve the quality of grapes produced. ©freeprod/123RF

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7.6 Group Decision Making: How to Work with Others

THE BIG PICTURE Group decision making has five potential advantages and four potential disadvantages. The disadvantage of groupthink merits focus because it leads to terrible decisions. It is also important to consider the characteris- tics of group decision making before allowing a group to make a decision. Finally, knowledge about group problem-solving techniques can enhance group decision-making effectiveness.

The movies celebrate the lone heroes who, like Bruce Willis or Mark Wahlberg, make their own moves, call their own shots. Most managers, however, work with groups and teams (as we discuss in Chapter 13). Although groups don’t make as high-quality decisions as the best individual acting alone, research suggests that groups make better decisions than most individuals acting alone.149 Thus, to be an effective manager, you need to learn about decision making in groups.

Advantages and Disadvantages of Group Decision Making Because you may often have a choice as to whether to make a decision by yourself or to consult with others, you need to understand the advantages and disadvantages of group- aided decision making.

Advantages Using a group to make a decision offers five possible advantages.150 For these benefits to happen, however, the group must be made up of diverse partici- pants, not just people who all think the same way.

■ Greater pool of knowledge. When several people are making the decision, there is a greater pool of information from which to draw. If one person doesn’t have the pertinent knowledge and experience, someone else might.

■ Different perspectives. Because different people have different perspectives—mar- keting, production, legal, and so on—they see the problem from different angles.

■ Intellectual stimulation. A group of people can brainstorm or otherwise bring greater intellectual stimulation and creativity to the decision-making process than is usually possible with one person acting alone.

■ Better understanding of decision rationale. If you participate in making a deci- sion, you are more apt to understand the reasoning behind the decision, includ- ing the pros and cons leading up to the final step.

■ Deeper commitment to the decision. If you’ve been part of the group that has bought into the final decision, you’re more apt to be committed to seeing that the course of action is successfully implemented.

Disadvantages The disadvantages of group-aided decision making spring from problems in how members interact.151

■ A few people dominate or intimidate. Sometimes a handful of people will talk the longest and the loudest, and the rest of the group will simply give in. Or one individual, such as a strong leader, will exert disproportionate influence, sometimes by intimidation. This reduces creativity.

■ Groupthink. Groupthink occurs when group members strive to agree for the sake of unanimity and thus avoid accurately assessing the decision situation.

LO 7-6 Outline the basics of group decision making.

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Here the positive team spirit of the group actually works against sound judgment.152 Groupthink is explored more thoroughly in the next section.

■ Satisficing. Because most people would just as soon cut short a meeting, the tendency is to seek a decision that is “good enough” rather than to push on in pursuit of other possible solutions. Satisficing can occur because groups have limited time, lack the right kind of information, or are unable to handle large amounts of information.153

■ Goal displacement. Although the primary task of the meeting may be to solve a particular problem, other considerations may rise to the fore, such as rivals trying to win an argument. Goal displacement occurs when the primary goal is subsumed by a secondary goal.

Groupthink Cohesiveness isn’t always good. When it results in groupthink, group or team members are friendly and tight-knit but unable to think “outside the box.” Their “strivings for unanimity override their motivation to realistically appraise alternative courses of action,” says Irwin Janis, author of Groupthink.154

The results of groupthink can include failure to consider new information and a loss of new ideas. For instance, some blame the 2015 ouster of Ellen Kullman, DuPont’s high-performing CEO, who had 27 years with the company, on a case of group- think by the firm’s insulated board of directors, who never asked Kullman to meet with them to defend her actions.155 Investors in Silicon Valley also often show a herd mentality in their desire to be part of “the next big thing,” according to one writer.156

Symptoms of Groupthink How do you know that you’re in a group or team that is suffering from groupthink? Some symptoms include the following:157

■ Sense of invulnerability. Group members have the illusion that nothing can go wrong, breeding excessive optimism and risk taking. They may also be so assured of the rightness of their actions that they ignore the ethical implications.

■ Rationalization. Rationalizing protects the pet assumptions underlying the group’s decisions from critical questions.

■ Illusion of unanimity and peer pressure. The illusion of unanimity is another way of saying that a member’s silence is interpreted as consent. If people do disagree, peer pressure leads other members to question the dissenters’ loyalty.

■ “The wisdom of crowds.” Groupthink’s pressure to conform often leads mem- bers with different ideas to censor themselves—the opposite of collective wis- dom, says James Surowiecki, in which “each person in the group is offering his or her best independent forecast. It’s not at all about compromise or consensus.”158

No doubt you’ve felt yourself pulled into a “groupthink opinion” at some point. Probably we all have. Self-Assessment 7.4 provides you with a way to evaluate the extent to which groupthink is affecting a team. Results provide insight into reducing this coun- terproductive group dynamic.

Different perspectives or groupthink? A diversified team can offer differing points of view, as well as a greater pool of knowledge and intellectual stimulation. Or it can offer groupthink and satisficing. What has been your experience as to the value of decision making in the groups you’ve been in? ©Sam Edwards/age fotostock

Individual and Group Decision Making CHAPTER 7 267

Preventing Groupthink: Making Criticism and Other Perspectives Permissible Janis believes it is easier to prevent groupthink than to cure it. As preventive measures, he and other writers suggest the following:159

■ Allow criticism. Each member of a team or group should be told to be a critical evaluator, able to actively voice objections and doubts. Subgroups within the group should be allowed to discuss and debate ideas. Once a consensus has been reached, everyone should be encouraged to rethink his or her position to check for flaws. It is sometimes helpful for the group leader to withhold his or her opin- ion at first, to encourage others to speak up.

■ Allow other perspectives. Outside experts should be used to introduce fresh per- spectives. Different groups with different leaders should explore the same policy questions. Top-level executives should not use policy committees to rubber-stamp decisions that have already been made. When major alternatives are discussed, someone should be made devil’s advocate to try to uncover all negative factors.

Characteristics of Group Decision Making If you’re a manager deliberating whether to call a meeting for group input, there are four characteristics of groups to be aware of.

1. They Are Less Efficient Groups take longer to make decisions. Thus, if time is of the essence, you may want to make the decision by yourself. Faced with time pres- sures or the serious effect of a decision, groups use less information and fewer commu- nication channels, which increases the probability of a bad decision.160

2. Their Size Affects Decision Quality The larger the group, the lower the quality of the decision.161 Some research says that seven people is the optimal size.162 Others suggest five is best.163 (An odd number is also considered best, when the group uses majority rules.)

3. They May Be Too Confident Groups are more confident about their judgments and choices than individuals are. This, of course, can be a liability because it can lead to groupthink.

4. Knowledge Counts Decision-making accuracy is higher when group members know a good deal about the relevant issues. It is also higher when a group leader has the ability to weight members’ opinions.164 Depending on whether group members know or don’t know one another, the kind of knowledge also counts. For example, people who are familiar with one another tend to make better decisions when members have a lot of unique information. However, people who aren’t familiar with one another tend to make better decisions when the members have common knowledge.165

Remember that individual decisions are not necessarily better than group decisions. As we said, although groups don’t make as high-quality decisions as the best individual acting alone, groups generally make better decisions than most individuals acting alone. Some guidelines to using groups are presented in Table 7.3.

Toward consensus. Working to achieve cooperation in a group can tell you a lot about yourself. How well do you handle the negotiation process? What do you do when you’re disappointed in a result achieved by consensus? ©Xavier Arnau/Getty Images

Assessing Groupthink The following survey was designed to assess groupthink. Please be prepared to answer these questions if your instructor has assigned Self-Assessment 7.4 in Connect.

1. Where does the team stand on the three aspects of groupthink?

2. Based on your survey scores, what would you do differently to reduce groupthink in the group you evaluated? Be specific.

SELF-ASSESSMENT 7.4

268 PART 3 Planning

1. When it can increase quality: If additional information would increase the quality of the decision, managers should involve those people who can provide the needed information. Thus, if a type of decision occurs frequently, such as deciding on promotions or who qualifies for a loan, groups should be used because they tend to produce more consistent decisions than individuals do.

2. When it can increase acceptance: If acceptance within the organization is important, managers need to involve those individuals whose acceptance and commitment are important.

3. When it can increase development: If people can be developed through their participation, managers may want to involve those whose development is most important.

Source: Derived from George P. Huber, Managerial Decision Making (Glenview, IL: Scott, Foresman, 1980), p. 149.

TABLE 7.3 When a Group Can Help in Decision Making: Three Practical Guidelines These guidelines may help you as a manager decide whether to include people in a decision-making process and, if so, which people.

In general, group decision making is more effective when members feel that they can freely and safely disagree with each other. This belief is referred to as minority dissent, dissent that occurs when a minority in a group publicly opposes the beliefs, attitudes, ideas, procedures, or policies assumed by the majority of the group.166 Minority dissent is associated with increased innovation within groups.167 Do your teams at school or work allow minority dissent? If not, what can be done to increase its existence? Self- Assessment 7.5 can help answer these questions.

Assessing Participation in Group Decision Making The following survey measures minority dissent, participation in group decision making, and satisfaction with a group. Please be prepared to answer these questions if your instructor has assigned Self-Assessment 7.5 in Connect.

1. What is the level of minority dissent in the group, and to what extent are you satisfied with being a member of this group?

2. Use the three lowest items that measure minority dissent to answer the following question: What can you do to increase the level of minority dissent in this group? Be specific.

3. Why do you think many groups muzzle the level of minority dissent?

SELF-ASSESSMENT 7.5

Claye Smith described how a lack of minority dissent affected his work environment in the “I Wish …” feature.

Claye Smith works in the banking industry as a financial analyst. His managers have created a toxic decision-making environment where employees do not feel safe expressing opinions, and new ideas are rarely encouraged.

According to Claye, a lot of the executives have been with the company and the industry for a long time. While they have a wealth of knowledge, they are far removed from the day-to-day happenings in the banking centers.

“You can tell, on some of our phone calls, that these manag- ers are on a different page,” said Claye. “If you try to explain something to them, they don’t take well to that. It’s not that they feel you are talking down to them, but they think, ‘This is how we’ve done it, and this is how it’s supposed to go.’” Claye believes that if management were more welcoming of new ideas from all employees, it would go a long way to creating a better decision-making environment.

I Wish... …my workplace didn’t have a toxic group decision-making environment.

Individual and Group Decision Making CHAPTER 7 269

Group Problem-Solving Techniques: Reaching for Consensus Using groups to make decisions generally requires that they reach a consensus, which occurs when members are able to express their opinions and reach agreement to support the final decision. More specifically, consensus is reached “when all members can say they either agree with the decision or have had their ‘day in court’ and were unable to convince the others of their viewpoint,” says one expert in decision making. “In the final analysis, everyone agrees to support the outcome.”168 This does not mean, how- ever, that group members agree with the decision, only that they are willing to work toward its success.

One management expert offers the following dos and don’ts for achieving consensus.169

■ Do’s: Use active listening skills. Involve as many members as possible. Seek out the reasons behind arguments. Dig for the facts.

■ Don’ts: Avoid log rolling and horse trading (“I’ll support your pet project if you’ll support mine”). Avoid making an agreement simply to keep relations amicable and not rock the boat. Finally, don’t try to achieve consensus by put- ting questions to a vote; this will only split the group into winners and losers, perhaps creating bad feelings among the latter.

More Group Problem-Solving Techniques Decision-making experts have developed several group problem-solving techniques to aid in problem solving. Four we will discuss here are (1) brainstorming, (2) devil’s advocacy, (3) the dialectic method, and (4) post-mortems.

1. Brainstorming: For Increasing Creativity Brainstorming is a technique used to help groups generate multiple ideas and alternatives for solving problems.170 Developed by advertising executive A. F. Osborn, the technique consists of having members of a group meet and review a problem to be solved. Individual members are then asked to silently generate ideas or solutions, which are then collected (preferably without identi- fying their contributors) and written on a board or flip chart. A second session is then used to critique and evaluate the alternatives. (Incidentally, taking a brief stroll, even around the office, can significantly increase creativity.)171

“Obviously, a lot of younger employees are not going to know everything that the managers know. At the same time, executive management might have an overview of how the banking centers work, but a lot of managers don’t go out and see how the centers actually function. They did back when they were in our positions, but so much has changed since then,” said Claye.

In addition to being removed from certain pro- cesses and procedures, the managers are also removed from the environment and atmosphere of the banking centers. “Our corporate work environ- ment is very dry and quiet. They work hard and get things done without a lot of chatter,” said Claye. “The banking centers are almost the complete opposite. They are really upbeat, and you have customers coming in and out all the time.”

Managers from the corporate office have a harder time adjusting to the banking center atmosphere when they visit.

Action has been taken by Claye’s company to alleviate this issue. “We’ve hired a new position right under our director that will be spending a lot more time in the banking centers and bringing feed- back to the corporate office,” said Claye.

He hopes that this will result in a better connec- tion between the managers and the employees who work directly with customers. With a stronger con- nection, managers might be more receptive to hear- ing new ideas. If employees feel like they can

participate in the decision-making process, they are likely to be more satisfied and committed to the company’s goals.

Courtesy of Claye Smith

Clay Smith Courtesy Claye Smith

270 PART 3 Planning

A modern-day variation is electronic brainstorming, sometimes called brainwriting, in which members of a group come together over a computer network to generate ideas and alternatives.172 Technology has also turned the smartphone into a device that uses vari- ous apps to spur the thinking process and unblock creative juices.173

Some rules for brainstorming suggested by IDEO, a product design company, are shown below in Table 7.4.

Brainstorming is an effective technique for generating new ideas/alternatives, and research reveals that people can be trained to improve their brainstorming skills.174

2. Devil’s Advocacy Devil’s advocacy gets its name from a traditional practice of the Roman Catholic Church. When someone’s name comes before the College of Car- dinals for elevation to sainthood, it is absolutely essential to ensure that the person had a spotless record. Consequently, one individual is assigned the role of devil’s advocate to uncover and air all possible objections to the person’s canonization. In today’s organiza- tions devil’s advocacy assigns someone the role of critic. Figure 7.5 shows the steps in this approach. Note how devil’s advocacy alters the usual decision-making process in steps 2 and 3 on the left-hand side of the figure.

3. The Dialectic Method Like devil’s advocacy, the dialectic method is a time- honored practice, going all the way back to ancient Greece. Plato and his followers attempted to identify a truth, called thesis, by exploring opposite positions, called antith- esis. Court systems in the United States and elsewhere today rely on hearing directly opposing points of view to establish guilt or innocence. Accordingly, the dialectic method calls for managers to foster a structured dialogue or debate of opposing view- points prior to making a decision.175 Steps 3 and 4 in the right-hand side of Figure 7.5 set the dialectic approach apart from common decision-making processes.

4. Project Post-Mortems Said to have originated as a debriefing strategy used by the military, a project post-mortem is, as the name suggests, a review of recent decisions in order to identify possible future improvements. The idea is to carefully evaluate project results after the fact, noting what could be done differently and better, and then to record those insights to inform future decisions.176 The post mortem usually takes place during a meeting of the project team and should begin with a thorough look at how the reality of the project differed from plans and expectations. For instance, did the upgrade

TABLE 7.4 Six Rules for Brainstorming

1. Defer judgment. Don’t criticize during the initial stage of idea generation. Phrases such as “we’ve never done it that way,” “it won’t work,” “it’s too expensive,” and “our manager will never agree” should not be used.

2. Build on the ideas of others. Encourage participants to extend others’ ideas by avoiding “buts” and using “ands.”

3. Encourage wild ideas. Encourage out-of-the-box thinking. The wilder and more outrageous the ideas, the better.

4. Go for quantity over quality. Participants should try to generate and write down as many new ideas as possible. Focusing on quantity encourages people to think beyond their favorite ideas.

5. Be visual. Use different-colored pens (for example, red, purple, blue) to write on big sheets of flip-chart paper, whiteboards, or poster boards that are put on the wall.

6. One conversation at a time. The ground rules are that no one interrupts another person, no dismissing of someone’s ideas, no disrespect, and no rudeness.

Source: These recommendations and descriptions were derived from B. Nussbaum, “The Power of Design,” BusinessWeek, May 17, 2004, pp. 86–94.

Individual and Group Decision Making CHAPTER 7 271

A devil’s advocate decision program The dialectic decision method

6 The decision is monitored.

5 The decision to adopt, modify, or discontinue the proposed course

of action is taken.

4 Any additional information

relevant to the issues is gathered.

3 The critique is presented to

key decision makers.

2 A devil's advocate (individual

or group) is assigned to criticize the proposal.

1 A proposed course of action

is generated.

6 The decision is monitored.

5 The decision to adopt either position,

or some other position, e.g., a compromise, is taken.

4 Advocates of each position present

and debate the merits of their proposals before key decision makers.

3 A conflicting counterproposal is generated based on di­erent

assumptions.

2 Assumptions underlying the proposal

are identified.

1 A proposed course of action

is generated.

FIGURE 7.5 Techniques for stimulating functional conflict: Devil’s advocacy and the dialectic method Source: From R.A. Castler and R.C. Schwenk, “Agreement and Thinking Alike: Ingredients for Poor Decisions,” Academy of Management Executive, February 1990, pp. 72–73.

of the company’s computer system take more time or cost more money than budgeted? Were any steps in the process changed or eliminated as the project went along? How were unplanned contingencies handled? What went wrong, and what went right?

The purpose of this step is not to fix blame for anything that might have gone wrong, but rather to prepare the way for the next step: identifying ways in which recent experiences can help make future projects go more smoothly. For instance, if a project like upgrading a computer system took more time than anticipated, was the reason that the software vendor delivered late, that it took longer to train staff in the new program than planned, or that unanticipated compatibility problems delayed the cutover date? Only by identifying the reason can managers work on avoiding delays in similar projects in the future. The final step is to prepare a written report, which should be circulated to the team, to document the post mortem process and encourage the application of any lessons learned.

The length of the meeting, the number of participants, the degree of formality in its structure, and even the amount of time that has passed since project completion all can vary with the complexity of the project. A few basic strategies for any successful post mor- tem, however, are not to wait too long to schedule one, to prepare an agenda, and to encour- age honest feedback from all participants, which should also include any customer comments and feedback received. At the very least, Ed Catmull of Pixar and Disney Animation, where project post mortems are popular, recommends doing at least this much after every project: Write down five things you would do again and five you wouldn’t.177 ●

272 PART 3 Planning

7.7 Career Corner: Managing Your Career Readiness

The career readiness soft skills of critical thinking/problem solving and decision mak- ing are highly desired competencies within our model of career readiness shown below. They also go hand in hand. Consider the definition of critical thinking/problem solving shown in Table 1.2. This competency entails the ability to use sound reasoning to ana- lyze situations, make decisions, and solve problems. It also requires skills at obtaining, interpreting, and analyzing both qualitative and quantitative information while cre- atively solving problems.

Critical thinking is much different from the moment-to-moment thinking that guides our everyday activities. Moment-to-moment thinking is automatic and highly susceptible to the biases discussed in this chapter. In contrast, critical thinking requires more deliberate mental processes. We need to stop and consciously process information when trying to critically think about a problem.

This section provides suggestions for improving your decision making by engaging in critical thinking and problem solving. We then discuss how you can demonstrate these skills during an employment interview.

Improving Your Critical Thinking and Problem-Solving Skills Good decision-making ability amounts to being able to understand the relationship between causes and outcomes. In other words, good decision makers can predict what will occur in a given situation. Reflecting on your past experiences and using a decision methodology are two ways to develop this skill.

Reflect on Past Decisions Most problems you will encounter at work after graduation will not be new, but they may be unfamiliar to you.178 This means there are ready-made solutions you can use. One expert defined ready-made solutions as “best practices that have been captured and turned into standard operating procedures so that employees are better prepared to address regu- larly recurring problems.”179 By learning and applying these ready-made solutions, you can develop a larger set of options for solving problems, thereby improving your decision- making skills. This improvement will in turn assist you in resolving unanticipated prob- lems. Use the following steps to increase your awareness of ready-made solutions.180

1. Think of a time in which you faced a problem either at work or in your personal life and you successfully resolved it. Now write down answers to the following questions: ■ What was the problem? Where did it occur and who was involved? ■ What was the solution? ■ Why did you select this solution? ■ What lessons can you derive from this experience that you can use when

faced with similar problems?

LO 7-7 Describe how to develop the career readiness competencies of critical thinking/problem solving and decision making.

FIGURE 7.6 Model of career readiness ©2018 Kinicki and Associates, Inc.

Career readiness

Knowledge (K)

Soft skills (S)

Career outcomes

Attitudes (A)

Other characteristics

(O)

Individual and Group Decision Making CHAPTER 7 273

2. Now think of a time you unsuccessfully solved a problem in your work or personal life. Write answers to the same questions listed above.

3. Think of someone you know who is very good at solving problems. Now focus on a specific problem you observed this person solving and write answers to the following questions: ■ What was the problem? Where did it occur and who was involved? ■ What was the solution? ■ What steps did the person follow in solving the problem? ■ What lessons can you learn from this and apply when faced with similar

problems?

Establish a Decision Methodology There is no single “right” way to solve problems. As you learned in this chapter, people have different decision-making styles. The key is to establish a process or method that works for you. Consider using or modifying the following steps:181

1. Analyze the situation. Why does a decision need to be made? What would hap- pen if you delayed making a decision? Who will be affected by the decision? What information, data, analytics, or research do you need to consider in order to understand the causes and possible solutions? Are there political issues you need to take into account?

2. Consider what others would think about the solutions under consideration. Would you be proud of your decision if someone tweeted it out or printed it on the front page of the newspaper?

3. Seek advice or feedback from others before making a decision.

4. Conduct a cost-benefit analysis of different solutions. Do the benefits of any exceed the costs? Is it okay to incur higher short-term costs for a better long- term solution?

5. Is the decision consistent with your values and principles? Are you willing to co-opt your values or principles? Consider the cost of doing so.

6. Make the decision and observe the consequences. Then do a post-mortem.

Demonstrating These Competencies During a Job Interview Being career ready means possessing the desired knowledge, skills, attitudes, and other characteristics (KSAOs) and being able to demonstrate them during a job interview. Assuming you possess some of these skills, now it’s time to make a plan for making a positive impression. We recommend that you start by preparing answers to the follow- ing behaviorally based questions:182

■ Describe the process you use to make decisions. Provide a specific example in which this process resulted in a positive outcome.

■ Tell me about a time in which you had to make a quick decision. How did you approach the situation and what obstacles did you face? How did you make this decision without having all the necessary information?

■ Describe a time in which you used intuition to make a decision rather than relying on data or hard facts. What was the outcome of your decision, and what did you learn from the experience? ●

274 PART 3 Planning

analytics 252 anchoring and adjustment bias 261 availability bias 260 Big Data 254 Big Data analytics 254 bounded rationality 244 brainstorming 269 confirmation bias 261 consensus 269 decision 240 decision making 240 decision-making style 257

decision tree 248 devil’s advocacy 270 diagnosis 242 electronic brainstorming 270 escalation of commitment bias 262 ethics officer 248 framing bias 261 goal displacement 266 groupthink 265 heuristics 260 hindsight bias 261 intuition 245

minority dissent 268 nonrational models of decision

making 244 opportunities 242 overconfidence bias 261 predictive modeling 254 problems 242 project post-mortem 270 rational model of decision making 242 representativeness bias 260 satisficing model 244 sunk-cost bias 261

Key Points

7.1 Two Kinds of Decision Making: Rational and Nonrational

• A decision is a choice made from among available alternatives. Decision making is the process of identifying and choosing alternative courses of action. Two models managers follow in making decisions are rational and nonrational.

• In the rational model, there are four steps in making a decision: Step 1 is identifying the problem or opportunity. A problem is a difficulty that inhibits the achievement of goals. An opportunity is a situation that presents possibilities for exceeding existing goals. This is a matter of diagnosis—analyzing the underlying causes. Step 2 is thinking up alternative solutions. Step 3 is evaluating the alternatives and selecting a solution. Alternatives should be evaluated according to cost, quality, ethics, feasibility, and effectiveness. Step 4 is implementing and evaluating the solution chosen. The rational model of decision making assumes managers will make logical decisions that will be the optimum in furthering the organization’s best interests. The rational model is prescriptive, describing how managers ought to make decisions.

• Nonrational models of decision making assume that decision making is nearly always uncertain and risky, making it difficult for managers to make optimum decisions. Two nonrational models are satisficing and intuition. (1) Satisficing falls under the concept of bounded rationality—that is, that the ability of decision makers to be rational is limited by enormous constraints, such as time and money. These constraints force managers to make decisions according to the satisficing model—that is, managers seek alternatives until they find one that is satisfactory, not optimal. (2) Intuition is making choices without the use of conscious thought or logical inference. The sources of intuition are expertise and feelings.

7.2 Making Ethical Decisions • Corporate corruption has made ethics in decision

making once again important. Many companies have an ethics officer to resolve ethical dilemmas, and more companies are creating values statements to guide employees as to desirable business behavior.

• To help make ethical decisions, a decision tree—a graph of decisions and their possible consequences—may be helpful. Managers should ask whether a proposed action is legal and, if it is intended to maximize shareholder value, whether it is ethical—and whether it would be ethical not to take the proposed action.

7.3 Evidence-Based Decision Making and Analytics

• Evidence-based management means translating principles based on best evidence into organizational practice. It is intended to bring rationality to the decision-making process.

• Scholars Jeffrey Pfeffer and Robert Sutton identify seven implementation principles to help companies that are committed to doing what it takes to profit from evidence-based management: (1) Treat your organization as an unfinished prototype; (2) “no brag, just facts”; (3) see yourself and your organization as outsiders do; (4) have everyone, not just top executives, be guided by the responsibility to gather and act on quantitative and qualitative data; (5) you may need to use vivid stories to sell unexciting evidence to others in the company; (6) at the very least, you should slow the spread of bad practices; and (7) you should learn from failure by using the facts to make things better.

• Applying the best evidence to your decisions is difficult, for seven reasons: (1) There’s too much evidence. (2) There’s not enough good evidence. (3) The evidence doesn’t quite apply. (4) People are trying to mislead you. (5) You are trying to mislead

Key Terms Used in This Chapter

Individual and Group Decision Making CHAPTER 7 275

you. (6) The side effects outweigh the cure. (7) Stories are more persuasive, anyway.

• Perhaps the purest application of evidence-based management is the use of analytics, or business analytics, sophisticated forms of business data analysis. Analytics competitors have three key attributes: (1) They go beyond simple descriptive statistics and use data mining and predictive modeling to identify potential and most profitable customers. (2) They don’t have just one principal application but rather use analytics in multiple applications. (3) The use of analytics is supported by top executives.

• A new concept is that of Big Data, which requires handling by very sophisticated analysis software and supercomputing-level hardware. Big Data includes not only data in corporate databases, but also web- browsing data trails, social network communications, sensor data, and surveillance data.

• Big Data analytics is the process of examining large amounts of data of a variety of types to uncover hidden patterns, unknown correlations, and other useful information.

7.4 Four General Decision-Making Styles • A decision-making style reflects the combination of how

an individual perceives and responds to information. • Decision-making styles may tend to have a value

orientation, which reflects the extent to which a person focuses on either task or technical concerns versus people and social concerns when making decisions.

• Decision-making styles may also reflect a person’s tolerance for ambiguity, the extent to which a person has a high or low need for structure or control in his or her life.

• When the dimensions of value orientation and tolerance for ambiguity are combined, they form four styles of decision making: directive (action-oriented decision makers who focus on facts), analytical (careful decision makers who like lots of information and alternative choices), conceptual (decision makers who rely on intuition and have a long-term perspective), and behavioral (the most people- oriented decision makers).

7.5 Decision-Making Biases and the Use of Artificial Intelligence

• Nine common decision-making biases present real barriers to high-quality decision making. They are (1) availability, (2) representativeness, (3) confirmation, (4) sunk cost, (5) anchoring and adjustment, (6) overconfidence, (7) hindsight, (8) framing, and (9) escalation of commitment.

• Artificial intelligence (AI) presents vast potential to assist human decision making, with applications already under way in manufacturing, transportation (driverless cars), medicine, and other fields. Advantages include reduced costs, the potential to eliminate bias in decision making, and human freedom from drudgery. AI might also be able to better protect secure data stores and systems

from hacks that endanger functionality, safety, and consumer privacy. On the other hand, critics warn of the potential for AI to be used to deceive and for runaway programs to make their own decisions, such as to hack the systems they are supposed to protect.

7.6 Group Decision Making: How to Work with Others

• Groups make better decisions than most individuals acting alone, though not as good as the best individual acting alone.

• Using a group to make a decision offers five possible advantages: (1) a greater pool of knowledge, (2) different perspectives, (3) intellectual stimulation, (4) better understanding of the reasoning behind the decision, and (5) deeper commitment to the decision.

• It also has four disadvantages: (1) a few people may dominate or intimidate; (2) it will produce groupthink, when group members strive for agreement among themselves for the sake of unanimity and so avoid accurately assessing the decision situation; (3) satisficing; and (4) goal displacement, when the primary goal is subsumed to a secondary goal.

• Some characteristics of groups to be aware of are (1) groups are less efficient, (2) their size affects decision quality, (3) they may be too confident, and (4) knowledge counts—decision-making accuracy is higher when group members know a lot about the issues.

• Using groups to make decisions generally requires that they reach a consensus, which occurs when members are able to express their opinions and reach agreement to support the final decision. Minority dissent should be allowed, so members can safely disagree with each other.

• Four techniques aid in problem solving. (1) Brainstorming helps groups generate multiple ideas and alternatives for solving problems. A variant is electronic brainstorming, in which group members use a computer network to generate ideas. 2. Devil’s advocacy assigns someone the role of critic. Figure 7.5 shows the steps in this approach. 3. The dialectic method calls for managers to foster a structured dialogue or debate of opposing viewpoints prior to making a decision. Steps 3 and 4 on the right-hand side of Figure 7.5 set the dialectic approach apart from common decision-making processes. (4) A project post mortem is a review of recent decisions in order to identify possible future improvements. The idea is not to assign blame but to carefully evaluate project results after the fact, noting what could be done differently and better.

7.7 Career Corner: Managing Your Career Readiness

• The career readiness competencies of critical thinking/problem solving and decision making go hand in hand.

• Reflecting on your past experiences and using a decision methodology are two ways to improve critical thinking and problem solving.

276 PART 3 Planning

1. What are the steps in rational decision making?

2. What are two models of nonrational decision making?

3. What are four ethical questions a manager should ask when evaluating a proposed action to make a decision?

4. Competitors using analytics have what three key attributes?

5. What is Big Data?

6. Describe the four general decision-making styles.

7. How does artificial intelligence support human decision making?

8. Can you name the nine common decision-making biases?

9. What are the advantages and disadvantages of group decision making?

10. What are four group problem-solving techniques?

Understanding the Chapter: What Do I Know?

New York’s Subway System Is Crumbling With 472 stations, the New York City subway system is the largest in the world, with a long and rich history. The system was first established in 1904 in the borough of Manhattan, before expanding to Brooklyn, Queens, and the Bronx by 1915. The Metropolitan Transporta- tion Authority (MTA) oversees its 27 subway lines.183

Subway ridership had grown to 5.7 million daily pas- sengers in 2017, double the number two decades earlier. The level of service and quality, however, has not kept up. Tunnels and track routes are crumbling. Signal problems and equipment failures have doubled between 2007 and 2017, and the system has the worst on-time performance of any major rapid transit system in the world. These problems are not due to acts of nature like a flood. Rather, decades of poor decision making seems to be a key cause, according to The New York Times.184 Let’s take a closer look at what’s been plagu- ing the Empire State’s transit system.

THE BIG APPLE’S TRANSIT PROBLEM The derelict state of the New York City subway system is partly due to poor decision making by the MTA and other state-level government officials. Some decisions were made for political reasons or based on decision- making biases, and sometimes officials simply refused to make a decision at all. This type of governmental dysfunction is not out of the ordinary, but it is surpris- ing given the number of people who rely on the subway daily to get around.

Politics was the first problem with the city’s decision making. The MTA decided in 2008 to renovate stations by installing glass domes and mirrors. These cosmetic improvements were to be made in the home district of New York’s then Assembly speaker. The Times reported that the Assembly speaker demanded the project be

completed; otherwise, MTA’s budget would be vetoed. The project cost $1.4 billion (more than the annual budget of the entire Chicago rapid transit system).185 Not a penny was spent on signals or tracks, which are vital to keep the trains running safely and on time. The executive director of TransitCenter told amNewYork that there “has been sort of the lack of accountability in Albany and the continual depletion of resources from the MTA and misprioritization on cosmetics instead of the nuts and bolts of actually running the system reliably.”186

The MTA tried to minimize future political decision making by assembling an independent Transportation Reinvention Commission in 2014 to study the city’s deteriorating system. The Commission was made up of successful transportation leaders from all over the world. It provided seven strategies to rehabilitate the subway system, including capacity expansion, a dedi- cated transportation fund, and congestion pricing.187

You might imagine that the Commission’s findings then provided a starting point for the MTA’s future decisions. This was not the case. For example, the Commission diagnosed capacity expansion, not cos- metic remodeling, as a major problem for the subway system. Capacity expansion would allow the subway to continue to handle increased ridership in a safe, sus- tainable way.188 Instead of investing in capacity expan- sion, however, as NBC New York reported, the agency decided years after the Commission’s report to again invest in cosmetically remodeling dozens of stations, this time to the tune of $1 billion.189

The MTA’s choice to make cosmetic repairs wasn’t the only example of poor decision making. State lead- ership contributed to the problem as well. For exam- ple, the MTA owed Albany for expenses related to the subway system that the state had incurred. The agency could have been allowed to keep the money and invest

Management in Action

Individual and Group Decision Making CHAPTER 7 277

in its crumbling infrastructure, but state leaders instead ordered the MTA to bail out state-run ski resorts. The New York Daily News reported that in 2013 around $5 million was sent to the Olympic Regional Development Authority, which operates the state ski resorts.

Lawmakers and transportation advocates ques- tioned the decision to bail out ski resorts when the sub- way system urgently needed attention. A state senator told the Daily News, “The MTA needs more money, not less. It’s having enough trouble funding its own needs. I don’t see why we’d be sending MTA resources to ski slopes.” The MTA does not oversee state-run ski resorts, but it sent the money anyway.190 The agency’s board hired a law firm to investigate the decision. It was found to be legal, but the board still labeled it as inappropriate.191

IT’S IN THE DATA! Why all these poor decisions? One reason is that lead- ers may not have been utilizing data to support their actions. For example, the MTA’s sloppy data collec- tion prevented it from adopting congestion pricing, a strategy of increasing fares during times of peak rider- ship (similar to Uber’s “surge pricing”). Supporters of congestion pricing told CBS News that this scheme would address gridlock and raise money for mass tran- sit. Skeptics of congestion pricing included Bill de Blasio, New York City’s mayor. De Blasio believed congestion pricing in general was a burden on middle class and low-income commuters.192 These conflicting views, coupled with a lack of evidence to support an ideal solution, may have led to indecision on fare price increases.

All these issues have made the subway situation so bad that New York’s governor declared a “state of emergency” for the system in 2017.193 Riders also made declarations of their own. A group of them ral- lied at the State Capitol in Albany in 2018. The protes- tors, representing subway riders, told amNewYork they were “desperate for change” and that state legislators could not leave Albany without approving new fund- ing for the system.194 New Yorkers’ patience had reached its end.

A NEW DECISION MAKER ENTERS THE PICTURE Andy Byford became head of the New York City Transit Authority (NYCTA) in January 2018. The NYCTA is the division of the MTA that oversees the New York City subway and bus systems. Byford came from the Toronto transit system, where he executed a five-year modernization plan. The plan significantly improved the subway system, and Toronto earned “outstanding public transit system of the year” in 2017. A Toronto transit activist told the Guardian that

upon his arrival in Canada, Byford had been “looking for, in the short term, quick wins.” Byford understood that a reputation for indecisiveness doesn’t bode well for a new leader. “That’s the basic thing any new manager does: they come in and want to be seen as doing something . . . ” said the activist.195 The ques- tion is whether Byford can duplicate Toronto’s suc- cess with the New York City’s subway system, which is four times bigger than Toronto’s.196

Byford doesn’t just make decisions for the sake of expediency in pursuit of quick wins. He first wants to study the New York subway system by riding it to work every day. He believes this experience will garner useful feedback from commuters and MTA employ- ees. Byford cultivated this hands-on style in Toronto, where he once spent hours navigating the subway in a wheelchair with a member of the system’s accessibil- ity forum. This experience provided him useful insights about the challenges faced by those who have a mobility impairment. Gathering first-hand informa- tion meant he could make more informed decisions to their benefit.197

The new NYCTA chief’s style seems to be making an impact at the MTA as well. His inf luence stems from serving on the 2014 MTA Transportation Reinvention Commission. In that role, Byford was able to help convince the agency to halt the $1 billion mod- ernization project it had slated for summer 2018 because it did not address urgent needs. Not everyone is in agreement with halting the project, though, includ- ing the MTA chairman. He argues that fresh paint, bet- ter lighting, and working MetroCard machines are more about safety, not luxury.198

Byford doesn’t seem to be a fan of cosmetic make- overs. He told The Wall Street Journal that, “We’ve got to get the basics right, day in, day out.” These basics include service reliability. Byford plans to shake up the agency’s workforce, processes, and infrastructure in a new plan to be released in late 2018. The plan will not be centered solely on his views though. Byford wants to engage city board members in the process as well. This way, even if they don’t agree with his plans in the end, they won’t feel shut out of the process.199

Byford must effectively balance time and discussion if he wants to get past the indecisiveness of his prede- cessors. The Journal reports that it could take up to 40 years to modernize the subway’s signal system. Byford wants to speed the process up, but not at any cost. For example, an MTA spokesman mentioned in 2018 that wireless technology might speed up modernization efforts. Byford was cautious though. “I would need to be convinced that an alternative is viable because we don’t have the time to waste going down a blind alley,” he says.200

Will Byford’s decision-making style put the subway system back on track?

278 PART 3 Planning

FOR DISCUSSION Problem-Solving Perspective

1. What is the underlying problem in this case from NYCTA President Andy Byford’s perspective?

2. What do you think about Byford’s approach for solv- ing the problem? Explain.

Application of Chapter Content

1. What are some barriers to Byford’s ability to utilize rational decision making? Explain.

2. Which nonrational decision making model does Byford employ? How?

3. Is the MTA’s practice of bailing out state-run ski resorts with subway funds ethical? Use Figure 7.3 in your response.

4. How can the MTA use evidence-based decision making? Explain.

5. What decision making style does Byford utilize? Provide examples to support your assertion.

6. What barriers to decision making were prevalent before Byford’s arrival? Explain.

It’s All about a Peacock Emotional support pets help people suffering from anxiety and other psychological disorders during air- line travel. Airlines have responsively recognized this issue within the structure of federal guidelines. According to ABC News, federal regulations allow an emotional support animal such as a dog, a cat, or even a pot-bellied pig to travel on airplanes in the cabin with the owner. The animal can be outside a carrier and f lies for free if the owner has proper documenta- tion, usually a letter from a doctor or other mental health professional. Airlines are allowed to ask people traveling with emotional support animals for this doc- umentation, but they are not required to.201 These policies have led to soaring numbers of support pets on planes.

USA Today reports that United Airlines has seen a 75 percent increase in emotion support animals on flights—from 43,000 to 76,000—between 2016 and 2017. The rise has also contributed to a significant increase in onboard incidents.202 The union representing United’s flight attendants says many of these incidents include allergic reactions in other passengers and unde- sirable animal behaviors like aggressive behavior, bit- ing, urination, and defecation.203 This all contributed to United Airlines drawing the line when someone tried to bring a pet called Dexter on a flight leaving Newark. The airline refused not because Dexter is your typical four-legged emotional support animal but because Dexter is a peacock—and quite a large one at that.

This challenge pertains to whether United made the right call in changing its support pet policies after Dexter’s aborted trip.

United’s new policies require customers to confirm that the animal has been trained to behave properly in

public and to acknowledge their responsibility for the animal’s conduct. Customers must also provide the air- line with 48 hours’ notice, a health and vaccination form from a veterinarian, and a letter from a mental health professional stating the benefit received from the emotional support animal.204 The 48-hour rule means that customers will have trouble boarding with their pets during emergency travel.

Do these changes seem fair? Consider that different airlines require different documentation in order to decide whether a pet is qualified as an emotional sup- port animal. United and Delta Airlines require certain documentation, while American Airlines has other requirements. Some airlines don’t allow emotional sup- port pets onboard, period.205 Should the airlines be consistent?

The preceding rules do not apply to service ani- mals, which are legally defined as dogs “trained to do work or perform tasks for people with disabilities.” These animals are protected by the Americans with Disabilities Act (ADA) and can go wherever their owners go. Service dogs receive specific training in order to be certified as such. A Seeing Eye dog, for example, is a carefully trained dog that serves as a travel tool for persons who have severe visual impair- ments or are blind. Emotional support animals are not required to go through the same training and cer- tifications, a loophole that National Geographic reports some pet owners are abusing to avoid the air- lines’ surcharge of $125 or more for transporting regu- lar pets.206 A CBS News correspondent was actually able to purchase a support animal vest and accompa- nying mental health professional letter online without her cat even being evaluated. The registration took just five minutes and cost $150.207

Legal/Ethical Challenge

Individual and Group Decision Making CHAPTER 7 279

This behavior is causing problems for those with legitimate service animals. Some are being harassed by fed-up and unsympathetic airline employees and pas- sengers, and untrained emotional support pets have also attacked trained service animals during flights. An advocate for the blind told CBS News, “As a person who is blind, my access rights are being infringed upon when somebody passes off a fake service dog.”208

SOLVING THE CHALLENGE What would you do if you were United Airlines’ CEO?

1. Do not implement the new rules. The airline should allow emotional support pets to travel unrestricted,

just as service dogs do. Airlines should not be in the business of categorizing passengers’ pets.

2. Implement the new rules. Emotional support pets are not service dogs and should be treated differently. The airline needs to ensure the safety of employees, passengers, and other animals during flight.

3. Refer this issue to regulators like the Department of Transportation instead of implementing your own rules. The government can address this issue by pass- ing regulation that will consistently be enforced by all airlines.

4. Invent other options.

Learn about decision making at Uber, with an emphasis on how former CEO Travis Kalanick and current CEO Dara Khosrowshahi make decisions. Assess your ability to apply concepts discussed in this chapter to the case by going to Connect.

Uber Continuing Case

We discuss organizational cultures and structures, and how they should be

aligned to coordinate employees in the pursuit of the organization’s

strategic goals. We then consider the three types of organizations and

their seven basic elements. We next review seven types of organizational

structures and consider five factors that should be considered when

designing the structure of an organization. We conclude with a Career

Corner that focuses on how to use the career readiness competencies of

understanding the business and personal adaptability to improve your

ability to assess an organization’s internal context.

What’s Ahead in This ChapterFORECAST

PART 4 • ORGANIZING

8 After reading this chapter, you should be able to:

LO 8-1 Describe how managers align vision and strategies with the organization’s culture and structure.

LO 8-2 Explain how to characterize an organization’s culture.

LO 8-3 Describe the process of culture change in an organization.

LO 8-4 Compare the structures of for-profit, nonprofit, and mutual-benefit organizations.

LO 8-5 Identify the major elements of an organization.

LO 8-6 Describe the eight organizational structures.

LO 8-7 Identify the factors that affect the design of an organization’s structure.

LO 8-8 Describe how to use the career readiness competencies of understanding the business and personal adaptability to assess an organization’s internal context.

Organizational Culture, Structure, and Design Building Blocks of the Organization

© O

livier Renck/Aurora/G etty Im

ages

How to Get Noticed in a New Job: Fitting into an Organization’s Culture in the First 60 Days

“Once you are in the real world—and it doesn’t make any difference if you are 22 or 62, starting your first job or your fifth,” say former business columnists Jack and Suzy Welch, “the way to look great and get ahead is to overdeliver.”1

Overdelivering means doing more than what is asked of you—not just doing the report your boss requests, for example, but doing the extra research to provide him or her with something truly impressive. “You must continue to ‘sell yourself’ after you are hired,” says one human resources director. “Keep your boss informed of things you are working on, including projects others ask you to assist with.”2

Among things you should do in the first 60 days are the following.3

Be Aware of the Power of First Impressions Within three minutes of meeting someone new, people form an opinion about where the future of the relationship is headed, according to one study.4 Journalist and author Malcolm Gladwell concluded that “Snap judgments are, first of all, enormously quick: they rely on the thinnest slices of experience . . . they are also unconscious.”5 Counter the possibility of someone else’s bias in such a quick judgment by using your career readiness skills of social and emotional intelligence to put your best foot forward.

See How People Behave by Arriving Early and Staying Late “Many aspects of a company’s culture can be subtle and easy to overlook,” writes one expert. “Instead, observe everything.” Try coming in 30 minutes early and staying a little late just to observe how people operate—where they take their meals, for example. If a meal was part of your interview, you’ve probably picked up some clues about whether they regularly eat out or are mostly brown-bagging it at their desks.6

Network with People and Find Out How the Organization Works Keep your networking skills at the ready; they represent a career readiness competency. During the first two weeks, get to know a few people and try to have lunch with them. Find out how the organization works, how people interact with the boss, what the corporate culture encourages and discourages. Walk the halls and get to know receptionists, mail room clerks, and office managers, who can help you learn the ropes. Your role here is to listen. Realize that you have a lot to learn when you’re new.7

Ask for Advice Be aware that those who seek advice are perceived as being more competent than those who do not.8 Your proactive learning orientation will help you here; don’t be afraid to ask co-workers for feedback as you start learning the job. At the end of 30 days, have a “How am I doing?” meeting with your boss.

Overdeliver Because performance reviews for new hires generally take place at 60 to 90 days, you need to have accomplished enough—and preferably something big—to show your boss your potential. In other words, do as the Welches suggest: overdeliver.

For Discussion How does the preceding advice square with your past experiences in starting a new job? Are there things you wish you could have done differently?

282 PART 4 Organizing

How important is culture, the “social glue” that binds together organizations? “Culture and people are everything,” says Brett Wilson, CEO of TubeMogul, a

video advertising software company. “Nothing else matters, and our ability to stay ahead is a function of having the best people and moving faster than our competitors. . . . Creating an exceptional culture is the only way to build a sustainable competitive advantage.”9

How an Organization’s Culture and Structure Are Used to Implement Strategy “A leader’s job is to help inspire every employee to help execute strategy,” says one report. “This requires consistently and constantly demonstrating, celebrating, and modeling the cultural traits that reinforce strategy.”10 Or, for better performance, per- haps the leader’s style should even be different from the organization’s culture (as we’ll discuss later).11

Strategy, as we saw in Chapter 6, consists of the large-scale action plans that reflect the organization’s vision and are used to set the direction for the organization. To implement a particular strategy, managers must determine the right kind of organizational culture and organizational structure, which mutually influence each other. (See Figure 8.1.)

The “I Wish . . .” feature illustrates what happened to John French when his employer failed to integrate strategy and culture.

8.1 Aligning Strategy, Culture, and Structure THE BIG PICTURE The study of organizing, the second of the four functions in the management process, begins with the study of organizational culture and structure, which managers must determine so as to implement a particular strategy. Organizational culture consists of the set of shared, taken-for-granted implicit assumptions that a group holds in the workplace. Organizational structure describes who reports to whom and who does what.

LO 8-1 Describe how managers align vision and strategies with the organization’s culture and structure.

Organizational culture binds people to common norms and expectations just like glue binds pieces of materials into one. ©McGraw-Hill Education/Michael Scott, photographer

John French worked as a senior financial analyst for a medical group as part of a national health care system. While in this posi- tion, he witnessed severe resistance to change as the company attempted to reshape its culture.

It was necessary to change the culture of this health care company because the current cul- ture was not valuing its employees. The company’s

competitor was located in the same area, and was constantly taking advantage of the undervalued employees at John’s company. “Instead of promoting from within and cultivating tal- ent, the way you get promoted here is by going to the competi- tion and getting a raise,” said John. John’s company continued to lose some of its best employees because of their approach toward promotions. Consequently, people with little industry experience found themselves in management positions they were not qualified for.

In addition to failing to value its current employees, the com- pany was struggling financially due to its culture. “We’re a non- profit, and we had a very non-profit culture. Because of that, the company thought that it didn’t need to focus on money. People would always say, ‘It’s for the patient,’ but if you’re bleeding money, you won’t survive for the patient,” said John.

I Wish… …my company had integrated its corporate strategy and organizational culture.

John French. Courtesy John French

Organizational Culture, Structure, and Design CHAPTER 8 283

Because of the lack of financial focus, the company contin- ued to promote medical practitioners instead of businesspeo- ple. This deepened the financial issues because the people who were managing the departments did not have business experience and were not concerned about the financial well- being of the company.

When John found himself in a management role after his man- ager left the company to work for the competition, he decided to bring in an analytics team to evaluate the company’s finances. This did not go over well with the rest of the team. “We were able to link payments together and define how successful we were. And what we found was that we were actually overpaying our doctors.

We were paying our doctors more than they were bringing in,” said John. Of course, the doctors did not take well to this information, and they did not understand it from a financial perspective.

The medical group continued to lose money and talent by refusing to change its ways. John began to reevaluate his role within the company. He quickly realized that the culture was leading to the destruction of the company, and he no longer wanted to be a part of it.

After an unsuccessful meeting with Human Resources about an increase in pay, John left the company, where things have remained stagnant to this day. Courtesy of John French

Realizing the Organizational Vision and Strategy: Get the Right Culture and the Right Structure Let’s consider these two concepts—organizational culture and organizational structure.

Organizational Culture: The Shared Assumptions That Affect How Work Gets Done We described the concept of culture in Chapter 4 on global management as “the shared set of beliefs, values, knowledge, and patterns of behavior common to a group of people.” Here we are talking about a specific kind of culture called an organi- zational culture.

According to scholar Edgar Schein, organizational culture, sometimes called corpo- rate culture, is defined as the set of shared, taken-for-granted implicit assumptions that a group holds and that determines how it perceives, thinks about, and reacts to its various environments.12 These are the beliefs and values shared among a group of people in the workplace that are passed on to new employees by way of socialization and mentoring, which significantly affect work outcomes at all levels.13 As we said earlier, culture is the “social glue” that binds members of the organization together. Just as a human being has a personality—fun-loving, warm, uptight, competitive, or whatever—so an organiza- tion has a “personality,” too, and that is its culture. The culture helps employees under- stand why the organization does what it does and how it intends to accomplish its long-term goals.

The cultural tone is often set in the hiring process. “The ultimate filter we use is that we only hire nice people,” says Peter Miller, CEO of Optinose, a pharmaceutical company.14 MuleSoft, a software company, looks for people with “high integrity, being a great team player, and they want to win as a company first, team second, individually third,” says CEO Greg Schott.15

TubeMogul CEO Brett Wilson, mentioned earlier, also prefers nice people. “I . . . really value people who are kind to one another,” he says. “That makes the workplace better, and they end up having a deeper sense of empathy with our clients.” In addition, “we want a culture where people aren’t afraid to make mistakes. . . . Our ability to win is a function of how innovative we are. So making mistakes is encouraged.” Finally, he says, “it’s a cul- ture where we value the people who do what they say—they have a high ‘do-to-say’ ratio.”16

Drivers of culture

Organizational culture

al Organizational structure & internal processes

al Group & social processes

Work attitudes & behaviors

Overall performance

FIGURE 8.1 Drivers and flow of organizational culture

284 PART 4 Organizing

Culture can vary considerably, with different organizations having differing empha- ses on risk taking, treatment of employees, teamwork, rules and regulations, conflict and criticism, and rewards.

As such, culture can have both positive and negative effects on employees and over- all corporate performance. Zenefits, a San Francisco health-insurance brokerage start- up, for example, is being sued for actions associated with a negative culture. Its director of real estate and workplace services sent employees a note asking them to cut out using the headquarters stairwells for smoking, drinking, eating, and sex.18

Some other organizations, believing that the office has become “too nice,” have embraced a culture known as “radical candor” or “front-stabbing,” in which workers are encouraged “to drop the polite workplace veneer and speak frankly to each other no matter what,” according to one report.19 Still other companies go beyond candor to fraudulent behavior, such as the case of Volkswagen. The company admitted in 2015 that it cheated on its emission tests. Mitsubishi also admitted to 25 years of company engineers’ intentionally manipulating fuel-economy tests.20

In addition, the elements that drive an organization’s culture also vary. They may represent the values of the founder, the industry and business environment, the national culture, the organization’s vision and strategies, and the behavior of leaders. (See Table 8.1.)

We thoroughly discuss organizational culture in Sections 8.2 and 8.3.

Freewheeling culture. Mic, a New York City news website created by and for Millennials, which has 106 mostly Millennial employees, is described as having a “playful vibe.”17 Here CEO Chris Altchek (right) talks with an employee. At Mic, oversharing, acting entitled, and second-guessing the boss are the norm. Dogs wander between desks, some employees use a megaphone for impromptu announcements, others ride hoverboards into the kitchen for free snacks. Could the Mic culture work in, say, the labs of Pfizer Inc., the global pharmaceutical company, where drug discovery is a high-risk, costly endeavor? ©Jennifer S. Altman/The New York/Redux Pictures

•  Founder’s values

•  Industry and business environment

•  National culture

•  Organization’s vision and strategies

•  Behavior of leaders

TABLE 8.1 What Drives an Organizational Culture?

Organizational Culture, Structure, and Design CHAPTER 8 285

EXAMPLE How Strategy Affects Culture and Culture Affects Structure: Cleveland Clinic Refocuses Its Continuous Improvement Strategy

The guiding principle at Cleveland Clinic, one of the largest research and teaching hospitals in the United States, is “Patients first.”21 To ensure that patients experience the best care and the best outcomes, the hospital needs practitioners who are at the top of their field but are not content with the status quo. So it recently undertook a new initiative to update its strategy of continuous improvement, in which all members of the organization are encouraged to make incremental improvements in all processes and services on an ongoing basis22 (see Chapter 16). The idea this time was to “change the culture” by giving “everyone the opportunity to look at how they’re doing their day-to-day jobs and where they could make improvements, reduce wastes, cut costs and improve the patient experience,” the chief medical operations office said.23

The Strategy: Continuous Improvement The goal of Cleveland Clinic’s continuous improvement strategy is “to cre- ate practices through which every caregiver is capable, empowered, and expected to make improvements every day.” The Clinic is focusing on measuring and improving patient safety, patient quality, patient experience, caregiver experi- ence, and affordability.24 The reason for upgrading the con- tinuous improvement program was not that practitioners didn’t already value excellence; Cleveland’s organizational culture is known for that. But as Dr. Lisa Yerian, medical direc- tor of continuous improvement, said, “People who are com- mitted to excellence can create a lot of workarounds. They will go the extra mile but don’t always think about how to go three miles fewer to deliver the same or better quality care.”25

The Structure: A Matrix Cleveland Clinic itself is organized around individual organs and diseases rather than around clini- cal departments like most hospitals. Its continuous improve- ment department, launched in 2006 when the hospital first adopted continuous improvement, has since grown in size and

in scope and now includes 32 members, some from industries outside the medical profession. Skilled in applying world-class quality improvement strategies, they are located in many dif- ferent departments and institutes within the hospital, so they are able to work with teams that similarly cross functional lines in the organization.26

The Culture: A Commitment to Excellence The continuous improvement team has been able to strengthen the hospital’s “patients first” culture in many tangible ways. It has reduced cancer patients’ wait times for chemotherapy treatments, achieved faster set-up in the hospital’s operating rooms, and dramatically reduced wait times in the emergency department so more patients are seen. In-patients and out-patients, as well as their caregivers and families, all have benefitted. In addition, the Decision Support Services (DSS) team, part of the finance division and an early participant in the newest continuous improvement effort, made permanent upgrades in its reporting process and changed its own culture. A brief project-status meeting every morning now gives every team member an opportunity to ask questions, air problems, and suggest solu- tions. As a result of these in-person check-ins, the volume of e-mail has dropped dramatically, team members feel more accountable to each other, and department costs have dropped more than 10 percent. Today, the DSS team members are help- ing to share what they learned about continuous improvement with teams in other areas of the organization.27

YOUR CALL The continuous improvement model adopted by Cleveland Clinic integrates the hospital’s vision, strategic goals, culture, and structure. Do you think this is hard to pull off in today’s organizations? Why do you think Cleveland Clinic was successful?28

Organizational Structure: Who Reports to Whom and Who Does What Orga- nizational structure is a formal system of task and reporting relationships that coordinates and motivates an organization’s members so that they can work together to achieve the organization’s goals. As we describe in Sections 8.4–8.6, organizational structure is con- cerned with who reports to whom and who specializes in what work.

Whether an organization is for-profit or nonprofit, the challenge for top managers is to align the organization’s vision and strategies with its organizational culture and organizational structure, as shown in the two gold boxes in Figure 8.1.

Figure 8.1 shows that the consistency among these elements in turn impacts (see the three green boxes) group and social processes (discussed in Chapters 13–15), individ- ual work attitudes and behaviors (discussed in Chapters 11–12), and the organization’s overall performance. As you can see from the diagram, consistency across strategy, culture, and structure is expected to foster higher performance. ●

286 PART 4 Organizing

8.2 What Kind of Organizational Culture Will You Be Operating In?

THE BIG PICTURE Organizational culture appears as three layers: observable artifacts, espoused values, and basic assumptions. Cultures can be classified into four types: clan, adhocracy, market, and hierarchy. Culture is transmitted to employees through symbols, stories, heroes, rites and rituals, and organizational socialization.

Want to get ahead in the workplace but hate the idea of “office politics”? You probably can’t achieve the first without mastering the second. Although hard

work and talent can take you a long way, “there is a point in everyone’s career where politics becomes more important,” says management professor Kathleen Kelley Reardon. You have to know the political climate of the company you work for, says Reardon, who is author of The Secret Handshake and It’s All Politics.29 “Don’t be the last person to understand how people get promoted, how they get noticed, how certain proj- ects come to attention. Don’t be quick to trust. If you don’t understand the political machinations, you’re going to fail much more often.”30

A great part of learning to negotiate the politics—that is, the different behavioral and psychological characteristics—of a particular workplace means learning to understand the organization’s culture. The culture consists not only of the slightly quirky personali- ties you encounter but also all of an organization’s normal way of doing business, as we’ll explain.

The Three Levels of Organizational Culture Organizational culture appears as three layers: (1) observable artifacts, (2) espoused val- ues, and (3) basic assumptions.31 Each level varies in terms of outward visibility and resistance to change, and each level influences another level.

Level 1: Observable Artifacts—Physical Manifestations of Culture At the most visible level, organizational culture is expressed in observable artifacts—physical manifestations such as manner of dress, awards, myths and stories about the company,

rituals and ceremonies, and decorations, as well as visi- ble behavior exhibited by managers and employees.

Example: In a conference room reserved for sensi- tive discussions, online travel company Kayak has a 2-foot-high stuffed elephant named Annabelle—the “elephant in the room”—that is an artifact believed to bring forth more honest and constructive communica- tions among employees.32 (The expression “elephant in the room” is used in business and politics to mean an obvious truth that is either being ignored or going unaddressed.)

Level 2: Espoused Values—Explicitly Stated Val- ues and Norms Espoused values are the explicitly stated values and norms preferred by an organization, as may be put forth by the firm’s founder or top managers.

Example: The founders of technology company Hewlett-Packard stressed the “HP Way,” a collegial,

LO 8-2 Explain how to characterize an organization’s culture.

Although this is not a photo of Annabelle, you can see how a photo or stuffed animal can be used as an artifact to reflect an aspect of an organization’s culture. ©McGraw-Hill Education

Organizational Culture, Structure, and Design CHAPTER 8 287

egalitarian culture that gave as much authority and job security to employees as possi- ble. Although managers may hope the values they espouse will directly inf luence employee behavior, employees don’t always “walk the talk,” frequently being more influ- enced by enacted values, which represent the values and norms actually exhibited in the organization.33

Another example: Leaders at retailer and health care company CVS Health recog- nized the gap between espoused values (“We sell health products”) and enacted values (“We also sell tobacco products”) and made a key strategic change to create alignment. A transformative moment came in early 2014 when CEO Larry Merlo announced that CVS would cease selling tobacco products by October 1. One year later, the company reported that the average smoker had purchased five fewer packs of cigarettes in states where CVS controlled at least 15 percent of the retail pharmacy market, amounting to an overall decrease of 95 million packs. In the same states, sales of nicotine patches rose 4 percent over the same period.34

Level 3: Basic Assumptions—Core Values of the Organization Basic assump- tions, which are not observable, represent the core values of an organization’s culture— those that are taken for granted and, as a result, are difficult to change.

Example: At insurance giant AIG, people worked so hard that, while employees com- menting on Indeed.com generally call it a great place to work, one said, “The workplace culture is work hard. I didn’t know anyone that worked 9:00–5:00. There were too many projects with tight deadlines to leave at 5:00.”35

Another example: Many founders of start-ups hate rules and red tape. College Hunks Hauling Junk, for instance, was cofounded by Nick Friedman with no formal policies about dress code, vacation, sick days, and other things because he envisioned “a real-life Never Never Land where work is always fun, and the culture is always stress- free.”36 However, when the enterprise grew from a single cargo van to more than 50 franchises, the freewheeling spirit made employees lose focus, and client-service ratings, employee morale, and profitability all declined. The firm had to come up with rules and procedures while, at the same time, trying to “maintain a healthy balance of fun company culture with an accountable organization and team,” Friedman said. Now more than 100 franchises strong, with $50 million in annual sales, the firm is rid- ing high.37

Four Types of Organizational Culture: Clan, Adhocracy, Market, and Hierarchy The competing values framework (CVF) provides a practical way for managers to understand, measure, and change organizational culture. The CVF, which has been vali- dated by extensive research involving 1,100 companies, classifies organizational cultures into four types: (1) clan, (2) adhocracy, (3) market, and (4) hierarchy, as we’ll explain.38 (See Figure 8.2.)

Research leading to the development of the CVF found that organizational effective- ness varied along two dimensions:

■ The horizontal dimension—inward or outward focus? This dimension expresses the extent to which an organization focuses its attention and efforts inward on internal dynamics and employees (“internal focus and integration”) versus out- ward toward its external environment and its customers and shareholders (“external focus and differentiation”).

■ The vertical dimension—flexibility or stability? This dimension expresses the extent to which an organization prefers flexibility and discretion versus stabil- ity and control. Combining these two dimensions creates the four types of organizational culture based on different core values—namely, clan, adhocracy, market, and hierarchy.

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Each culture type has different characteristics, and while one type tends to dominate in any given organization, it is the mix of types that creates competitive advantage. We begin our discussion of culture types in the upper-left quadrant of the CVF.

1. Clan Culture: An Employee-Focused Culture Valuing Flexibility, Not Stability A clan culture has an internal focus and values flexibility rather than stability and control. Like a family-type organization, it encourages collaboration among employ- ees, striving to encourage cohesion through consensus and job satisfaction and to increase commitment through employee involvement. Clan organizations devote con- siderable resources to hiring and developing their employees, and they view customers as partners.

Example: Property and casualty insurance company Acuity, Fortune’s No. 9 Best Company to Work For in 2017,39 strongly endorses a clan culture. CEO Ben Salzmann believes “that if employees are given a fun, rewarding place to work where they can express their creativity, in return the firm will get innovation, diehard loyalty, and world- class customer service.”40 Employees have generous perks and are empowered to par- ticipate in the way the company is run. The end results are profitability and an enviably low turnover rate.41

2. Adhocracy Culture: A Risk-Taking Culture Valuing Flexibility An adhoc- racy culture has an external focus and values flexibility. Creation of new products and services is the strategic thrust of this culture, which attempts to create innovative prod- ucts by being adaptable, creative, and quick to respond to changes in the marketplace. Employees are encouraged to take risks and experiment with new ways of getting things done. Adhocracy cultures are well suited for start-up companies, those in industries undergoing constant change, and those in mature industries that are in need of innova- tion to enhance growth.

Example: Baxter International, a giant Illinois-based manufacturer of medical prod- ucts, values innovation enough to say it practically is culture. Recently appointed CEO José Almeida cut away several layers of the company’s bureaucracy to make it easier for

Flexibility and discretion

Stability and control

Clan Adhocracy

Hierarchy Market

Thrust: Collaborate

Means: Cohesion, participation, communication, empowerment

Ends: Morale, people development, commitment

Thrust: Create

Means: Adaptability, creativity, agility

Ends: Innovation, growth, cutting-edge output

Thrust: Control

Means: Capable processes, consistency, process control, measurement

Ends: E�ciency, timeliness, smooth functioning

Thrust: Compete

Means: Customer focus, productivity, enhancing competitiveness

Ends: Market share, profitability, goal achievement

External focus and di�erentiation

Internal focus and integration

FIGURE 8.2 Competing values framework Source: Adapted from K.S. Cameron, R.E. Quinn, J. Degraff, and A.V. Thakor, Competing Values Leadership (Northampton, MA: Edward Elgar, 2006), p. 32.

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employees to communicate with peers around the organization and speed deci- sion making. “Never disassociate innovation and culture,” he says. “They are almost one and the same.” Since his arrival, the company’s stock has climbed 70 percent.42

3. Market Culture: A Competitive Culture Valuing Profits over Employee Satisfaction A market culture has a strong external focus and values stability and control. Because market cultures are focused on the external environment and driven by competition and a strong desire to deliver results, customers, productivity, and profits take precedence over employee develop- ment and satisfaction. Employees are expected to work hard, react fast, and deliver quality work on time; those who deliver results are rewarded.

Example: Uber, the ride-hailing company, has had such a culture, but its management allowed aggressively competitive and sometimes sexually harassing behavior to flourish within its freewheeling work environment, courting scandals from which the company is struggling to recover43 even as its founder and CEO has been ousted.44 Uber has also seen its reputation tarnished by drivers’ bad behavior in some countries and its market clipped by legislators protecting local taxi industries in other locations such as London, British Columbia (Canada), Denmark, Italy, and Australia’s Northern Territory.45

4. Hierarchy Culture: A Structured Culture Valuing Stability and Effective- ness A hierarchy culture has an internal focus and values stability and control over flexibility. Companies with this kind of culture are apt to have a formalized, structured work environment aimed at achieving effectiveness through a variety of control mecha- nisms that measure efficiency, timeliness, and reliability in the creation and delivery of products.

Example: Amazon relies on the benefits of a hierar- chical culture to effectively manage its vast shipping pro- cesses. A Fortune reporter commented that the company has achieved success by “sticking steadfastly—even boringly—to a few key principles. . . . Instead of focusing on competitors or technology shifts [a market culture orientation], they continually invest in getting a little bit better. In their core retail business, they grind out incre- mental improvements in delivery speed and product offerings while chipping away at prices.”46 Since purchas- ing Whole Foods in 2017, Amazon has been working to integrate its signature Amazon Prime service into the upscale grocery chain’s operations to ease customer ordering, delivery, pickups, and returns.47

Are you curious about the type of culture that exists in a current or past employer? Do you wonder whether this culture is best suited to help the company achieve its strategic goals? The following self-assessment allows you to consider these questions.

Chick-fil-A culture. Among the quick-service restaurant’s ways of engaging employees are hiring only nice people (harder than it sounds); hiring managers with people skills, not just functional skills; and closing stores on Sundays so employees can have family time. How would you classify Chick-fil-A’s culture according to the competing values framework? ©St. Petersburg Times/Zuma Press Inc/Alamy Stock Photo

This Amazon Distribution Center in Staffordshire, England relies on an internal focus to meet its delivery goals. ©SWNS/Alamy Stock Photo

What Is the Organizational Culture at My Current Employer? Please be prepared to answer these questions if your instructor has assigned Self-Assessment 8.1 in Connect.

1. How would you describe the organizational culture?

2. Do you think this type of culture is best suited to help the company achieve its strategic goals? Explain.

SELF-ASSESSMENT 8.1

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How Employees Learn Culture: Symbols, Stories, Heroes, Rites and Rituals, and Organizational Socialization Culture is transmitted to employees in several ways, most often through such means as (1) symbols, (2) stories, (3) heroes, (4) rites and rituals, and (5) organizational socialization.48

1. Symbols A symbol is an object or action that represents an idea or quality. With respect to culture, symbols are artifacts used to convey an organization’s most important values. The Nike swish is an example.

Example: One of the most iconic products of IKEA, maker of inexpensive home furnishings, whose vision is “to create a better life for the many,” is the LACK table, a 22-inch by 22-inch side table that sells for only $9.99.49

2. Stories A story is a narrative based on true events, which is repeated—and some- times embellished upon—to emphasize a particular value. Stories are oral histories that are told and retold by members about incidents in the organization’s history.

Example: Marc Benioff is the founder and CEO of cloud computing business Salesforce.com, a San Francisco company known for its great sense of social respon- sibility and generosity (and rated No. 1 on Fortune’s 2017 Best Companies to Work For list).50 Its spirit of philanthropy is embodied in a story called the 1-1-1 rule that embodies its commitment to giving 1 percent of its product, 1 percent of its equity earnings, and 1 percent of employee work hours back to the community. So far that has meant donating $160 million to charity, volunteering 2.1 million hours of employees’ time, and assisting 31,000 nonprofit organizations with free Salesforce technology.51

3. Heroes A hero is a person whose accomplishments embody the values of the orga- nization. IKEA employees are expected to work hard, inspired by an anecdote from their late Swedish founder, Invar Kamprad, in his 1976 “A Furniture Dealer’s Testament.” In that essay, he recounts how he was berated by his father for repeatedly failing to get out of bed to milk the cows on his family’s farm. Then one day Kamprad got an alarm clock. “‘Now by jiminy, I’m going to start a new life,’ he determined, setting the alarm for twenty to six and removing the ‘off button.’ ”52 In Kamprad’s obituary in 2018, The Economist noted, “Setbacks inspired him.”53

4. Rites and Rituals Rites and rituals are the activities and ceremonies, planned and unplanned, that celebrate important occasions and accomplishments in the organization’s life. Military units and sports teams have long known the value of ceremonies handing out decorations and awards, but many companies have rites and rituals as well.

Example: Employee-owners of New Belgium Brewery in Fort Collins, Colorado, which makes Fat Tire Ale, are given a cruiser bicycle during their first year. After five years, they get a free brewery-hopping trip to Belgium, and after 10 years, a four-week paid sabbatical. (The company boasts a 93 percent employment retention rate.) “It’s not just about making sure people get lots of perks,” says cofounder and former CEO Kim Jordan. “It’s about building a community.”54

5. Organizational Socialization Organizational socialization is defined as the pro- cess by which people learn the values, norms, and required behaviors that permit them to participate as members of an organization.55 Converting from outsider into organiza- tional insider may take weeks or even years and occurs in three phases, researcher Daniel Feldman suggests—before one is hired, when one is first taken on, and when one has been employed a while and is adjusting to the job.56

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The first phase (anticipatory socialization phase) occurs before one joins the organiza- tion, when a person learns—from career advisors, from web sources, from current employees—what the organization’s job needs and values are and how one’s own needs, values, and skills might fit in. The second phase (encounter phase) takes place when a person is first hired and comes to learn what the organization is really like and how to adjust his or her expectations. The company may help to advance this socialization process through various familiarization programs (known as “onboarding” programs). The third phase (change and acquisition phase) comes about once the employee under- stands his or her work role and now must master the necessary skills and tasks and learn to adjust to the work group’s values and norms. The company may advance this phase of socialization through goal setting, incentives, employee feedback, continued support, and ceremonies (“graduation”) that celebrate completion of the process.

Example: New hires at New York University are partnered with a buddy during their first two months “to help welcome employees and reaffirm their decision to join NYU” as well as to provide a reliable contact for speedy answers on work practices and organi- zational culture. Among other characteristics, “the buddy should have a positive out- look on his/her work and use that perspective to help build self-confidence and loyalty in the new employee. The buddy should lead by example.”57

The Importance of Culture Many people believe culture powerfully shapes an organization’s long-term success by enhancing its competitive advantage. A team of researchers tested this hypothesis with a meta-analysis (a statistical procedure combining data from multiple studies) of more than 38,000 organizational units—either organizations as a whole or departments in different organizations—and 616,000 individuals.58 The results are shown below. (See Figure 8.3.)

Positive work attitudes

Positive employee behavior

Customer satisfaction

Market share

Operational e�ciency

Product/service quality

Innovation

Financial performance

Financial growth

Clan Adhocracy Market Hierarchy

Moderate StrongWeakNot significant

V a

ri a

b le

s

Strength of relationship

FIGURE 8.3 What organizational benefits are associated with what organizational cultures? Source: Data taken from A. Y. Ou, C. Hartnell, A. Kinicki, E. Karam, and D. Choi, “Culture in Context: A Meta-Analysis of the Nomological Network of Organizational Culture.” Presentation as part of symposium Connecting Culture and Context: Insights from Organizational Culture Theory and Research at the 2016 National Academy of Management meeting in Anaheim, California.

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Results revealed that culture is positively associated with a variety of outcomes. Most relationships were of moderate strength, meaning they are important to today’s managers. Closer examination of Figure 8.3 leads to the following six conclusions:

■ An organization’s culture matters. The type of organizational culture can be a source of competitive advantage.

■ Employees have more positive work attitudes when working in organizations with clan cultures. Employees clearly prefer to work in organizations that value flex- ibility over stability and control, as well as those that are more concerned with satisfying the needs of employees than those of shareholders or customers.

■ Clan and market cultures are more likely to deliver higher customer satisfaction and market share. We suspect this result holds because the positive employee attitudes associated with clan cultures motivate employees to provide better customer service.

■ Operational outcomes, quality, and innovation are more strongly related to clan, adhocracy, and market cultures than to hierarchical ones. Managers should avoid the use of too many rules and procedures—hierarchical characteristics— when trying to improve these outcomes.

■ An organization’s financial performance (profit and revenue growth) is related to market and hierarchy culture. Clan and adhocracy cultures are not related to financial performance, so managers should not expect to see a direct increase in financial performance by encouraging these two types of culture. On the other hand, research suggests that developing market and hierarchical cultures can prompt higher financial performance.

■ Companies with market cultures tend to have more positive organizational out- comes. Managers are encouraged to make their cultures more market oriented.

What Does It Mean to “Fit”? Anticipating a Job Interview “What’s your favorite movie?” the job interviewer asks you. “Your favorite website?” “What’s the last book you read for fun?” “What makes you uncomfortable?”

These are the four most frequently asked interview questions used by hiring manag- ers, according to a survey involving 285,000 kinds of interview questions.59 For you as a job applicant, these questions might not seem to have much to do with your perfor- mance in previous jobs. But what the interviewer is trying to find out is how well you will fit in—what is called person–organization (PO) fit, which reflects the extent to which your personality and values match the climate and culture in an organization.60

A good fit of this kind is important because it is associated with more positive work attitudes and task performance, lower stress, and fewer expressions of intention to quit (“I’m gonna tell ’em, ‘They can take this job and . . .’”).61 How well an applicant will fit in with the institution’s organizational culture is considered a high priority by many interviewers. Indeed, more than 50 percent of the evaluators in one study considered “fit” to be the most important criterion of the interview process.62

How can you determine how well you might fit in before you go into a job interview? You should write down your strengths, weaknesses, and values—and then do the same for the organization you’re interviewing with, by researching it online and talking with current employees. You can then prepare questions to ask the interviewer about how well you might fit.63

Example: If being recognized for hard work is important to you, ask the interviewer how the company rewards performance. If the answer doesn’t show a strong link between performance and rewards (“Well, we don’t really have a policy on that”), you’ll probably have a low person–organization fit and won’t be happy working there. Incidentally, a positive corporate culture that engages and motivates employees will help a company’s bottom line, according to a study of car dealerships, but the reverse is not true—a company’s success isn’t enough to ensure a positive culture.64 ●

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8.3 The Process of Culture Change THE BIG PICTURE There are 12 ways a culture becomes established in an organization.

Changing organizational culture is essentially a teaching process—that is, a process in which members instruct each other about the organization’s preferred values, beliefs, expectations, and behaviors. The process is accomplished by using one or more of the following 12 mechanisms.65 These mechanisms represent levers that management pushes and pulls to create culture change. It’s very important for managers to consider using a combination of these changes levers in order to create a culture that is aligned with their organiza- tions’ strategy.

1. Formal Statements The first way to embed preferred culture is through the use of formal statements of organizational philosophy, mission, vision, and values, as well as materials used for recruiting, selecting, and socializing employees.

Example: Fashion website Polyvore has a distinct organizational culture embodied in the three statements posted on its website (1) “do a few things well,” (2) “delight the user,” and (3) “make an impact.”66 Walmart’s website promotes four basic values that represent the core of the retailer’s culture: (1) service to customers, (2) respect for the individual, (3) strive for excellence, and (4) act with integrity.67

2. Slogans and Sayings The desirable corporate culture can be expressed in language, slogans, sayings, and acronyms.

Example: CEO Mary Berner used two slogans to create culture change at Cumulus Media Inc., the second-largest broadcaster in the United States with more than 454 stations. The acronym HABU reflects the company’s focus on the “highest and best use” of resources. The slogan “The force” is short for “focused, responsible, collab- orative, and empowered.” To model support for these slogans, The Wall Street Journal reported that Berner “sold the corporate jet, consolidated duplicate internet- technology departments, and created a department to provide stations with market data and analytics on which to base local programming decisions.”68 What types of culture are reinforced by these slogans and changes?

3. Rites and Rituals As we mentioned earlier, rites and rituals represent the planned and unplanned activi- ties and ceremonies that are used to celebrate important events or achievements.

Example: OXO, an award-winning New York–based maker of office products and Good Grips brand kitchen tools, has adopted the universal design philosophy, meaning its products must be designed to be used by as many people as possible. In a ritual that

LO 8-3 Describe the process of culture change in an organization.

Mary Berner has been CEO of Cumulus since 2015. She turned the company around financially by changing its culture. ©Scott Gries/Getty Images

Creating culture change involves pushing and pulling change levers in a desired direction. It is very similar to pushing and pulling these levers on a control panel of a lifting mechanism. In both cases, individuals push levers in order to produce a desired outcome. ©Neramit Buakaew/ Shutterstock

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reinforces this philosophy, employees collect gloves lost on the street for a display in the company’s offices that’s meant to remind everyone of “the different hands our products need to comfortably fit.”69

4. Stories, Legends, and Myths A story is a narrative about an actual event that happened within the organization and that helps to symbolize its vision and values to employees.

Example: Nike’s reputation for innovation is ref lected in the often-told story of cofounder Bill Bowerman’s struggle to design a light running shoe that could grip an artificial surface well without spikes. Bowerman’s wife Barbara tells what hap- pened next: “We were making the waff les that morning and talking about [the track]. As one of the waff les came out, he said, ‘You know, by turning it upside down—where the waff le part would come in contact with the track—I think that might work.’ So he got up from the table and went tearing into his lab and got two cans of whatever it is you pour together to make the urethane, and poured them into the waff le iron.”70

5. Leader Reactions to Crises How top managers respond to critical incidents and organizational crises sends a clear cultural message.

Example: After three years of drought and lagging response by local politicians, the city of Cape Town, South Africa, with a population of almost 4 million people, faces the possibility of soon running out of water. Newly energized by the crisis, however, the governing party of the province has instituted tough restrictions on water use that have cut consumption by 60 percent and postponed Day Zero, the day the city is expected to have no water left. Mayor Ian Neilson urged citizens to con- tinue conserving water even if seasonal rains bring needed reserves to the city’s sup- ply. Mmusi Maimane, leader of the governing party, thanked residents for responding “magnificently.”71

6. Role Modeling, Training, and Coaching Many companies provide structured training to provide an in-depth introduction to their organizational values. Others build learning into their culture.

Example: River Island is a family-run fashion retailer with 350 stores in the United Kingdom, the Middle East, Asia, and Europe and six websites handling transactions in four different currencies. Its management recently evaluated the company’s perfor- mance feedback system and decided it needed to incorporate a larger role for continu- ous employee feedback and learning. “We have begun to prize learning,” says Nebel Crohurst, the company’s head of talent. “We now recognise the value in taking time to develop employees, role modeling and encouraging teams to continually develop their skills . . . If we’re able to show externally that our culture supports career development and that we put our people at the forefront of the way we operate, then we have huge competitive advantage.”72

7. Physical Design There is constant experimenting to find the best office layout that will encourage employee productivity and send a strong message about the culture.

Example: A recent Work Environment Survey by a Capital One team found that employees of all ages value natural light, inspiring and creative artwork, adjustable furniture, and space for collaboration. Acknowledgement of local culture is also

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important. In the Capital One Plano TX facility, a workspace dedicated to digital product demos and formal and informal meetings is called “The Garage” because it houses a classic Chevrolet and picket fence, along with real garage doors to divide the space.73

8. Rewards, Titles, Promotions, and Bonuses Rewards and status symbols are among the strongest ways to embed organizational culture.

Example: Change doesn’t always go according to plan. United Airlines had been giv- ing each eligible employee up to $300 per quarter when the company achieved the operational goals it had set. In early 2018, however, it announced a new system that would give out much larger prizes ranging all the way up to $40,000 in cash, as well as luxury cars and vacations, but to far fewer employees. Winners would be selected by lottery and would include one lucky winner of a $100,000 grand prize. The change angered employees, more than a thousand of whom signed an online petition in protest. Management quickly reversed itself and promised to reevaluate the program, though without committing to a timeline.74

9. Organizational Goals and Performance Criteria Many organizations establish organizational goals and criteria for recruiting, selecting, developing, promoting, dismissing, and retiring people, all of which reinforce the desired organizational culture.

Example: Netflix has a corporate culture firmly focused on the expectation that employees are adults who can achieve their goals without complicated rules. Vacations are unlimited and the expense policy con- sists of just five words: “Act in Netflix’s best interests.” But former Chief Talent Officer Patty McCord, who helped build the com- pany, says a great company needs to “elimi- nate the slackers, the laggards and the people who are just putting in his or her time.”75 The company’s website therefore promises “no bell curves or rankings or quotas such as ‘cut the bottom 10% every year,’ ” but it does say that “adequate per- formers will be given a generous severance package, so that we can find a star for that position.”76

10. Measurable and Controllable Activities An organization’s leaders can pay attention to, measure, and control a number of activities, processes, or outcomes that can foster a certain culture.

Example: Amazon, which has come under fire for putting too much pres- sure on its warehouse workers,77 recently patented a wristband that can vibrate to alert workers when they are not performing productively. Although it is not in use, the device can collect information about where workers are and what they are doing.78

The wow culture. The “wow” factor that encourages Zappos’s clan-based culture is partly created by encouraging employees to have fun at work. Is this a place you could stick with? ©Jared McMillen/Aurora Photos

These activity tracking devices are a great example of how measurement can alter someone’s behavior. ©Kelvin Wong/Shutterstock

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11. Organizational Structure The hierarchical structure found in most traditional organizations is more likely to reinforce a culture oriented toward control and authority compared with the f latter organization that eliminates management layers in favor of giving employees more power.

Example: Zappos recently adopted a radical experiment in organizational structure called holacracy, to encourage collaboration by eliminating workplace hierarchy—no titles and no bosses. Unfortunately, employees weren’t sure how to get things done any- more, which resulted in such confusion that the company’s 2015 turnover rate went from 20 percent to 30 percent.79 Since then, however, turnover has stabilized once again, and the company remains committed to its newly flattened structure.80

12. Organizational Systems and Procedures Companies are increasingly using electronic networks to increase collaboration among employees, to improve innovation, quality, and efficiency.

Example: A recent report by the McKinsey Global Institute revealed that 72 percent of the more than 4,000 large and small companies studied had adopted social tools like Slack, Yammer, Chatter, or Microsoft Teams to allow employees to communicate. Some explained that these innovative technologies were necessary for attracting younger workers.81

Organizational mergers entail the intergration of organizational systems and proce- dures across two or more organizations. This integration has important cultural impli- cations. The “I’m Glad . . .” feature discusses Casey Walters’ experience when his firm in the transporation industry merged with another company.

Casey Walters is a legal counsel in the transportation industry. His company was involved in the merging of two companies that had completely different cultures. Casey witnessed resistance to change when the new company management had to decide which culture would be embraced for the company moving forward.

Both companies belong to the same industry and offer the same services in the same area of the coun- try, but they are run in very different ways. One com- pany empowers its employees. The employees are asked to work toward a common goal, and manage- ment is willing to provide whatever resources needed to help them achieve the goal.

“On the other hand, the other company that was part of the merger said ‘Here are the tasks that I want you to fulfill,’ without sharing or collaborating with the employees about the end goal. It’s very much task-ori- ented,” said Casey.

Company management decided to transition the culture of the task-oriented company to the more empowered

approach. “I have found it very interesting to see the difference in folks going above and beyond in the company where they feel empowered, as though they have ownership over not only the tasks but the goal, and that they play a part in the organi- zation,” said Casey, “rather than just ticking off boxes of the tasks that they’ve been assigned with- out knowing the bigger picture and how they are contributing to the overall success of the organization.”

“I absolutely believe that this has been the right move for the company,” said Casey, “but it hasn’t come without growing pains and reluctance. With empowerment comes more responsibility.”

Many employees of the previously task-driven company were resistant to the change, but once they saw the benefits of the new culture of empowerment, they embraced it. For example, one process that was affected by the new culture was the process of responding to subpoenas. Before, within the task-oriented company, employees would respond to every subpoena simply to check items off the list. In the empowered

I’m Glad… …management embraced an empowering culture during a merger.

Casey Walters Courtesy Casey Walters

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Assessing Your Preferred Type of Organizational Culture This survey is designed to assess your preferred type of orga- nizational culture. Please be prepared to answer these ques- tions if your instructor has assigned Self-Assessment 8.2 in Connect.

1. In rank order, what are your preferred culture types? Are you surprised by the results?

2. Compute the gap between your preferred and actual culture types by subtracting your actual culture type

score (Self-Assessment 8.1) from your preferred type score (Self-Assessment 8.2). Where are the largest gaps?

3. Make a plan to improve your person–organization fit. Focusing on your two largest culture types, identify what is causing the gaps. You will find it helpful to look at the survey items that measure these types.

4. Now use the 12 embedding mechanisms just discussed and suggest at least two things you can do to improve your level of fit.

SELF-ASSESSMENT 8.2

Don’t Forget about Person–Organization Fit Now that we have described the four key types of organizational culture and the mecha- nisms managers can use to change culture, it’s time to reflect on your person– organization (PO) fit. Recall that PO fit reflects the extent to which your personality and values match the climate and culture in an organization. Your PO fit matters because it links to your work attitudes and performance.82

We have two activities for you to complete to measure your level of fit and see what you can do about it. The first is Self-Assessment 8.2, which measures your preference for the four types of culture in the CVF. The second is to answer the discussion ques- tions associated with this assessment. You will be asked to conduct a gap analysis between the culture for a current or past employer and your preferred culture type. You can use this gap to make a plan of action for improving your PO fit. ●

company, however, employees were expected to determine whether the subpoena had the power to compel disclosure rather than responding to every request addressed to the com- pany. In short, the new deliberate and mindful process allows for a decrease in response by more than 75 percent, which saves time and money.

“There was reluctance to switch to this new process despite the anecdotal evidence that this would make your life much

easier. But after we implemented it and addressed the employ- ees’ concerns, now they have a different pep in their step just based upon the fact that they are doing far less work,” said Casey.

While the process of merging into one unified culture is complicated and takes time, Casey believes it will benefit the company in the long run. Courtesy of Casey Walters

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8.4 Organizational Structure THE BIG PICTURE The organizational structure of the three types of organizations—for-profit, nonprofit, and mutual-benefit— may be expressed vertically or horizontally on an organization chart.

Once an organization’s vision and strategy have been determined, as we stated at the beginning of this chapter, the challenge for top managers is, first, to create a culture that will motivate its members to work together and, second, a structure that will coordinate their actions to achieve the organization’s strategic goals. Here let us begin to consider the second part—an organization’s structure.

In Chapter 1, we defined an organization as a group of people who work together to achieve some specific purpose. According to Chester I. Barnard’s classic definition, an organization is a system of consciously coordinated activities or forces of two or more people.83 By this wording, a crew of two coordinating their activities to operate a com- mercial tuna fishing boat is just as much an organization as tuna companies Bumble Bee and StarKist with their thousands of employees.

The Organization: Three Types As we stated in Chapter 1, there are three types of organizations classified according to the three different purposes for which they are formed:84

■ For-profit organizations. These are formed to make money, or profits, by offer- ing products or services.

■ Nonprofit organizations. These are formed to offer services to some clients, not to make a profit (examples: hospitals, colleges).

■ Mutual-benefit organizations. These are voluntary collectives whose purpose is to advance members’ interests (examples: unions, trade associations).

Clearly, you might have an occupation (such as auditor or police officer) that is equally employable in any one of these three sectors. As a manager, however, you

would be principally required to focus on different goals—making profits, delivering public services, or satisfying member needs—depending on the type of organization.

The Organization Chart Whatever the size or type of organization, it can be rep- resented in an organization chart. An organization chart is a box-and-lines illustration showing the formal lines of authority and the organization’s official positions or work specializations. This is the family-tree-like pattern of boxes and lines posted on workplace walls and given to new hires, such as the following for a hospital. (See Figure 8.4.)

Two kinds of information that organization charts reveal about organizational structure are (1) the vertical hierarchy of authority, who reports to whom, and (2) the horizontal specialization, who specializes in what work.

LO 8-4 Compare the structures of for-profit, nonprofit, and mutual-benefit organizations.

For-profit automakers are seeking growth by offering electric cars like this. They appeal to consumers who like cool technology, are environmentally conscious, or are frugal. There were 3.2 million electric cars on the global roadways. ©hans engbers/Alamy Stock photo

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The Vertical Hierarchy of Authority: Who Reports to Whom A glance up and down an organization chart shows the vertical hierarchy, the chain of com- mand. A formal vertical hierarchy also shows the official communication net- work—who talks to whom. In a simple two-person organization, the owner might communicate with just a secretary or an assistant. In a complex organization, the president talks principally to the vice presidents, who in turn talk to the assistant vice presidents, and so on.

The Horizontal Specialization: Who Specializes in What Work A glance to the left and right on the line of an organization chart shows the horizontal specialization, the different jobs or work specialization. The husband-and-wife partners in a two-person desktop-publishing firm might agree that one is the “outside person,” handling sales, client relations, and finances and the other is the “inside person,” handling production and research. A large firm might have vice presidents for each task—marketing, finance, and so on. ●

Director of Nutrition & Food

Services

Director of X-Ray &

Laboratory Services

Director of Admissions

Director of Pharmacy

Director of Personnel

Chief Physician

Director of Surgery

Director of Accounting

Director of Patient &

Public Relations

Executive Administrative

Director

Executive Medical Director

Board of Directors

Legal Counsel

Strategic Planning Advisor

President Cost-Containment

Sta�

Chief Executive O�cer

Director of Outpatient Services

FIGURE 8.4 Organization chart Example for a hospital.

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8.5 The Major Elements of an Organization THE BIG PICTURE Seven basic elements or features of an organization are described in this section.

Whether for-profit, nonprofit, or mutual-benefit, organizations have a number of ele- ments in common. We discuss four proposed by an organizational psychologist, and then describe three others that most authorities agree on.

Common Elements of Organizations: Four Proposed by Edgar Schein Organizational psychologist Edgar Schein proposed the four common elements of (1) common purpose, (2) coordinated effort, (3) division of labor, and (4) hierarchy of authority.85 Let’s consider these.

1. Common Purpose: The Means for Unifying Members An organization with- out purpose soon begins to drift and become disorganized. The common purpose unifies employees or members and gives everyone an understanding of the organization’s reason for being.

2. Coordinated Effort: Working Together for Common Purpose The com- mon purpose is realized through coordinated effort, the coordination of individual efforts into a group or organizationwide effort. Although it’s true that individuals can make a difference, they cannot do everything by themselves.

3. Division of Labor: Work Specialization for Greater Efficiency Division of labor, also known as work specialization, is the arrangement of having discrete parts of a task done by different people. Even a two-person crew operating a fishing boat probably has some work specialization—one steers the boat and the other works the nets. With division of labor, an organization can parcel out the entire complex work effort to be performed by specialists, resulting in greater efficiency.

4. Hierarchy of Authority: The Chain of Command The hierarchy of authority, or chain of command, is a control mechanism for making sure the right people do the right things at the right time. If coordinated effort is to be achieved, some people—namely, managers—need to have more authority, or the right to direct the work of others. Even in member-owned organizations, some people have more authority than others, although their peers may have granted it to them.

In addition, authority is most effective when arranged in a hierarchy. Without tiers or ranks of authority, a lone manager would have to confer with everyone in his or her domain, making it difficult to get things done. Even in newer organizations that flatten the hierarchy, there still exists more than one level of management.86 A flat organization is defined as one with an organizational structure with few or no levels of middle manage- ment between top managers and those reporting to them.

Finally, a principle stressed by early management scholars was that of unity of com- mand, in which an employee should report to no more than one manager in order to avoid conflicting priorities and demands. Today, however, with advances in computer technol- ogy and networks, there are circumstances in which it makes sense for a person to

LO 8-5 Identify the major elements of an organization.

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communicate with more than one manager (as is true, for instance, with the organiza- tional structure known as the matrix structure, as we’ll describe).

Common Elements of Organizations: Three More That Most Authorities Agree On To Schein’s four common elements we add three others that most authorities agree on: (5) span of control, (6) authority, responsibility, and delegation, and (7) centralization versus decentralization of authority.

5. Span of Control: Narrow (or Tall) versus Wide (or Flat) The span of control, or span of management, refers to the number of people reporting directly to a given manager.87 There are two kinds of spans of control: narrow (or tall) and wide (or flat).

Narrow Span of Control This means a manager has a limited number of people reporting—three vice presidents reporting to a president, for example, instead of nine vice presidents. An organization is said to be tall when there are many levels with nar- row spans of control.

Wide Span of Control This means a manager has several people reporting—a first- line supervisor may have 40 or more subordinates, if little hands-on supervision is required, as is the case in some assembly-line workplaces. An organization is said to be flat when there are only a few levels with wide spans of control.

Historically, spans of about 7 to 10 subordinates were considered best, but there is no consensus as to what is ideal. In general, when managers must be closely involved with their subordinates, as when the management duties are complex, they are advised to have a narrow span of control. This is why presidents tend to have only a handful of vice presidents reporting to them. By contrast, first-line supervisors directing subordi- nates with similar work tasks may have a wide span of control.

Today’s emphasis on lean management staffs and more efficiency means that spans of control need to be as wide as possible while still providing adequate supervision. Wider spans also fit in with the trend toward allowing workers greater autonomy in decision making. Research suggests that, when aided by technology to communicate and monitor, a manager can oversee 30 employees or more.88

6. Authority, Responsibility, and Delegation: Line versus Staff Positions Male sea lions have to battle other males to attain authority over the herd. In human organizations, however, authority is related to the management authority in the organi- zation; it has nothing to do with the manager’s fighting ability or personal characteris- tics. With authority goes accountability, responsibility, and the ability to delegate one’s authority.

Accountability Authority refers to the rights inherent in a managerial position to make decisions, give orders, and utilize resources. (Authority is distinguished from power, which, as we discuss in Chapter 14, is the extent to which a person is able to influence others so they respond to orders.) In the military, of course, orders are given with the expectation that they will be obeyed, disobedience making one liable to a dishonorable discharge or imprisonment. In civilian organizations, disobeying orders may lead to less dire consequences (demotion or firing), but subordinates are still expected to accept that a higher-level manager has a legitimate right to issue orders.

Authority means accountability—managers must report and justify work results to the managers above them. Being accountable means you have the responsibility for per- forming assigned tasks.89

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Responsibility With more authority comes more responsibility. Responsibility is the obligation you have to perform the tasks assigned to you. A car assembly-line worker has less authority and responsibility than a manager of the assembly line. Whereas the line worker is generally responsible for one specific task, such as installing a windshield, the manager has much greater responsibilities.

It is a sign of faulty job design when managers are given too much authority and not enough responsibility, in which case they may become abusive to subordinates in exert- ing authority.90 Conversely, managers may not be given enough authority, so the job becomes difficult.

Delegation Delegation is the process of assigning managerial authority and responsi- bility to managers and employees lower in the hierarchy. To be more efficient, most man- agers are expected to delegate as much of their work as possible. However, many bosses get hung up on perfection, failing to realize that delegation is a necessary part of managing.

A smart rule is the “70% Rule”: If the person you would like to perform the task is able to do it at least 70 percent as well as you can, you should delegate it. “Is it frustrat- ing that the task won’t be done with the same degree of perfection or perceived perfec- tion that [you] could achieve?” asks one writer. “Sure! But let go of perfection.”91

All managers must learn how to delegate—to assign man- agement authority and responsibilities to people lower in the company hierarchy. Delegation also helps you avoid ex- haustion from overwork. If, as a manager, you find yourself often behind, always taking work home, doing your subordi- nates’ work for them, and constantly having employees seeking your approval before they can act, you’re clearly not delegating well. If you lack even the time to train some- one to take over tasks for you, reprioritize some tasks and find the time.92

How can you delegate more effectively? It’s fine to start small. Here are some guidelines.93

Delegate Routine Tasks and Technical Matters Always try to delegate routine tasks and routine paperwork, keeping only the tasks that call for your input. When there are technical mat- ters, let the experts handle them.

Delegate Tasks That Help Your Subordinates Grow Let your employees solve their own problems whenever possible. Let them try new things so they will grow in their jobs. Your success depends on theirs, so give them room to achieve.

Match Delegated Tasks to Your Subordinates’ Skills and Abilities While recognizing that delegation involves some risk, make your assignments appropriate to the training, tal- ent, skills, and motivation of your employees. Begin by asking your team members whether they can handle more work, and in what areas they would like to improve their skills or up- grade their responsibilities. Be sure you’ve given them the

tools and clarity they need to get the job done, stay available for help and questions, but let your subordinates do what is now their job.94

Don’t Delegate Confidential or Human Resource Matters Tasks that are confidential or that involve the evalua- tion, discipline, or counseling of subordinates should never be handed off to someone else.

Don’t Delegate Emergencies By definition, an emergency is a crisis for which there is little time for solution and a high need for coordination within the organization. You should handle this yourself.

Don’t Delegate Special Tasks That Your Boss Asked You to Do—Unless You Have His or Her Permission If your su- pervisor entrusts you with a special assignment, such as at- tending a particular meeting, don’t delegate it unless you have permission to do so.

YOUR CALL Managers fail to delegate for many reasons: An excessive need for perfection. A belief that only they should handle “special,” “difficult,” or “unusual” problems or clients. A wish to keep the parts of a job that are fun. A fear that oth- ers will think them lazy. A reluctance to let employees lower down in the hierarchy take risks. A worry that subordinates won’t deliver. A concern that the subordinates will do a bet- ter job and show them up. Are any of these reasons that you might need to improve your skill at delegating? What are some others?

How to Delegate EffectivelyPRACTICAL ACTION

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Regarding authority and responsibility, the organization chart distinguishes between two positions, line and staff. (Refer back to Figure 8.4.)

Line Position Line managers have authority to make decisions and usually have people reporting to them. Examples are the president, the vice presidents, the director of per- sonnel, and the head of accounting. Line positions are indicated on the organization chart by a solid line (usually a vertical line).

Staff Position Staff personnel have authority functions; they provide advice, recom- mendations, and research to line managers (examples: specialists such as legal counsels and special advisers for mergers and acquisitions or strategic planning). Staff positions are indicated on the organization chart by a dotted line (usually a horizontal line).

7. Centralization versus Decentralization of Authority Who makes the impor- tant decisions in an organization? That is what the question of centralization versus decentralization of authority is concerned with.

Centralized Authority With centralized authority, important decisions are made by higher-level managers. Very small companies tend to be the most centralized, although nearly all organizations have at least some authority concentrated at the top of the hier- archy. Kmart and McDonald’s are examples of companies using this kind of authority.

An advantage in using centralized authority is that there is less duplication of work, because fewer employees perform the same task; rather, the task is often performed by a department of specialists. Another advantage of centralization is that procedures are uniform and thus easier to control; all purchasing, for example, may have to be put out to competitive bids.

Decentralized Authority With decentralized authority, important decisions are made by middle-level and supervisory-level managers. Here, obviously, power has been dele- gated throughout the organization. Among the companies using decentralized authority are General Motors and Harley-Davidson.

An advantage in having decentralized authority is that managers are encouraged to solve their own problems rather than to buck the decision to a higher level. In addition, decisions are made more quickly, which increases the organization’s flexibility and efficiency. ●

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8.6 Basic Types of Organizational Structures THE BIG PICTURE Eight types of organizational structures are simple, functional, divisional, matrix, horizontal, hollow, modular, and virtual.

As we’ll see when we discuss job analysis in Chapter 9, companies create organizational structures in order to help employees do their jobs better. Because of this focus, struc- ture and culture are often intertwined. When Google cofounder (with Sergey Brin) and CEO Larry Page was asked in 2011 about the biggest threat to his company, Page answered in a single word: “Google.”

Now 20 years old, Google started out as a freewheeling company in which, as we mentioned, engineers were given time to experiment on their own projects, producing the famed Google’s culture of innovation. The problem, however, was that the company grew so quickly (it’s now more than 88,000 people) that decision making had become molasses-like. For instance, the two cofounders, who had been trained as engineers, had hired a professional manager, Eric Schmidt, to be CEO, but the three of them “had to agree before anything could be done,” says one report. “The unwieldy management and glacial pace of decision making were particularly noticeable in [Silicon Valley], where start-ups overtake behemoths in months.”95

In 2015, Google revamped its corporate structure into a conglomerate called Alphabet Inc., with individual operations headed by separate chief executives. The word conglomerate (defined as a large company that is doing business in different, quite unre- lated areas—General Electric and Berkshire Hathaway are two examples) is unpopular with most companies today because critics think it spreads top management focus too widely.96 However, for the Google founders, the purpose of Alphabet was not only to streamline the company’s structure and decision-making processes, but also to bring more transparency into the company’s operations to satisfy investors who, as one edito- rial explained it, “admired its cash-rich search businesses but complained that its other sidelines are hard to measure.”97 The reorganization separated the collection of tradi- tional businesses most associated with Google—such as Search, Android, YouTube, and Google Maps—from more speculative “moonshot” ventures such as Calico (life exten- sion), Google X (self-driving cars), Nest (smart-home devices), and Sidewalk (city infrastructure).98

Organizational design is concerned with designing the optimal structures of account- ability and responsibility that an organization uses to execute its strategies. We can cate- gorize organizational designs as three types: (1) traditional designs, (2) horizontal designs, and (3) designs that open boundaries between organizations.99

1. Traditional Designs: Simple, Functional, Divisional, and Matrix Structures Traditional organizational designs tend to favor structures that rely on a vertical man- agement hierarchy, with clear departmental boundaries and reporting arrangements, as follows.

The Simple Structure: For the Small Firm The first organizational form is the simple structure. This is the form often found in a firm’s very early, entrepreneurial stages, when the organization is apt to reflect the desires and personality of the owner or founder. An organization with a simple structure has authority centralized in a single person, a flat hierarchy, few rules, and low work specialization. (See Figure 8.5.)

LO 8-6 Describe the eight organizational structures.

Administrative Assistant

Owner

FIGURE 8.5 Simple structure: An example There is only one hierarchical level of management beneath the owner.

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Hundreds of thousands of organizations are arranged according to a simple structure— for instance, small mom-and-pop firms running landscaping, construction, insurance sales, and similar businesses. Examples: Both Hewlett-Packard and Apple Computer began as two-man garage start-ups that later became large.

The Functional Structure: Grouping by Similar Work Specialties The sec- ond organizational form is the functional structure. In a functional structure, people with similar occupational specialties are put together in formal groups. This is a quite commonplace structure, seen in all kinds of organizations, for-profit and nonprofit. (See Figure 8.6.)

Examples: A manufacturing firm will often group people with similar work skills in a Marketing Department, others in a Production Department, others in Finance, and so on. A nonprofit educational institution might group employees according to work spe- cialty under Faculty, Admissions, Maintenance, and so forth.

The Divisional Structure: Grouping by Similarity of Purpose The third organi- zational form is the divisional structure. In a divisional structure, people with diverse occupational specialties are put together in formal groups by similar products or services, customers or clients, or geographic regions. (See Figure 8.7.)

Product Divisions: Grouping by Similar Products or Services Product divisions group activities around similar products or services. Examples: The media giant Time Warner has different divisions for magazines, movies, recordings, cable television, and so on. The Warner Bros. part of the empire alone has divisions spanning movies and television, a broadcast network, retail stores, theaters, amusement parks, and music.

Customer Divisions: Grouping by Common Customers or Clients Customer divisions tend to group activities around common customers or clients. Examples: Ford Motor Co.

Vice President,

Human Resources

Vice President, Production

Vice President, Marketing

Structure for a business

Structure for a hospital

Vice President, Finance

President

Director of Nutrition & Food

Services

Director of Outpatient Services

Chief of Medical Services

Director of Administrative

Services

Chief Administrator

FIGURE 8.6 Functional structure: Two examples This shows the functional structure for a business and for a hospital.

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has separate divisions for passenger-car dealers, for large trucking customers, and for farm products customers. A savings and loan might be structured with divisions for making con- sumer loans, mortgage loans, business loans, and agricultural loans.

Geographic Divisions: Grouping by Regional Location Geographic divisions group activities around defined regional locations. Example: This arrangement is frequently used by government agencies. The Federal Reserve Bank, for instance, has 12 separate districts around the United States. The Internal Revenue Service also has several districts.

The Matrix Structure: A Grid of Functional and Divisional for Two Chains of Command The fourth organizational form is the matrix structure. In a matrix struc- ture, an organization combines functional and divisional chains of command in a grid so that there are two command structures—vertical and horizontal. The functional structure usually doesn’t change—it is the organization’s normal departments or divisions, such as Finance, Marketing, Production, and Research & Development. The divisional struc- ture may vary—as by product, brand, customer, or geographic region. (See Figure 8.8.)

Internet Products Division

Magazine & Book Division

Motion Pictures & Television Division

Customer divisional structure

Product divisional structure

Geographic divisional structure

Music Division

Agricultural Loans

Business Loans

Consumer Loans

Mortgage Loans

President

Eastern Region

Southern Region

Western Region

Northern Region

President

President

FIGURE 8.7 Divisional structure: Three examples This shows product, customer, and geographic divisions.

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A hypothetical example, using Ford Motor Co.: The functional structure might be the departments of Engineering, Finance, Production, and Marketing, each headed by a vice president. Thus, the reporting arrangement is vertical. The divisional structure might be by product (the new models of Taurus, Mustang, Explorer, and Expedition, for example), each headed by a project manager. This reporting arrangement is horizontal. Thus, a marketing person, say, would report to both the vice president of marketing and the project manager for the Ford Mustang. Indeed, Ford Motor Co. used the matrix approach to create the Taurus and a newer version of the Mustang.

2. The Horizontal Design: Eliminating Functional Barriers to Solve Problems The second organizational design is the horizontal design. In a horizontal design, also called a team-based design, teams or workgroups, either temporary or permanent, are used to improve collaboration and work on shared tasks by breaking down internal boundaries. For instance, when managers from different functional divisions are brought together in teams—known as cross-functional teams—to solve particular problems, the barriers between the divisions break down. The focus on narrow divisional interests yields to a common interest in solving the problems that brought them together. Yet team members still have their full-time functional work responsibilities and often still formally report to their own managers above them in the functional-division hierarchy. (See Figure 8.9.)

Vice President, Marketing

Vice President, Production

Vice President,

Engineering

Project Manager,

Taurus

Project structure

Functional structure

Vice President, Finance

President

Project Manager, Mustang

Project Manager, Explorer

Project Manager,

Expedition

Subordinate reports to both Vice President of Marketing (above) AND to Project Manager for Mustang (left)

FIGURE 8.8 Matrix structure An example of an arrangement that Ford might use.

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Functional structure

Project teams

Project team members

Vice President, Marketing

Vice President,

Engineering

Vice President,

Research & Development

Vice President,

Design

Product Team Manager,

Manufacturing, Light Trucks

Product Team Manager,

Manufacturing, Sedans

Product Team Manager,

Manufacturing, Sports Cars

President

FIGURE 8.9 Horizontal design This shows a mix of functional (vertical) and project-team (horizontal) arrangements.

EXAMPLE Use of a Horizontal Design: Whole Foods Market

Upscale natural and organic-food grocery Whole Foods Market, recently purchased by Amazon, started out in 1980 as one store in Austin, Texas, and today has revenues of $15.7 billion and 477 stores in North America and the United Kingdom.100 It remained one of Fortune’s “100 Best Companies to Work For” every year for 17 years (most recently as No. 75 in 2016).101 Its management strategy is based not on hierarchy, but on autonomous profit centers of self- managed teams.

Decentralizing by Empowering Small Teams One of Whole Foods’s core operating principles is that all work is teamwork. Thus, each store is organized into roughly eight self-managed teams, each with a designated team leader. The leaders in each store also operate as a team, as do the store leaders in each region, and the directors of the company’s 11 regions operate as a team.

At the individual-store level, compensation is tied to team rather than individual performance, and performance measure- ments and individual pay schedules are open to all. Each team has the mission of improving the food for which it is responsi- ble; is given wide flexibility in how it manages its responsibili- ties, hires and fires its members, and stocks its shelves; and is given a lot of power in how it responds to the changing tastes of local consumers.

A Steady Diet of Growth Whole Foods employees are given both the freedom to do the right thing for customers and the incentive to do the right thing for profits. The financial results of this business model are that Whole Foods is the most profitable food retailer in the United Sates, when measured by profit per square foot.102

Changes under Amazon So far it seems that Amazon is bringing mostly operational changes to Whole Foods, such as selectively

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3. Designs That Open Boundaries between Organizations: Hollow, Modular, and Virtual Structures The opposite of a bureaucracy, with its numerous barriers and divisions, a boundaryless organization is a fluid, highly adaptive organization whose members, linked by information technology, come together to collaborate on common tasks. The collaborators may include not only co-workers but also suppliers, customers, and even competitors. This means that the form of the business is ever-changing, and business relationships are informal.104

Three types of structures in this class of organizational design are hollow, modular, and virtual structures.

The Hollow Structure: Operating with a Central Core and Outsourcing Func- tions to Outside Vendors In the hollow structure, often called the network struc- ture, the organization has a central core of key functions and outsources other functions to vendors who can do them cheaper or faster. (See Figure 8.10.) A company with a hollow structure might retain such important core processes as design or marketing and out- source most other processes, such as human resources, warehousing, or distribution, thereby seeming to “hollow out” the organization.105

cutting prices, testing an online ordering service with same-day delivery, allowing pick-up and return of Amazon orders in certain stores, and extending discounts and other benefits to Whole Foods shoppers who are Amazon Prime subscribers. The com- pany has also sold Amazon products like the Echo and Kindle in pop-up stores staffed by Amazon employees at some Whole Foods locations. After the acquisition, Whole Foods’ sales began by growing at a faster rate than before, and the grocery chain plans to hire more workers. But unless Amazon makes structural changes, it may not need to add more layers in the process.103

YOUR CALL In designing new products, the horizontal design team approach, known as concurrent engineering or integrated product development, has been found to speed up design because all the specialists meet at once, instead of sepa- rately doing their own thing, then handing off the result to the next group of specialists. Why do you think a horizontal design would be better in a retail business such as groceries?

Design studio

Sweden

Components assembly

Mexico, Asia

Accounting & finance

USA

Core of personal computer company

USA

Engineering company

Japan

Distribution company

Canada

FIGURE 8.10 Hollow structure This is an example of a personal computer company that outsources noncore processes to vendors.

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A firm with a hollow structure might operate with extensive, even worldwide operations, yet its basic core could remain small, thus keeping payrolls and overhead down. The glue that holds everything together is information tech- nology, along with strategic alliances and contractual arrangements with sup- plier companies. An example of a hollow structure is EndoStim, the medical device start-up we described earlier.

The Modular Structure: Outsourc- ing Pieces of a Product to Outside Firms The modular structure differs from the hollow structure in that it is ori- ented around outsourcing certain pieces of a product rather than outsourcing cer- tain processes (such as human resources or warehousing) of an organization. In a modular structure, a firm assembles prod-

uct chunks, or modules, provided by outside contractors. One article compares this form of organization to “a collection of Lego bricks that can snap together.”

An example of the modular structure is the massive 787 Dreamliner project, in which Boeing contracted with many suppliers, each responsible for one component or assem- bly, which were then integrated to make the aircraft. Another example is an eight- passenger business jet, the Continental, made by Bombardier (pronounced “bom-bar-dee-ay”) of Wichita, Kansas. The Continental is designed in a dozen large modules, which are built in various places around the world. The cockpit and forward fuselage are built by Bombardier Montreal. The center section is built in Belfast, the wing by Mitsubishi in Japan, the stabilizers and rear fuselage by Aerospace Industrial Development in Taiwan, the landing gear by Messier-Dowty in Canada, and the tailcone by Hawker de Havilland in Australia. The engines are provided by General Electric and the avionics gear by Rockwell Collins, both companies in the United States. The 12 modules are shipped to Wichita, where the parts are snapped together in just four days.106

The Virtual Structure: An Internet-Connected Partner for a Temporary Proj- ect “Strip away the highfalutin’ talk,” says one industry observer, “and at bottom the Internet is a tool that dramatically lowers the cost of communication. That means it can radically alter any industry or activity that depends heavily on the flow of informa- tion.”107 One consequence of this is the virtual structure, an organization whose mem- bers are geographically apart, usually working with e-mail and other forms of information technology, yet which generally appears to customers as a single, unified organization with a real physical location.108

An example is web-services company Automattic Inc., which has a San Francisco office, but it’s only for occasional use. Its real offices are the homes of its 123 employ- ees working in 26 countries, 94 cities, and 28 U.S. states. Although occasionally employ- ees hop on a plane and meet face to face, they mainly transmit messages via text-based internal blogs or, when misunderstandings occur, talk on the phone. With a virtual structure, companies can “tap into a wider talent pool not limited by geography,” says one report. “Firms can also save money on real estate, though sizable travel budgets may partly offset that.”109 ●

Modular structure. The center section of Bombardier’s eight- passenger Continental business jet is built in Ireland and is shipped to Wichita, Kansas, where it is assembled with 12 other major components in just four days. ©epa european presspoto agency b.v./Alamy Stock Photo

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8.7 Contingency Design: Factors in Creating the Best Structure

THE BIG PICTURE Three factors that should be considered when determining the best organizational culture involve whether an organization’s environment is mechanistic or organic, whether its environment stresses differentiation or integration, and how its strategy can affect its structure.

What is the optimal size for an organization? How big is too big? There is no one best form of structure for an organization. The choice of the best

structure depends on a variety of contingency factors and internal organizational char- acteristics.110 For example, the maker of Legos, Lego AS, is changing its structure because the current one “was created to cope with double-digit sales growth, but the company says it now has too many layers and overlapping business functions.” Management feels this structure makes “it tougher to implement marketing strategies, slower to react to trends and disconnected from retailers.”111

This section discusses how companies can more effectively structure themselves by using the concept of contingency organization design. According to the contingency approach to organization design, organizations are more effective when they are struc- tured to fit the demands of the situation, and when the structure is aligned with the strate- gies and internal actions of the organization.

Three Factors to Be Considered in Designing an Organization’s Structure When managers are considering what organizational arrangements to choose from, such factors as stage of development are among the factors, or contingencies, they must consider. Recall from Chapter 2 that the contingency approach to management empha- sizes that a manager’s approach should vary according to—that is, be contingent on—the individual and environmental situation. Thus, the manager following the contingency approach simply asks, “What method is the best to use under these particular circumstances?”

Managers taking a contingency approach must consider the following factors in designing the best kind of structure for their particular organization at that particular time:

1. Environment—mechanistic versus organic.

2. Environment—differentiation versus integration.

3. Link between strategy, culture, and structure.

1. The Environment: Mechanistic versus Organic Organizations—the Burns and Stalker Model Making beds—how hard could it be?

Actually, a hotel housecleaner may be expected to whip not just beds but entire rooms, 16–30 of them, into spick-and-span shape dur- ing an eight-hour shift. Here every job is broken down into the small- est of steps, with vacuuming, dusting, mopping, making beds, and so

LO 8-7 Identify the factors that affect the design of an organization’s structure.

Could anyone do this? Hotel housekeepers, following the model of a mechanistic organization, are supposed to be able to make beds in no more than 3 minutes and ready an entire room within 24 minutes. The tasks are physically demanding, and the staff must be taught how to bend properly to make the work easier on the body. If you had this job, what would you do to vary the routine to avoid monotony—or would that sacrifice speed? ©Simon Dawson/Bloomberg/Getty Images

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on expected to take about 20–24 minutes per room, according to time-motion studies. Making a neatly tucked bed should take no more than 3 minutes.112 Marriott allows 30 minutes for tidying up a room and has developed a 66-step manual with very specific directions (“Wipe the nightstand’s glass top with a blue rag, using the blue bottle. Wipe the phone and clock”).113

Much of this kind of mundane hotel work exemplifies what British behavioral scien- tists Tom Burns and G. M. Stalker call a mechanistic organization, as opposed to an organic organization.114 (See Table 8.2.)

Mechanistic Organizations: When Rigidity and Uni- formit y Work Best In a mechanistic organization, authority is centralized, tasks and rules are clearly specified, and employees are closely supervised. Mechanistic organiza- tions, then, are bureaucratic, with rigid rules and top-down communication. This kind of structure is effective in cer- tain aspects of hotel work because the market demands uni- form product quality and cleanliness.

In general, mechanistic design works best when an orga- nization is operating in a stable environment. Yet new com- panies that have gone through a rough-and-tumble start-up period may decide to change their structures so that they are more mechanistic, with clear lines of authority.

Organic Organizations: When Looseness and Flex- ibility Work Best In an organic organization, authority is decentralized, there are fewer rules and procedures, and  networks of employees are encouraged to cooperate and respond quickly to unexpected tasks. Tom Peters and Robert Waterman called this kind of organization a “loose” structure.115

Organic organizations are sometimes termed “adhocracies” because they operate on an ad hoc basis, improvising as they go along. As you might expect, information-tech- nology companies favor the organic arrangement because they constantly have to adjust to technological change. Companies that need to respond to fast-changing consumer tastes also favor organic arrangements.

Etsy, the quirky online craft marketplace, had been growing rapidly for a few years, adding staff and upgrading its trendy Brooklyn headquarters with garden walls and spaces reserved for yoga and meditation. The company increased employee sala- ries and offered generous benefits and perks, while maintaining a strong reputation that attracted heavy traffic to its website. In April 2015, it issued its initial public offering (IPO). But Etsy was spending as much as 24 percent of its revenue on gen- eral and administrative expenses (compared to, say, 10 percent at eBay) and it was losing money. In 2016, the board of directors announced a large layoff and replaced the CEO. The company changed its definition of “handmade,” and its new CEO, Josh Silverman, simplified its focus from 15 measures to “the one metric that mat- ters”: gross merchandise sales. Some employees wonder whether the company’s original idealism, which one investor said “does translate into growth,” is being replaced by an imperative to simply sell merchandise. In other words, will its once organic organization become too mechanized for the company to retain its unortho- dox, individualistic, and sometimes emotional culture? Time will tell. The company has given up its coveted status as a certified B Corp (granted by the nonprofit B Lab), but sales, revenues, and share price were all up dramatically in the fourth quarter of 2017. “We’re getting a lot more done,” said Silverman. “There’s a lot more focus, a lot more urgency.”116

TABLE 8.2 Mechanistic versus Organic Organizations

MECHANISTIC ORGANIZATIONS

ORGANIC ORGANIZATIONS

Centralized hierarchy of authority

Decentralized hierarchy of authority

Many rules and procedures

Few rules and procedures

Specialized tasks Shared tasks

Formalized communication

Informal communication

Few teams or task forces

Many teams or task forces

Narrow span of control, taller structures

Wider span of control, flatter structures

Organizational Culture, Structure, and Design CHAPTER 8 313

Assessing Your Organizational Structure Preference This survey is designed to assess your preferred type of organi- zational structure. Please be prepared to answer these questions if your instructor has assigned Self-Assessment 8.3 in Connect.

SELF-ASSESSMENT 8.3

1. Do you prefer a more mechanistic or organic structure? What do you think is the cause for this preference?

2. If you were interviewing for a job, what questions might you ask to determine if the company is more mechanistic or organic?

2. The Environment: Differentiation versus Integration—the Lawrence and Lorsch Model Burns and Stalker’s ideas were extended in the United States by Harvard University researchers Paul R. Lawrence and Jay W. Lorsch.117 Instead of a mechanistic–organic dimension, however, they proposed a differentiation–integration dimension—forces that impelled the parts of an organization to move apart or to come together. The stability of the environment confronting the parts of the organization, according to Lawrence and Lorsch, determines the degree of differentiation or integration that is appropriate.

Differentiation: When Forces Push the Organization Apart Differentiation is the tendency of the parts of an organization to disperse and fragment. The more subunits into which an organization breaks down, the more highly differentiated it is.

This impulse toward dispersal arises because of technical specialization and division of labor. As a result, specialists behave in specific, delimited ways, without coordinating with other parts of the organization. For example, a company producing dental floss, deodorants, and other personal-care products might have different product divisions, each with its own production facility and sales staff—a quite differentiated organization.

Integration: When Forces Pull the Organization Together Integration is the tendency of the parts of an organization to draw together to achieve a common purpose. In a highly integrated organization, the specialists work together to achieve a common goal. The means for achieving this are a formal chain of command, standardization of rules and procedures, and use of cross-functional teams and computer networks so that there is frequent communication and coordination of the parts.

3. Linking Strategy, Culture, and Structure We began this chapter by discussing why it makes sense that a company’s organizational culture and organizational structure should be aligned with its vision and strategies. Thus, if the managers of an organization change its strategy, as gloStream did when it decided to add lots more people and put them under one roof instead of in a virtual network, they need to change the organization’s culture and structure to support that strategy. Indeed, companies often begin by offering a single product or product line that requires only a simple structure, but as they grow and their strategies become more ambitious and elabo- rate, the culture and structure need to change to support those strategies.118

All the organizational cultures and structures described in this chapter are used today because all of them have advantages that make them appropriate for some cases and disad- vantages that make them not useful for others. For example, the clear roles and strict hierar- chy of an extremely mechanistic organization are clearly suitable in a system valuing careful routines and checks and balances, such as a nuclear power plant. A fast-moving start-up drawing on sources of expertise throughout the world may benefit from a more flexible cul- ture and organic structure that lowers boundaries between functions and organizations. ●

314 PART 4 Organizing

8.8 Career Corner: Managing Your Career Readiness

Organizational culture and structure are important aspects of the internal context found in every organiza- tion. Recall from Chapter 4 that an organization’s internal context represents the situational or environmental characteristics that influence employees’ behavior.119 Understanding the internal context of your organiza- tion helps you to fit in and display organizationally preferred behaviors, ultimately leading to higher job satis- faction, performance, and greater chances of promotability.120 This section thus focuses on improving your ability to assess an organization’s internal context.

We recommend an approach that uses two key career readiness competencies from the model shown below: understanding the business and personal adaptability.

LO 8-8 Describe how to use the career readiness competencies of understanding the business and personal adaptability to assess an organization’s internal context.

FIGURE 8.11 Model of career readiness ©2018 Kinicki and Associates, Inc.

Career readiness

Knowledge (K)

Soft skills (S)

Career outcomes

Attitudes (A)

Other characteristics

(O)

Understanding the Business and Where You “Fit” In We are focusing on understanding the business and your level of fit after being hired. We recommend two steps for determining where you fit in a specific context and how you can adapt.121

Step 1: Assess Where and How You Fit in the Context. Use a current or past job to answer the following questions:

■ What is the mission or purpose of my work unit? ■ How does this work unit support corporate strategy, and what is at stake if we

fail to achieve our goals? ■ How long have my colleagues worked here and what is their background? ■ What are the norms or expected ways of getting things done around here?

What happens when someone violates one of these norms? ■ Why did I take this job and what are my career expectations? ■ What is my role in relationship to other roles in my work unit? ■ How do I contribute to achievement of corporate strategies?

Organizational Culture, Structure, and Design CHAPTER 8 315

Next, brainstorm answers to the following questions. If you don’t know the answers, seek input from colleagues or your boss.

■ Where do I fit within the organization’s structure? (It’s important to under- stand reporting relationships across management levels.)

■ What are the rules governing what we do and how we do it in this work unit? What is my view of these rules?

■ What values define the culture? Are my values consistent with the organiza- tion’s values?

■ What are the characteristics of people in leadership roles? Do I like and admire these characteristics?

Step 2: How Can You Effectively Adapt? Answering the following questions will give you a plan for adapting to the current internal context.

■ Based on my assessment of the organization’s structure, how can I adapt to this context?

■ Based on my assessment of the rules governing behavior, how can I adapt to this environment?

■ Which of your values are consistent and inconsistent with the values of this organization? Am I willing to adapt? How might I do this?

■ How might I adapt to the type of leadership in this organization?

Becoming More Adaptable Personal adaptability is defined as the ability and willingness to adapt to changing situations. It represents an “other characteristic” in our model of career readiness that contributes to your performance and success because it allows you to remain productive during times of organizational change.122 Try the following suggestions to increase your level of adaptability.

■ Focus on Being Optimistic. Optimistic people see change as an opportunity. Because they therefore view work or career changes as challenges to be over- come, they have positive expectations about future events and confidence in their ability to adjust. Optimistic people tend not to whine. Rather, they attempt to change or influence a decision or they adapt and move on.123

■ Display a Proactive Learning Orientation. A proactive learning orientation reflects your desire to learn and improve other career readiness competencies. This attitude keeps you focused on learning and initiating the behavior desired by an organization during times of change.

■ Be More Resourceful. When faced with challenges, look for solutions not prob- lems. Practice using project post mortems, discussed in Chapter 7, to find cre- ative ideas for improving results. It also helps to create contingency plans that identify what you can do if Plan A doesn’t work.

■ Take Ownership and Accept Responsibility. This career readiness attitude is the willingness to accept responsibility for your actions. Adaptable people don’t become “victim to external influences because they’re proactive,” according to a Forbes writer. He notes that, “To adapt to something new you must forego the old. Adaptable people don’t hold grudges or eschew needlessly but instead absorb, understand and move on.”124 Indeed sound advice.

■ Expand Your Perspective by Asking Different Questions. Asking new or novel questions helps to broaden your perspective when faced with a challenge. Most of us tend to ask questions that are too narrow. Try something like: “What sur- prises me about this situation? What are impossible options in this situation? What data am I ignoring?”125 ●

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accountability 301 adhocracy culture 288 authority 301 boundaryless organization 309 centralized authority 303 clan culture 288 common purpose 300 contingency approach to

organizational design 311 coordinated effort 300 corporate culture 283 customer divisions 305 decentralized authority 303 delegation 302 differentiation 313 division of labor 300 divisional structure 305

enacted values 287 espoused values 286 flat organization 300 functional structure 305 geographic divisions 306 hero 290 hierarchy culture 289 hierarchy of authority 300 hollow structure 309 horizontal design 307 integration 313 line managers 303 market culture 289 matrix structure 306 mechanistic organization 312 modular structure 310 organic organization 312

organization 298 organization chart 298 organizational culture 283 organizational design 304 organizational socialization 290 organizational structure 285 person–organization (PO) fit 292 product divisions 305 responsibility 302 rites and rituals 290 simple structure 304 span of control 301 staff personnel 303 story 290 symbol 290 unity of command 300 virtual structure 310

Key Points

8.1 Aligning Strategy, Culture, and Structure • Person–organization fit reflects the extent to which

your personality and values match the climate and culture in an organization. A good fit is associated with more positive work attitudes and task performance, lower stress, and fewer intentions to quit.

• The challenge for top managers is to align the organization’s vision and strategies with its organizational culture and organizational structure.

• Organizational culture is defined as the set of shared, taken-for-granted implicit assumptions that a group holds and that determines how it perceives, thinks about, and reacts to its various environments. The culture helps employees understand why the organization does what it does and how it intends to accomplish its long-term goals.

• Organizational structure is a formal system of task and reporting relationships that coordinates and motivates an organization’s members so that they can work together to achieve the organization’s goals.

8.2 What Kind of Organizational Culture Will You Be Operating In?

• Organizational culture appears as three layers. Level 1 is observable artifacts, the physical manifestations of culture. Level 2 is espoused values, explicitly stated values and norms preferred by an organization, although employees are frequently influenced by enacted values, which represent the values and norms actually exhibited in the

organization. Level 3 consists of basic assumptions, the core values of the organization.

• According to one common methodology known as the competing values framework, organizational cultures can be classified into four types: (1) clan, which has an internal focus and values flexibility; (2) adhocracy, which has an external focus and values flexibility; (3) market, which has a strong external focus and values stability and control; and (4) hierarchy, which has an internal focus and values stability and control.

• Culture is transmitted to employees in symbols, stories, heroes, rites and rituals, and organizational socialization. A symbol is an object, an act, a quality, or an event that conveys meaning to others. A story is a narrative based on true events, which is repeated—and sometimes embellished on—to emphasize a particular value. A hero is a person whose accomplishments embody the values of the organization. Rites and rituals are the activities and ceremonies, planned and unplanned, that celebrate important occasions and accomplishments in the organization’s life. Organizational socialization is defined as the process by which people learn the values, norms, and required behaviors that permit them to participate as members of an organization.

8.3 The Process of Culture Change • The 12 mechanisms managers use to embed a

culture in an organization are (1) formal statements; (2) slogans and sayings; (3) rites and rituals; (4) stories, legends, and myths; (5) leader reactions to crises; (6) role modeling, training, and coaching;

Key Terms Used in This Chapter

Organizational Culture, Structure, and Design CHAPTER 8 317

(7) physical design; (8) rewards, titles, promotions, and bonuses; (9) organizational goals and performance criteria; (10) measurable and controllable activities; (11) organizational structure; and (12) organizational systems and procedures.

8.4 Organizational Structure • An organization is a system of consciously

coordinated activities or forces of two or more people.

• There are three types of organizations classified according to the three different purposes for which they are formed: for-profit, nonprofit, and mutual- benefit.

• Whatever the size of an organization, it can be represented in an organization chart, a boxes-and- lines illustration showing the formal lines of authority and the organization’s official positions or division of labor.

• Two kinds of information that organizations reveal about organizational structure are (1) the vertical hierarchy of authority, who reports to whom, and (2) the horizontal specialization, who specializes in what work.

8.5 The Major Elements of an Organization • Organizations have seven elements. Four

proposed by Edgar Schein are (1) common purpose, which unifies employees or members and gives everyone an understanding of the organization’s reason for being; (2) coordinated effort, the coordination of individual efforts into a group or organizationwide effort; (3) division of labor, having discrete parts of a task done by different people; and (4) hierarchy of authority, a control mechanism for making sure the right people do the right things at the right time.

• Two other common elements are (5) span of control, which refers to the number of people reporting directly to a given manager, and (6) authority and accountability, responsibility, and delegation.

• Authority refers to the rights inherent in a managerial position to make decisions, give orders, and utilize resources. Accountability means that managers must report and justify work results to the managers above them. Responsibility is the obligation you have to perform the tasks assigned to you. Delegation is the process of assigning managerial authority and responsibility to managers and employees lower in the hierarchy.

• Regarding authority and responsibility, the organization chart distinguishes between two positions, line and staff. Line managers have authority to make decisions and usually have people reporting to them. Staff personnel have advisory functions; they provide advice, recommendations, and research to line managers.

• The final common element of organizations is (7) centralization versus decentralization of authority. With centralized authority, important decisions are

made by higher-level managers. With decentralized authority, important decisions are made by middle- level and supervisory-level managers.

8.6 Basic Types of Organizational Structures • Organizations may be arranged into eight types of

structures. (1) In a simple structure, authority is centralized in a single person; this structure has a flat hierarchy, few rules, and low work specialization. (2) In a functional structure, people with similar occupational specialties are put together in formal groups. (3) In a divisional structure, people with diverse occupational specialties are put together in formal groups by similar products or services, customers or clients, or geographic regions. (4) In a matrix structure, an organization combines functional and divisional chains of command in grids so that there are two command structures—vertical and horizontal. (5) In a horizontal design or team- based design, teams or workgroups are used to improve horizontal relations and solve problems throughout the organization. A boundaryless organization is a fluid, highly adaptive organization whose members, linked by information technology, come together to collaborate on common tasks. Three designs that open boundaries between organizations are hollow, modular, and virtual structures. (6) In the hollow structure, often called the network structure, the organization has a central core of key functions and outsources other functions to vendors who can do them cheaper or faster. (7) In a modular structure, a firm assembles product chunks, or modules, provided by outside contractors. (8) The virtual structure is an organization whose members are geographically apart, usually working with e-mail and other forms of information technology, yet which generally appears to customers as a single, unified organization with a real physical location.

8.7 Contingency Design: Factors in Creating the Best Structure

• The process of fitting the organization to its environment is called contingency design. Managers taking a contingency approach must consider at least three factors in designing the best kind of structure for their organization at that particular time.

• The first is that an organization may be either mechanistic or organic. In a mechanistic organization, authority is centralized, tasks and rules are clearly specified, and employees are closely supervised. In an organic organization, authority is decentralized, there are fewer rules and procedures, and networks of employees are encouraged to cooperate and respond quickly to unexpected tasks.

• The second is that an organization may also be characterized by differentiation or integration. Differentiation is the tendency of the parts of an organization to disperse and fragment. Integration is

318 PART 4 Organizing

the tendency of the parts of an organization to draw together to achieve a common purpose.

• The third is the link between strategy, culture, and structure. If the managers of an organization change its strategy, they need to change the organization’s culture and structure to support that strategy. Indeed, companies often begin by offering a single product or product line that requires only a simple structure, but as they grow and their strategies become more ambitious and elaborate, so the culture and structure need to change to support those strategies.

8.8 Career Corner: Managing Your Career Readiness

• You can improve your ability to assess an organization’s internal context by using the career readiness competencies of understanding the business and personal adaptability.

• There is a two-step process for determining how you “fit” in a specific context.

• You can become more adaptable by being optimistic, displaying a proactive learning orientation, and being more resourceful.

1. To implement an organization’s strategy, what are the two kinds of important areas that managers must determine?

2. How would you describe the four kinds of organizational cultures, according to the competing values framework?

3. Describe and explain the three levels of organizational culture.

4. What are five ways in which culture is transmitted to employees?

5. Name 12 mechanisms by which an organization’s members teach each other preferred values, beliefs, expectations, and behaviors.

6. What are seven common elements of organizations?

7. Describe the four types of traditional organizational designs.

8. Explain what is meant by horizontal organizational designs.

9. What are three designs that open boundaries between organizations?

10. What are three factors to consider in designing an organization’s structure?

Understanding the Chapter: What Do I Know?

Wells Fargo’s Sales Culture Fails The Company How do you sell money? This is a fundamental chal- lenge for retail banks, and Richard Kovacevich had a solution. He saw banks as stores, bankers as salespeo- ple, and financial instruments as consumer products. Much like a deli worker asks if you’d like to upsize that combo or add dessert to your order, a banker should encourage you to add a credit card, savings account, or loan to your portfolio. Kovacevich called it “cross- selling,” and he based it on the fact that customers with several accounts are much more profitable to a bank than customers with a single account. How many ac- counts should a customer have? Eight, according to the “Going for Gr-Eight” initiative he launched as CEO of Norwest in 1997. Why eight? Because, Kovacevich said, “It rhymes with GREAT!”126

SALES PRACTICES AT WELLS FARGO Norwest merged with Wells Fargo in 1998; the bank retained the Wells Fargo name, and Kovacevich took the helm as president and CEO. He saw revenue growth as the bank’s most important goal and cross-selling as the way to achieve it.127 Bankers could earn between $500 and $2,000 in quarterly bonuses for hitting sales targets, and district managers could increase their an- nual compensation by up to $20,000. According to for- mer Wells Fargo worker Scott Trainor, “If you could sell, you had a job.”128

The strong sales culture transformed Wells Fargo’s bottom line, as evidenced by a 67 percent increase in the bank’s stock from 2006–2015.129 Unfortunately, the culture had a dark side. Steven Schrodt, who worked at a Wells Fargo branch in Lincoln, Nebraska, before re- signing due to severe sales pressure in 2012, remembers

Management in Action

Organizational Culture, Structure, and Design CHAPTER 8 319

managers encouraging those who hadn’t reached sales goals to open accounts for their family members and friends. Other former employees describe searching for potential customers at retirement homes and local bus stops.130

Bankers who grew tired of asking friends, family, and strangers for business adopted more covert tactics. One former Wells Fargo employee recalls the day he discovered a high-performing co-worker’s secret for- mula. A customer had applied for a home equity loan and somehow also ended up with a $20,000 personal line of credit. “So then I realized how he was doing all his loans, because he was basically tagging on other loan products in the same application so they wouldn’t really notice when they signed the documents.”131

Problems started to emerge in 2009. At this point, Richard Kovacevich was gone, John Stumpf was presi- dent and CEO, and Kovacevich’s sales culture was deeply embedded. To investigate potential problems in retail sales practices (RSPs) in the bank’s branches, Wells Fargo established an internal task force in 2012. The task force concluded that the unethical behavior was due to a small set of “rogue” individual branch workers.132 Wells Fargo subsequently fired more than 5,000 “rogue” bankers between 2013 and 2016.133

WELLS FARGO ADMITS TO FRAUD: BLAMES PROBLEM ON WORKERS, NOT CULTURE In September 2016, the Office of the Comptroller of the Currency (OCC), the Consumer Financial Protection Bureau (CFPB), and the Los Angeles City Attorney publicly fined Wells Fargo $185 million for opening millions of bank accounts without customers’ knowledge.134, 135 The bank openly admitted to the fraud, but executives noted that Wells Fargo had offi- cial policies in place in their Sales Quality Manual re- quiring customers’ consent “for each specific solution or service” and expressly prohibiting bankers from opening multiple accounts to increase incentive com- pensation.136 In an interview with The Wall Street Journal, CEO Stumpf maintained “there was no incen- tive to do bad things” adding “the 1% that did it wrong, who we fired, terminated, in no way reflects our culture nor reflects the great work the other vast majority of the people do.”137 Former workers tell a different story.

While there was “no shortage of internal publica- tions advising Wells employees on how to conduct themselves, including the Wells Fargo Code of Ethics and the Wells Fargo Team Member Handbook,”138 the pressure inside branches was so intense that formal guidelines did little to deter underhanded sales tactics. In an interview with NPR, one former employee said bankers at her branch were expected to sell “a ridicu- lous amount of products” and that pressure and fraud occurred even at the bank’s headquarters.139 Former

employees who worked at Wells between 2004 and 2011 told NPR the fraud was pervasive and that manag- ers were heavily involved. One former banker recalled sitting at a conference table with her managers in a win- dowless, locked room and receiving a “formal warning” to sign. Her managers told her that bankers who didn’t meet sales goals were not team players, and poor team members would be fired and forced to carry the mark on their permanent records.140

For bankers who did play by the rules, the outcome was bleak. “They ruined my life,” says Bill Bado, a for- mer Pennsylvania branch worker.141 Bado repeatedly refused to open fraudulent bank accounts and credit cards, made calls to bank’s ethics hotline, and even sent an e-mail to HR about his supervisors pressuring him to engage in unethical RSPs; just over a week after e-mailing HR, Bado was terminated for excessive tardi- ness. Another former employee lost her job after e-mail- ing Stumpf directly about the fraud; Stumpf has claimed he doesn’t recall the e-mail.142

AFTERMATH Stumpf resigned from Wells Fargo in October 2016, and Timothy Sloan took over as CEO. Sloan immedi- ately discontinued labeling branches “stores” and over- hauled the bank’s incentive compensation plan, shifting the focus to customer satisfaction and drastically reduc- ing the emphasis on sales goals. Sloan restructured the organization to fully centralize the bank’s risk and HR functions, consolidating “much of the vast risk-control bureaucracy into a new office of ethics, oversight, and integrity, accountable to the board’s risk committee.”143

And yet, in spite of Sloan’s efforts, another scandal was brewing.

Earlier in 2016, executives at Wells Fargo had real- ized that hundreds of thousands of car loan customers had been charged for unnecessary auto insurance.144 An internal report revealed that the costs of the gratu- itous insurance resulted in auto loan defaults for more than 270,000 customers and the repossession of ap- proximately 25,000 vehicles.145 Federal probes into the insurance debacle shed light on yet another slew of in- ternal issues with compliance, controls, and board over- sight of operations at Wells Fargo.146 In a report released in October 2017, OCC regulators slammed managers at Wells Fargo Dealer Services (the bank’s auto loan unit) for ignoring customer complaints, fail- ing to monitor contractors, and general laziness in re- sponding to problems that had been unfolding since at least 2015.147

In July 2017, Wells Fargo publicly admitted it became aware of the auto insurance scandal a year prior. Interestingly, when the Senate Banking Committee asked, as part of the September 2016 hearings related to RSP fraud, if executives were “confident that this type of fraudulent activity does not exist” in other areas,

320 PART 4 Organizing

the bank insisted problems were limited to individual employees in the community banking division.148 Senator Sherrod Brown has since alleged that Wells Fargo “pure and simple lied to this committee–and lied to the public” in failing to disclose the auto insurance problems during the 2016 hearings.149 Sloan has main- tained there are fundamental differences between the RSP and auto insurance scandals, with only the former being fueled by sales incentives.150

Wells Fargo has experienced substantial losses in rankings, reputation, and bottom line.151 Federal regula- tors continue to impose severe penalties and restric- tions ref lecting concerns with the bank’s ability to manage potential operating risks.152, 153

FOR DISCUSSION Problem-Solving Perspective

1. What is the underlying problem in this case from the regulators’ perspective?

2. What role do you believe Wells Fargo’s executive lead- ership played in the RSP and auto insurance scandals?

3. What do you think regulators should do to encour- age permanent change in Wells Fargo’s culture and prevent similar problems in the broader banking industry?

Application of Chapter Content

1. Using the competing values framework as a point of reference, how would you describe the organi- zational culture under CEO Kovacevich and under CEO Sloan? Provide examples to support your conclusions.

2. How do you think new branch employees learned the culture at Wells Fargo?

3. Describe how Wells Fargo can use the 12 mecha- nisms for culture change to drastically improve its culture.

4. Is Wells Fargo’s structure more organic or mechanis- tic? Explain.

5. What is the most important lesson from this case? Discuss.

Should Socializing outside Work Hours Be Mandatory? Person–organization fit ref lects the extent to which someone’s personality and values match, or fit, and organization’s culture and climate. Good fit is impor- tant for both employees and organizations. This chal- lenge involves the cultural considerations of asking employees to socialize outside work hours. If socializ- ing outside work is an expectation of new hires, then it becomes something to consider when applying for jobs.

Why would companies ask employees to socialize outside of work hours? There are a number of good reasons: (1) fostering comfort and relaxation among employees, (2) helping people de-stress after a hard day, (3) learning more about one’s colleagues, and (4) building teamwork and unity.154 All of these benefits should improve interpersonal relationships and poten- tially boost productivity and customer service.

If such requests are voluntary, however, then it is likely that fewer people will show up, thereby reducing the benefits. People who show up are more likely to be like-minded and share a common race and gender, as well as hobbies. For example, one employee described the in-group at their company as the folks who hunted and fished together outside of work.155 Voluntary

requests can thus serve as a subtle way of promoting homogeneity rather than diversity.

Moreover, voluntary requests potentially set up a situation in which people develop unequal social net- works. This can have unfair career advantages for those who attend because people discuss work-related issues at such gatherings. In an interview, advertising executive Ian Mirmelstein said his career has suffered since he stopped attending work happy hours.156

It thus makes some sense to make it mandatory to socialize outside of work. Some companies accept this conclusion. Zappos did in the past, and other compa- nies continue the practice today.

One woman told a reporter that there was an unwritten requirement at her employer that “employ- ees were expected to spend extra money and time on group lunches and twice-weekly drinks. This kind of socializing was necessary in order to get ahead.” She was not told about the requirement during the hiring process, and she now feels a lack of fit. Her problem with the expectation is that she has two children to pick up from school and she tries to save money by taking her lunch to work. In a recent performance appraisal, she was told, “I needed to be more of a team player.” Her feedback was partly based on her lack of socializing outside of work.157

Legal/Ethical Challenge

Organizational Culture, Structure, and Design CHAPTER 8 321

SOLVING THE CHALLENGE What are your thoughts about making it mandatory to socialize outside of work hours?

1. I think it’s a good idea. The benefits exceed the costs, and I don’t agree that it fails to appreciate diversity. The socializing activities can be varied to fit the val- ues and needs of diverse employees, thereby support- ing diversity.

2. I don’t like it. What employees do after work hours is their business, and companies should not infringe on

them. Socializing outside work hours should be voluntary.

3. I believe that employers have no business interfering with how employees spend time outside of work. This means that I don’t want either voluntary or manda- tory requests about socializing outside of work hours. If people want to socialize outside work, let them arrange it on their own.

4. Invent other options.

Learn about the evolution of Uber’s culture and how its structure has changed through the years by reading this case. Assess your ability to apply concepts discussed in this chapter to the case by going to Connect.

Uber Continuing Case

9 After reading this chapter, you should be able to:

LO 9-1 Discuss the importance of strategic human resource management.

LO 9-2 Discuss ways to recruit and hire the right people.

LO 9-3 Outline common forms of compensation.

LO 9-4 Describe the processes used for orientation and learning and development.

LO 9-5 Discuss effective performance management and feedback techniques.

LO 9-6 List guidelines for handling promotions, transfers, discipline, and dismissals.

LO 9-7 Discuss legal considerations managers should be aware of.

LO 9-8 Describe labor-management issues and ways to work effectively with labor unions.

LO 9-9 Review the steps for becoming a better receiver of feedback.

Human Resource Management Getting the Right People for Managerial Success

© O

livier Renck/Aurora/G etty Im

ages

FORECAST What’s Ahead in This Chapter This chapter considers human resource (HR) management—planning for,

attracting, developing, and retaining an effective workforce. We consider

how this subject fits in with the overall company strategy, how to evaluate

current and future employee needs, and how to recruit and select qualified

people. We describe the common forms of compensation, the processes

used for orientation and learning and development, and how to assess

employee performance and give feedback. We discuss guidelines for

handling promotions and discipline, and workplace performance problems.

We go over basic legal requirements and consider the role of labor unions.

We conclude with a Career Corner that focuses on how to become a better

receiver of feedback.

Job candidates often make a few common mistakes in initial interviews. Here are some tips for using the career readiness competencies of career management, new media literacy, and communication skills to avoid them.

Be Prepared Can you pronounce the name of the company with which you’re interviewing? How about the name of the person who is going to interview you? Do you understand what the company makes or does, and the duties of the position for which you’re interviewing? Do you know the company’s competition? What new products or services are being offered? What are your greatest strengths and specific achievements? Your weaknesses? Research the company’s website and any recent news articles and press releases about the firm. Identify strengths of yours that fit what the company does. When asked about your weaknesses, discuss how you recognized one, overcame a dilemma it posed, and were improved by it. Practice your answers, but not so much that you sound phony saying them.

Dress Right and Be On Time Dress neatly and professionally for the interview. Make sure you know the exact location of the interview, and if possible, do a test run a day or so before, at about the same time of day as your interview, so you know how long it will take to get there on time. If unforeseeable circumstances arise and cause you to be late, call to inform your interviewer. When you arrive, be courteous to the receptionist and greet everyone who greets you. Silence your phone and don’t take it out again until you’ve left the building.

Practice What to Say and What to Ask Rehearse questions to ask the interviewer, such as the challenges for the position in the future and how success in the job will be defined. Don’t make negative comments about your old company or boss. Rather, figure out the positives and convey what you learned and gained from

How to Prepare for a Job Interview your experience. If asked an inappropriate question (about age, marital status, whether you have children or plan to), politely say you don’t believe the question is relevant to your qualifications. Be friendly and enthusiastic but not too personal.1 Within 24 hours of the meeting, send an e-mail (with no misspellings or faulty grammar) thanking the interviewer and reiterating your interest in the position. If you think you messed up part of the interview, use the e-mail to smooth over your mistakes.2

Know What You Will Be Asked More than 8 in 10 companies now routinely check job applicants’ references, and 7 in 10 conduct background checks.3 Some employers may ask for your GPA, especially if a job opening is highly competitive. If your grade point average is not as high as you would like, prepare an explanation.4 Finally, be sure your social media profile is mostly private, and that whatever is public is limited, is not too personal, and would make your parents proud. More than 7 in 10 employers scrutinize job seekers’ social media profiles, sometimes in search of personal information they are not allowed to ask about, such as whether you are married. While this kind of snooping—and particularly asking for your passwords— carries some legal risks for companies depending on state laws, unwary job applicants can still lose opportunities if their profiles don’t reflect the kind of maturity the hiring company is looking for.5 Don’t let that happen to you.

For Discussion What kind of advice do you see here that you wish you’d followed in the past? What will you do differently next time?

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How do you get hired by one of the top five workplaces for Millennials on Fortune magazine’s list 2018—companies such as Ultimate Software, SalesForce, Edward Jones, Workday, and Kimley-Horn.6

You try to get to know someone in the company, suggests one guide.7 You play up volunteer work on your résumé. You get ready to interview and interview and interview. And you do extensive research on the company—far more than just online research, such as by talking to customers.

And what kinds of benefits does an employee of a Fortune “Best” company get? At Google (now part of Alphabet), the Mountain View, California, search engine com- pany (ranked No. 1 Best Company seven times in the last 10 years), you’re entitled to eat in free gourmet cafeterias, have generous parental leave policies, get haircuts on site, work out at the gym, attend support group meetings and unconscious-bias work- shops, have your laundry done free, and get virtual doctor visits. You may also be a candidate for millions of dollars in compensation incentives, special bonuses, and founders’ awards.8

The reason for this exceptional treatment? It results in greater commitment and per- formance from employees,9 which in turn fosters more profit according to a study of 250 companies. The researchers identified the top 6 percent that invested in the employee experience: technology, physical environment, and organizational culture. These companies included Adobe, Accenture, Facebook, and Microsoft, and they real- ized 4.2, 4.0, and 2.8 times the average profit, profit per employee, and revenue per employee, respectively, over the remaining 94 percent of the sample.10 All told, investing in people leads to competitive advantage.

Human Resource Management: Managing an Organization’s Most Important Resource Human resource (HR) management consists of the activities managers perform to plan for, attract, develop, and retain an effective workforce. Whether it’s McKenzie looking for entry-level business consultants, the U.S. Navy trying to fill its ranks, or churches trying to recruit priests and ministers, all organizations must deal with staffing.

The fact that the old personnel department is now called the human resources department is not just a cosmetic change. It is intended to suggest the importance of staffing to a company’s success. Although talking about people as “resources” might seem to downgrade them to the same level as financial resources and material resources, in fact, people are an organization’s most important resource.

Indeed, companies ranked in the top 10 on Fortune magazine’s 2018 Best Companies list—which include Salesforce, Wegmans Food Markets, Ultimate Software, Boston Consulting Group, Edward Jones, Kimpton Hotels & Restaurants, Workday, Genentech, Hyatt, and Kimley-Horn—have discovered that putting employees first has been the foundation for their success11 “If you’re not thinking all the time about making every person valuable, you don’t have a chance,” says former General Electric head Jack Welch. “What’s the alternative? Wasted minds? Uninvolved people? A labor force that’s angry or bored? That doesn’t make sense!”12

9.1 Strategic Human Resource Management THE BIG PICTURE Human resource management consists of the activities managers perform to plan for, attract, develop, and retain an effective workforce. Planning the human resources needed consists of understanding current employee needs and predicting future employee needs.

LO 9-1 Discuss the importance of strategic human resource management.

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Assessing the Quality of HR Practices This survey is designed to assess the quality of HR practices at your current place of employment. If you are not currently working, consider a previous job when completing the survey. Please be prepared to answer these questions if your instructor has assigned Self-Assessment 9.1 in Connect.

1. How did you rate the quality of the company’s HR practices?

2. Based on your responses, what advice would you give the senior HR leader about how to improve its HR practices? Be specific. What are the consequences of having poor-quality HR practices? Explain.

SELF-ASSESSMENT 9.1

Clearly, companies listed among the best places to work become famous by offering progressive and valued programs, policies, and procedures. Are you curious to see if a current or past employer is one of these progressive companies? You can find out by taking Self-Assessment 9.1.

Human Resources as Part of Strategic Planning Some companies—those with f lat management structures, for instance—have done away with HR departments entirely, letting the regular line managers handle these tasks. But most workers say they feel the absence of an in-house HR staff, especially when it comes to resolving pay prob- lems and mediating employee disputes.13 So what should organizations do in regard to investing in human resources? Based on research findings, we come down on the side that people are an organization’s most important asset and it’s important to invest in human resources. All told, studies show that companies have higher levels of employee satisfaction, financial performance, and service performance when the company has high-quality human resource practices and programs.14 At many companies, human resources has become part of the strategic planning process. Thus, HR departments deal not only with employee paperwork and legal accountability—a very important area, as we describe in Section 9.7—but also with helping to support the organization’s over- all strategy.

Example: Is it important, as Wegmans’ owners think, to have loyal, innovative, smart, passionate employees who will give their best to promote customer satisfaction (the grocery chain’s mission)? Who, then, should be recruited? How should they be trained? What’s the best way to evaluate and reward their performance? The answers to these questions should be consistent with the firm’s strategic mission.

The purpose of the strategic human resource process, then—shown in the gold shaded boxes at right—is to get the optimal work performance that will help the com- pany’s mission and goals. (See Figure 9.1.)

Three concepts important in this view of human resource management are human capital, knowledge workers, and social capital.

Human Capital: Potential of Employee Knowledge and Actions New Brunswick Power, home of “Canada’s Most Admired Corporate Culture,” was facing dramatic changes in the energy industry, including climate change and the arrival of solar power, and economic and demographic changes in its local market of New Brunswick province as customers had energy choices for the first time. Says Sherry Thomson, the company’s HR officer, “We needed to change the traditional culture of NB Power to be more agile, adjust our mindsets and engage our entire workforce in the effort so we could be our customers’ first choice as new options became available to them.” Thomson goes on, “The first challenge was confronting the mindset that HR’s role was to be the ‘employee advocate’ versus a key enabler in driving business results. We needed to reposition and reframe ourselves in order to support and lead the transformation.” Thomson achieved this by “stepping into the shoes of operational

Establish the mission & the vision

Purpose: Get optimal work performance to help realize company’s mission & vision

Establish the grand strategy

Formulate the strategic plans

Plan human resources needed

Recruit & select people

Perform appraisals of people

Orient, train, & develop

FIGURE 9.1 The strategic human resource management process

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leaders [in order to] listen to their challenges and opportunities.” Without that effort, she feels, “you don’t get the invitation to partner in a way that’s truly strategic.” The relationships Thomson built, with the goal of engaging the entire workforce, have helped the company improve its earnings and discover many unsuspected new leaders among its employees who have helped continue the positive culture changes she sought.15 Human capital is the economic or productive potential of employee knowledge, experience, and actions.

Scripps Health, a nonprofit health care system in San Diego and 45th on Fortune’s 2017 list of “Best Places to Work For,” helps employees develop human capital by pro- viding career coaching and college tuition reimbursement and scholarships. The com- pany also offers a wide variety of internal courses, some taught by the CEO, that focus on employee development.16

It’s also important to take responsibility for your own human capital. You may find this surprising, but a recent study showed that lack of sleep depletes your human capital and lowers performance.17 To perform at their best, people need their full ration of sleep.

Knowledge Workers: Potential of Brain Workers A knowledge worker is some- one whose occupation is principally concerned with generating or interpreting information, as opposed to manual labor. Knowledge workers add value to the organization by using their brains rather than their muscle and sweat, and as such they are the most common type of worker in 21st-century organizations.18 Over the past three decades, automation has threatened a lot of routine jobs, but the rise of knowledge workers has been accelerating.

Social Capital: Potential of Strong and Cooperative Relationships Social capital is the economic or productive potential of strong, trusting, and cooperative relation- ships. It can help you land a job. For example, a national survey of recruiters revealed that 74 percent had found the highest-quality job applicants came through employee referrals. Employees hired through referrals also tend to stay longer at their jobs, a result of better person–organization fit.19

Social capital is also beneficial beyond the early stages of your career, particu- larly when you are developing trusting relationships with others. Trusting relation- ships lead to more job and business opportunities, faster advancement, greater capacity to innovate, and more status and authority.20 Dora Moscoso, a project specialist with the Inter-American Development Bank, writes that networking is particularly valuable to entrepreneurs: “It is the social network of individuals whom entrepreneurs surround themselves with—mentors, peers, friends, family, and other entrepreneurs-that adds value and promotes trust, reciprocity, and cooperation.”21 All told, it pays to have a rich network of good relationships, and social capital helps makes this possible.

Planning the Human Resources Needed When a building contractor, looking to hire someone for a few hours to dig ditches, drives by a group of idle day laborers standing on a street corner, is that a form of HR planning? Certainly it shows the contractor’s awareness that a pool of laborers usually can be found in that spot. But what if the builder needs a lot of people with specialized training—to give him or her the competitive advantage that the strategic planning pro- cess demands?

Here we are concerned with something more than simply hiring people on an “as needed” basis. Strategic human resource planning consists of developing a systematic, comprehensive strategy for (a) understanding current employee needs and (b) predicting future employee needs. Let’s consider these two parts.

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Understanding Current Employee Needs To plan for the future, you must understand the present—what today’s staffing picture looks like. This requires that you (or a trained specialist) first do a job analysis and from that write a job description and a job specification.22

■ Job analysis. The purpose of job analysis is to determine, by observation and analysis, the basic elements of a job. Specialists who do this interview job occu- pants about what they do, observe the flow of work, and learn how results are accomplished. For example, UPS has specialists who ride with the couriers and time how long it takes to deliver a load of packages and note what problems are encountered (traffic jams, vicious dogs, recipients not home, and so on).

■ Job description and job specification. Once the fundamentals of a job are under- stood, then you can write a job description, which summarizes what the holder of the job does and how and why he or she does it. Next you can write a job specification, which describes the minimum qualifications a person must have to perform the job successfully.

This process can produce some surprises. Jobs that might seem to require a college degree, for example, might not after all. Thus, the process of writing job analyses, descriptions, and specifications can help you avoid hiring people who are overqualified (and presumably more expensive) or underqualified (and thus not as productive) for a particular job.

In addition, by entering a job description and specification with their attendant char- acteristics into a database, an organization can use an applicant tracking system (ATS) to match keywords (nouns) on incoming résumés with the keywords describing the job.23 Enterprise Rent-A-Car, for example, sorts through 50,000 candidates a month to identify those with a bachelor’s degree, good driving record, and customer-service or leadership experience who might qualify for the company’s management training program.24

What kind of job is this? A UPS driver’s problems of driving in a big city—traffic, double parking, addressees not at home—are different from those of driving in rural areas, where there may be long stretches of boredom. Specialists in job analysis can interview drivers about their problems in order to write job descriptions that allow for varying circumstances. ©McGraw-Hill Education/John Flournoy, photographer

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Predicting Future Employee Needs Job descriptions change, of course: Auto mechanics, for instance, now have to know how computer chips work in cars. (Current 7-Series BMWs and S-class Mercedes have about 100 processors apiece.) And new jobs are created: Who could have visualized the position of “e-commerce accountant” 10 years ago, for example?

As you might expect, predicting future employee needs means you have to become knowledgeable about the staffing the organization might need and the likely sources for that staffing:

■ The staffing the organization might need. You could assume your organization won’t change much. In that case, you can fairly easily predict that jobs will periodically become unoccupied (because of retirement, resignations, and so on) and that you’ll need to pay the same salaries and meet the same criteria about minority hiring to fill them.

Better, however, to assume the organization will change. Thus, you need to under- stand the organization’s vision and strategic plan so that the proper people can be hired to meet the future strategies and work. We discussed strategic plans in Chapter 6.

■ The likely sources for staffing. You can recruit employees from either inside or outside the organization. In looking at those inside, you need to consider which employees are motivated, trainable, and promotable and what kind of training your organization might have to do. A device for organizing this kind of information is a human resource inventory, a report listing your organization’s employees by name, education, training, languages, and other important informa- tion. In looking outside, you need to consider the availability of talent in your industry’s and geographical area’s labor pool, the training of people graduating from various schools, and such factors as what kinds of people are moving into your area. The U.S. Bureau of Labor Statistics and the U.S. Census Bureau issue reports on such matters. ●

One way to attract potential employees. One of the first places companies are apt to look for potential employees is online, such as the social networking sites Facebook, LinkedIn, and Glassdoor, as well as Twitter (although sometimes searches can lead to discrimination against some candidates). Creative users also post unusual digital résumés featuring eye-catching graphics, YouTube videos, and PowerPoint slides on Pinterest, the popular online pin board for photos. As for job seekers, they can find useful job-hunting apps on Monster.com. Are you up to speed on these job-hunting advantages? ©dennizn/Shutterstock

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9.2 Recruitment and Selection: Putting the Right People into the Right Jobs

THE BIG PICTURE Qualified applicants for jobs may be recruited from inside or outside the organization. The task of choosing the best person is enhanced by such tools as reviewing candidates’ application forms, résumés, and refer- ences; doing interviews, either structured or unstructured; and screening with ability, personality, perfor- mance, and other kinds of employment tests.

“We know that 5% of your workforce produces 26% of your output, so you need to focus on hiring people who really make the difference,” says San Francisco State University professor John Sullivan, an expert in human resources strategy. Hiring has become a science, Sullivan states, but most people doing the recruiting think it is still an art. “Most people in HR have no clue. We don’t measure failed hires. There’s no feedback loop.”25

The tight labor market is making it harder for companies to find qualified employees. The Wall Street Journal reported that “Some firms are partnering with local school or unions while others are paying vacation costs, beefing up internship programs or add- ing new locations where labor isn’t as scarce.”26 Let’s consider in more detail this important HR function.

Recruitment: How to Attract Qualified Applicants At some time nearly every organization has to think about how to find the right kind of people. Recruiting is the process of locating and attracting qualified applicants for jobs open in the organization. The word qualified is important: You want to find people whose skills, abilities, and characteristics are best suited to your organization. Recruiting is of two types: internal and external.

1. Internal Recruiting: Hiring from the Inside Internal recruiting means mak- ing people already employed by the organization aware of job openings. Indeed, most vacant positions in organizations are filled through internal recruitment, mainly through job posting, placing information about job vacancies and qualifications on bulletin boards, in newsletters, and on the organization’s intranet. This means employ- ees need to take responsibility for managing their own careers (a career readiness skill we’ve discussed throughout the book). For instance, according to Kerry Bianchi, CEO of advertising technology company Visto, it’s important for employees to work in more than one department in the organization, but “People think, ‘if I put my head down someone will figure out what I want.’ That’s not real.”27 In one twist on recruiting from within, more firms are now rehiring former workers who had left (a tactic once frowned upon) because so many employers are having difficulty finding qualified people.28

2. External Recruiting: Hiring from the Outside External recruiting means attracting job applicants from outside the organization. In years past, notices of job vacan- cies were placed through newspapers, employment agencies, executive recruiting firms, union hiring halls, college job-placement offices, and word of mouth. Today more than 90 percent of U.S. organizations use social networks to find new employees, with LinkedIn the most popular site by far. The Society for Human Resource Management even reports that 35 percent of employers are less likely to invite candidates without an online presence to come in for an interview.29 While LinkedIn has far fewer users than

LO 9-2 Discuss ways to recruit and hire the right people.

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Facebook overall, 87 percent of recruiters use it to find candidates compared to only 55 percent for Facebook (not surprising considering the very different purposes and cultures of the two sites). Meanwhile, however, 83 percent of job seekers are Facebook users, while only 36 percent are on LinkedIn.30

Glassdoor, the job and recruitment site, reports that job seekers check an average of seven to eight recruitment websites during their search, and many Glassdoor users com- pare as many as seven different reviews of an organization before deciding what they think about it.

Both internal and external methods have advantages and disadvantages.31 (See Table 9.1.)

TABLE 9.1 Internal and External Recruiting: Advantages and Disadvantages

INTERNAL RECRUITING

ADVANTAGES DISADVANTAGES

1. Employees tend to be inspired to greater effort and loyalty. Morale is enhanced because they realize that working hard and staying put can result in more opportunities.

2. The whole process of advertising, interviewing, and so on is cheaper.

3. There are fewer risks. Internal candidates are already known and are familiar with the organization.

1. Internal recruitment restricts the competition for positions and limits the pool of fresh talent and fresh viewpoints.

2. It may encourage employees to assume that longevity and seniority will automatically result in promotion.

3. Whenever a job is filled, it creates a vacancy elsewhere in the organization.

EXTERNAL RECRUITING

ADVANTAGES DISADVANTAGES

1. Applicants may have specialized knowledge and experience.

2. Applicants may have fresh viewpoints.

1. The recruitment process is more expensive and takes longer.

2. The risks are higher because the persons hired are less well known.

Which External Recruiting Methods Work Best? In general, the most effective sources are employee referrals, say human resource professionals, because, to protect their own reputations, employees are fairly careful about whom they recommend, and they know the qualifications of both the job and the prospective employee.32 HR expert John Sullivan, mentioned earlier, states that this method is preferred by the better com- panies, which ask their own top-performing employees, “Who do you learn from? Who’s better than you? Who mentors you?”33

Among some newer ideas: San Francisco–based BlueCrew is a tech-enabled employ- ment agency focused on hiring for warehouse workers, forklift operators, and other blue-collar temporary employees.34 Barclays, the international bank, uses a free mobile videogame called Stockfuse, a stock-trading game, to attract and evaluate job appli- cants.35 A cloud-storage firm named Compose and an employment firm named Woo, both in northern California, arrange “blind dates” between job seekers and employers, using résumés that feature only a person’s work, no names.36 (The “I’m Glad … feature describes how Sarah Cabou’s health care company uses a similar approach.) GE Digital, located in Providence, Rhode Island, has stopped relying solely on people’s credentials, instead using “competency-based selection” strategies that measure whether job applicants have the competencies to fill specific engineering roles.37

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Sarah Cabou is a senior market operations man- ager at a start-up health care company. Her com- pany runs primary care clin- ics for geriatric patients, and the employee selection process is incredibly impor- tant given the type of work involved in being a health coach at the company.

“Geriatric patients come to our clinics and are seen by a doctor, but they also get a health coach who is a non-medical person who is trained in techniques like

motivational interviewing and coaching skills to help our patients with behavioral change or whatever it is that might be a barrier to them achieving higher levels of health status,” said Sarah.

Patients are also encouraged to participate in exercise classes like yoga and Tai Chi, and attend support groups and diabetic education classes among other activities.

“Our company is entirely based on interactions with our customers and patients in a health care setting that is a bit dif- ferent from what most of our senior population has experi- enced. And that needs to be a really fantastic experience. This is entirely based on the person that sits with them—and that would be a health coach,” said Sarah.

When the company opens a new clinic, a large-scale recruit- ment effort is launched. “We do not require health coaches to have a particular background, and this makes it really challeng- ing to approach,” said Sarah. “What we’re hiring for is a certain culture match and a certain value profile. This makes looking at a résumé almost impossible to determine whether or not a per- son is a good fit for our company.”

In order to cast a wide net, the company does “speed inter- viewing” to allow anyone who submitted a résumé to attend. The candidates participate in five-minute interviews with staff members who are trained to look for certain traits among the candidates. The interviewers ask the candidates what intrigued them about the job they applied for and what makes them think they might be a good fit.

Within those five minutes, the interviewer will decide whether the candidate will proceed to a full, one-on-one inter- view. “At first, I was taken aback by this process. How can we really get to know someone in five minutes enough to have them proceed to another interview? But I’ve been pleasantly shocked to find what you can know about a person in five min- utes that you could never find from a résumé,” said Sarah.

If the candidate is asked to participate in the second full interview, the staff will ask more behavioral-based questions and ask about past performance to determine if that person would be a good fit for the company. “We want the patient to have an amazing customer service experience from start to fin- ish, and we can only do that through the right kind of people,” said Sarah. Courtesy of Sarah Cabou

I’m Glad… …my company is serious about its recruiting and selection processes.

Courtesy Sarah Cabou

Assessing Your Person–Job Fit This survey is designed to assess your job fit. If you are not cur- rently working, consider a previous job when completing the survey. Please be prepared to answer these questions if your instructor has assigned Self-Assessment 9.2 in Connect.

1. What is your level of fit?

2. Whether you have high or low fit, what are the main causes for your level of fit? Explain.

3. What questions might you ask a future recruiter to ensure a higher level of person–job fit? Be specific.

SELF-ASSESSMENT 9.2

How do you feel about the job you are in now, if you have one, or the last job you had? Do you feel like you are a “good fit” for the job? That is, do you like the work and does the work match your skills? Research shows that we are happier and more produc- tive when our needs and skills fit the job requirements. If you would like to see whether or not you fit with your current (or last) job, complete Self-Assessment 9.2. You may find the results very interesting.

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Realistic Job Previews A realistic job preview (RJP) gives a candidate a picture of both positive and negative features of the job and the organization before he or she is hired. This recruiting technique is very effective at reducing turnover within 30–90 days of employment.38 For instance, hiring managers at the Hilton Baltimore demonstrate to housekeeping job applicants how to make a bed, then ask the applicants to do it them- selves. With this realistic job preview, says Tishuana Hodge, regional director of HR, says, “We can see who is genuinely interested and physically up to the challenge.”39

EXAMPLE The Changing Job Market: Millennials, the Gig Economy, and the Episodic Career

Young adults (Millennials and Gen Z—those born between 1981 and the mid-2000s) are said to be less focused on finding jobs that nourish the wallet than those that nourish the soul, less concerned with finding financial success than on making a difference, as we said at the start of Chapter 3. But will the economy and the job market cooperate?

The Gig Economy Most of the job growth among U.S. work- ers during the past decade has been not in traditional jobs, but rather in opportunities for independent contractors, through temporary services or on-call work. In this so-called gig economy, organizations contract with independent work- ers who are not employees for short-term engagements, and the burden of providing health insurance and the like falls on the workers themselves rather than on an employer.40 Nearly half of all Millennial workers participate in the gig economy, and by 2027, such contract workers, who are often highly qualified, are expected to make up the majority of the workforce.41

Using contract workers saves employees a great deal of money. “Hiring experts for a specific project cuts over- head, ramp up time, hours spent interviewing and

on-boarding permanent candidates, as well as long-term payroll expenses. All of these eliminated costs drop to your bottom line,” according to the president of AXIOM Learning Solutions.42

The Episodic Career Farai Chideya is the author of The Episodic Career: How to Thrive at Work in the Age of Disruption.43 Because of decades of wage stagnation, the effects of the Great Recession, and “an incredible sense that perhaps the future will not be better than the past,” she says, we have entered into the era of “the episodic career.”44 Surviving this challenge will require three qualities, she sug- gests: emotional resilience to deal with the unexpected, an understanding of the job market, and self-knowledge to effec- tively market your skills.

The Gig Economy’s Dark Side Not everyone is convinced the gig economy is a good thing, however. Drivers for Lyft and Uber, for instance, earn little profit after spending their own money on auto insurance, repairs, fuel, depreciation, and other expenses.45 Contract workers also lack benefits, promotion and career development opportunities, bargaining power, and the security of a steady cash flow.

Former U.S. Labor Secretary Robert Reich says the gig economy is changing “the whole employment relationship,” and not for the better. Gig workers struggle to match their unpredictable income with the fixed costs of daily life, such as food and utilities. “They’re on a downward escalator,” he warns. Reich proposes adopting such economic supports for gig workers as income insurance to even out cash flows and portable benefits (tied to the worker, not the employer). But most important, he feels, is preventing people from falling into contract work in the first place: “If you believe, as I do, that the heart of the economy is a good job, with predictable wages and benefits, we are actually reducing the quality of life for millions of people,” he concludes.46

YOUR CALL What kind of skills could you bring to the gig econ- omy? Would you prefer to be a contract worker or to be an employee? Why?

The shortage of health care workers has led to an increase in hiring independent contractors. Do you see any danger with this trend for health care providers? ©Martin Barraud/age fotostock

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Selection: How to Choose the Best Person for the Job Whether the recruitment process turns up a handful of job applicants or thousands, now you turn to the selection process, the screening of job applicants to hire the best candidate. Essentially, this becomes an exercise in prediction: How well will the candi- date perform the job and how long will he or she stay?

Three types of selection tools are background information, interviews, and employment tests.

1. Background Information: Application Forms, Résumés, and Reference Checks Application forms and résumés provide basic background information about job applicants, such as citizenship, education, work histor y, and certifications.

Unfortunately, a lot of résumé information consists of mild puffery and even outra- geous fairy tales. A staggering 85 percent of job applicants lie on their résumés, a huge increase reported by a new study. One likely reason for the surge is that job seekers are trying to outsmart applicant tracking systems by doing whatever it takes to make sure key words in their résumés match the stated job requirements, whether they match the truth or not.47 Other reasons include attempts to hide perceived deficiencies in techni- cal or language skills, education, job history, or achievements, most of which are mis- takes that can be cause for dismissal.48 Regardless of the reason for misstating or lying, be aware that you can be fired for lying on a job application or résumé. We recommend honesty as the best policy.49

EXAMPLE Lies Job Applicants Have Told

Some of the most frequent lies job applicants tell on their résu- més are about their education, employment history, achieve- ments, and criminal or immigrant status. Here are a few real-world examples of what not to do.

Lies about Education Richard Clark falsely claimed, when he applied for a position at Coopers & Lybrand (Canada), that he had earned a doctorate. The lie went unchallenged and Clark was hired, but a few years later the company uncovered it while checking his qualifications before offer- ing him a partnership. Clark was fired, sued for wrongful dismissal, and lost in court.50 A better idea, if you feel your educational background is lacking, is to include other learning opportunities you’ve had, such as through volun- teer work.

Lies about Employment History Another common fabri- cation attempts to cover gaps in employment history. In his application for a job as a sales rep for Jazz Forest Products, a lumber company, David Lura said he was currently wind- ing down his own lumber business, but in fact he had closed it years before and had since worked in several other unrelated, low-level jobs. Lura was hired but he failed to close any sales, and after discovering he had lied about his job history, Jazz fired him. However, a Canadian

court agreed with Lura that this lie was not serious enough to warrant dismissal.51 Some people try to cover up taking years off to do child care, but it is better to explain than to hide these dates.52 As you might expect, people also embel- lish their salary histories, job titles, and achievements on projects.

Lies about Both Largely due to unfilled openings at the U.S. Office of National Drug Control Policy, Taylor Weyeneth, then 23, rose rapidly to the position of deputy chief of staff. However, almost as quickly he resigned, after an investigation by The Washington Post in early 2018 revealed that he had lied on three separate résumés about having a master’s degree (which he had never completed) and about his work at a law office, where a supervisor said he had actually been let go for not showing up. Weyeneth in fact had no professional experi- ence other than as a campaign volunteer and had even lied about being president of his fraternity.53

YOUR CALL Most employers compare résumé data to cover letters, check references, call alma maters, do background checks, sleuth on Google, and administer skills tests.54 Now that you know that, would you lie on your résumé? Why or why not?

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The Employee Polygraph Protection Act (1988) prohibits most private employers from using polygraphs during the hiring process. In contrast, federal, state, and local government agencies may use these tests. Would you be comfortable taking a polygraph test to obtain a government job? ©andreyuu/123RF

Many companies are finding conventional résu- més not all that useful (because they don’t quantify an applicant’s accomplishments or are too full of f luff descriptors such as “outstanding” or “ener- getic”) and are increasingly relying on professional networks such as LinkedIn, video profiles, or online quizzes to assess candidates.55 Résumés are still popular and expected, however, and your cover let- ter matters too.56

While, under the law, people serving as references can answer any and all questions, including about pro- tected information (like the applicant’s age, race, or marital status) and can say anything else they want to (as long as it’s true), hiring companies are still bound to use only legally allowed criteria for making employ- ment decisions (not age, race, marital status, and so on). And some employers, perhaps fearful of lawsuits, enact policies to limit what their managers can say

about former employees; for instance, some allow the person serving as a reference only to confirm the former employee’s job title and dates of employment.57 The infor- mation that is generally allowed includes the reason for departure and whether the employee would be rehired.58 Obviously, in any job you want to leave a good name behind you.

Many employers also like to check applicants’ credit references, although there is no evidence that people with weak credit scores are apt to be unqualified or dishonest employees. Several states have passed laws to curb the practice, often allowing it for jobs at certain levels or where required by law because of the position’s financial respon- sibilities. In most states, prospective employers need the applicant’s written consent to run a credit check in connection with a job offer.59

2. Interviewing: Unstructured, Situational, and Behavioral-Description The interview, which is the most commonly used employee-selection technique, may take place face to face, by videoconference, or—as is increasingly the case—via the Internet. (In-depth phone interviews of an hour or more are also frequently used.60 However, face-to-face interviews have been perceived as being more fair and leading to higher job acceptance intentions than videoconferencing and telephone interviews.61) To help eliminate bias, interviews can be designed, conducted, and evaluated by a committee of three or more people.

The most commonly used employee-selection technique, interviewing, takes three forms: unstructured interviews and two types of structured interviews.62

Unstructured Interview Like an ordinary conversation, an unstructured interview involves asking probing questions to find out what the applicant is like. There is no fixed set of questions asked of all applicants and no systematic scoring procedure. As a result, the unstructured interview has been criticized as being overly subjective and apt to be influenced by the biases of the interviewer. Equally important, it is susceptible to legal attack because some questions may infringe on non-job-related matters such as privacy, diversity, or disability.63 However, compared with the structured interview method, the unstructured interview has been found to provide a more accurate assessment of an applicant’s job-related personality traits.64

Structured Interview Type 1: The Situational Interview The structured interview involves asking each applicant the same questions and comparing their responses to a standardized set of answers. The “I wish . . . ” feature discusses Dena Baptiste’s views about using structured interviews to hire retail employees.

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Dena Baptiste, SHRM- SCP, worked as a Customer Relations Manager in the retail i n d u s t r y, a n d s h e believes her company could have done a better job selecting the right employees for the job.

As Dena points out, there is high employee turnover in the retail industry, and employers often take the “warm

bodies” approach to hiring—that is, they work quickly to fill posi- tions for the sake of filling them rather than taking time to metic- ulously select the candidates who best fit the company culture.

At Dena’s company, managers would typically hire employ- ees on the spot after one interview if they had a good personal- ity or seemed motivated to do the job. This practice was particularly prevalent during busy selling seasons, like the win- ter holidays, when the company needed to make sure it was fully staffed for the shopping rush.

Employees who are hired quickly without much vetting often fail to stay with the company for an extended period. And

the cycle continues when the company works to quickly fill those vacant positions in the same manner.

“I think it’s important to have a structured interview process in place. I agree that somebody has to be a good fit and there are certain personality traits that are important, like being friendly and outgoing. But there has to be a standard process in place, and I really believe that there needs to be more than one person involved in the interview process,” said Dena.

“Because retail has such high turnover, you have to move quickly, which is fine, but you still have to make the right deci- sions. If you’re questioning a candidate and you have one man- ager who really likes that person and another manager who isn’t sure, maybe you need to take a day to think about it instead of hiring the person because you need to fill a position. They should take the time to think about it, come back together and discuss it, and make a final decision,” said Dena.

By having a solid interview and selection process in place, retail stores can work to combat high turnover and increase employee morale. In contrast, Dena noted that “When you have somebody who doesn’t have the right temperament or personality, or doesn’t really care all that much about the job, you get a drag on the employee morale, which can affect the whole team—and that can affect your customers. It’s just not good for the organization as a whole.” Courtesy of Dena Baptiste

I Wish… …my company used a structured interview process.

In one type of structured interview, the situational interview, the interviewer focuses on hypothetical situations. Example: “What would you do if you saw two of your people arguing loudly in the work area?” The idea here is to find out if the applicant can handle difficult situations that may arise on the job.

Structured Interview Type 2: The Behavioral-Description Interview In the sec- ond type of structured interview, the behavioral-description interview, the interviewer explores what applicants have actually done in the past. Example: “What was the best idea you ever sold to a supervisor, teacher, peer, or subordinate?” This question (the U.S. Army asked it of college students applying for its officer training program) is designed to assess the applicants’ ability to influence others.

Courtesy Dena Baptiste

The Manage U feature at the beginning of the chapter talked about getting ready for a job interview. Here we add to those insights by taking you inside the interviewer’s point of view.65

Before the Interview: Employers Define Their Needs and Review Applicants’ Résumés. It’s been said that looking to hire somebody is like going to the supermarket; the employer needs to have a list and know what he or she needs. Thus, the

HR department will write out (or be told) what skills, traits, and qualities the job requires that the company is trying to fill. The interviewer will also look at the applicant’s résumé or applica- tion to identify relevant experience, gaps, and discrepancies.

The Interviewer Prepares the Questions to Be Asked. The interviewer should use a structured approach that asks all can- didates the same set of questions, so their answers can be

The Job Interview: What Employers Are Looking ForPRACTICAL ACTION

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compared. (This helps keep the company out of legal trouble, too, because it makes it more difficult for the interviewer to act on racial or gender bias.) In general, the questions should be designed to elicit the following types of information. • What drawbacks does the applicant’s previous work

experience show? Examples: “Why are you leaving your current job, or why are you currently unemployed?”

• Does the applicant have the knowledge and soft skills to do the job? Examples: “Give an example where you came up with a creative solution.” “Do you enjoy problem solving?” “Do you work well on a team?”

• Can the applicant handle difficult situations? Examples: “Tell me about an irate customer you handled.” “Can you work without constant direction?”

• Is the applicant willing to learn? Examples: “Have you taken any extra classes, and why?” “How do you deal with change?” “What would you like to learn to do better?”

• Will the applicant fit in with the organization’s culture? Examples: “Where do you see yourself in five years?” “How would your last supervisor describe you?” “How do you set goals for yourself?”

Interviewers Often Follow a Three-Scene Interview Scenario. The interview itself may follow a three-scene script. • Scene 1: The first three minutes—small talk and “com-

patibility” test. The first scene is really a “compatibility test.” It takes about three minutes and consists of exchang- ing small talk, giving the interviewer a chance to establish rapport and judge how well the candidate makes a first impression.

Note: First impressions are powerful. In a recent survey re- ported in the Journal of Occupational and Organizational Psy- chology, about 700 students participated in real job interviews of about half an hour each, after which 60 percent of the 166 interviewers said they had made up their minds about the can- didate in 15 minutes or less. The rest made decisions within a few minutes of the interview’s conclusion.66

• Scene 2: The next 15–60 minutes—asking questions and listening to the applicant’s “story.” In the next scene, the interviewer will ask you the questions he or she previously wrote out (and answer those that you have). A good inter- viewer will allow you, the interviewee, to do 70 percent– 80 percent of the talking, and he or she will take notes to remember important points. Be aware that the interviewer’s intuition can play a strong role in the hiring decision.

• Scene 3: The final two minutes—closing the interview and setting up the next steps. In the final minutes, the in- terviewer will listen to determine whether the candidate expresses interest in taking the job.

After the Interview. After you have left, the interviewer will probably write a short report making some sort of quantitative score of your qualifications and indicating reasons for the deci- sion. If he or she decides to invite you back for a second inter- view (or pass you along to another interviewer), your references will also be checked.

YOUR CALL What additional questions would you like to be asked that would showcase you as the best candidate? How would you work into the interview what you want to say?

3. Employment Tests: Ability, Personality, Performance, Integrity, and Others Employment tests are legally considered to consist of any procedure used in the employ- ment selection decision process, even application forms, interviews, and educational requirements.67 The Equal Opportunity Employment Opportunity Commission lists “cognitive tests, personality tests, medical examinations, credit checks, and criminal background checks” among the common types.68 Most types of employment testing are legal, including drug tests, though employers are obligated not to use results in ways that discriminate based on candidates’ demographic or ethnic characteristics. Poly- graphs, or lie detector tests, are generally not allowed, however.69 Some major types of employment tests are the following.

Ability Tests Ability tests measure physical abilities, strength and stamina, mechani- cal ability, mental abilities, and clerical abilities. Intelligence or cognitive ability tests are also popular for predicting future executive performance, and perhaps with good reason. IBM’s Supercomputer, Watson, recently performed an analysis of the personal- ity traits of leading CEOs in industries including entertainment, finance, fashion, media, politics and found that intellect was one of the top two. (Altruism was the other.)70 The military and law enforcement agencies test for physical qualifications, along with behavioral and educational abilities.

Performance Tests Performance tests, or skills tests, measure performance on actual job tasks—so-called job tryouts—as when computer programmers take a test on a

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particular programming language or middle managers work on a small sample project.71 Some companies have an assessment center, in which management candidates partici- pate in activities for a few days while being assessed by evaluators. A team of researchers examined the relative accuracy by which ability tests and assessment center results pre- dicted who would be successful on the job. Although both tests were effective, assess- ment center tests were more effective.72

Personality Tests Personality tests measure such personality traits as emotional intel- ligence, social intelligence, resilience, personal adaptability, and need for achievement. Many of these represent competencies associated with career readiness. Career-assess- ment tests that help workers identify suitable jobs tend to be of this type.73 One of the most famous personality tests, in existence for more than 75 years, is the 93-question Myers–Briggs Type Indicator, which has been translated into 25 languages and taken by millions of people around the world.74 However, this and other personality tests, espe- cially if like Myers-Briggs they were not designed for use in hiring decisions, need to be interpreted with caution because of the difficulty of measuring personality characteris- tics and of making a legal defense if the results are challenged.75 In the last few years, their use has declined.76

EXAMPLE Personality Tests: Pros and Cons

Personality tests, if used, should be only one piece of the man- ager’s hiring strategy. A recent analysis of selection procedures found that among the strategies that best predict future job performance is a general abilities test combined with an integ- rity test, one kind of personality test.77

Pros Those who support the use of personality tests in hiring believe they help identify candidates who could be good fits for the corporate culture, and those with personality traits that suggest superior performance in the job. They also feel tests help weed out those who may be dishonest and uncover the potential downsides of desired qualities like a strong work ethic (potentially poor response to stress) or high intelligence (potentially low emotional intelligence).78

Judy Weiniger is CEO of Weiniger Group and a believer in the use of personality tests. Because the tests ask repetitive questions to elicit the same information in different ways, she finds them reliable for helping identify candidates who will do well in different jobs based on their core personality traits, such as pinpointing people with strong social skills as potentially good sales reps. She also checks references and consults with her staff. “I think it would be very difficult to trick these tests and appear to be someone you’re not,” Weiniger says.79

Cons Those who disagree believe such tests are subjective, open to interpretation by people who are not trained to evalu- ate the results, and vulnerable to misuse by applicants who try to choose the answers they think the hiring company is looking for. Some also fear that personality tests can be discriminatory (some have caught the attention of the Equal Employment Opportunity Commission) and that they raise the potential for privacy violations.80 Tests that appear to look for mental health characteristics may violate the Americans with Disabilities Act.81

The Myers & Briggs Foundation discourages reliance on the Myers-Briggs test, saying, “It is unethical and in many cases illegal to require job applicants to take the Indicator if the results will be used to screen out applicants. The administrator should not counsel a person to, or away from, a particular career, personal relationship or activity based solely upon type information.”82

YOUR CALL Would you be comfortable taking a personality test? Do you think it’s better to honestly answer the questions or to provide ones that makes you appear more suited for the job? Explain.

Integrity Tests Integrity tests “assess attitudes and experiences related to a person’s honesty, dependability, trustworthiness, reliability, and pro-social behavior.”83 The ratio- nale for these tests is that people who do poorly on them may have low productivity or tend toward undesired work behaviors like theft, sabotage, and even violence. Overt integrity tests often ask specifically whether the applicant has ever engaged is illegal behavior. While integrity tests in general are easy to administer, it is also relatively easy for test takers to submit false responses.84

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Drug and Alcohol Tests Companies are permitted to test job applicants for drug and alcohol use before making an offer, contingent to making an offer, and randomly after hiring, depending on state law. Job applicants cannot be tested selectively; either everyone who applies for a job must be tested or no one can be. Tests for the presence of drugs or alcohol can examine the person’s urine, blood, hair, breath, saliva, or sweat. Marijuana use presents a complex problem because some states have legalized it for medical and/or recreational use, but the federal government has not.85 Partly for this reason, and partly because unemployment has dropped over the last few years, putting pressure on companies to attract employees, drug testing for employment has been declining. Among companies that no longer conduct drug testing are Excellence Health Inc., AutoNation Inc., and the Denver Post.86

Reliability and Validity: Are the Tests Worth It? With any kind of test, an important legal consideration is the test’s reliability—the degree to which a test measures the same thing consistently—so that an individual’s score remains about the same over time, assuming the characteristics being measured also remain the same.

Another legal consideration is the test’s validity—the test measures what it purports to measure and is free of bias. If a test is supposed to predict performance, then the indi- vidual’s actual performance should reflect his or her score on the test. Using an invalid test to hire people can lead to poor selection decisions. It can also create legal problems if the test is ever challenged in a court of law.

Geeks, Robots, and People Analy tics: How AI Is Changing Recruiting Artificial intelligence (AI) may still be a relatively new technology, but it is already changing many aspects of the recruitment and selection processes. Some AI programs can help with tasks as routine but time-consuming as scheduling interviews, screening and ranking candidates, creating job postings, and administering some kinds of ability tests. One AI company is working on a virtual assistant that can build a database of applicants’ interactions with the hiring company to preserve information for future ref- erence, and another builds models to help managers hire based on data about their current employees. AI can also help managers improve employee diversity and scan video interviews to analyze applicants’ verbal and nonverbal communication for pat- terns and inconsistencies.87 ●

No drugs. Many jobs, such as those in warehousing and trucking, require that job applicants take a drug test to see if they test positive for marijuana, heroin, and other opioid drugs. However, many potential applicants simply skip tests they think they cannot pass. Do you think it's fair to force certain workers to take drug tests? ©Cultura/Getty Images

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Do we work only for a paycheck? Many people do, of course. But money is only one form of compensation.

Compensation has three parts: (1) wages or salaries, (2) incentives, and (3) benefits. In different organizations one part may take on more importance than another. For instance, in some nonprofit organizations (education, government), salaries may not be large, but health and retirement benefits may outweigh that fact. In a high-technology start-up, the salary and benefits may actually be somewhat humble, but the promise of a large payoff in incentives, such as stock options or bonuses, may be quite attractive. Let’s consider these three parts briefly. (We expand on them in Chapter 12, when we discuss ways to motivate employees.)

Wages or Salaries Base pay consists of the basic wage or salary paid employees in exchange for doing their jobs. The basic compensation is determined by all kinds of economic factors: the pre- vailing pay levels in a particular industry and location, what competitors are paying, whether the jobs are unionized, if the jobs are hazardous, what the individual’s level is in the organization, and how much experience he or she has.

Incentives To attract high-performing employees and to induce those already employed to be more productive, many organizations offer incentives, such as commissions, bonuses, profit- sharing plans, and stock options. We discuss these in detail in Chapter 12.

Benefits Benefits, or fringe benefits, are additional nonmonetary forms of compensation designed to enrich the lives of all employees in the organization, which are paid all or in part by the organization. We discuss benefits in more detail in Chapter 12, but examples are many: health insurance, dental insurance, life insurance, disability protection, retire- ment plans, holidays off, accumulated sick days and vacation days, recreation options, country club or health club memberships, family leave, discounts on company merchan- dise, counseling, credit unions, legal advice, and education reimbursement. For top executives, there may be “golden parachutes,” generous severance pay for those who might be let go in the event the company is taken over by another company.

Benefits are no small part of an organization’s costs. In September 2017, private industry spent an average of $35.64 per hour worked in employment compensation, of which wages and salaries accounted for 68.3 percent and benefits for the remaining 31.7 percent.88

Managers should also be aware that men and women regard workplace benefits differ- ently. Recent research by PriceWaterhouse showed that almost two-thirds of women respondants valued work–life balance as very important compared to only a little more than half of men. Women also valued “feeling like I can be myself” and having meaningful work slightly more than did men.89 In another report, by MassMutual, men and women both chose vacation time and better 401(k) retirement plan matching as their top bene- fits, while women gave much higher value to tuition reimbursement than men did.90 ●

9.3 Managing an Effective Workforce: Compensation and Benefits

THE BIG PICTURE Managers must manage for compensation—which includes wages or salaries, incentives, and benefits.

LO 9-3 Outline common forms of compensation.

Communication is everything. Human resource managers need to keep these questions in mind: What good does it do a company to have attractive incentive plans if employees don’t understand them? Will an employee exert the extra effort in pursuit of rewards if he or she doesn’t know what the rewards are? ©ColorBlind Images/Blend Images LLC

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On your first day of work at a new job, you will probably have to fill out a lot of forms. (Don’t forget to bring your documentation—driver’s license, Social Security card, per- haps passport—so you’ll get the paperwork right and be paid on time.) After that, the process of orientation begins.

Today when a hire is made, companies often offer what is known as onboarding, pro- grams that help employees to integrate and transition to new jobs by making them familiar with corporate policies, procedures, cultures, and politics by clarifying work-role expecta- tions and responsibilities. This process also is referred to as employee socialization.91 New software engineers hired at Facebook, for example, spend six weeks in an onboard- ing program called “Bootcamp.” In it they are assigned a mentor and given a variety of tasks in specific “tracks” so they can learn about the company, its procedures, and best practices while doing real work (under close supervision, to avoid negatively affecting the site’s more than 1 billion users). During these six weeks, the new employees gain enough first-hand, practical experience of the company’s features and products to be able to choose the team on which they want to work. The program also allows them to bond with each other as well as network across the company. Ultimately, says Vlad Fedorov, the company’s engineering director, “We want to set expectations that you’re here to use your talents to be as impactful as possible. And we believe in you and here you’re able to do it right from the start.”92

The emphasis in onboarding, as we’ve said, is on “human capital.” Why? Researchers have found that effective employee socialization enhances their job satisfaction and performance and reduces turnover.93 The manager’s tools for helping employees per- form their jobs are orientation and employee learning and development programs.

Orientation: Helping Newcomers Learn the Ropes The finalist candidate is offered the job, has accepted it, and has started work. Now he or she must begin, in that old sailor’s phrase, to “learn the ropes.” This is the start of orientation, helping the newcomer fit smoothly into the job and the organization.

9.4 Orientation and Learning and Development THE BIG PICTURE Two ways newcomers are helped to perform their jobs are through orientation to fit them into the job and through learning and development to upgrade employees’ skills in their current position and develop them for future opportunities.

LO 9-4 Describe the processes used for orientation and learning and development.

Group training. In large companies, orientation and ongoing training are often conducted in group sessions led by a presenter while the employees follow along. What are the pros and cons of this approach? ©Rawpixel.com/ Shutterstock

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Helping New Employees Get Comfortable: The First Six Months “How well will I get along with other employees?” “What if I screw up on a project?” Going into a new job can produce a lot of uncertainty and anxiety. In part this is because, depending on the job, it may take 2–24 months for an average employee to be fully productive.94

The first six months on a job can be critical to how one performs over the long haul because that’s when the psychological patterns are established. Thus, employers have discovered that it’s far better to give newcomers a helping hand than to let them learn possibly inappropriate behavior that will be hard to undo later.95

The Desirable Characteristics of Orientation Like orientation week for new college students, the initial socialization period is designed to give new employees the information they need to be effective. In a large organization, orientation may be a for- mal, established process. In a small organization, it may be so informal that employees find themselves having to make most of the effort themselves.

Following orientation, the employee should emerge with information about three mat- ters (much of which he or she may have acquired during the job-application process):

■ The job routine. At minimum, the new employee needs to have learned what is required in the job for which he or she was hired, how the work will be evalu- ated, and who the immediate co-workers and managers are. This is basic.

■ The organization’s mission and operations. Certainly all managers need to know what the organization is about—its purpose, products or services, opera- tions, and history. And it’s now understood that low-level employees perform better if they, too, have this knowledge.

■ The organization’s work rules and employee benefits. A public utility’s HR depart- ment may have a brochure explaining formalized work rules, overtime require- ments, grievance procedures, and elaborate employee benefits. A technology start-up may be so fluid that many of these matters will not have been established yet. Even so, there are matters of law (such as those pertaining to sexual harass- ment) affecting work operations that every employee should be made aware of.

Learning and Development: Helping People Perform Better Of course, in hiring, an employer always tries to select people whose qualifications match the requirements of the job. Quite often, however, there are gaps in what new employees need to know. These gaps are filled by learning and development (L&D) programs. The process has five steps, as shown below. (See Figure 9.2.) Typical areas for employee learning and development programs are customer service, safety, leadership, computer skills, quality initiatives, communications, human relations, ethics, diversity, and sexual harassment.

4. Implementation How should learning and development be e�ected?

3. Selection Which learning and development methods should be used?

5. Evaluation Is the learning and development working?

2. Objectives What should learning and development achieve?

1. Assessment Is learning and development needed?

FIGURE 9.2 Five steps in the learning and development process

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A recent report reveals that among Millennials, who are now the largest part of the U.S. workforce, training and development ranks as the workplace benefit they value most.96 Some companies excel at L&D. For example, SAS, a global business software and services company headquartered in North Carolina, offers leadership programs, mentoring, and a career resource center. According to Shannon Heath, the company’s senior communications specialist, “Knowledge workers never want to be stagnant. So SAS provides opportunities for growth to keep our employees challenged, motivated and engaged.”97 CyberCoders is a placement organization for the tech industry that offers an “incubator program” for its recruiters. Shane Lamb, the company’s president, says, “We believe that equipping young professionals with the tools they need to build their busi- ness development and recruiting skill will lead to a long and successful career.”98

At Estée Lauder, the cosmetics giant, learning and development opportunities include short-term special assignments, “stretch projects” that occupy a few hours a week in addition to the learner’s regular workload, and temporary job swaps and job- sharing arrangements.99 And at Yelp, to retain young account executives who have been carefully developed and are then sought out by competitors, managers act as mentors, stress the company’s commitment to employee development, and promote from within. Optional L&D opportunities are always available to employees.100 IBM uses artificial intelligence (AI) to analyze employees’ profiles, training already undertaken, and expected career path to identify appropriate L&D programs for individuals, which can include animated simulations to provide coaching on desired behaviors.101

Some HR professionals believe most companies should be taking their L&D investments more seriously, however. Penny Asher, director of executive education at Open University Business School, says managers should realize that spending on effective L&D programs is less costly in the long run than failing to develop employees’ capabilities across the organiza- tion. Employees at all levels expect it, she says. “These days, employees are demanding con- tinuous learning and an investment in all the employee population rather than just picking up on the top tier of management. We are experiencing a fundamental shift that will affect every L&D department. . . . there has never been such pressure to get it right.”102

The Different Types of Learning and Development There are all kinds of learn- ing and development methods, and their effectiveness depends on whether facts or skills are being taught. If people are to learn facts—such as work rules or legal matters— lectures, videotapes, and workbooks are effective. If people are to learn skills—such as improving interpersonal relations or the use of new tools—then interactive techniques such as discussion, role-playing, case analysis, and simulations work better.

Another way to categorize L&D methods is to distinguish between on-the-job and off-the-job programs.

■ On-the-job learning and development. On-the-job L&D takes place in the work setting while employees are performing job-related tasks. Four major methods are coaching, training positions, job rotation, and planned work activities.

■ Off-the-job learning and development. Off-the-job L&D consists of classroom programs, workbooks, videos, and games and simulations. Today, of course, lots of off-the-job development consists of technology-enhanced learning— online learning, or e-learning. Virtual reality (VR) is an increasingly valuable L&D resource because it can simulate real situations and make learning more engaging, which translates into better results for retention and recall. Case Western University and Microsoft have partnered to train health care workers in human anatomy with a VR program called HoloLens.103 Another VR initia- tive called MPathic helps medical students learn how to better read patients’ and families’ verbal and nonverbal language to improve their ability to handle difficult conversations.104 Another relatively new approach is microlearning, or bite-size learning, which segments learning into bite-size content, enabling a stu- dent to master one piece of learning before advancing to anything else. Most microlearning mixes video and interactive lessons that take under five minutes to complete and include a quiz.105

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EXAMPLE Keller Williams Realty: Learning for Earning

“At Keller Williams University, we don’t believe in learning for learning’s sake; we believe in learning for earning’s sake.” Keller Williams Realty is a com- mission-based global real estate fran- chise company headquartered in Austin, Texas, with almost 177,000 agents in more than 900 regional offices around the world. Since 2014, it has been the largest such company in the world, with a strong commit- ment to educating, coaching, and developing its franchised associates. This drive to develop its agents is what the company believes not only sets it apart from competitors but also drives its steady growth and success.

In 2017, Keller Williams was named the top training organi- zation in any industry worldwide by Training magazine (a pro- fessional development magazine for HR professionals). Among the criteria for the No. 1 designation are objective measures like the company’s total budget for learning and development, that budget as a percent of company payroll, the number of L&D hours per program and per employee, and the results of several subjective measures and workplace surveys.

The company’s learning and development tools and resources are available to agents at all levels of experience and are managed by the company’s chief learning officer. The intention is to help all Keller Williams agents become experts in their particular markets, which can include luxury and com- mercial real estate and farm properties. The learning pro- grams include Keller Williams University, which offers online multimedia training; skill building programs called MAPS

Coaching; hundreds of onsite and virtual classroom training classes; special events including a “family reunion” convention; and several others. “For 35 years, Gary Keller has been saying we’re a training and coaching organization disguised as a real estate company,” said John Davis, CEO and president. “Thanks to his vision and commitment to invest- ing in our people, we’ve been able to help our associates grow their busi- nesses and create opportunities to fund their lives.”

Keller Williams’s new Mega Agent Expansion (MEA) program has helped more than 200 highly successful asso-

ciates (“mega agents”) expand their franchises into new mar- kets by using class instruction, webinars, coaching, consulting, and mentoring to guide them. Learners complete the program with detailed business plans for their expansion efforts, new leadership skills, and needed expertise. A private social media community also allows them to share best practices with each other. As another benefit to the company, MEA helps it to retain these top agents. “For the first time,” says Dianna Kokoszka, CEO of the MAPS coaching program, “individual agents can realize their dream of their brand stretching around the country or the world, all within Keller Williams.”106

YOUR CALL Keller Williams employees and agents average 82 hours of formal learning a year, almost seven hours a month. Do you think this is excessive? Can organizations spend too much on L&D? Explain.

Off-the-job learning and development. Your author, Angelo Kinicki, has conducted hundreds of educational classes off the job for executives around the world. Do you think managers can readily apply this knowledge back at work? ©stevecoleimages/Getty Images

Is a Career in HR Right for You? This survey is designed to assess your skills and interests and determine if a career in human resources is right for you. Please be prepared to answer these questions if your instructor has assigned Self-Assessment 9.3 in Connect.

1. Are you suited for a career in human resources? Which specific aspect of human resources do you prefer?

2. Look at the top two areas of HR for which you tested as being best suited. Look over the descriptions of these fields and then identify what skills you need to have to be successful.

3. Even if you do not pursue a career in HR, which skills do you feel you should continue to develop? Explain.

SELF-ASSESSMENT 9.3 CAREER READINESS

You now have learned about the different HR programs and practices, such as recruiting, training, and compensation. Do careers in these fields interest you? Not everyone is suited for HR work, but it is very rewarding for some. The following self- assessment will help you decide whether or not a career in HR fits for you. ●

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Want to know how well your managers think you’re doing at work? Be prepared to be disappointed: 60 percent of employees say they don’t get adequate feedback, accord- ing to a 2015 study, and 43 percent say they don’t get enough feedback to improve performance.107 Feedback about how you’re doing in your job is part of performance management.

Performance Management in Human Resources No doubt you’ve had the experience at some point of having a sit-down with a superior, a boss or a teacher, who told you how well or poorly you were doing—a performance appraisal. A performance appraisal is a single event, as we discuss later in this section. Performance management, by contrast, is a powerful ongoing activity that has pro- duced such spectacular results as 48 percent higher profitability, 22 percent higher productivity, 30 percent higher employee engagement scores, and 19 percent lower turnover.108

Performance management is defined as a set of processes and managerial behaviors that involve defining, monitoring, measuring, evaluating, and providing consequences for performance expectations.109 It consists of four steps: (1) define performance, (2) moni- tor and evaluate performance, (3) review performance, and (4) provide consequences. (See Figure 9.3.)

9.5 Performance Appraisal THE BIG PICTURE Performance appraisal, assessing employee performance and providing them feedback, may be objective or subjective. Appraisals may be by peers, subordinates, customers, or oneself. Feedback may be formal or informal.

LO 9-5 Discuss effective performance management and feedback techniques.

Step 1: Define Performance Set goals and communicate performance expectations.

Step 3: Review Performance Deliver feedback and

coaching.

Step 4: Provide Consequences Administer valued rewards and

appropriate punishment.

Step 2: Monitor & Evaluate Performance

Measure and evaluate progress and outcomes.

FIGURE 9.3 Performance management: four steps Source: Adapted from A. J. Kinicki, K. J. L. Jacobson, S. J. Peterson, and G. E. Prussia, “Development and Validation of the Performance Management Behavior Questionnaire,” Personnel Psychology, 66 (2013), pp. 1–45.

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EXAMPLE Performance Management at Edward Jones

At almost 100 years old, St. Louis–based broker-dealer Edwards Jones & Co. is now the largest U.S. securities firm in terms of number of branches and salesforce. The company has 13,314 branches in the United States and Canada, mostly in small cities and towns, and employs nearly 16,000 financial advisors, who focus on selling mutual funds to nearly 7 million individual investors. Edward Jones has won a number of awards as a best place to work, a corporate equality proponent, a best workplace for women, and a top training company. It was ranked by Fortune as the 5th Best Place to Work For in the United States in 2017.110 Here is a description of its performance management process (as defined by Figure 9.3).111

1. Define performance. Edward Jones generally hires and trains career changers and military veterans. It encour- ages them to build their financial advisor practice by adopting a four-step business planning process: Assess market and team; plan mission for three to five years; execute the plan; measure progress regularly. A set of proprietary planning tools and sample documents and a learning program are offered to develop skills such as collaboration, goal setting, and planning.

2. Monitor and evaluate performance. Several years ago, the company increased long-term performance expecta- tions for its financial advisors. For example, advisors who were already exceeding expectations were expected to the increase their monthly production to $30,000 within 10 years of starting and $32,000 within 12 years. Those

below expectations had goals of $20,000 a month at 5½ years and $22,000 at 6 years.

3. Review performance. Based on their current job de- scriptions, advisors are evaluated on their performance using a scale of 5, ranging from outstanding to unsatis- factory, against criteria like job knowledge, teamwork, decision making/problem solving, and leadership. Managers review their ratings with advisors and then give them an overall rating. Performance appraisal is seen as part of an ongoing, five-part circular process con- sisting of review, plan, develop, perform, and assess.

4. Provide consequences. Edward Jones advisors operate on a salary-plus-commission pay plan in which the propor- tion of earnings coming from commissions increases over time. High performers can be rewarded with bonuses, profit sharing, and travel awards; about 500 associates are also limited partners in the company. Low-performing individuals are given four months to improve, along with a performance improvement plan to help them get there.

YOUR CALL What do you think about Edward Jones’ performance manage- ment process? The financial goals for its financial advisors are considered low in comparison to those at competitors like Morgan Stanley and Wells Fargo Advisors, which tend to hire more experienced brokers. Do you think Edward Jones’ perfor- mance goals are appropriate given the differences between it and other brokerages? Why or why not?

Performance management, which is often exerted through an organization’s manag- ers and human resources policies and practices, is a powerful means for improving individual, group, and organizational effectiveness.112

Performance Appraisals: Are They Worthwhile? A performance appraisal, or performance review, is a management process that consists of (1) assessing an employee’s performance and (2) providing him or her with feedback. Unlike performance management, which is an ongoing, interactive process between managers and employees, a performance appraisal is often dictated by a date on the calendar and can sometimes consist of a tense conversation that leaves both parties feeling unsatisfied.

Management expert W. Edwards Deming (see Chapter 2) felt that such reviews were actually harmful because people remember only the negative parts.113 Ninety-five per- cent of managers in one study declared they were dissatisfied with their performance review/management systems.114 No wonder, then, that some companies began dropping the practice altogether, although they soon learned that putting nothing in its place left employees without needed and indeed desired feedback about how they were doing on the job. Some companies went in the other direction, providing more frequent apprais- als that would let managers and employees make faster “course corrections” and

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prevent performance problems from piling up. Among these companies are Gap, Pfizer, Cigna, and Procter & Gamble. Johnson & Johnson used to encourage managers to have five meetings a year in place of an annual review, in which, with each subordinate, they would focus on “goal setting, career discussion, a midyear performance review, a year- end appraisal, and a compensation review.” Now the company is experimenting with a customized app that lets managers, employees, and their peers exchange feedback on a continuous basis and in real time.115

Deloitte, a global consulting firm, led the way in redesigning the performance review in 2015 after discovering, among other negatives, that the process in place was consum- ing nearly 2 million work hours a year, not nearly enough of which was spent in discus- sions of employees and their futures. After much internal research, the company came up with a streamlined system with three goals: (1) to recognize each individual’s perfor- mance by (2) asking the person’s manager four questions each quarter about what future actions he or she planned to take with respect to that employee, such as promote or flag as low-performing, and (3) to have managers check in with team members once a week. The overall aim of the revamped program is to gain not the “simplest” view of each employee, but the “richest.”116

Accenture, Cigna, Microsoft, and Adobe are among the companies that have revamped their systems to encourage frequent or at least regular “check ins”; they are also abandoning rating or ranking systems they used in the past (see below). Adobe has boosted its stock price and reduced turnover by 30 percent since making the change.117 Today, Deloitte continues to survey performance management and appraisal systems, and it reports that employees want regular feedback, likely influenced by the response mechanisms of social media, and that most companies are now able to obtain increas- ingly useful data for better HR decision making.118

In that context, let us take a look at performance appraisals, since they are still used frequently.

Two Kinds of Performance Appraisal: Objective and Subjective There are two ways to evaluate an employee’s performance—objectively and subjectively.

1. Objective Appraisals Objective appraisals, also called results appraisals, are based on facts and are often numerical. In these kinds of appraisals, you would keep track of such matters as the numbers of products the employee sold in a month, cus- tomer complaints filed against an employee, miles of freight hauled, and the like.

There are two good reasons for having objective appraisals:

■ They measure desired results. Objectively measuring desired results enables managers to focus employees on the important or preferred outcomes. Exam- ples would be the number of cars sold by salespeople, the number of journal publications for professors, and the number of defects for a manufacturing plant.

■ They are harder to challenge legally. Not being as subject to personal bias, objective appraisals are harder for employees to challenge on legal grounds, such as for age, gender, or racial discrimination.

2. Subjective Appraisals Few employees can be adequately measured just by objective appraisals—hence the need for subjective appraisals, which are based on a man- ager’s perceptions of an employee’s (1) traits or (2) behaviors.

■ Trait appraisals. Trait appraisals are ratings of such subjective attributes as “attitude,” “initiative,” and “leadership.” Trait evaluations may be easy to cre- ate and use, but their validity is questionable because the evaluator’s personal bias can affect the ratings.

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■ Behavioral appraisals. Behavioral appraisals measure spe- cific, observable aspects of performance—being on time for work, for instance—although making the evaluation is still somewhat subjective. An example is the behaviorally anchored rating scale (BARS), which rates employee grada- tions in performance according to scales of specific behaviors. For example, a five-point BARS rating scale about attendance might go from “Always early for work and has equipment ready to fully assume duties” to “Frequently late and often does not have equipment ready for going to work,” with gra- dations in between.

Who Should Make Performance Appraisals? If one of your employees was putting on a good show of solving prob- lems that, it turned out, she had actually created herself so that she could be an “office hero” and look good, how would you know about it? (This phenomenon has been dubbed “Munchausen—pronounced MUN- chow-zen—at work” because it resembles the rare psychological disorder in which sufferers seek attention by making up an illness.)119 Most per- formance appraisals are done by managers; however, to add different perspectives, sometimes appraisal information is provided by other people knowledgeable about particular employees.

Peers, Subordinates, Customers, and Self Among additional sources of infor- mation are co-workers and subordinates, customers and clients, and the employees themselves.

■ Peers and subordinates. Co-workers, colleagues, and subordinates may well see different aspects of your performance. Such information can be useful for development, although it probably shouldn’t be used for evaluation. (Many managers will resist soliciting such information about themselves, of course, fearing negative appraisals.)

■ Customers and clients. Some organizations, such as restaurants and hotels, ask customers and clients for their appraisals of employees. Publishers ask authors to judge how well they are doing in handling the editing, production, and mar- keting of their books. Automobile dealerships may send follow-up question- naires to car buyers.

■ Self-appraisals. How would you rate your own performance in a job, knowing that it would go into your personnel file? Probably the bias would be toward the favorable. Nevertheless, self-appraisals help employees become involved in the whole evaluation process and may make them more receptive to feedback about areas needing improvement.

360-Degree Assessment: Appraisal by Multiple Sources We said that perfor- mance appraisals may be done by peers, subordinates, customers, and oneself. Some- times all these may be used in a technique called 360-degree assessment.

In a “theater in the round,” the actors in a dramatic play are watched by an audience on all sides of them—360 degrees. Similarly, as a worker, you have many people watching you from all sides. Thus has arisen the idea of the 360-degree feedback appraisal, or 360-degree assessment, in which employees are appraised not only by their managerial superiors but also by peers, subordinates, and sometimes clients, thus providing several perspectives.

Typically, an employee chooses evaluators from 6 to 12 other people to make evaluations, who then fill out anonymous forms, the results of which are tabulated by

“Here’s the deal . . .” One of the most important tasks of being a manager is giving employees accurate information about their work performance. Which would you be more comfortable giving—objective appraisals or subjective appraisals? ©Asia Images Group/Getty Images

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computer. The employee then goes over the results with his or her manager and together they put into place a long-term plan for performance goals.

All told, collecting performance information from multiple sources helps the person being evaluated get a broad view of his or her performance, and it highlights any biases and perceptual errors that are occurring. Finally, using multiple raters also makes it much more difficult for managers to unfairly favor or punish particular employees. According to one report, more than 85 percent of Fortune 500 companies use this method.120 A recent study showed that this form of evaluation enhanced employees’ ability and knowledge sharing.121

Forced Ranking: Grading on a Curve To increase performance, an estimated one- third of Fortune 500 companies have some variant of performance review systems known as forced ranking (or “rank and yank”) systems.122 In forced ranking performance review systems, all employees within a business unit are ranked against one another and grades are distributed along some sort of bell curve—just like students being graded in a college course. Top performers (such as the top 20 percent) are rewarded with bonuses and promotions; the worst performers (such as the bottom 20 percent) are given warnings or dismissed.

This type of performance review system is rapidly losing favor. Proponents of forced ranking say it encourages managers to identify and remove poor performers and struc- tures a predetermined compensation curve, which enables them to reward top performers. However, opponents contend that the system eventually gets rid of talented as well as untalented people.123 There may also be legal ramifications. A recent suit brought against Yahoo’s media division claimed the company used forced ranking to discriminate against male employees.124

In addition, numeric ratings, rankings, and formal evaluations without positive feed- back may produce the opposite of their intended results—namely, create a culture of reduced performance, according to recent neurological and psychological research.125 When Accenture eliminated its ranking system, its CEO said, “We’re going to evaluate you in your role, not vis-à-vis someone else who might work in Washington, who might work in Bangalore. It’s irrelevant. It should be about you.”126 Finally, forced ranking systems—originally conceived at the turn of the 20th century to measure the perfor- mance of manual laborers and factory workers—seem inappropriate today, when more than 70 percent of workers are employed in service or knowledge-intensive jobs in which skills, attitudes, and abilities are hard to evaluate along a bell curve.

Effective Performance Feedback As a manager, you may not feel comfortable about critiquing your employees’ perfor- mance, especially when you have to convey criticism rather than praise. Nevertheless, giving performance feedback is one of the most important parts of the manager’s job.

Think of yourself as a coach, as if you were managing a team of athletes, and remem- ber to deliver at least one positive message to balance any negative feedback you must convey. Here are some suggestions:127

■ Take a problem-solving approach, avoid criticism, and treat employees with respect. Recall the worst boss for whom you ever worked. How did you react to his or her method of giving feedback? Avoid criticism that might be taken personally.

Example: Don’t say, “You’re picking up that bag of cement wrong” (which both is personal and also criticizes by using the word wrong). Say, “Instead of bending at the waist, a good way to pick up something heavy is to bend your knees. That’ll help save your back.”

■ Be specific and direct in describing the employee’s present performance and in identifying the improvement you desire. Describe your subordinate’s current per- formance in specific terms and concentrate on outcomes that are within his or her ability to improve.

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Example: Don’t say, “You’re always late turning in your sales reports.” Say, “Instead of making calls on Thursday afternoon, why don’t you take some of the time to do your sales reports so they’ll be ready on Friday along with those of the other sales reps.”

■ Get the employee’s input. In determining causes of a problem, listen to the employee and get his or her help in crafting a solution. Be thoughtful and compassionate.

Example: Don’t say, “You’ve got to learn to get here by 9:00 a.m. every day.” Say, “What changes do you think could be made so that your station is covered when people start calling at 9:00?”

■ Follow up. Always check in with the employee later to be sure he or she has taken any corrective action you discussed and that you’ve made yourself available for any further questions or input.

Example: Don’t say, “Why are you still turning in incomplete progress reports?” Say, “It’s almost time for me to ask for your next progress report. Should we take a look at a draft of it together first?” ●

It is important to remember that employees are unlikely to respond to constructive feedback unless they accept it. This underscores how important it is to deliver specific feedback in a way that does not cause defensiveness. We discuss the causes of defensive communication in Chapter 15. ©Antonio Guillem/Shutterstock

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9.6 Managing Promotions, Transfers, Disciplining, and Dismissals

THE BIG PICTURE As a manager, you’ll have to manage employee replacement actions, as by promoting, transferring, demoting, laying off, or firing.

“The unemployment rate is an abstraction, an aggregation of bodiless data,” writes journalist/novelist Walter Kirn, “but losing a job is a lived experience, written on the nerves. . . . Some blame themselves and some blame everybody. Still others, not know- ing whom to blame, explode.”128

Among the major—and most difficult—decisions you will make as a manager are those about employee movement within an organization: Whom should you let go? promote? transfer? discipline? All these matters go under the heading of employee replacement. And, incidentally, any time you need to deal with replacing an employee in a job, that’s a time to reconsider the job description to see how it might be made more effective for the next person to occupy it.

As regards replacement, HR specialists distinguish between turnover (employee is replaced) and attrition (employee is not replaced), both of which occur when an employee leaves the company. Turnover occurs when an employee abandons, resigns, retires, or is terminated from a job, and the employer seeks to replace him or her. Attrition occurs when an employee retires or when the company eliminates his or her job, and the employer leaves the vacancy unfilled.129 You’ll have to deal with replacement whenever an employee quits, retires, becomes seriously ill, or dies. Or you may initiate the replacement action by promoting, transferring, demoting, laying off, or firing.

Promotion: Moving Upward Promotion—moving an employee to a higher-level position—is the most obvious way to recognize that person’s superior performance (apart from giving raises and bonuses). Three concerns are the following.

Fairness It’s important that promotion be fair. The step upward must be deserved. It shouldn’t be for reasons of nepotism, cronyism, or other kind of favoritism.

Nondiscrimination The promotion cannot discriminate on the basis of race, ethnicity, gender, age, or physical ability.

Others’ Resentments If someone is promoted, someone else may be resentful about being passed over. As a manager, you may need to counsel the people left behind about their performance and their opportunities in the future. In fact, if you are passed over yourself, it is important not to let your anger build. Instead, gather your thoughts, then go in and talk to your boss and find out what qualities were lack- ing, suggests one report. You should also create a career action plan and look for ways to improve and showcase your knowledge, skills, and abilities. Don’t forget to make your interest in advancement known.130 Above all, don’t give up. It may be that this was not the right opportunity for you and another will come when you least expect it.131

LO 9-6 List guidelines for handling promotions, transfers, discipline, and dismissals.

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Transfer: Moving Sideways Transfer is movement of an employee to a different job with similar responsibility. It may or may not mean a change in geographical location (which might be part of a promotion as well).

Employees might be transferred for four principal reasons: (1) to solve organiza- tional problems by using their skills at another location; (2) to broaden their experience in being assigned to a different position; (3) to retain their interest and motivation by being presented with a new challenge; or (4) to solve some employee problems, such as personal differences with their bosses. Top Volkswagen managers considered imple- menting a mandatory rotation of key executives to new positions in order to disrupt what they perceived was “a culture of tolerance for breaking rules [that was] at the heart of its emissions crisis,” according to The Wall Street Journal.132 We also saw above that new employees at Estée Lauder and Facebook can rotate through different posi- tions or departments as part of their company’s learning and development process.

Disciplining and Demotion: The Threat of Moving Downward Poorly performing employees may be given a warning or a reprimand and then disci- plined. That is, they may be temporarily removed from their jobs, as when a police officer is placed on suspension or administrative leave—removed from his or her regular job in the field and perhaps given a paperwork job or told to stay away from work.

Alternatively, an employee may be demoted—that is, have his or her current respon- sibilities, pay, and perquisites taken away, as when a middle manager is demoted to a first-line manager. (Sometimes this may occur when a company is downsized, resulting in fewer higher-level management positions.)

Dismissal: Moving Out of the Organization Dismissals are of three sorts: layoffs, downsizings, and firings. We will also describe exit interviews and nondisparagement agreements, which often go along with dismissals.

Layoffs The phrase being laid off tends to suggest that a person has been dismissed temporarily—as when a carmaker doesn’t have enough orders to justify keeping its produc- tion employees—and may be recalled later when economic conditions improve. Layoffs are cited by many companies (recently Nordstrom, Sprint, and American Express) as needed to improve profitability, although research suggests they do not, in fact, improve profits.133

Downsizings A downsizing is a permanent dismissal; there is no rehiring later. An automaker discontinuing a line of cars or on the path to bankruptcy might permanently let go of its production employees.

Firings The phrase being fired, with all its euphemisms and synonyms—being “termi- nated,” “separated,” “let go,” “sacked,” “axed,” “canned”—tends to mean that a person was dismissed permanently “for cause”: absenteeism, sloppy work habits, failure to perform sat- isfactorily, breaking the law, and the like. (A CEO “never gets fired,” comments one writer dryly; rather, he or she leaves “to pursue other opportunities” or “spend more time with the family.”)134

It used to be that managers could use their discretion about dismissals. Today, how- ever, because of the changed legal climate, steps must be taken to avoid employees suing for “wrongful termination.” That is, an employer has to carefully document the reasons for dismissals. You also need to take into account the fact that survivors in the company can suffer just as much as, if not more than, their colleagues who were let go.135

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Incidentally, in terms of your own career, be aware that dismissals rarely come as a surprise. Most bosses are conflict-averse, and you may see the handwriting on the wall when your own manager begins to interact with you less.136

In some industries, such as those in information technology, “treating workers as if they are widgets to be used up and discarded is a central part of the revised relationship between employers and employees,” in the view of one former employee of a Cambridge, Massachusetts, “digital sweatshop.”137 Start-ups are also quick to fire if new hires don’t measure up quickly.138

The Practical Action box offers some suggestions for handling dismissals.

“Employment at will” is the governing principle of employment in the great majority of states, which means that anyone can be dismissed at any time for any reason at all—or for no reason.139 Exceptions are whistle-blowers and people with employment contracts. Civil-rights laws also prohibit organizations’ dismiss- ing people for their gender, skin color, or physical or mental disability.140

Four suggestions for handling a dismissal follow.

Give the Employee a Chance First. If you’re dealing with someone who has a problem with absenteeism, alcohol/ drug dependency, or the like, articulate to that employee what’s wrong with his or her performance; then set up a plan

for improvement (which might include counseling). It’s a good idea to get help from your HR department in such a case. Or if you’re dealing with an employee who has a bad cultural or personality fit with the company—a buttoned- down, by-the-book style, say, that’s at odds with your flexi- ble, fast-moving organization—have a conversation about the mismatch and give the employee time to find a job elsewhere.141

Don’t Delay the Dismissal, and Make Sure It’s Completely Defensible. If improvements aren’t forthcoming, don’t carry the employee along because you feel sorry for him or her. Your first duty is to the performance of the organization. Make sure,

The Right Way to Handle a DismissalPRACTICAL ACTION

Fired. Being fired can be one of the most stressful events of one’s life—more than the death of a close friend, separation from one’s spouse over marital problems, or an injury requiring hospitalization. Some people who have been let go from their jobs suffer major health consequences. If you as a manager ever had to fire someone, what would you do to try to soften the blow? ©VGstockstudio/Shutterstock

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however, that you’ve documented all the steps taken in advance of the dismissal. Also be sure that the steps taken fol- low the law and all important organizational policies. You should have a paper trail.142

Be Aware How Devastating a Dismissal Can Be. To the person being let go, the event can be as much of a blow as a divorce or a death in the family. Be compassionate but not emotional, and allow some silence to give the employee time to react.143 Dismissals can also adversely affect those remain- ing with the company, who may feel guilty for not being fired, fearful of being fired, or worried about having to take on the fired person’s workload. But if you have made the right deci- sion, you have probably done everyone else on the team a favor by showing your commitment to maintaining a productive workplace.144 Be sure you talk to your team members to dis- cuss any issues that concern them (but without divulging details of the firing or your decision process).

Consider the Timing. On this score, current thinking is that the best day to lay people off is not Friday (the traditional day, when often managers didn’t want to deal with other employ- ees’ reactions) and not Monday (when leaders may not have time to prepare for the aftermath) but rather the middle of the week, which gives former employees a chance to look for work before the week is over.145

Getting Ready to Survive a Job Loss. We hope you are never fired, but it is not a bad idea to protect yourself by being prepared. A few smart steps that rely on your career readiness skills are to build a personal brand by becoming known among your industry peers (try writing a blog or contributing articles on LinkedIn), to network both inside and outside the company, and to identify three companies or industries where your skills and abilities are valued and monitor them for hiring trends. Keep your résumé up to date, too, so you can start interviewing as soon as possible.146

Exit Interview and Nondisparagement Agreement An exit interview is a formal conversation between a manager and a departing employee to find out why he or she is leaving and to learn about potential problems in the organization. For example, one com- pany looked at the exit interviews of four employees and learned they all told the same story: Their manager “lacked critical leadership skills, such as showing appreciation, engendering commitment, and communicating vision and strategy,” according to one article. Moreover, “the organization was promoting managers on the basis of technical rather than managerial skill.”147

A departing employee may want to pound the desk during an exit interview and shout about all that went wrong, but that’s not a good idea. “The last impression is the one people remember,” suggests a Wall Street Journal article. “A graceful exit can bur- nish an employee’s reputation and shore up valuable relationships. A bad one can do serious damage to both.”148

A nondisparagement agreement is a contract between two parties that prohibits one party from criticizing the other; it is often used in severance agreements to prohibit former employees from criticizing their former employers. Employees who are laid off or whose jobs have been eliminated are often obliged to sign nondisparagement agreements in return for receiving severance pay—pay an employer may give a worker who leaves, such as the equivalent of two weeks of salary for each year he or she was employed. A nondisparagement clause at Abbott Laboratories in Libertyville, Illinois, reads “You agree to make every effort to maintain and protect the reputation of Abbott and its products and agents.” However, some former Abbott employees say the provision “stopped them from speaking openly with elected officials or appearing at congres- sional hearings” about what they say was the misuse of temporary work visas (H-1B visas) to replace American workers with foreign-born workers, according to one account.149 ●

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9.7 The Legal Requirements of Human Resource Management

THE BIG PICTURE Four areas of human resource law any manager needs to be aware of are labor relations, compensation and benefits, health and safety, and equal employment opportunity.

Laws underlie all aspects of the human resource process discussed so far. Whatever your organization’s human resource strategy, in the United States (and in U.S. divisions overseas) it has to operate within the environment of the American legal system. Four areas you need to be aware of are as follows. Some important laws are summarized in Table 9.2.

1. Labor Relations The earliest laws affecting employee welfare had to do with unions, and they can still have important effects. Legislation passed in 1935 (the Wagner Act) resulted in the National Labor Relations Board (NLRB), which enforces procedures whereby employees may vote to have a union and for collective bargaining. Collective bargaining consists of negotiations between management and employees about disputes over compensation, benefits, working conditions, and job security.

A 1947 law (the Taft-Hartley Act) allows the president of the United States to pre- vent or end a strike that threatens national security. (We discuss labor–management issues further in Section 9.8.)

2. Compensation and Benefits The Social Security Act in 1935 established the U.S. retirement system. The passage of the Fair Labor Standards Act of 1938 established minimum living standards for workers engaged in interstate commerce, including provision of a federal minimum wage (cur- rently $7.25 an hour; 29 states have higher minimums, 5 states do not have minimums) and a maximum workweek (now 40 hours, after which overtime must be paid), along with banning products from child labor. Salaried executive, administrative, and profes- sional employees are exempt from overtime rules.

Proponents of a $15 minimum wage say it would help people pay their bills because existing minimum wages have not kept up with inflation, and it would create a fairer working environment because different states now pay wildly different minimums. Detractors say that the $15 figure is arbitrary and that a higher minimum would pro- duce job losses, hurt low-skilled workers, have little effect on reducing poverty, and result in higher prices to consumers.150

3. Health and Safety From miners risking tunnel cave-ins to cotton mill workers breathing lint, industry has always had dirty, dangerous jobs. Beginning with the Occupational Safety and Health Act (OSH Act) of 1970, a body of law has grown that requires organizations to provide employees with nonhazardous working conditions (most recently augmented by an update to the Toxic Substances Control Act of 1976).151 Later laws extended health coverage, including 2010 health care reform legislation, which requires employees with more than 50 employees to provide health insurance.152 (More than 60 percent of work- ing-age Americans who signed up for Medicaid or a private health plan through the Affordable Care Act get health care they previously couldn’t get.153)

LO 9-7 Discuss legal considerations managers should be aware of.

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TABLE 9.2 Some Important Recent U.S. Federal Laws and Regulations Protecting Employees

YEAR LAW OR REGULATION PROVISIONS

Labor Relations

1974

1986

2003

Privacy Act

Immigration Reform & Control Act

Sarbanes-Oxley Act

Gives employees legal right to examine letters of reference concerning them

Requires employers to verify the eligibility for employment of all their new hires (including U.S. citizens)

Prohibits employers from demoting or firing employees who raise accusations of fraud to a federal agency

Compensation and Benefits

1974

1993

1996

2007

Employee Retirement Income Security Act (ERISA)

Family and Medical Leave Act

Health Insurance Portability and Accountability Act (HIPPA)

Fair Minimum Wage Act

Sets rules for managing pension plans; provides federal insurance to cover bankrupt plans

Requires employers to provide 12 weeks of unpaid leave for medical and family reasons, including for childbirth, adoption, or family emergency

Allows employees to switch health insurance plans when changing jobs and receive new coverage regardless of preexisting health conditions; prohibits group plans from dropping ill employees

Increased federal minimum wage to $7.25 per hour on July 24, 2009

Health and Safety

1970

1985

2010

Occupational Safety and Health Act (OSHA)

Consolidated Omnibus Budget Reconciliation Act (COBRA)

Patient Protection and Affordable Care Act

Establishes minimum health and safety standards in organizations

Requires an extension of health insurance benefits after termination

Employers with more than 50 employees must provide health insurance

Equal Employment Opportunity

1963

1964, amended 1972

1967, amended 1978 and 1986

1990

1991

Equal Pay Act

Civil Rights Act, Title VII

Age Discrimination in Employment Act (ADEA)

Americans with Disabilities Act (ADA)

Civil Rights Act

Requires men and women be paid equally for performing equal work

Prohibits discrimination on basis of race, color, religion, national origin, sex, or sexual orientation

Prohibits discrimination in employees over 40 years old; restricts mandatory retirement

Prohibits discrimination against essentially qualified employees with physical or mental disabilities or chronic illness; requires “reasonable accommodation” be provided so they can perform duties

Amends and clarifies Title VII, ADA, and other laws; permits suits against employers for punitive damages in cases of intentional discrimination

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4. Equal Employment Opportunity The effort to reduce discrimination in employment based on racial, ethnic, and reli- gious bigotry and gender stereotypes began with Title VII of the Civil Rights Act of 1964. This established the Equal Employment Opportunity Commission (EEOC), whose job is to enforce antidiscrimination and other employment-related laws. Title VII applies to all organizations or their agents engaged in an industry affecting interstate commerce that employs 15 or more employees. Contractors who wish to do business with the U.S. government (such as most colleges and universities, which receive federal funds) must be in compliance with various executive orders issued by the president covering antidis- crimination. Later laws prevented discrimination against older workers and people with physical and mental disabilities.

Workplace Discrimination, Affirmative Action, Sexual Harassment, and Bullying Three important concepts covered by EEO laws are workplace discrimination, affirma- tive action, and sexual harassment, which we discuss in this section. We also consider bullying, which is not covered by equal employment opportunity (EEO) laws.

Workplace Discrimination Workplace discrimination occurs when employment decisions about people are made for reasons not relevant to the job, such as skin color or eye shape, gender, religion, national origin, and the like. Two fine points to be made here are that (1) although the law prohibits discrimination in all aspects of employ- ment, it does not require an employer to extend preferential treatment because of race, color, religion, and so on and (2) employment decisions must be made on the basis of job-related criteria.

There are two types of workplace discrimination:

■ Adverse impact. Adverse impact occurs when an organization uses an employment practice or procedure that results in unfavorable outcomes to a protected class (such as Hispanics) over another group of people (such as non-Hispanic whites). For exam- ple, requiring workers to have a college degree can inadvertently create adverse impact on Hispanics because fewer Hispanics graduate from college than whites. This example would not be a problem, however, if a college degree were required to perform the job. Another example is basing a person’s starting salary on what he or she earned at a previous job. This can discriminate against women because they tend to make less money than men for the same level of experience and skills.

In recent years, pay discrepancies between women and men improved slightly, but as of 2016 women overall still earned only 80.5¢ to every $1 for a man, according to the Institute for Women’s Policy Research. “If change continues at the same slow pace as it has done for the past fifty years, it will take 41 years—or until 2059154—for women to finally reach pay par- ity. For women of color, the rate of change is even slower: Hispanic women will have to wait until 2233155 and Black women will wait until 2124156 for equal pay.” Of the most common occupations, the gender gap is widest for financial managers, followed by retail salesper- sons.157 According to HRMagazine, pay discrepancies between men and women “is why a number of state and local legislators, including those in California and New York City, are moving to ban questions about job candidates’ salary histories.”158

■ Disparate treatment: Disparate treatment results when employees from protected groups (such as disabled individuals) are intentionally treated differently. An example would be making a decision to give all international assignments to people with no disabilities because of the assumption that they won’t need any special accommodations related to travel.

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When an organization is found to have been practicing discrimination, the people discriminated against may sue for back pay and punitive damages. In 2017, among complaints to the EEOC, the most frequently cited basis for charges of discrimina- tion was retaliation (49 percent), followed by race discrimination (34 percent); dis- crimination based on disability (32 percent); sex discrimination, including sexual harassment and pregnancy discrimination (30 percent); and discrimination based on age (22 percent): These percentages are greater than 100 percent because some charges allege multiple types of discrimination.159

Women are more likely to suffer from depression and anxiety compared to men, and one study suggests an important reason: U.S. women make significantly less money than their male counterparts, besides having to assume greater responsibility in child care and housework.160

Affirmative Action Affirmative action focuses on achieving equality of opportunity within an organization. It tries to make up for past discrimination in employment by actively finding, hiring, and developing the talents of people from groups traditionally discriminated against. Steps include active recruitment, elimination of prejudicial ques- tions in interviews, and establishment of minority hiring goals. It’s important to note that EEO laws do not allow the use of hiring quotas.161

Affirmative action has created tremendous opportunities for women and minorities, but it has been resisted more by some white males who see it as working against their interests.162 Affirmative action plans are more successful when employees view them as being fair and equitable and when whites are not prejudiced against people of color.163 In addition, research shows that women and minorities hired on the basis of affirmative action felt stigmatized as unqualified and incompetent.164

Sexual Harassment Sexual harassment consists of unwanted sexual attention that creates an adverse work environment. This means obscene gestures, sex-stereo- typed jokes, sexually oriented posters and graffiti, suggestive remarks, unwanted dating pressure, physical nonsexual contact, unwanted touching, sexual proposi- tions, threatening punishment unless sexual favors are given, obscene phone calls, and similar verbal or physical actions of a sexual nature.165 The harassment may be

Sexual harassment. If this woman is unaware of the man ogling her legs, does that make his behavior acceptable? Or does it still contribute to an offensive work environment? ©Phanie/SuperStock

358 PART 4 Organizing

Two Types of Sexual Harassment There are two types of sexual harassment, both of which violate Title VII of the 1964 Civil Rights Act.

In the quid pro quo harassment type, the person to whom the unwanted sexual atten- tion is directed is put in the position of jeopardizing being hired for a job or obtaining job benefits or opportunities unless he or she implicitly or explicitly acquiesces.

More typical is the hostile environment type, in which the person being sexually harassed doesn’t risk economic harm but experiences an offensive or intimidating work environment. Anti-female remarks are particularly prevalent on social media.172

Table 9.3 presents some guidelines for preventing sexual harassment.

• Don’t suggest or tolerate sexual favors for rewards related to work or promotion.

• Don’t engage in uninvited touching, patting, or hugging of others’ bodies.

• Don’t make or tolerate sexually suggestive jokes, demeaning remarks, slurs, or obscene gestures or sounds.

• Don’t display or accept sexual pictures in your workplace or write notes of a sexual nature.

• Don’t laugh at others’ sexually harassing words or behaviors.

TABLE 9.3 Preventing Sexual Harassment

EXAMPLE Sexual Harassment at Work

Sexual harassment is never acceptable, but beginning in 2017, it has become less hidden. Men in fields ranging from sports to entertainment to politics to media and the arts were accused of groping, making sexually inappropriate comments, and even rape by women who at last felt empowered, if not compelled, to speak out.

In what The New York Times called “a seismic shift in what behavior is tolerated in the workplace,” personified in a move- ment called #MeToo, scores of men, often high-profile figures with years of professional achievement behind them, were fired, suspended, or forced to resign or step down based on once hushed-up behavior in the recent, or not-so-recent, past. Some have admitted guilt and apologized; others have denied it. As of February 2018, the Times listed 71 such cases and promised the list would be updated as events continued to unfold.167

Sexual harassment is not a new behavior. It has occurred throughout history. Over the last two decades, psycholo- gists attempted to understand its causes by studying men who harass or assault women. This research shows that male harassers “have different motivations yet typically share specific personality traits” that are amplified by hav- ing power, according to The Wall Street Journal. The two

traits are hostile masculinity and impersonal sexuality. The Journal notes that “Men with ‘hostile masculinity’ find power over women to be a sexual turn-on. They feel anger at being rejected by a woman. . . . They justify their aggres- sion and are often narcissists.”168 Narcissism consists of “a self-centered perspective, feelings of superiority, and a drive for personal power and glory.”169 Individuals with this trait have inflated views of themselves, fantasize about being in control of everything, and like to attract the admi- ration of others. It’s thus not surprising that narcissists tend to emerge as leaders.170 “Men with ‘impersonal sexuality’ prefer sex without intimacy or a close connection, which often leads them to seek promiscuous sex or multiple part- ners. Often, but not always, this type of person has had a difficult home environment as a child, with abuse or vio- lence, or they had some anti-social tendencies as adolescents.”171

YOUR CALL Given that two personality traits are associated with sexual harassment, how can an organization stop it? Why do you think tolerance for the covering up of sexual harassment and other inappropriate or illegal behavior seems to be evaporating?

by a member of the opposite sex or a member of the same sex, by a manager, by a co-worker, or by an outsider. If the harasser is a manager or an agent of the organi- zation, the organization itself can be sued, even if it had no knowledge of the situation.166

Human Resource Management CHAPTER 9 359

What Managers Can Do To help prevent harassment from occurring, managers can make sure their companies have an effective sexual harassment policy in place. The policy should be shown to all current and new employees, who should be made to understand that neither sexual harassment nor covering up for an offender will not be tolerated under any circumstances.173 A formal complaint procedure should be estab- lished, which should explain how charges will be investigated and resolved. Supervisors should be trained in Title VII requirements and the proper procedures to follow when charges occur. If charges occur, they should be investigated promptly and objectively, and if substantiated, the offender should be disciplined at once—no matter his or her rank in the company.

Bullying Bullying is repeated mistreatment of one or more persons by one or more perpetrators; it is abusive physical, psychological, verbal, or nonverbal behavior that is threatening, humiliating, or intimidating. It can happen at work just as easily and as often as in the schoolyard.

Indeed, bullying on the job is now being experienced or has been experienced by 19 percent of employees, according to a recent survey. That is 30 million people; other estimates range even higher. Another 83 percent of workers have witnessed or been aware of it.174 Bullying by supervisors that takes the form of forcing long hours on workers or yelling and behaving in a threatening way is more apt to occur in small

Bullying. A surprisingly common activity, bullying is apt to be verbal, involving shouting and name calling, or relational, including spreading malicious rumors and lies. In some cases, however, it can be physically aggressive, involving pinching or pushing. Perhaps as many as half of all employees have experienced some sort of bullying on the job. Have you? What did you do about it? ©Jetta Productions/ The Image Bank/Getty Images

360 PART 4 Organizing

TABLE 9.4 Beating Back the Bully

• Recognize the mistreatment as bullying: Don’t blame yourself, and don’t wait to respond. Stand up for yourself from the start. (Yes, this is hard to do.)

• Stay calm and confident: Don’t feed the bully’s sense of power by showing fear.

• Don’t strike back: It might get you fired. Ask to be treated with fairness and respect.

• Avoid being alone with the bully: Make sure someone can hear your interactions. Or record them on your smartphone.

• Document what is happening: Specifically describe to the bully the effect he or she is having on your work and state that you will no longer tolerate it. Also document in writing the date and details (make hard copies of any emails, texts, or other written communications), describe the effect on your work, and indicate whether any witnesses were present.

• Know your next steps: Get others on your side. Seek advice from your manager and HR officer, and be ready to ask for a transfer or even seek a new job if all else fails.

Sources: A. Bruzzese, “Workplace Becomes New Schoolyard for Bullies,” USA Today, August 24, 2011, http:// usatoday30.usatoday.com/money/jobcenter/workplace/bruzzese/2011-08-24-bully-bosses-overtake-workplace_n. htm (accessed June 6, 2016); K. V. Brown, “Far beyond School Playground, Bullying Common in Workplace,” San Francisco Chronicle, November 6, 2011, pp. A1, A10; Robert Half International, “6 Tips for Dealing with the Office Bully,” The Arizona Republic, November 29, 2015, p. 4E; G. James, “This Is Exactly What to Do if Your Boss Is a Bully,” Inc., February 22, 2018, https://www.inc.com/geoffrey-james/this-is-exactly-what-to-do-if-your-boss-is-a-bully. html?cid=search; S. Lucas, “Study: Bullied at Work? No Matter What You Do, You’re Screwed,” Inc., February 23, 2017, https://www.inc.com/suzanne-lucas/study-bullied-at-work-no-matter-what-you-do-youre-screwed. html?cid=search; S. M. Heathfield, “How to Deal with a Bully at Work,” The Balance, September 30, 2017, https:// www.thebalance.com/how-to-deal-with-a-bully-at-work-1917901.

businesses (50 or fewer employees), where the education level of bosses is often less high than in larger firms and where one person’s bad behavior may have greater influence.175

Men account for 70 percent of workplace bullies, and women are 65 percent of the targets. Women are the bullies only 30 percent of the time, but most of their targets (67 percent) are also women.176 Bullying can occur between colleagues, managers, and employees, but bosses are reported to be 61 percent of all workplace bullies.177 Bullying on the job may be physically aggressive, such as pushing, pinching, or cornering some- one. However, it is more apt to be verbal, including interrupting, shouting, swearing, and name calling. Or it may be relational, including malicious gossip, rumors, and lies that may cause someone to feel isolated or cut off. Bullying through technology (cyber- bullying), such as Facebook, Twitter, or e-mail, accounts for about one in five incidents.178

The Effects of Bullying Unfortunately, many workplace bullies are quite charming and manipulative and so receive positive evaluations from their supervisors and achieve high levels of career success, according to one study.179 “If people are politically skilled, they can do bad things really well,” says one of the study authors.180 Of course, that doesn’t make this behavior right. Indeed, bullying can devastate a workplace.181 Accord- ing to the most recent report by the Workplace Bullying Institute, “40% of targets are believed to suffer adverse health consequences from bullying.”182 These can include anxiety, depression, and even panic attacks.183

Table 9.4 presents some guidelines for combating bullying. (See Table 9.4.) ●

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Starting in 1943, James Smith worked his way up from washing dishes in the galley of a passenger train’s dining car to waiter, earning tips on top of his wages of 36 cents an hour. The union job with the Brotherhood of Sleeping Car Porters, the first African American union, enabled him to go to college, and when he left the railroad he was hired as a civil engineer for the city of Los Angeles. “His story,” says one report, “is emblematic of the role the railroads and a railroad union played in building a founda- tion for America’s black middle class.”184 Unions also helped to grow the U.S. (and European) middle classes in general, bringing benefits to all, organized or not.

Labor unions are organizations of employees formed to protect and advance their members’ interests by bargaining with management over job-related issues. The union movement is far less powerful that it was in the 1950s—indeed, its present membership is the lowest since 1916—but it is still a force in many sectors of the economy. (See Table 9.5.) Despite declining membership, about 60 percent of U.S. adults hold a favor- able view of unions today, the highest in a decade and up sharply from less than 50 percent in 2015. Young adults hold more favorable views of unions (75 percent) than they do of business corporations (55 percent).185

9.8 Labor–Management Issues THE BIG PICTURE We describe the process by which workers get a labor union to represent them and how unions and man- agement negotiate a contract. This section also discusses the types of union and nonunion workplaces and right-to-work laws. It covers issues unions and management negotiate, such as compensation, cost-of-living adjustments, two-tier wage systems, and givebacks. It concludes by describing mediation and arbitration.

TABLE 9.5 Snapshot of Today’s U.S. Union Movement

Who’s in a union (2017)?

• 10.7% of full-time U.S. workers—down from a high of 35.5% in 1945 but also up about a quarter million workers since 2016

• 6.5% of private-sector workers (7.6 million)

• 34.4% of public-sector workers (7.2 million)

• Most members, public sector: local government (40%), including teachers, police officers, and firefighters

• Most members, private sector: utilities (23%), transportation and warehousing (17%), telecommunications (16%), construction (14%)

• Union membership rate by gender: men (11%), women (10)

• Union membership rate by race and ethnicity: Blacks (13%), whites (11%), Asian Americans (9%), Hispanic Americans (9%)

Source: Bureau of Labor Statistics, “Union Members 2017,” News Release, January 19, 2018, https://www.bls.gov/news.release/pdf/union2.pdf.

How Workers Organize When workers in a particular organization decide to form a union, they first must get each worker to sign an authorization card, which designates a certain union as the work- ers’ bargaining agent. When at least 30 percent of workers have signed cards, the union may ask the employer for official recognition.

LO 9-8 Describe labor- management issues and ways to work effectively with labor unions.

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Usually the employer refuses, at which point the union can petition the National Labor Relations Board (NLRB) to decide which union should become the bargaining unit that represents the workers, such as the Teamsters Union, United Auto Workers, American Federation of Teachers, or Service Employees International Union, as appro- priate. (Some workers, however, are represented by unions you would never guess: Zookeepers, for instance, are represented by the Teamsters, which mainly organizes transportation workers. University of California, Berkeley, graduate student instructors are represented by the United Auto Workers.) An election is then held by the NLRB, and if 50 percent or more of the votes cast agree to unionization, the NLRB certifies the union as the workers’ exclusive representative.

How Unions and Management Negotiate a Contract Once a union is recognized as an official bargaining unit, its representatives can then meet with manage- ment’s representatives to do collective bargaining—to negotiate pay and benefits and other work terms.

When agreement is reached with management, the union representatives take the collective bargaining results back to the members for ratification—they vote to accept or reject the contract negotiated by their lead- ers. If they vote yes, the union and management repre- sentatives sign a negotiated labor–management contract, which sets the general tone and terms under which labor and management agree to work together during the contract period.

The Issues Unions and Management Negotiate About The key issues that labor and management negotiate are compensation, employee benefits, job security, work rules, hours, and safety matters. However, the first issue is usually the union security clause and man- agement rights.

Union Security and Types of Workplaces A key issue is, Who controls hiring policies and work assignments—labor or management? This involves the following matters:

■ The union security clause. The basic underpinning of union security is the union security clause, the part of the labor–management agreement that states that employees who receive union benefits must join the union, or at least pay dues to it. In times past, a union would try to solidify the union security clause by getting management to agree to a closed shop agreement—which is illegal today—in which a company agreed it would hire only current union members for a given job.

■ Types of unionized and nonunionized workplaces. The four basic kinds of work- places are closed shop, union shop, agency shop, and open shop. (See Table 9.6.)

■ Right-to-work laws. Individual states are allowed (under the 1947 Taft-Hartley Act) to pass legislation outlawing union and agency shops. As a result, 28 states have passed right-to-work laws, statutes that prohibit employees from being required to join a union as a condition of employment.

Have you ever been part of a union contract? ©Stockbyte/Getty Images

Human Resource Management CHAPTER 9 363

WORKPLACE DEFINITION STATUS

Closed shop Employer may hire only workers for a job who are already in the union.

Illegal

Union shop Workers aren’t required to be union members when hired for a job but must join the union within a specified time.

Not allowed in 22 states (right-to-work states)

Agency shop Workers must pay equivalent of union dues but aren’t required to join the union.

Applies to public-sector teachers in some states, prohibited in others

Open shop Workers may choose to join or not join a union.

Applies in 22 states (right-to- work states)

Business interests supporting such laws argue that forcing workers to join a union violates their rights and makes a state less attractive to businesses considering moving there. Union supporters say that states with such laws have overall lower wages and that all workers benefit from union gains, so everyone should be compelled to join.

The 28 work-to-right states are shown in dark blue in Figure 9.4.

Compensation: Wage Rates, COLA Clauses, and Givebacks Unions strive to negotiate the highest wage rates possible, or to trade off higher wages for something else, such as better fringe benefits. Some issues involved with compensation are as follows:

■ Wage rates—same pay or different rates? Wage rates subject to negotiation include overtime pay, different wages for different shifts, and bonuses. In the

TABLE 9.6 Four Kinds of Workplace Labor Agreements

Right-to-work states

Non–right-to-work states

FIGURE 9.4 States with right-to-work laws What kind of state do you live in? (Alaska and Hawaii are non– right-to-work states.)

364 PART 4 Organizing

past, unions tried to negotiate similar wage rates for unionized employees working in similar jobs for similar companies or similar industries. However, the pressure of competition abroad and deregulation at home has forced many unions to negotiate two-tier wage contracts, in which new employees are paid less or receive lesser benefits than veteran employees have.

Example: In 2011, when automakers began to create new jobs, new union hires were offered about half the pay ($14 an hour) that autoworkers were getting before ($28). Such two-tier wage systems can be attractive to employers, who are able to hire new workers at reduced wages, but they also benefit veteran union members, who experi- ence no wage reduction. However, among autoworkers, at least, such contracts may be on the way out.186 One study found that the two-tier setup wasn’t, in fact, any more profitable for companies.187

■ Cost-of-living adjustment. Because the cost of living is always going up (at least so far), unions often try to negotiate a cost-of-living adjustment (COLA) clause, which during the period of the contract ties future wage increases to increases in the cost of living, as measured by the U.S. Bureau of Labor Statistics’s consumer price index (CPI). (An alternative is the wage reopener clause, which allows wage rates to be renegotiated at certain stated times during the life of the contract. Thus, a 10-year contract might be subject to renegotiation every two years.)

■ Givebacks. During tough economic times, when a company (or, in the case of public employee unions, a municipality) is fighting for its very survival, man- agement and labor may negotiate givebacks, in which the union agrees to give up previous wage or benefit gains in return for something else. Usually, the union seeks job security, as in a no-layoff policy.

Settling Labor–Management Disputes Even when a collective-bargaining agreement and contract have been accepted by both sides, there may likely be ongoing differences that must be resolved. Sometimes differ- ences lead to walkouts and strikes, or management may lock out employees. However, conflicts can be resolved through grievance procedures and mediation or arbitration.

Grievance Procedures A grievance is a complaint by an employee that management has violated the terms of the labor–management agreement. Example: An employee may feel he or she is being asked to work too much overtime, is not getting his or her fair share of overtime, or is being unfairly passed over for promotion.

Grievance procedures are often handled initially by the union’s shop steward, an offi- cial elected by the union membership who works at the company and represents the interests of unionized employees on a daily basis to the employees’ immediate supervi- sors. If this process is not successful, the grievance may be carried to the union’s chief shop steward and then to the union’s grievance committee, who deal with their counter- parts higher up in management.

If the grievance procedure is not successful, the two sides may decide to try to resolve their differences by one of two ways—mediation or arbitration.

Mediation Mediation is the process in which a neutral third party, a mediator, listens to both sides in a dispute, makes suggestions, and encourages them to agree on a solution. Mediators may be lawyers or retired judges or specialists in various fields, such as con- flict resolution or labor matters.

Arbitration Arbitration is the process in which a neutral third party, an arbitrator, listens to both parties in a dispute and makes a decision that the parties have agreed will be binding on them. Arbitrators are often retired judges. Many corporations,

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including new tech start-ups, have vigorously embraced arbitration as a business tool with consumers and employees, and some for-profit colleges have even required it of their students, forbidding them from resolving their complaints through class- action suits (when a large number of plaintiffs with similar complaints band together to sue a company).188 Critics, however, contend that forcing consumers to sign agreements that require arbitration and prevent lawsuits has the effect of bias- ing resolutions in favor of business and constitutes a “privatization of the justice system.”189

Leo Kanne, head of Local 440 for the United Food & Commercial Workers International Union in Denison, Iowa, home of a Smithfield meat-processing plant, says plant workers earn enough to take their children to Pizza Ranch or maybe Dairy Queen every week and go on vacation once a year. “That’s all these people want,” he says. “Nobody is getting rich working in these plants.” Word that a Chinese company had acquired Smithfield had everyone worried. Would they cut costs and not honor past labor agreements?190 Considering these kinds of concerns, what is your feeling about labor unions? Self-Assessment 9.4 enables you to answer this question by assess- ing your general attitudes toward unions.

Assessing Your Attitudes toward Unions This survey is designed to assess your attitude toward unions. Please be prepared to answer these questions if your instructor has assigned Self-Assessment 9.4 in Connect.

1. Where do you stand on your attitude toward unions— positive, neutral, or negative?

2. What experiences or events in your life have led to your attitude toward unions? Describe. What do you think lies in the future for labor unions?

3. Why has there been growing dislike for unions in the United States?