Management II

42 PART 1 | Introduction

3 The Organizational Environment and Culture chapter

After studying Chapter 3, you should be

able to

LO1 Describe the five elements of an organization’s macroenvironment.

LO2 Explain the five components of an organization’s competitive environment.

LO3 Understand how managers stay on top of changes in the external environment.

LO4 Summarize how managers respond to changes in the external environment.

LO5 Discuss how organizational cultures can be leveraged to overcome challenges in the external environment.

Learning Objectives

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CHAPTER 3 | The Organizational Environment and Culture 43

B open systems organizations that are affected by, and that affect, their environment

external environment all relevant forces outside a firm’s boundaries, such as competitors, customers, the government, and the economy

ob Stiller, founder and former chairman of Green

Mountain Coffee Roasters (now called Keurig

Green Mountain), brought his company a long

way since its beginnings in a small Vermont café more than

30 years ago. He expanded his business by surveying the com-

petition and choosing avenues that looked most promising. With

the retail coffee market crowded by Starbucks, Seattle’s Best

Coffee, Dunkin’ Donuts Coffee, Caribou Coffee, and others, Stiller

chose to focus on the quality of his coffee—offering more than

100 gourmet varieties—and to sell through retail stores, whole-

sale outlets, direct-mail catalogs, and on the web. Recognizing

consumers’ growing interest in organic foods, KGM also began

offering organically grown coffees that were produced through

fair trade practices—ensuring that farmers receive a fair price

for their crops. 1 The company

also makes the best-selling

single-cup coffee machine in

the United States. Tripling in

size since 2011, the single-cup

coffee market accounted for

half of the $11.7 billion in sales

in the United States in 2013. 2 Leveraging the popularity of its

Keurig single-cup brewers, KGM has entered into partnerships

with several competitors. In 2014, the company extended its

agreement with Starbucks to sell SB’s coffee in Keuring K-cup

packs in grocery stores. Other recent partnerships include offer-

ing Unilever’s Lipton hot and iced tea in K-cup packs and to dis-

tribute Peet’s Coffee & Tea in the popular single-cup offerings. 3

Executives such as Stiller must keep a sharp watch on their

external environment, or developments outside

their organizations. As we suggested

in the first two chapters, organiza-

tions are open systems —that is, they are affected by and in

turn affect their external envi-

ronments. They use inputs like goods and services from

their environment to create

goods and services that are

outputs to their environment. When we use the term external environment here, we mean more than an organization’s cus-

tomers, competitive partnerships,

or supplier relationships: the

external environment includes all

relevant forces outside the organi-

zation’s boundaries. Many external factors are uncon-

trollable. Managers and their orga-

nizations are often battered by

recession, government interference,

and competitors’ actions. But their

lack of control does not mean that

managers can ignore such forces, use

them as excuses for poor performance,

and try to just get by. Managers must

stay abreast of external developments and

react effectively. In addition, as we will discuss later in this

chapter, sometimes managers can influence components

of the external environment.

This chapter discusses the

major components of an orga-

nization’s macroenvironment

and competitive environment.

It covers several methods that

managers use to gather infor-

mation to better understand

uncertainties in their firm’s

external environment. Next the

chapter discusses how leaders

respond to and attempt to man-

age this uncertainty in their envi-

ronment. It also examines the

internal environment, or culture,

of the organization and how a

culture can help the organization

respond to its environment. Later

chapters elaborate on many of the

basic environmental forces intro-

duced here. For example, technology

will be discussed again in Chapters 5

and 15. Other chapters focus on ethics,

social responsibility, and the natural

environment. And Chapter 15 reiter-

ates the theme that recurs throughout this

text: organizations must change continually

because environments change continually.

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44 PART 1 | Introduction

1 |  THE MACRO- ENVIRONMENT

All organizations operate in a macroenvironment , which includes the general elements in the external environment that

potentially can influence strategic decisions. As Exhibit  3.1

illustrates, the five components of an organization’s macroen-

vironment include laws and regulations, the economy, technol-

ogy, demographics, and social values.

1.1 |  Laws and Regulations Protect and Restrain Organizations

U.S. government policies impose strategic constraints on

organizations but may also provide opportunities. For exam-

ple, while the Patient Protection and Affordable Care Act of 2010 (PPACA) imposes several changes in the way that

certain employers administer and pay for health insurance

for their workers, companies involved with supporting the

enrollment portal, Healthcare.gov, have benefited. For exam-

ple, Terremark, a subsidiary of Verizon, hosts several parts of

the website as well as an information exchange among state-

run insurance exchanges, federal agencies, and insurance com-

panies. The United States government has paid $55.4 million to

Verizon for its support services. 4

The government can affect business opportunities through

tax laws, economic policies, labor laws, and international trade

rulings. In some countries, for example, bribes and kickbacks

are common and expected ways of doing business. However,

the Foreign Corrupt Practices Act (FCPA) prohibits Americans from bribing foreign officials.

5 In 2014, after a subsidiary of

lightweight metals manufacturer Alcoa pleaded guilty to pay-

ing bribes to government officials in Bahrain, it agreed to pay

$384 million in penalties. 6 Under the auspices of the FCPA,

U.S. officials are looking into whether JPMorgan Chase hired

the children of Chinese elite as a way to attract business from

the Chinese govenment. 7 Hewlett-Packard recently agreed to

pay $108 million to U.S. government authorities to settle alle-

gations that HP’s Russian, Polish, and Mexican subsidiaries

bribed government officials in those countries to win lucrative

contracts. 8 But laws can also assist organizations. Because U.S.

federal and state governments protect property rights, including

copyrights, trademarks, and patents, it is economically more

attractive to start businesses in the United States than in coun-

tries where laws and law enforcement offer less protection.

Regulators are specific government organizations in a firm’s

more immediate task environment. Here are some example of

regulatory agencies:

• Equal Employment Opportunity Commission ( www.eeoc.gov ).

• Occupational Safety and Health Administration ( www.osha.gov ).

• Federal Aviation Administration ( www.faa.gov ).

• Food and Drug Administration ( www.fda.gov ).

• National Labor Relations Board ( www.nlrb.gov ).

• Office of Federal Contract Compliance Programs ( www.ofccp.gov ).

• Environmental Protection Agency ( www.epa.gov ).

These agencies have the power to investigate company prac-

tices and take legal action to ensure compliance with laws. For

example, the U.S. National Labor Relations Board (which reg-

ulates union activities) has proposed the Employee Free Choice

Act that would make sweeping changes to labor law, effec-

tively making it easier for employees to form unions. 9 As of

the writing of this book, the proposed amendment has not been

passed and is being opposed by several pro-business groups.

Often the corporate community sees government as an

adversary. However, many organizations realize that govern-

ment can be a source of competitive advantage for an individ-

ual company or an entire industry. Public policy may prevent

or limit new foreign or domestic competitors from entering

an industry. Government may subsidize failing companies or

provide tax breaks to some. Federal patents protect innova-

tive products or production technologies. Legislation may be

LO1 Describe the five elements of an organization’s macroenvironment

Outline chapters and make voca bulary flashcards At first it may sound like a waste of time, but making an outline of a chapter as you read it will help you later when it’s time to study for an exam. A brief one- to two-page outline (for exam- ple, write the headings and key points from LO 1, 1.1, 1.2, and so on) in your notebook or laptop gives you a “road map” for the whole chapter. The road map allows you to quickly see (and remember) how the different sections of the chapter interrelate and where the key concepts and vocabulary fit. Even though you can find an outline already done for you either online or in the back of this book, doing it yourself will help you understand better the material and thus increase your chances of getting higher grades on exams.

In your outlines, be sure to include the vocabulary terms (but don’t write out the definitions—this will make the outline too long). On index cards, write the name of a vocabulary term on one side and the full definition on the other. Keep them with you and practice them while eating lunch, walking for exercise, and so forth. Being organized and disciplined will pay off!

study tip 3

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antigovernment protests throughout several

nations, Syria’s civil war, and the intense

struggle between Russia and the Ukraine over

the sovereignty of Crimea.

The economic environment dramatically affects

managers’ ability to function effectively and

influences their strategic choices. Interest and

inflation rates affect the availability and cost of

capital, growth opportunities, prices, costs, and

consumer demand for products. Unemployment

rates affect labor availability and the wages

the firm must pay, as well as product demand.

Steeply rising energy and health care costs have limited companies’

ability to hire and have raised the cost of doing business. Changes

in the value of the dollar on world exchanges may make American

products cheaper or more expensive than their foreign competitors.

An important economic influence is the stock market. When

investors bid up stock prices, they are paying more to own shares

in companies, so the companies have more capital to support

their strategies. Observers of the stock market watch trends

in major indexes such as the Dow Jones Industrial Average,

Standard & Poor’s 500, and NASDAQ Composite, which com-

bine many companies’ performance into a single measurement.

In recent years, the indexes had risen to great heights, but then

they dropped rapidly. The falling prices reflected an economy

in which demand for homes and cars had shriveled, credit was

difficult to obtain, exports tumbled, and unemployment rates

soared. 10

Governments launched a variety of stimulus efforts

to help companies get financing and to encourage consum-

ers to start spending again. Since then, the stock markets have

rebounded as a result of investors having confidence in renewed

business growth.

The stock market may also affect the behavior of individual

managers. In publicly held companies, managers throughout

the organization may feel required to meet Wall Street’s earn-

ings expectations. It is likely that you, too, at some point in

your career will be asked to improve budget or sales numbers

because your company does not want to disappoint “the Street.”

Such external pressures usually have a positive effect—they

help make many firms more efficient and profitable. But failure

to meet those expectations can cause a company’s stock price

to drop, making it more difficult for the firm to raise additional

capital for investment. The compensation of managers may

also be affected, particularly if they have been issued stock

options. These pressures sometimes lead managers to focus

● Police officers, who retreated into the prosecutor’s office, fire gas and

stun grenades at pro-Russian activists who take cover behind shields taken

from the police on May 1, 2014, in Donetsk, Ukraine. Activists marched to the

prosecutor’s office and overran the police guarding the building. After taking

control of the building and confiscating the police riot gear, police officers

were set free.

passed to support industry prices, thereby guaranteeing profits

or survival. The government may even intervene to ensure the

survival of certain key industries or companies, as it has done

to help auto companies, airlines, and agricultural businesses.

1.2 |  The Economy Affects Managers and Organizations

Although most Americans think in terms of the U.S. econ-

omy, the economic environment for organizations is much

larger—created by complex interconnections among the econ-

omies of different countries. Several events in the world have

had far-reaching influence: the post-tsunami nuclear melt-

down in Japan, the European financial crisis and social unrest,

Exhibit 3.1 Environments

Demographics

Social values

Technology

Culture

Values

Economy

Laws and regulations

Macroenvironment

Competitive environment

Buyers/ customers

Suppliers

Rivals

New entrants

Substitutes and complements

Internal environment

macroenvironment the general environment; includes governments, economic conditions, and other fundamental factors that generally affect all organizations

CHAPTER 3 | The Organizational Environment and Culture 45

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46

demographics statistical characteristics of a group or population such as age, gender, and education level

on short-term

results at the

expense of the

long-term success of their organizations, or

even worse, to engage in unethical or unlawful

behavior that misleads investors. 11

1.3 |  Technology Is Changing Every Business Function

Today a company cannot succeed without incor-

porating into its strategy the astonishing tech-

nologies that exist and are under development.

As technology evolves, new industries, mar-

kets, and competitive niches develop. Advances

in technology also permit companies to enter

markets that would otherwise be unavailable to

them, such as when Apple’s iPhone technology

spurred exponential growth among application

developers. New technologies also provide new

production techniques. In automobile and other

types of capital- intensive manufacturing, sophis-

ticated robots perform jobs without suffering

fatigue, requiring vacations or weekends off, or

demanding wage increases. New methods, such

as drilling horizontal wells to reach new oil and

natural gas deposits in Texas, Oklahoma, and

North Dakota have led to a boom in production

and the need for U.S.-based refining companies

to expand production capabilities. 12

In this case,

technological and economic forces overlap: the

rising price of oil has made it worthwhile for

companies to develop and try new technology. 13

In addition, new technologies provide more

efficient ways to manage and communicate.

Advanced information technology and tele-

communication systems make information

available when and where it’s needed around

the clock. Productivity software monitors

employee performance and detects deficiencies.

Telecommunications allow conferences to take

place without requiring people to travel to the same

location. As we will discuss in Chapter 5, strate-

gies developed around cutting-edge technological

advances can create a competitive advantage.

1.4 |  Demographics Describe Your Employees and Customers

Demographics are statistical characteristics of a group or population. An organization’s cus-

tomers, a university’s faculty and staff, or a

nation’s current labor force can all be described

statistically in terms of their members’ ages,

genders, education levels, incomes, occupa-

tions, and so forth. Managers must consider workforce demo-

graphics in formulating their human resources strategies. The

labor force participation rate measures the percentage of the

population working or looking for work. From early 2007

(before the recession hit) to March 2014, this rate decreased

from 66.4 to 63.2 percent. Fewer workers contributed to a

13.3 percent reduction in productivity growth during that same

period. 15

Population growth influences the size and composi-

tion of the labor force. In the decade from 2012 to 2022, the

U.S. civilian labor force is expected to grow at a rate of 10.8

percent, reaching nearly 163 million in 2022. 16

This growth is

slower than during the previous decade, partly because young

workers—those between the ages of 16 and 24—are declining

in numbers. The fastest-growing age group will be workers

who are 55 and older, who are expected to represent one out of

four workers in the labor force in 2022. What does this mean

for employers? They will need to find ways to retain and fully

use the talents of their experienced workers while competing

for relatively scarce entry-level workers. Perhaps their older

employees will be willing to work past the traditional retirement

age of 65, at least on a part-time basis; research suggests that

a lack of pensions and adequate savings will make retirement

unaffordable for many of today’s baby boomers. 17

Eventually,

however, declining participation in work by older people will

force managers to find replacements for these highly experi-

enced workers.

Texting during lecture may be hazardous to your grades. A research study published in Research in Higher Education Journal divided a group of undergraduate business students into two groups: one-half of participants were allowed to text during lecture and the other half were not. Exam scores of the “texting” students were significantly lower than those students who focused only on lecture. 14

Did You Know?

LISTEN & LEARN ONLINE

YOUNG MANAGERS

Speak Out! “ Within  .  .  .  my specific store, we have a relatively flat organization. My associates report directly to me, and I report up to a more senior level of management. I also have indirect relationships with department heads in other areas of my organization. ”

Kevin Wielgus , General Manager, Carpet Company

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CHAPTER 3 | The Organizational Environment and Culture 47

B y now many people have heard of Blake Mycoskie, the 34-year-old “social entre- preneur” and founder of Toms Shoes (short for Tomorrow’s Shoes). Before becoming famous, Mycoskie started several entre- preneurial ventures. As a business school student at Southern Methodist University in Dallas, he started a door-to-door laun- dry service for students. Later he cre- ated an outdoor media company that was purchased by Clear Channel. In 2002 he teamed up with his sister to compete in the CBS reality show The Amazing Race, which brought him to Argentina where he witnessed large-scale poverty.

While traveling back to Argentina in 2006, Mycoskie met an American woman who was coordinating a shoe drive to deliver donated shoes to poor Argentinean children. Barefoot children are exposed to dangerous hookworm, tetanus, and other soil-based ailments. Mycoskie noticed that children who received donated shoes often got the wrong size. He had a “light- bulb” moment and came up with the idea of creating a sustainable, for-profit business that could fund donations of new shoes for poor children. Known as the “one-for- one” sustainability model, for every pair of shoes that the company sells, it donates a pair of shoes to a poor child somewhere in the world.

Modeled after a popular Argentinean shoe known as an alpargata, Toms Shoes are available in many colors and styles for men, women, and children online and through retail outlets like Whole Foods and Nordstrom. The company is in the process of expanding its product offerings and now also donates eyeglasses.

Toms Shoes was not the first company to use the “one-for-one” sustainability model, but its success is inspiring many other entrepreneurs to create their own socially conscious ventures that make profit while helping others. In 2011 Mycoskie wrote a book titled Start Something That Matters, in which he offers six suggestions that others can follow to develop a sustainable ven- ture that is meaningful. His six suggestions

are to find your story, face your fears, be resourceful without resources, keep it sim- ple, build trust, and realize that giving is good business.

The Toms Shoes socially conscious and sustainable business model is having impact. As of June 2013, Toms Shoes had given more than 10 million pairs of new shoes to children in 60 countries. Blake Mycoskie is proving that a company can do well by doing good.

• Some critics believe that sustainable and socially oriented business models like the one at Toms Shoes are a pass- ing fad. To what degree do you agree or disagree with this claim? Can you think of some other examples of organiza- tions that are doing well by doing good?

• What are some areas in which you have thought about making a difference? Do you envision yourself ever starting a venture that matters to you and others?

SOURCES: See Toms Shoes 2013 Giving Report at www.toms.com/media/TOMS_Giving_Report_2013. pdf ; B. Mycoskie, Start Something That Matters (New York: Spiegel & Grau, 2011); P. D. Broughton, “Doing Good by Shoeing Well,” The Wall Street Journal (online), September 10, 2011, www.wsj .com ; J. Schectman, “Good Business,” Newsweek 156, no. 15 (October 11, 2010), p. 8; “In Toms’ Shoes: Start-Ups Copy ‘One-for-One’ Model,” The Wall Street Journal (online), September 29, 2010, www .wsj.com ; and J. Shambora, “Blake Mycoskie, Founder of TOMS Shoes,” Fortune 161, no. 4 (March 22, 2010), p. 72.

Discussion Questions

Toms Shoes Makes Impact with Its “One-for-One” Model

Wanting to help children have adequate shoes to protect their feet, founder

Blake Mycoskie created TOMS Shoes. The company matches every pair of

shoes purchased with a pair of new shoes for a child in need, creating the

model of One for One. ®

The education and skill levels of the workforce are another

demographic factor managers must consider. The share of

the U.S. labor force with at least some college education has

been increasing steadily over the past several decades, from

less than one-fourth of the workforce in 1970 to close to

70  percent today. 18

Even so, many companies invest heavily

in training their entry-level workers and send them through

their own corporate universities, common at hundreds of large

organizations like Apple, Boeing, Motorola, Amazon, and

General Electric. Also, as college has become a more popu-

lar option, employers are having difficulty recruiting employ-

ees for jobs that require knowledge of a skilled trade, such as

machinists and toolmakers, especially in areas where the cost

of living is so high that most residents are professionals. 19

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48 PART 1 | Introduction

However, as education levels improve around the globe, more

organizations may send technical tasks to lower-priced but

highly trained workers overseas. For example, some U.S. hos-

pitals, to avoid paying higher wages to U.S.-based radiolo-

gists, outsource radiology services (called “teleradiology”) to

Indian specialists who analyze patients’ images and provide

written reports of the results—all via telecommunications

technology. 20

Another factor that significantly influences the U.S. popu-

lation and labor force is immigration. For each year between

now and 2020, it is estimated that 1.5 million immigrants will

become residents of the United States. In recent years, immi-

grants have accounted for approximately 40 percent of recent

U.S. population growth. 21

Immigrants are frequently of work-

ing age, but some have different educational and occupational

backgrounds from the rest of the labor force. The demographic

importance of immigration intersects with legal issues govern-

ing who is permitted to work in the United States. For exam-

ple, the federal government recently cracked down not only on

undocumented workers but also on the managers who hired

them. It established a new program by which businesses are

required to check prospective hires’ legal status by submitting

their names to a database called “E-Verify.” 22

Some compa-

nies have asked the U.S. government to admit more foreign

workers with technical expertise that may be hard to find in the

United States.

Immigration is one reason why the labor force in the future

will be more ethnically diverse than it is today. The biggest per-

centage of employment increases will be by Asian Americans

and Hispanic populations, followed by African Americans.

In the last quarter of the 20th century, women joined the

U.S. labor force in record numbers. Throughout the 1970s and

1980s, they became much more likely to take paying jobs. In

the 1970s only about one-third of women were in the labor

force, but 60 percent had jobs in 1999. Since then, women’s

labor force participation rate has stayed near that level, declin-

ing slightly. 23

A more diverse workforce has many advantages, but

managers have to ensure they provide equality for women

and minorities with respect to employment, advancement

opportunities, and compensation. They must recruit, retain,

train, motivate, and effectively utilize people of diverse

demographic backgrounds who have the skills to achieve the

company’s mission.

1.5 |  Social Values Shape Attitudes Toward Your Company and Its Products

Societal trends regarding how people think and behave have

major implications for management of the labor force, corporate

social actions, and strategic decisions about products and mar-

kets. For example, during the 1980s and 1990s women in the

workforce often chose to delay having children as they focused

on their careers, but today more women are having children and

then returning to the workforce. As a result, at companies like

Bank of America and PricewaterhouseCoopers, parents who

work just 20 hours per week receive full benefits. 24

General

Mills has introduced more supportive policies, including family

leave, flexible working hours, less travel, and child care assis-

tance. 25

Firms provide these benefits as a way of increasing a

source of competitive advantage: an experienced workforce.

A prominent issue today pertains to natural resources: drill-

ing for oil in formerly protected areas in the United States.

Firms in the oil industry like ExxonMobil, Royal Dutch Shell,

British Petroleum, ConocoPhillips, and Chevron face consid-

erable public opinion both in favor of preserving the natural

environment and against U.S. dependence on other countries

for fuel. Protection of the natural environment will factor into

social concerns and many types of management decisions.

How companies respond to these and other social issues may

affect their reputation in the marketplace, which in turn may help

or hinder their competitiveness. The public health issue of child-

hood obesity has given video games a bad name among those

who advocate for children to get off the couch and move. But

two games have generated favorable publicity: Konami’s Dance

Dance Revolution (DDR), where players compete with dance

moves, and Nintendo’s Wii Sports, where players swing a remote

control containing motion sensors to move a virtual tennis racket,

golf club, bowling ball, baseball bat, or boxing gloves. Exercise-

oriented video games like DDR have been shown to help increase

the mobility of older patients with major, debilitating diseases. 26

These games have also been praised as an alternative to games

with violent themes. Dean Bender, the public relations agent for

Traditional Thinking Twenty-somethings interested in a business career will join

companies and work their way up the ranks. In exchange

for performing well, companies will reward employees with

pay raises, benefits, and job security.

Source: Adapted from M. J. Cetron and O. Davies, “Trends Shaping Tomorrow’s World: Forces in the Natural and Institutional Environments,” The Futurist 44, no. 4 (July/August 2010), pp. 38–53.

The Best Managers Today Are increasingly starting their own entrepreneurial ventures,

often before turning 30 years old. Millennials’ command of

technology and social networking will create many opportunities

for new businesses.

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CHAPTER 3 | The Organizational Environment and Culture 49

2 |  THE COMPETITIVE ENVIRONMENT

All managers are affected by the components of the macroenvi-

ronment we just discussed. As Exhibit 3.2 illustrates, each organi-

zation also functions in a closer, more immediate competitive environment , consisting of rivalry among existing competi- tors and the threat of new entrants, the threat of substitute and

complementary products, and the bargaining power of suppliers

and buyers. This model was originally developed by Michael

Porter, a Harvard professor and a noted authority on strategic

management. 29

According to Porter, successful managers do

more than simply react to the environment; they act in ways

that actually shape or change the organization’s environment.

Porter’s model is an excellent method for analyzing the competi-

tive environment and adapting to or influencing the nature of the

competition.

2.1 |  Rivals Can Be Domestic or Global

Among the various components of the competitive environ-

ment, competitors within the industry must first deal with one

another. When organizations compete for the same customers

and try to win market share at the others’ expense, all must

react to and anticipate their competitors’ actions.

Identify the Competition The first question to consider is this: Who is the competition? Sometimes the answer is obvious.

The major competitors in the

market for video game con-

soles are Sony (whose brand

is the PlayStation), Microsoft

(Xbox 360), and Nintendo

(maker of the Wii). But if organizations focus exclusively on

traditional rivalries, they miss the emerging ones. Back in the

1990s, many of the large music companies were so busy com-

peting against one another for sales and market share that they

underestimated the long-term impact of new technologies like

MP3 files and music swapping services like Napster. Then the

launch of iTunes by Apple that allowed customers to purchase

(for about $.99) single songs represented another competitive

blow to the traditional music industry. In-store sales of CDs

have never recovered. Apple’s game changing strategy didn’t

stop there. In 2007, Apple released it’s first iPhone which

played MP3 files along with performing countless other func-

tions. The music player industry didn’t expect a computer man-

ufacturer (Apple) to create a smartphone with multifunctionality

that could compete with stand alone MP3 players. 30

As a first step in understanding their competitive environ-

ment, organizations must identify their competitors. Competitors

may include many types of companies:

• Small domestic firms, especially upon their entry into tiny, premium markets.

• Strong regional competitors.

• Big new domestic companies exploring new markets.

LO2 Explain the five components of an organization’s competitive environment

competitive environment the immediate environment surrounding a firm; includes suppliers, customers, rivals, and the like

Exhibit 3.2 Porter’s five forces: The organization’s competitive environment

Threat of new

entrants

Bargaining power of suppliers

Bargaining power of buyers/

customers

Rivalry among existing

competitors

Threat of substitute

products or services

Source: Adapted from M. E. Porter, “The Five Competitive Forces That Shape Strategy,” Harvard Business Review (online), www.hbr.org (January 2008), pp. 78–93. Copyright © 2008 by the Harvard Business School Publishing Corporation; all rights reserved. Reprinted by permission of Harvard Business Review.

DDR, said of his client, “With all the bad PR about violence,

we became the white knights.” 27

And Wii Sports players have

reported breaking into a sweat and even straining muscles. 28

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● Nike spokesperson

Michelle Wie teeing off at

the Swingin Skirts event.

50 PART 1 | Introduction

• Global firms, especially those that try to solidify their posi- tion in small niches (a tradi-

tional Japanese tactic) or can draw on an inexpensive labor force on a large scale (as in India and China).

• Newer ventures launched by all types of entrepreneurs.

The growth in competition from other countries has

been especially significant with worldwide reduction in

international trade barriers. For example, the North

American Free Trade Agreement (NAFTA)

sharply reduced tariffs on

trade between the United

States, Canada, and Mexico.

Managers today confront a

particular challenge from

low-cost producers abroad.

Analyze How They Compete Once competitors have been identified, the next step is to analyze how they com-

pete. Competitors use tactics such as price reductions, new

product introductions, and advertising campaigns to gain

advantage over their rivals. Consider the market for ath-

letic shoes. Nowadays, the Nike brand frequently comes to

consumers’ minds when it’s time to purchase a new pair of

shoes for the gym or sports. That wasn’t always the case.

For 30  years, Nike and Reebok competed fiercely with one

another over the lucrative footwear market. Founded in 1964

by Phil Bowerman and Phil Knight, Nike quickly gained a

foothold in the market by importing quality athletic footwear

and “aggressively courting male customers.” 31

Paul Fireman,

who bought Reebok in 1984, instead focused on the growing

market for female sneakers; a strategy that led to Reebok sur-

passing Nike in sales in 1987.

Nike took a different approach by signing the world-famous

athlete, Michael Jordan, as a spokesperson for the company.

The Air Jordan brand was a hit and earned the company annual

sales of $1 billion. In later years, Nike signed other well-

known athletes like Tiger Woods, Ronaldinho, Andre Agassi,

high-growth industries offer enormous opportunities for prof-

its. When an industry matures and growth slows, profits drop.

Then intense competition causes an industry shakeout: weaker

companies are eliminated, and the strong companies survive. 33

We will discuss competitors and strategy further in Chapter 5.

2.2 |  New Entrants Increase When Barriers to Entry Are Low New entrants into an industry compete with

established companies. A relatively new

global industry, downloadable apps have

become big business. In 2013, 102 billion

app store downloads were made world-

wide, resulting in $26 billion in sales. 34

In

June of that year, the top 5 paid for apps

were: Minecraft (Mojang), Dentist Office

Kids (Beansprites), Plants vs. Zombies

(PopCap Games), Scribblenauts Remix

(Warner Bros.), and Temple Run:

Brave (Disney). 35

If many factors prevent new

companies from entering an indus-

try, the threat to established firms is

less serious. If there are few such

barriers to entry , the threat of new entrants is greater. Several major barriers to entry are common:

• Government policy —When a firm’s patent for a drug expires, other companies can enter the market. The patents recently expired on several drugs made by Pfizer, including antidepres- sant Zoloft and allergy medicine Zyrtec. At the same time, several research projects to introduce new, patented medicines failed, so Pfizer had to lay off employees and close some facilities to cut costs. 36

• Capital requirements —Getting started in some industries, such as building aircraft or operating a railroad, may cost so much that companies won’t even try to raise such large amounts of money. This helps explain why Boeing and Airbus have no direct competi- tors in manufacturing large, long-haul aircraft. 37

barriers to entry conditions that prevent new companies from entering an industry

“Your most unhappy customers are your greatest source of learning.”

— Bill Gates

Mia Hamm, Rory McIlroy, and so forth. Eventually, with the

help of celebrity endorsements and strong branding, Nike beat

out Reebok to become the $25.3 billion powerhouse that it is

today. 32

Competition is most intense when there are many direct

competitors (including global contenders), industry growth is

slow, and the product or service cannot be differentiated. New,

• Brand identification —When customers are loyal to a familiar brand, new entrants have to spend heavily. Imagine, for example, the costs involved in trying to launch a new chain of fast-food restaurants to compete against McDonald’s or Subway. Similarly, Google’s recent entry into the market for business software, with a package called Google Apps for Business, surprised many people because Microsoft has dominated that segment for many years. 38

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CHAPTER 3 | The Organizational Environment and Culture 51

• Cost disadvantages —Established companies may be able to keep their costs lower because they are larger, have more favorable locations, and have existing assets and so forth.

• Distribution channels —Existing competitors may have such tight distribution channels that new entrants struggle to get their goods or services to customers. For example, established food products have supermarket shelf space. New entrants must displace exist- ing products with promotions, price breaks, intensive selling, and other tactics.

2.3 |  Buyers/Customers Determine Your Success

Buyers (customers) purchase the goods or services an orga-

nization offers. Without them, a company won’t survive.

You are a final consumer when you buy a buy a book from Amazon or new home speak-

ers from Bose. Intermediate consumers buy raw materials or wholesale products and then

sell to final consumers, as when

Sony buys components from

IBM and ATI Technologies

and uses them to make PS3

consoles. Types of intermedi-

ate customers include retailers,

who buy from wholesalers and

manufacturers’ representatives

and then sell to consumers, and

industrial buyers, who buy raw

materials (such as chemicals) to

be converted into final products.

Intermediate customers make

more purchases than individual

final consumers do.

Customers do much more

than simply purchasing goods

and services. They can demand

lower prices, higher quality,

unique product specifications,

or better service. They also can

play competitors against one

another, as occurs when a car

buyer (or a purchasing agent) collects different offers and nego-

tiates for the best price. Often today’s customers want to be

actively involved with their products, as when Nike launched

its “NikeiD” program that lets customers customize their shoes

by choosing the color of the swoosh, stitching, tread, and upper

material. 39

Social networking and media sites have further

empowered customers. They provide an easy source of

information—both about product features and pricing. In

addition, today’s social media users informally create and

share messages about a product, which provide flattering free

“advertising” at best or embarrassing and even erroneous

bad publicity at worst. For example, when the power went

out for about 30 minutes

during Super Bowl XLVII

in the Superdome (New

Orleans) on February 3,

2013, the Oreo’s social

media team swooped into

action by tweeting: “You

can still dunk in the dark.” 40

The “brilliant and bold”

idea made quite a splash; within minutes the clever post

had 16,000 retweets and 20,000 likes on Facebook. 41

Another example of engaging customers online is what

Hasbro has done with its game, Cranium. Fans can either

play the board game in their living rooms or on social net-

works, and the “craniacs” can enjoy reading online posts

of factoids about everything

from Einstein’s theory of rel-

ativity to how Buenos Aires

received its name. 42

However,

viral posts and videos can also

work against companies. Out

of frustration over a customer

service dispute with United

Airlines, musician Dave Carroll

wrote a song titled “United

Breaks Guitars” and posted it

on YouTube. 43

As of July 2014

that video had received approx-

imately 14 million hits. Today’s

companies may find it difficult

to identify, much less respond

to, these unofficial messages.

As we discussed in Chapter 1,

customer service means giving

customers what they want or

need in the way they want it. This

usually depends on the speed

and dependability with which an

organization can deliver its prod-

ucts. Actions and attitudes that

provide excellent customer ser-

vice include the following:

• Speed of filling and delivering normal orders.

• Willingness to meet emergency needs.

• Merchandise delivered in good condition.

• Readiness to take back defective goods and resupply quickly.

• Availability of installation and repair services and parts.

• Service charges (i.e., whether services are free or priced separately). 44

An organization is at a disadvantage if it depends too heavily

on powerful customers—those who make large purchases or can

easily find alternative places to buy. If you are a firm’s largest

final consumer a customer who purchases products in their finished form

intermediate consumer a customer who purchases raw materials or wholesale products before selling them to final customers

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52 PART 1 | Introduction

switching costs fixed costs buyers face when they change suppliers

customer and can buy from

others, you have power over

that firm and probably can negotiate with it successfully. Your

firm’s biggest customers, especially if they can buy from other

sources, will have the greatest negotiating power over you.

2.4 |  Products Can Be Substitutes or Complements of Yours

Besides products that directly compete, other products can

affect a company’s performance by being substitutes for or

complements of the company’s offerings. A substitute is a potential threat; customers use it as an alternative, buying less

of one kind of product but more of another. For example, sub-

stitutes for coffee could be tea, energy drinks, cola, or water.

A complement is a potential opportunity because customers buy more of a given product if they also demand more of the

complementary product. Examples include ink cartridges as a

complement for printers; when people buy more printers, they

buy more ink cartridges.

Substitutes Technological advances and economic effi- ciencies are among the ways that firms can develop substi-

tutes for existing products. Internet offerings such as YouTube

and World of Warcraft have attracted video game players

away from their TV sets to interact with one another online.

This example shows that substitute products or services can

limit another industry’s revenue potential. Founded in Austin,

Texas, in 1980, Whole Foods positions itself as a substitute

to more traditional grocery chains like Kroger, Wegman, and

Albertsons. Providing natural and organic foods that cater to

health-conscious consumers and vegetarians, Whole Foods has

grown dramatically in recent years to 360 stores in the United

States and United Kingdom. 45

Rumors of soon-to-be available

substitutes can garner attention. Amazon is rumored to be close

to entering the smartphone market with a product that has six

cameras and other sensors to produce a 3D depth effect without

needed 3D glasses. 46

In addition to current substitutes, companies need to think about

potential substitutes that may be viable in the future. For example,

possible alternatives to fossil fuels include nuclear fusion, solar

power, and wind energy. The advantages promised by each of

these technologies are many: inexhaustible fuel supplies, inexpen-

sive electricity, zero emissions, universal public acceptance, and

so on. Yet each of these faces economic and technical hurdles.

Complements Besides identifying and planning for substi- tutes, companies must consider complements for their prod-

ucts. When the Wii became popular, some programmers saw

an opportunity to offer a niche service: tweaking the software

to offer customized avatars. Wii players can use Nintendo’s

software to select from a range of facial characteristics, height,

and other features, but some users want a more customized

look or perhaps a character modeled after a famous figure.

An entrepreneur in Tokyo created Mii Station, which uses a

customer-supplied photo to create a Mii lookalike for a $5 fee.

A web developer in Boston started Mii Plaza, a website where

users can tap a database of more than 8,000 characters to col-

lect and share Miis. Nintendo could have viewed these efforts

as copyright infringement, but the company’s initial response

has been to treat Mii-related businesses as harmless. 47

2.5 |  Suppliers Provide Your Resources

Recall from our earlier mention of open systems that organiza-

tions must acquire resources (inputs) from their environment

and convert those resources into products or services (outputs)

to sell. Suppliers provide the resources needed for production,

and those resources may come in several forms:

• People —supplied by trade schools and universities.

• Raw materials —from producers, wholesalers, and distributors.

• Information —supplied by researchers and consulting firms.

• Financial capital —from banks and other sources.

But suppliers are important to an organization for reasons

beyond the resources they provide. Suppliers can raise their

prices or provide poor-quality goods and services. Labor

unions can go on strike or demand higher wages. Workers may

produce defective work. Powerful suppliers, then, can reduce

an organization’s profits, particularly if the organization cannot

pass on price increases to its customers.

Organizations are at a disadvantage if they become overly

dependent on any powerful supplier. A supplier is powerful if

the buyer has few other sources of supply or if the supplier has

many other buyers. Intel has a dominant hold on a key part of the

microprocessor chip market. The company supplies the x86 chip

designed for servers that run Web-based applications. In 2012,

x86 servers accounted for 70 percent of worldwide server sales. 48

Switching costs are fixed costs buyers face if they change suppliers. For example, once a buyer learns how to operate a

supplier’s equipment, such as computer software, the buyer

● The picture of a virtual applicant appears on the screen of recruiters at the

cyber café, Le Milk, in Paris during its first virtual job fair on the 3-D “Second

Life” online game.

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CHAPTER 3 | The Organizational Environment and Culture 53

● The x86 (or 80x86) is the generic name of a microprocessor architecture

first developed and manufactured by Intel. It has dominated the desktop

computer, portable computer, and small server markets since the 1980s.

Although some challengers have hit the market, none have so far supplanted

the x86 for its core markets.

LO3 Understand how managers stay on top of changes in the external environment

supply chain management the managing of the network of facilities and people that obtain materials from outside the organization, transform them into products, and distribute them to customers

environmental uncertainty lack of information needed to understand or predict the future

faces both economic and psychological costs in changing to a

new supplier. In recent years many companies have improved their compet-

itiveness and profitability through supply chain management , the management of the entire network of facilities and people

that obtain raw materials from outside the organization, trans-

form them into products, and distribute them to customers. 49

Increased global competition has required managers to pay

close attention to their costs; they can no longer afford to hold

large inventories, waiting for orders to come in. Also, once

orders do come in, some products sitting in inventory might be

out of date. With the emergence of the Internet, customers look for products

built to their specific needs and preferences—and they want them

delivered quickly at the lowest available price. This requires the

supply chain to be not only efficient but also flexible, so that the

organization’s output can quickly respond to changes in demand.

Today the goal of effective supply chain management is to have

the right product in the right quantity available at the right place at

the right cost. Boeing, the aircraft and defense systems company,

forges partnerships with its suppliers to share knowledge that will

help them learn how to operate more efficiently. Rick Behrens is

senior manager of supplier development, charged with building

close supplier relationships and helping them understand Boeing’s

commitment to “lean” operations, aimed at eliminating waste. He

educates some suppliers in the basics of how to run lean operations;

for others, he sends a team to the organization to help them stream-

line certain activities. Behrens helps suppliers develop their abilities

so they can move from simply selling parts to providing complete

subassemblies. In Behrens’s

words, “We need suppliers that

can grow with us.” 50

In sum, choosing the right

supplier is an important strategic

decision. Suppliers can affect

manufacturing time, prod-

uct quality, costs, and inven-

tory levels. The relationship

between suppliers and the orga-

nization is changing in many

companies. The close supplier

relationship has become a new

model for many organizations that are using a just-in-time manu-

facturing approach. And in some companies, innovative managers

are forming strategic partnerships with their key suppliers in devel-

oping new products or new production techniques.

3 |  KEEP UP WITH CHANGES IN THE ENVIRONMENT

If managers do not understand how the environment affects

their organization or cannot identify opportunities and threats

that are likely to be important, their ability to make decisions

and execute plans will be severely limited. For example, if little

is known about customer likes and dislikes, organizations will

have difficulty designing new products, scheduling production,

or developing marketing plans. In short, timely and accurate

environmental information is critical for running a business.

But information about the environment is not always readily

available. For example, even economists have difficulty predict-

ing whether an upturn or a downturn in the economy is likely.

Moreover, managers find it difficult to forecast how well their

own products will sell, let alone how a competitor might respond.

In other words, managers often operate under conditions of uncer-

tainty. Environmental uncertainty means that managers do not have enough information about the environment to understand or

predict the future. Uncertainty arises from two related factors:

• Complexity —the number of issues to which a manager must attend, and the degree to which they are interconnected. Industries (e.g., the automotive industry) with many different firms that compete in vastly different ways tend to be more complex—and uncertain—than indus- tries (e.g., airplane manufacturers) with only a few key competitors.

• Dynamism —the degree of discontinuous change that occurs within the industry. High-growth industries (e.g., smartphones) with products and technologies that change rapidly are more uncertain than stable indus- tries (e.g., utilities) where change is less dramatic and more predictable. 51

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54 PART 1 | Introduction

environmental scanning searching for and sorting through information about the environment

competitive intelligence information that helps managers determine how to compete better

scenario a narrative that describes a particular set of future conditions

As environmental uncer-

tainty increases, managers need

methods for collecting, sorting

through, and interpreting infor-

mation about the environment.

We discuss some of these

approaches in this section of

the chapter. (In Chapter 5 we

will also discuss how man-

agers make decisions under

conditions of uncertainty.) By

analyzing forces in both the

macroenvironment and the

competitive environment, managers can identify opportunities and

threats that might affect the organization.

3.1 |  Environmental Scanning Keeps You Aware

The first step in coping with uncertainty in the environment is to

pin down what might be important. Frequently organizations and

individuals act out of ignorance, only to regret those actions in

the future. IBM, for example, had the opportunity to purchase the

technology behind xerography but turned it down. Xerox saw the

potential and took the lead in photocopying. Later, Xerox research-

ers developed the technology for the original computer mouse but

failed to see its potential and missed an important opportunity.

To understand and predict changes, opportunities, and threats,

organizations such as Verizon, Marriott, and Kelly Services

spend a good deal of time and money monitoring events in the

environment. Environmental scanning includes searching for information that is unavailable to most people and sorting

through that information to interpret what is important. Managers

can ask questions such as these:

• Who are our current competitors?

• Are there few or many entry barriers to our industry?

• What substitutes exist for our product or service?

• Is the company too dependent on powerful suppliers?

• Is the company too dependent on powerful customers? 52

Answers to these questions help managers develop competi- tive intelligence , the information necessary to decide how best to manage in the competitive environment they have identified.

Porter’s competitive analysis, discussed earlier, can guide envi-

ronmental scanning and help managers evaluate the competitive

potential of different environments. Exhibit  3.3 describes two

extreme environments: an attractive environment, which gives

a firm a competitive advantage, and an unattractive environ-

ment, which puts a firm at a competitive disadvantage. 53

3.2 |  Scenario Development Helps You Analyze the Environment

As managers try to determine the effect of environmental

forces on their organizations, they often develop different

outcomes that are uncertain in the future—alternative combi-

nations of different factors that form a total picture of the envi-

ronment and the firm. For example, before Samsung launched

the Galaxy S5 with fingerprint scanner, heart rate monitor,

50  GB of free dropbox storage, and a one-inch larger screen

than the iPhone 5 in early 2014, company planners developed

several “best guesses” about the level of sales the new prod-

uct would attract. Though precise projections are not available,

Samsung hopes the S5 will build on the company’s previous

sales of more than 200 million units of the Galaxy S line since

2010. 54

Frequently organizations develop a best-case scenario

(the occurrence of events that are favorable to the firm), a

worst-case scenario (the occurrence of unfavorable events),

and some middle-ground alternatives. The value of scenarios is that they help managers develop contingency plans for what

they might do given different outcomes. 55

For example, as a

manager, you will quite likely be involved in budgeting for

your area. You will almost certainly be asked to list initiatives

you would eliminate in case of an economic downturn and

new investments you would make if your firm does better than

expected.

Effective managers regard the scenarios they develop as liv-

ing documents, not merely prepared once and put aside. They

constantly update the scenarios to take into account relevant

new factors that emerge, such as significant changes in the

economy or actions by competitors. Also, managers try to iden-

tify strategies that are the most robust across all of the different

scenarios.

3.3 |  Forecasting Predicts Your Future Environment

Whereas environmental scanning identifies important factors

and scenario development develops alternative pictures of the

Environmental Factor Attractive Unattractive

Competitors Few; high industry growth; unequal size differentiated.

Many; low industry growth; equal size; commodity.

Threat of entry Low threat; many barriers.

High threat; few entry barriers.

Substitutes Few. Many.

Suppliers Many; low bargaining power.

Few; high bargaining power.

Customers Many; low bargaining power.

Few; high bargaining power.

Sources: Adapted from S. Ghoshal, “Building Effective Intelligence Systems for Competitive Advantage,” Sloan Management Review 28, no. 1 (Fall 1986), pp. 49–58; and K. D. Cory, “Can Competitive Intelligence Lead to a Sustainable Competitive Advantage?” Competitive Intelligence Review 7, no. 3 (Fall 1996), pp. 45–55.

Exhibit 3.3 Attractive and unattractive environments

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CHAPTER 3 | The Organizational Environment and Culture 55

forecasting method for predicting how variables will change the future

benchmarking the process of comparing an organization’s practices and technologies with those of other companies

empowerment the process of sharing power with employees to enhance their confidence in their ability to perform their jobs and contribute to the organization

future, forecasting predicts exactly how some variable or vari- ables will change in the future. For example, in making capital

investments, firms may forecast interest rates. In deciding to

expand or downsize a business, firms may forecast the demand

for goods and services or forecast the supply and demand of

labor. Publications such as Businessweek’s Business Outlook

provide forecasts to businesses both large and small. The accuracy of forecasts varies from application to appli-

cation. Because they extrapolate from the past to project the

future, forecasts tend to be most accurate when the future

ends up looking a lot like the past. Of course we don’t need

sophisticated forecasts in those instances. Forecasts are most

useful when the future will look radically different from the

past. Unfortunately that is when forecasts tend to be less

accurate. The more things change, the less confidence we

have in our forecasts. Here is some practical advice for using

forecasts:

• Use multiple forecasts, and consider averaging their predictions.

• Remember that accuracy decreases as you go further into the future.

• Collect data carefully. Forecasts are no better than the data used to construct them.

• Use simple forecasts (rather than complicated ones) where possible.

• Keep in mind that important events often are surprises that depart from predictions. 56

3.4 |  Benchmarking Helps You Become Best in Class

Besides trying to predict changes in the environment, firms can

intensively study the best practices of various firms to under-

stand their sources of competitive advantage. Benchmarking means identifying the best-in-class performance by a com-

pany in a given area—say, product development or customer

service—and then comparing your processes with theirs. A

benchmarking team collects information about its own compa-

ny’s operations and those of the other firm in order to determine

gaps. These gaps serve as a point of entry to learn the under-

lying causes of performance differences. Ultimately, the team

maps out a set of best practices that lead to world-class perfor-

mance. We will discuss benchmarking further in Chapter 5.

4 |  RESPONDING TO THE ENVIRONMENT

For managers and organizations, responding effectively to their

environments is almost always essential. Clothing retailers who

pay no attention to changes in the public’s style preferences,

and manufacturers who fail

to ensure they have steady

sources of supply, are soon

out of business. To respond to

their environment, managers

and companies have a num-

ber of options, which can be

grouped into three categories:

1. Adapting to the environment.

2. Influencing the environment.

3. Selecting a new environment.

4.1 |  Adapt to the External Environment

To cope with environmental uncertainty, organizations fre-

quently adjust their structures and work processes. Exhibit 3.4

shows four different approaches that organizations can take in

adapting to environmental uncertainty, depending on whether it

arises from complexity, dynamism, or both.

When uncertainty arises from environmental complexity, orga-

nizations tend to adapt by decentralizing decision making. For

example, if a company faces a growing number of competitors

in various markets, if different customers want different things, if

product features keep increasing, and if production facilities are

being built in different regions of the world, executives probably

cannot keep abreast of all activities and understand all the oper-

ational details of a business. In these cases, the top management

team is likely to give lower-level managers authority to make

decisions that benefit the firm. The term empowerment is used frequently today to talk about this type of decentralized authority.

To compete in volatile environments, organizations rely on knowl-

edgeable and skilled workers. One way to develop such workers is

to sponsor training programs. Alliances among employers, com-

munity colleges, universities, and nonprofit training programs are

producing workers with much-needed skills in many industries.

Exhibit 3.4 Four structural approaches for managing uncertainty

DynamicStable

S im

p le

C o

m p

le x Decentralized

Organic

(mutual adjustment)

Centralized

Organic

(direct supervision)

Decentralized

Bureaucratic

(standardized skills)

Centralized

Bureaucratic

(standardized work processes)

LO4 Summarize how managers respond to changes in the external environment

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56 PART 1 | Introduction

● Per Scholas hosted hands-on workshops to help 1,500 senior citizens in

New York City learn how technology can improve the quality of their lives.

buffering creating supplies of excess resources in case of unpredictable needs

smoothing leveling normal fluctuations at the boundaries of the environment

flexible processes methods for adapting the technical core to changes in the environment

One program in New York,

Per Scholas, trains computer

repair technicians in one of

the country’s poorest areas—

the Bronx. Funded by grants

from private foundations and

the New York City Council,

the program gained momen-

tum through its collaboration

with Time Warner Cable and

other companies looking for

skilled employees. To date, Per

Scholas has trained more than 3,800 low-income adults to obtain

jobs in the technology field.

Per Scholas boasts a job placement rate of 80 percent of its

graduates, who earn about $12 per hour in the first year and

$15  per hour in two years—often double what they would have

earned without the training. One graduate, Cristina Rodriguez,

works at Time Warner Cable as a broadband specialist. Her new

skills have empowered her to become a high-performing employee.

“What feels great is when I resolve someone’s issue,” she says.

Rodriguez, fluent in both English and Spanish, is able to solve cus-

tomers’ problems in both languages.

Training programs such as Per Scholas have grown more

sophisticated in the last few years because of their close association

with the companies that hire their graduates. These relationships

give the programs insight into how the employers operate and what

they need. Connie Ciliberti, vice president of human resources for

Time Warner Cable, confirms the importance of this collaboration.

“Per Scholas has spent time learning our business, understanding

our measures of success,” she says. 57

In response to uncertainty arising from a dynamic environ-

ment, organizations tend to establish more flexible structures.

Today the term bureaucracy generally has a bad connotation.

While bureaucratic organizations may be efficient and con-

trolled if the environment is stable, they tend to react slowly to

changes in products, technologies, customers, or competitors.

Because bureaucratic organizations tend to be formal and sta-

ble, they often cannot adjust to change or exceptional circum-

stances that “don’t fit the rules.” In these cases, more organic

structures give organizations the flexibility to adapt. Organic

structures are less formal than bureaucratic organizations;

decisions are made through interaction and mutual adjustment

among individuals rather than from a set of predefined rules.

Adapting at the Boundaries Because they are open sys- tems, organizations are exposed to uncertainties from both

their inputs and outputs. In response, they can create buffers

on both the input and output boundaries with the environ-

ment. Buffering creates supplies of excess resources to meet unpredictable needs. On the input side, organizations establish

relationships with employment agencies to hire part-time and

temporary help during rush periods when labor demand is dif-

ficult to predict. In the U.S. labor force, these workers, known

as contingent workers, include 2.5 million on-call workers,

1.2  million temporary-help agency workers, and more than

800,000 workers provided by contract firms, suggesting wide-

spread use of this approach to buffering labor input uncertain-

ties. 58

On the output side of the system, most organizations use

some type of ending inventories, keeping merchandise on hand

in case a rush of customers decides to buy their products. Auto

dealers are a common example of this practice; other compa-

nies that use buffer inventories include fast-food restaurants,

bookstores, and even real estate agencies. 59

In addition to buffering, organizations may try smoothing or leveling normal fluctuations at the boundaries of the environment.

For example, during winter months in the north, when automobile

sales drop off, dealers commonly cut the price of their in-stock

vehicles to increase demand. At the end of each clothing season,

retailers discount their merchandise to clear it out and make room

for incoming inventories. These are examples of smoothing envi-

ronmental cycles to level off fluctuations in demand.

Adapting at the Core While buffering and smoothing man- age uncertainties at the boundaries of the organization, firms also

can establish flexible processes that allow for adaptation in their technical core. For example, firms increasingly try to customize

their goods and services to meet customers’ varied and chang-

ing demands. Health care companies like Blue Cross and Blue

Shield and Aetna offer a variety of coverage options to custom-

ers. Even in manufacturing, where it is difficult to change basic

core processes, firms are creating flexible factories. Instead of

mass-producing large quantities of a “one-size-fits-all” product,

organizations can use mass customization to produce customized

products at an equally low cost. Whereas Henry Ford used to

claim that “you could have a Model T in any color you wanted,

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CHAPTER 3 | The Organizational Environment and Culture 57

as long as it was black,” auto companies now offer a wide array

of colors and trim lines, with different options and accessories.

Customers who purchase a Ford Mustang can choose from a

wide variety of exterior colors, and interior design features that

suit their style. 60

The process of mass customization involves the

use of a network of independent operating units in which each

performs a specific process or task such as making a dashboard

assembly on an automobile. When an order comes in, different

modules join forces to deliver the product or service as specified

by the customer. 61

4.2 | Influence Your Environment In addition to adapting or reacting to the environment, managers

and organizations can develop proactive responses

aimed at changing the environment. Two general types

of proactive responses are independent action and coop-

erative action.

Independent Action A company uses independent strategies when it acts on its own to change some aspect of its current environment. As illustrated in Exhibit 3.5 ,

several independent strategies are possible: 62

• Competitive aggression —exploiting a distinctive com- petence or improving internal efficiency for competitive advantage (e.g., aggressive pricing and comparative adver- tising). Southwest Airlines cuts fares when it enters a new market, and Sony positioned itself as the gaming industry’s technological leader with the launch of the PS3.

• Competitive pacification —independent action to improve relations with competitors (e.g., helping competitors find raw materials). Kellogg Company promotes the cereal

industry as a whole, as well as advertising its various brands.

• Public relations —establishing and maintaining favorable images in the minds of those making up the environment (e.g., sponsoring sporting events). The oil and natural gas industry advertises its role in national independence.

• Voluntary action —voluntary commitment to various interest groups, causes, and social problems (e.g., donating supplies to tsunami vic- tims). Converse, Apple, Gap, Dell, Nike, Shazam, and other compa- nies have signed on to Product Red, a program in which they market special Red-themed products and donate a percentage of the profits to the Global Fund, a project to help end AIDS in Africa.

Exhibit 3.5 Ways that managers can influence their environment

Voluntary action

Public relations

Competitive pacification

Competitive aggression

Legal action

Environment Political action

independent strategies strategies that an organization acting on its own uses to change some aspect of its current environment

Companies or organizations within an industry sometimes form political action committees (PACs) to raise money to help elect lawmakers with favorable points of view. In 2013–2014, the most PAC spending by businesses came from companies in finance, insurance, and real estate. 63

Did You Know?

100 20 30 40 50 60 70 80 90 100 110 120130

$129.8 million

$53.5 million

$49.8 million

$38.8 million

Finance, insurance, and real estate PACs

2013–2014 PAC spending by industry/sector (partial list)

Total spending (in millions)

Lawyer and lobbyist PACs

Health care PACs

Labor union PACs

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58 PART 1 | Introduction

• Legal action —engaging the company in a private legal battle (e.g., lawsuits against illegal music copying). Viacom sued Google for allowing users to post copyrighted video clips on the Google- owned YouTube website.

• Political action —efforts to influence elected representatives to create a more favorable business environment or limit competition (e.g., issue advertising or lobbying at state and national levels). In 2013, special interest groups like companies, labor unions, and other organizations spent a total of $3.2 billion to lobby elected offi- cial and candidates in the United States. 64

Each of these examples shows how organizations—on their

own—can have an impact on the environment.

Cooperative Action In some situations, two or more orga- nizations work together using cooperative strategies to influ- ence the environment.

65 Several types of cooperative strategies

are common: 66

• Contracts —negotiating an agreement between the organization and another group to exchange goods, services, information, pat- ents, and so on. Suppliers and customers, or managers and labor unions, may sign formal agreements about the terms and conditions of their future relationships. These contracts are explicit attempts to make their future relationship predictable.

• Cooptation —absorbing new elements into the organization’s leadership structure to avert threats to its stability or existence. Many universities invite wealthy alumni to join their boards of directors.

• Coalition —groups that act jointly with respect to a set of polit- ical initiatives for some period. Local businesses may band together to curb the rise of employee health care costs, and organizations in some industries have formed industry associa- tions and special interest groups. Life Is Good, a New England– based T-shirt company, used the latest economic downturn to strengthen cooperative action with the retailers that stock its products. Employees at Life Is Good began calling retailers to ask how they could help them through the slow times. Based on the feedback, the firm identified a need to establish online networks that retailers—the company’s customers—could use for sharing ideas. 67

At the organizational level, firms establish strategic alliances,

partnerships, joint ventures, and mergers with competitors to

deal with environmental uncertainties. Cooperative strategies

such as these make most sense when two conditions exist:

1. Taking joint action will reduce the organizations’ costs and risks.

2. Cooperation will increase their power (their ability to successfully accomplish the changes they desire).

4.3 |  Change the Boundaries of the Environment

Besides changing themselves (environmental adaptation)

or their environment, organizations can redefine or change

which environment they are in. We refer to this last category

as strategic maneuvering . By making a conscious effort to change the boundaries of its competitive environment, a firm

can maneuver around potential threats and capitalize on oppor-

tunities. 68

Managers can use several strategic maneuvers,

including domain selection, diversification, merger and acqui-

sition, and divestiture. 69

Domain selection is the entrance by a company into another suitable market or industry. For instance, the market

may have limited competition or regulation, ample suppliers

and customers, or high growth. An example is Nintendo’s

decision to create products such as the Wii that appeal to cus-

tomer segments that have not been enthusiastic to purchase

video games, such as people intimidated by complicated

game controllers and parents concerned about the violent

content and sedentary play involved in video games. By

avoiding head-on competition to be the product with the best

graphics or most advanced play, Nintendo was able to enjoy

immediate profits from its new console. Thus Nintendo has

used an existing expertise to broaden the goods and services

it offers.

Diversification occurs when a firm invests in different types of businesses or products or when it expands geograph-

ically to reduce its dependence on a single market or tech-

nology. Google, which earns the bulk of its revenues from

advertising on its ubiquitous search engine, has diversified

into such new products as Google Glass, self-driven cars,

high-speed fiber optic cable, the Nexus line of smartphones

and tablets, the Chromebook laptop, and the Chromecast

Internet connector for TVs. In March 2014, Google’s

Motorola unit and LG Electronics released a smartwatch

to compete in the broader 45-million unit wearable device

market. 70

A merger or acquisition takes place when two or more

firms combine, or one firm buys another, to form a single com-

pany. Mergers and acquisitions can offer greater efficiency

from combined operations or can give companies relatively

quick access to new markets or industries. Swedish auto-

maker Volvo was recently acquired by Geely Holding Group

in China. 71

Li Zhejiang, the CEO of Geely, has announced

plans to build several manufacturing plants in China to serve its

growing demand for cars.

cooperative strategies strategies used by two or more organizations working together to manage the external environment

strategic maneuvering an organization’s conscious efforts to change the boundaries of its task environment

domain selection entering a new market or industry with existing expertise

diversification a firm’s investment in a different product, business, or geographic area

merger one or more companies combining with another

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CHAPTER 3 | The Organizational Environment and Culture 59

Divestiture occurs when a company sells one or more businesses. At Ford Motor Company, recent operating

losses and the costs of restructuring its workforce have

brought about a cash shortage. To raise cash and

focus on meeting changing consumer tastes in the

U.S. automotive market, Ford recently disman-

tled its Premier Automotive Group by sell-

ing Aston Martin to a British-led group of

investors, Land Rover and Jaguar to Tata

of India, and Volvo to Geely of China. 72

Organizations engage in strategic

maneuvering when they move into

different environments. Some com-

panies, called prospectors , are more likely than others to engage in stra-

tegic maneuvering. 73

Aggressive

companies like Amazon, Google,

and Apple continuously change

the boundaries of their compet-

itive environments by seeking

new products and markets, diver-

sifying, and merging or acquir-

ing new enterprises. In these and other ways, corpo-

rations put their competitors on the

defensive and force them to react.

Defenders , in contrast, stay within a more limited, stable product domain.

4.4 |  Three Criteria Help You Choose the Best Approach

Three general considerations help guide management’s response

to the environment:

1. Managers need to change what can be changed. Environmental responses are most useful when aimed at elements of the environ- ment that cause the company problems, provide opportunities, and allow the company to change successfully. Thus Nintendo recognized that its game console would have difficulty competing on superior graphics, so it addressed underserved segments of the market, where customers and favorable publicity made the Wii successful.

2. Managers should use the appropriate response. If a company wants to better manage its competitive environment, competitive aggres- sion and pacification are viable. Political action influences the legal

environment, and contracting helps manage customers and suppliers.

No business likes bad press, but if

it occurs, managers must choose a

response. They can ignore the negative

publicity or address it in such a way

that the incident is viewed as neutral, or

even positive. When Washington,

DC, restaurateur Mark Sakuta dis-

covered criticisms of his restaurant

on the website for the Washington

Post, he was at first puzzled. About

10 negative reviews appeared simul-

taneously, accusing the restaurant of

using cookbook recipes instead of its

own original concoctions, claiming that

the floor was unstable, and more. A month

later, another harsh review criticized the

gratuity policy for large groups.

Sakuta knew that the first group of accu-

sations was simply untrue. He suspected they

were written by disgruntled former employees.

So he called customer service at the website and

asked to have the postings removed. The site manager

agreed. But Sakuta did not ask to

have the comment about the tip-

ping policy removed because it

was accurate. Instead he decided to

adjust the policy. He reasoned that

if customers were uncomfortable

with it, they might choose to dine

elsewhere. Now Sakuta keeps closer tabs on food-related web-

sites and blogs, looking for any comments about his business. 74

3. Managers should choose responses that offer the most benefit at the lowest cost. Return-on-investment calculations should incor- porate short-term financial considerations and long-term impact.

Proactive managers who consider these factors carefully

will guide their organizations to competitive advantage more

effectively.

In addition, effective managers also look to their internal

environment for ways to respond to changes that are occurring

outside their organization. This leads to a discussion of how an

organization’s culture can be used to address those changes in

the external environment.

acquisition one firm buying another

divestiture a firm selling one or more businesses

prospectors companies that continuously change the boundaries for their task environments by seeking new products and markets, diversifying and merging, or acquiring new enterprises

defenders companies that stay within a stable product domain as a strategic maneuver

● LG engineers worked closely with Google from the initial stages

of development to ensure that the LG G Watch worked perfectly with

Android Wear. It will be compatible with a wide-range of Android TM

smartphones and will present relevant information to users just when

they need it or whenever they say “OK Google” to ask questions or

get stuff done.

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60 PART 1 | Introduction

5 |  CULTURE AND THE INTERNAL ENVIRONMENT OF ORGANIZATIONS

An organization’s internal environment refers to all relevant forces inside a firm’s boundaries, such as its managers, employ-

ees, resources, and organizational culture.

As we have discussed, an organization’s managers serve a

critical role in scanning and responding to threats and opportuni-

ties in the external environment. Financial, physical, and human

resources also play a key role when it comes to achieving com-

petitive advantage. One of the most important factors that influ-

ence an organization’s response to its external environment is

its culture.

5.1 |  What Is an Organization Culture?

Organization culture is the set of assumptions about the organization and its goals and prac-

tices that members of the company share. 75

It is a system of shared values about what is

important and beliefs about how the world

works. It provides a framework that organizes

and directs people’s behavior on the job. 76

The

culture of an organization may be difficult for

an observer to define easily, yet like an indi-

vidual’s personality, an astute observer can

decipher the clues of the culture over time. As

illustrated in Exhibit 3.6 , there are three layers

of organization culture. 77

The first level is like

the exposed part of an iceberg and consists of

visible artifacts , which are the components of an organization that can be seen and heard such

as office layout, dress, orientation, stories, and

written material (e.g., annual reports and strate-

gic plans). Though seemingly easy to interpret,

these clues to understanding the culture often

take time to figure out. The second level of

Exhibit 3.6 The three levels of organizational culture

3:Unconscious Assumptions “But we have to be profitable.”

2:Values “We need to become a

‘green’ company.”

1:Visible Artifacts Office layout, dress code,

written documents.

Source: Adapted from E. H. Schein, “Coming to a New Awareness of Organizational Culture,” Sloan Management Review 25, no. 2 (Winter 1984), pp. 3–16. Copyright © 1984 from MIT Sloan Management Review/Massachusetts Institute of Technology. All rights reserved. Distributed by Tribune Content Agency, LLC.

culture refers to its values , which are the underlying qualities and desirable behaviors that are important to the organization.

Values are akin to that part of the iceberg that is just below the

surface of the water. They can’t be directly observed, but rather

values need to be inferred from the behavior of managers. For

example, acting on the value of wanting to become a “green”

automobile company, the top management team may decide to

build a line of fuel-efficient electric automobiles. The third and

deepest level of an organization’s culture refers to unconscious assumptions , which are strongly held and taken-for-granted beliefs that guide behavior in the firm. In the case of the auto-

mobile executives, they’ll be willing to “go green” only to the

extent that this new sustainability initiative is profitable. Cultures can be strong or weak; strong cultures can greatly

influence the way people think and behave. A strong culture is

one in which everyone understands and believes in the firm’s

goals, priorities, and practices. A strong culture can be a real

advantage to the organization if the behaviors it encourages and

facilitates are appropriate. Zappo’s culture encourages extraor-

dinary devotion to customer service; the culture at Cirque

du Soleil encourages innovation, and the culture at Walmart

stresses low cost and frugality. Employees in these companies

don’t need rule books to dictate how they act because these

behaviors are conveyed as “the way we do things around here,”

rooted in their companies’ cultures.

internal environment all relevant forces inside a firm’s boundaries, such as its managers, employees, resources, and organization culture

organization culture the set of assumptions that members of an organization share to create internal cohesion and adapt to the external environment

visible artifacts the components of an organization that can be seen and heard, such as office layout, dress, orientation, stories, and written material

values the underlying qualities and desirable behaviors that are important to the organization

unconscious assumptions the strongly held and taken- for-granted beliefs that guide behavior in the firm

LO5 Discuss how organizational cultures can be leveraged to overcome challenges in the external environment

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CHAPTER 3 | The Organizational Environment and Culture 61

In contrast, a strong culture that encourages inappropriate

behaviors can severely hinder an organization’s ability to deal

effectively with its external environment— particularly if the

environment is undergoing change, as is almost always the case

today. A culture that was suitable and even advantageous in a

prior era may become counterproductive in a new environment.

For instance, a small start-up may have an informal culture that

becomes less suitable when the company grows, faces more

competition, and requires decision making by a wide range of

specialized employees spread out over many locations.

In its relatively short life as a company, Google quickly became

a role model for its brainy culture of innovation. Software writ-

ers and engineers were attracted to Google not just for its famous

perks, such as free meals and laundry facilities, but also for a cli-

mate in which they were encouraged to let their imaginations roam

free, dreaming up ideas that could be crazy but just might be the

next big thing on the Internet. During a long-running business

boom, that culture served Google well. The best engineers were

thrilled to work for a company that let them spend one-fifth of

their time on new projects of their own choosing. But when the

economy slowed and the stock market nosedived, Google’s man-

agers had to cope with a new reality in which money was tight.

Google could no longer afford its free-spending culture. Managers

had to figure out how to maintain the best of the culture while

innovating at a more prudent pace.

Google’s modified culture now values setting priorities. New

ideas are still welcome if they are focused on core businesses

of search, advertising, and web-based software applications.

Managers are reassigning employees away from teams working on

unrelated projects and using them to staff teams working on prof-

itable ideas in the core areas. Employees who have an idea that

can improve the computer user’s experience are asked to consider

also what impact that idea might have on Google’s bottom line.

Similarly, hiring has slowed because managers must not only jus-

tify the talent of a candidate but also target hiring to particular

business needs. The challenge will be to keep employees as excited

about targeted innovation as they have been about freewheeling

innovation. 78

In contrast, at a company with a weak culture, different people hold different values, there is confusion about corpo-

rate goals, and it is not clear from one day to the next what

principles should guide decisions. Some managers may pay lip

service to some aspects of the culture (“we would never cheat

a customer”) but behave very differently (“don’t tell him about

the flaw”). As you can guess, such a culture fosters confusion,

conflict, and poor performance. Most managers would agree

that they want to create a strong culture that encourages and

supports goals and useful behaviors that will make the com-

pany more effective. In other words, they want to create a

culture that is appropriately aligned with the organization’s

competitive environment. 79

5.2 |  Companies Give Many Clues About Their Culture

Let’s say you want to understand a company’s culture. Perhaps

you are thinking about working there and you want a good “fit,”

or perhaps you are working there right now and want to deepen

your understanding of the organization and determine whether

its culture matches the challenges it faces. How would you go

about making the diagnosis? As the “Take Charge of Your

Career” feature discusses, a variety of things will give you use-

ful clues about culture:

• Corporate mission statements and official goals are a starting point because they will tell you the firm’s desired public image. Most companies have a mission statement—even the CIA (you can find it at http://www.cia.gov ). Your school has one, and you can probably find it online. But are these statements a true expression of cul- ture? A study of hospital employees and their managers found that managers rated their mission statement more positively than non- managers (even though employees had participated in developing it), and 3 out of 10 employees were not even aware that the hospital had a mission statement (even though the hospital had processes for communicating about it). 80 So even after reading statements of mission and goals, you still need to figure out whether the state- ments truly reflect how the firm conducts business.

• Business practices can be observed. How a company responds to problems, makes strategic decisions, and treats employees and cus- tomers tells a lot about what top management really values. When an unknown person(s) laced some Extra Strength Tylenol capsules with cyanide in the Chicago area back in the early 1980s, Jim Burke

● Annie’s CEO John Foraker pictured. Everyone at Annie’s shares a common

passion for food, people, and the planet we all share.

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62 PART 1 | Introduction

and the other leaders of Johnson & Johnson reacted to the crisis by recalling all related products throughout the United States. This decisive move, though not good for short-term profitability, was respected throughout the company and business community.

• Symbols, rites, and ceremonies give further clues about culture. For instance, status symbols can give you a feel for how rigid the hierarchy is and for the nature of relationships between lower and higher levels. Who is hired and fired—and why—and the activities that are rewarded indicate the firm’s real values.

• The stories people tell carry a lot of information about the compa- ny’s culture. Every company has its myths, legends, and true stories about important past decisions and actions that convey the compa- ny’s main values. The stories often feature the company’s heroes: people once or still active who possessed the qualities and charac- teristics that the culture especially values and who act as models for others about how to behave. Sam Walton, founder of Walmart, was a bigger-than-life presence for his employees. Well into his senior years, Walton would drive an old red pickup truck from store to store, where he’d meet and joke with employees and even lead them in a company cheer.

A strong culture combines these measures in a consis-

tent way. The Ritz-Carlton hotel chain gives each employee a

laminated card listing its 12 service values. Each day it carries

out a type of ceremony: a 15-minute meeting during which

employees from every department resolve problems and discuss

areas of potential improvement. At these meetings, the focus is

on the day’s “wow story,” which details an extraordinary way

that a Ritz-Carlton employee lived up to one of the service val-

ues. For example, a family arrived at the Bali Ritz-Carlton with

special eggs and milk because of their son’s allergies, but the

food had spoiled. The manager and dining staff couldn’t find

replacements in town, so the executive chef called his mother-

in-law in Singapore and asked her to buy the necessary products

and fly with them to Bali. 81

5.3 |  Four Different Types of Organizational Cultures

In general, cultures can be categorized according to whether

they emphasize flexibility versus control and whether their

focus is internal or external to the organization. Keep in

mind that organizations can have characteristics of more

than one culture. In order to understand their culture,

managers should discuss this issue with other managers

Take Charge of Your Career Figure out the organizational culture, and fast!

S tarting a new job or career is never easy. If you moved as a child, it may bring up memories of being the new kid in town. Here’s an idea. During the first few days, weeks, and months on the new job, try to “hit the ground listening.” There’s an old saying that suggests that because we’ve been given two ears and one mouth, we should probably try to listen twice as much as we talk. That makes a lot of sense, especially when trying to figure out the ins and outs of an organization you recently joined.

Think of yourself as a private investigator or cultural anthropologist whose job is to fig- ure out answers to questions like these:

1. The who’s: Who on staff is respected the most? Who seems to have the most influ- ence? Whom do people go to with problems? Whom do I need to impress?

2. The what’s: What skills, abilities, and knowl- edge does this organization value? What

kind of attitudes do successful people dis- play here?

3. The why’s: Why is this organization suc- cessful? Why does it hire people like me? Why do people get fired from here? Why is there talk about changing the culture to better align with the external environment?

4. The how’s: How good is the fit between the organizational culture and my values? How can I make a positive impact on this organization?

The questions are probably not the hardest part to figure out. Getting accurate answers to the questions is more challenging. How can you go about collecting information so that you can arrive at the answers?

First, find (or download) and read every- thing you can about the organization. Start with its website, but don’t stop there. Use your school’s library databases and Internet search engines to unearth articles, news releases, complaints, and other tidbits about your organization. Getting facts and opinions from diverse sources will give you a more complete picture of the organization than just relying on internal documents.

Second, start talking to people. When you start getting to know your supervisor, coworkers, customers, or suppliers, ask them for their opinions about some of the questions listed here. You might be surprised at what people are willing to tell you. Being new has advantages—most folks like imparting their wisdom to someone who’s willing to listen to them.

Last, observe people’s behaviors and lis- ten to what they say (and how they say it). If you’re a good observer of people, you’ll be able to piece together the puzzle that makes up an organization’s culture. If you find you often miss what people say or struggle with interpreting nonverbal cues, it may take you longer to arrive at the same point of under- standing. That’s okay. Everyone moves at his or her own pace. The important point is to make a direct and conscious effort to deci- pher your organization’s culture so you can decide whether it’s a good fit for you in the long term. If not, there are a virtually unlim- ited number of different organizations in the world. By finding one that fits well with your preferences, personality, values, and passion, you will feel at home while at work.

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CHAPTER 3 | The Organizational Environment and Culture 63

to compare notes on how the culture is evolving and its

strengths and weaknesses relative to the demands of the

external environment. By juxtaposing these two dimen-

sions, we can describe four types of organizational cultures,

depicted in Exhibit 3.7 :

• Group culture. The New Belgium Brewery in Fort Collins, Colorada, is an example of a group culture that is internally oriented and flex- ible. It tends to be based on the values and norms associated with the firm. The employees (i.e., organizational members) comply with organizational directives that flow from trust, tradition, and long- term commitment. Their culture emphasizes member development and values participation in decision making. The strategic orien- tation associated with this cultural type is one of implementation through consensus building. Its leaders tend to act as mentors and facilitators.

• Hierarchical culture. The U.S. armed forces are based on a hierar- chical culture that is internally oriented by more focus on control and stability. It has the values and norms associated with a bureau- cracy. It values stability and assumes that individuals will comply with organizational mandates when roles are stated formally and enforced through rules and procedures.

• Rational culture. Oil and natural gas companies tend to have ratio- nal cultures that are externally oriented and focused on control. This type of culture’s primary objectives are productivity, planning, and efficiency. Organizational members are motivated by the belief that performance that leads to the desired organizational objec- tives will be rewarded.

• Adhocracy. Apple is an example of an adhocracy that is exter- nally oriented and flexible. This culture type emphasizes change in which growth, resource acquisition, and innovation are stressed. Organizational members are motivated by the importance or ideolog- ical appeal of the task. Leaders tend to be entrepreneurial and risk takers. Other members tend to have these characteristics as well. 82

This type of diagnosis is important when two companies are

considering combining operations, as in a merger, acquisition,

or joint venture, because as we noted, cultural differences can

sink these arrangements. In some cases, organizations investi-

gating this type of change can benefit from setting up a “clean

team” of third-party experts who investigate the details of each

company’s culture. For example, they might conduct employee

focus groups, look for systems that empower employees to

Exhibit 3.7 Competing-values model of culture Flexible

Processes

Type: Adhocracy (Create) Dominant attribute: Entrepreneurship, adaptability, dynamism Leadership style: Innovator, entrepreneur, risk taker Bonding: Flexibility, risk, entrepreneur Strategic emphasis: Toward innovation, growth, new resources

Type: Clan (Collaborate) Dominant attribute: Cohesiveness, participation, teamwork, sense of family Leadership style: Mentor, facilitator, parent figure Bonding: Loyalty, tradition, interpersonal cohesion Strategic emphasis: Toward developing human resources, commitment, and morale

Type: Hierarchy (Control) Dominant attribute: Order, rules and regulations, uniformity, efficiency Leadership style: Coordinator, organizer, administrator Bonding: Rules, policies and procedures, clear expectations Strategic emphasis: Toward stability, predictability, smooth

Type: Market (Compete) Dominant attribute: Goal achievement, environment exchange, competitiveness Leadership style: Production- and achievement-oriented, decisive Bonding: Goal orientation, production, competition Strategic emphasis: Toward competitive advantage and market superiority

Control-Oriented Processes

Internal maintenance

External positioning

Source: Adapted from K. S. Cameron and R. E. Quinn, Diagnosing and Changing Organizational Culture 3rd edition, 2011, Jossey-Bass. Reprinted with permission of the author.

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64 PART 1 | Introduction

make independent decisions, and note how management talks

about the company’s founder, customers, and employees. In

this way, the clean team can identify for the organizations’

leaders the types of issues they will have to resolve and the val-

ues they must choose among as they try to establish a combined

culture. 83

What type of company culture is important to you in your

career?

Teamwork or Efficiency?

Creativity or Competitiveness?

5.4 |  Cultures Can Be Leveraged to Meet Challenges in the External Environment

We mentioned earlier in this chapter that one important way

organizations have of responding to the external environment

is to adapt to it by changing the organization itself. One of the

most important tools managers have for implementing internal

changes lies in their management of their organization’s cul-

ture. For example, a strong focus on customer service will be

difficult to establish in a culture that has always focused on

its own internal processes and goals. Simple directives alone

are often ineffective; the underlying values of the organization

also have to be shifted in the desired direction. Most compa-

nies today know that making moves necessary to remain com-

petitive is so essential that they require deep-rooted cultural

changes. When that kind of change occurs, organization mem-

bers may begin to internalize the new values and display the

appropriate behaviors.

Effective managers can take several approaches to manag-

ing culture:

• Craft an inspirational vision of “what can be” for the organizational culture.

• “Walk the talk” and show members of the culture that you are seri- ous about and committed to long-term change.

• Celebrate and reward members who behave in ways that exemplify the desired culture.

First, effective managers should espouse ideals and visions

for the company that will inspire organization members. That

vision should be articulated over and over until it becomes a

tangible presence throughout the organization. For example,

Coca-Cola’s vision statement provides a clear idea of what the

company stands for:

Our vision serves as the framework for our roadmap and guides every aspect of our business by describing what we need to accom- plish 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 suppli- ers; 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. 84

Second, executives need to “walk the talk” of the new

organizational direction by communicating regularly, being

visible and active throughout the company, and setting exam-

ples. The CEO not only should talk about the vision but also

should embody it day in and day out. This makes the CEO’s

pronouncements credible, creates a personal example others

can emulate, and builds trust that the organization’s progress

toward the vision will continue over the long run.

Important here are the moments of truth requiring hard

choices. Imagine top management trumpeting a culture that

emphasizes quality and then discovering that a part used in a

batch of assembled products is defective. Whether to replace

the part at great expense in the interest of quality or to ship the

defective part to save time and money is a decision that will

reinforce or destroy a quality-oriented culture.

To reinforce the organization’s culture, the CEO and other

executives should routinely celebrate and reward those who

exemplify the new values. Another key to managing cul-

ture involves hiring, socializing newcomers, and promoting

employees on the basis of the new corporate values. In this way,

the new culture will begin to permeate the organization. While

this may seem a time-consuming approach to building a new

culture, effective managers recognize that replacing a long-term

culture of traditional values with one that embodies the compet-

itive values needed in the future can take years. But the rewards

of that effort will be an organization much more effective and

responsive to its environmental challenges and opportunities.

“Be the change you want to see in the world.” — Mahatma Gandhi

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CHAPTER 3 | The Organizational Environment and Culture 65

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

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

Connect ® Management is available for M Management. Additional resources include:

Interactive Applications: • Comprehension Case: Rubio’s Competitive

Environment • Drag & Drop: Elements of Organizational Culture • Drag & Drop: Model of Organizational Culture

• Video Case: Nordstrom’s External and Internal Environment

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

Chapter Video: CH2M Hill

Young Manager Speaks Out: Kevin Wielgus, General Manager, Carpet Company

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66 PART 2 | Planning

4 chapter

Ethics and Corporate Responsibility

part two

After studying Chapter 4, you should be

able to

LO1 Describe how different ethical perspectives guide managerial decision making.

LO2 Identify the ethics-related issues and laws facing managers.

LO3 Explain how managers influence their ethics environment.

LO4 Outline the process for making ethical decisions.

LO5 Summarize the important issues surrounding corporate social responsibility.

LO6 Discuss the growing importance of managing the natural environment.

Learning Objectives

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CHAPTER 4 | Ethics and Corporate Responsibility 67

This chapter addresses the values and manner of doing busi-

ness adopted by managers as they carry out their organizational

and business strategies. In particular, we will explore ways of

applying ethics , the moral principles and standards that guide the behavior of an individual or group. We do so based on the

premise that employees, their organizations, and their commu-

nities thrive over the long term when managers apply ethical

standards that direct them to act with integrity. In addition, we

consider the idea that organizations have a responsibility to

meet social obligations beyond earning profits within legal and

ethical constraints. Professor Edward Freeman, an early cham-

pion of stakeholder theory 5 (discussed later in the chapter),

and business and academic thought leaders from the Business

Roundtable Institute for Corporate Ethics at the University of

Virginia believe that managers benefit their organizations not

F or an increasing number of people, tweeting, snap chatting, texting, downloading apps, check- ing Facebook walls, posting selfies on Pinterest,

or endorsing skills on LinkedIn are a 24/7 activity. For the major-

ity of Millennial (born between 1980 and 2000) employees, in

particular, social media connectivity is both an obsessive habit

and frequent necessity.

Consider the intersection of social media use at work and

ethical behavior. Is it ethical for a manager, before making an

offer to a job applicant, to search the applicant’s online social

media pages? What if she discovers (from her search) that the

applicant appears to be affiliated with a non-mainstream reli-

gious entity? How about when employees spend company time

texting friends or checking Twitter?

What about employees who post or blog (or have companies

or their friends do it for them) fake positive online reviews about

their company’s services or products to create buzz? Is this

practice ethical or misleading? Is it okay if everyone does it?

Organizations are increasingly addressing these sticky ethical

issues surrounding the use of social media at work. A  surprisingly

high percentage of companies have disciplined employees for inap-

propriate behavior on social media sites. 1 One famous instance was

when Virgin Atlantic Airlines fired 13 flight attendants for badmouth-

ing customers and the airline’s safety standards on a Facebook blog. 2

Also, employers in some states are asking lawmakers for

the right to ask for an employee’s username and password if

they’re suspected of online

misbehavior. This request is a

controversial part of a growing debate over social media pri-

vacy laws. As of 2013, 35 states have introduced laws concern-

ing social media privacy at the workplace. So far, five states

have passed laws that prohibit companies from obtaining

employees’ passwords to social media websites. 3

In contrast to the challenges presented here, many compa-

nies like Zappos and Amazon expertly leverage social media

to promote their brands, increase customer engagement, and

boost sales revenue. Other employers like IBM and Google har-

ness social media to increase social learning and intercompany

cohesion among employees and team members. And, let’s not

forget companies like Perfetti Van Melle (Mentos candies) and

Speed Stick (deodorant) that have benefited through relatively

low-cost marketing campaigns that went viral as a result of

social media. 4

Employers and employees alike have to come to terms with

what’s ethical (and legal) when it comes to using social media

tools at work. According to Natalie C. Rougeux, JD, SPHR

( www.rougeuxpllc.com ): “Our employers are struggling more

than ever with how to bridge the gap between: (i) the company’s

need to protect company data; and (ii) employees who consider

the unfettered use of technology to be essential to their work/

life balance. Quite simply, technology, employee/employer

expectations, and the law are not in sync on this issue.”

ethics the moral principles and standards that guide the behavior of an individual or group

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only by growing profits, but also by behaving ethically when

dealing with individuals and groups (known as stakehold-

ers) that interact with their organizations. 6 As you study this

chapter, consider what kind of manager you want to be. What

reputation do you hope to have? How would you like others to

describe your behavior as a manager?

It’s a Big Issue It seems ethics-related scandals are becoming a part of every-

day life. While business leaders and managers commit many of

these unethical acts, bad behavior can occur anywhere at anytime.

Recent examples of business-related scandals include the convic-

tion of Raj Rajaratnam, founder of the hedge fund Galleon Group,

for securities fraud and conspiracy. 7 He is currently serving an

11-year jail term. In Bangladesh, a multistory garment factory

collapsed recently, killing more than 400 workers. The owner of

the factor is accused of violating building and safety codes. 8 In

an unrelated scandal, Bernie Madoff was convicted of running

a $50 billion Ponzi scheme in which he deceived his investors

into thinking that they were earning legitimate returns on their

investments; in reality, Madoff was taking investor’s money to

pay “returns” to other investors. After pleading guilty to 11 felony

charges, Madoff is currently serving a 150-year prison term. 9

What other news disturbs you about managers’ behavior?

Tainted products in the food supply . . . damage to the environ-

ment . . . price fixing . . . Internet scams . . . employees pressured

to meet lofty sales or production targets by any means? The list

goes on, and the public becomes cynical. In a survey by public

relations firm Edelman, the percentage of Americans who trust

business dropped from 59 percent in 2008 to 44 percent in 2014.

They’re even suspicious of their own company’s management;

only 43 percent said they trust their own CEO. 10

Try to imagine

the challenge of leading employees who don’t trust you.

Unethical behavior can happen anywhere, not just in busi-

ness. It occurs when police officers “take care of parking tickets”

so friends and family members do not have to pay fines. 11

While

this may seem relatively minor at first glance, many citizens feel

this is an unfair practice and an abuse of power.

Recently prosecutors have brought criminal charges related to

“ticket fixing” against 13 members of the Patrolmen’s Benevolent

Association, a powerful police union in New York City. 12

Sports have seen their share of unethical behavior. The after-

shocks following the child sexual abuse trial of Jerry Sandusky,

the former defensive coordinator of the Penn State University

football team, have rocked the university and its community. For

years, eyewitness information was known by some people at the

university but not properly conveyed to the police. After the alle-

gations were finally made public, Sandusky was found guilty of

45 felony counts of sexual abuse against 10 boys over a 15-year

period. 13

He is serving a 30- to 60-year state prison sentence. Tim

Curley, the athletic director, and Gary Schultz, the now-retired

vice president of finance and business, were charged with perjury

and for failing to report what they knew about the alleged crimes. 14

Acting to “restore trust in the university,” the school’s board of

trustees dismissed the popular, longtime head coach Joe Paterno

and the university’s president, Graham Spanier. 15

The former

head coach (who died in early 2012) and ex-university president

were not charged in the case. The fallout from this tragic set of

events, including the university’s settlement of $59.7 million for

Sandusky’s victims, 16

will undoubtedly be felt for many years at

Penn State University and throughout the university’s community.

LISTEN & LEARN ONLINE

YOUNG MANAGERS

Speak Out! “I think socially responsible organizations appear more mature and reliable than others. Our customers recog- nize that aspect, and they can tell the difference between genuine awareness and care for the human community. In being socially responsible, I think we gain a like-minded audience, and like-minded consumers generally show brand loyalty.”

—Megan Gates, Market Development Manager

“In matters of style, swim with the current. In matters of principle, stand like a rock.”

— Thomas Jefferson

68

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CHAPTER 4 | Ethics and Corporate Responsibility 69

seeing abuse or intimidation of employees; lying to employees,

customers, vendors, or the public; or situations in which employ-

ees placed their own interests ahead of their company’s interests. 19

The motivations are not always as obvious as greed. Another

survey, conducted by the American Management Association

and the Human Resource Institute, found that the top justifica-

tion given for unethical behavior was “pressure to meet unre-

alistic goals and deadlines.” 20

Many of the decisions you will

face as a manager will pose ethical dilemmas, and the right

thing to do is not always clear.

It’s a Personal Issue “Answer true or false: ‘I am an ethical manager.’ If you answered

‘true,’ here’s an uncomfortable fact: You’re probably not.” 21

These sentences are the first in a Harvard Business Review arti- cle called “How (Un)Ethical Are You?” The point is that most

of us think we are good decision makers, ethical, and unbiased.

But the fact is, most people have unconscious biases that favor

themselves and their own group. For example, managers often

hire people who are like them, think they are immune to con-

flicts of interest, take more credit than they deserve, and blame

others when they deserve some blame themselves.

Knowing that you have biases may help you try to overcome

them, but usually that’s not enough. Consider the basic ethical

issue of telling a lie. Many people lie—some more than others,

and in part depending on the situation, usually presuming that

they will benefit from the lie. At a basic level, we all can make

ethical arguments against lying and in favor of honesty. Yet

it is useful to think thoroughly about the real consequences of

lying. 22

Exhibit 4.1 summarizes the possible outcomes of telling

the truth or lying in different situations. People often lie or com-

mit other ethical transgressions somewhat mindlessly, without

realizing the full array of negative personal consequences.

The list of bad behavior goes on, whether it is allegations about

the role that 38 principals and 178 teachers played in tampering

with elementary and middle school students’ scores on stan-

dardized tests in Atlanta 17

or cyclist Lance Armstrong who after

admitting to using performance-enhancing drugs was stripped of

his 7 Tour de France titles and banned from professional sports. 18

Still, simply talking about recent examples of lax ethics does

not get at the heart of the problem. Simply saying “I would never

do anything like that” or “I would have reported it if it were me”

is too easy. The fact is that temptations and levels of silence exist

in all organizations. In a survey called the Spherion Workplace

Snapshot, more than one-third of U.S. adults said they had

observed unethical conduct at work. About one out of five reported

● Jerry Sandusky, center, is escorted from his sentencing at the Centre

County Courthouse in Bellefonte in October 2012. Sandusky, maintaining

his innocence, was sentenced to at least 30 years in prison (effectively

a life sentence) in the child sexual abuse scandal that brought shame to

Penn State and led to coach Joe Paterno’s downfall.

Reasons Why People Lie Results of Lying Results of Telling the Truth

Negotiating • Short-term gain.

• Economically positive.

• Harms long-term relationship.

• Must rationalize to oneself.

• Supports high-quality long-term relationship.

• Develops reputation of integrity.

• Models behavior to others.

Keeping a confidence (that may require at least a lie of omission)

• Protects whatever good reason there is for the confidence.

• Maintains a long-term relationship with the party for whom confidence is kept.

• May project deceitfulness to the deceived party.

• Violates a trust to the confiding party.

• Makes one appear deceitful to all parties in the long run.

• Creates the impression of honesty beyond utility.

Reporting your own performance within an organization

• Might advance oneself or one’s cause.

• Develops dishonest reputation over time.

• Must continue the sequence of lies to appear consistent.

• Creates reputation of integrity.

• May not always be positive.

Source: Adapted from S. L. Grover, “The Truth, the Whole Truth, and Nothing but the Truth: The Causes and Management of Workplace Lying,” Academy of Management Executive 19 (May 2005), pp. 148–57, table 1, p. 155. Reprinted with permission of Academy of Management Executive. Permission conveyed through Copyright Clearance Center.

Exhibit 4.1 Lying vs. telling the truth

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70 PART 2 | Planning

Ethics issues are not easy,

and they are not faced only by

top corporate executives and

CEOs. You will face them;

no doubt, you already have.

You’ve got your own exam-

ples, but consider this one:

more and more people at work

use computers with Internet

access. If the employer pays

for the computer and the time

you spend sitting in front of

it, is it ethical for you to use

the computer to do tasks unre-

lated to your work? Would

you bend the rules for certain activities or certain amounts of

time? Maybe you think it’s OK to do a little online shopping

during your lunch hour or to check scores during the World

Series or March Madness. But what if you stream video of the

games for your own and your coworkers’ enjoyment or take a

two-hour lunch to locate the best deal on a flat-panel TV?

Besides lost productivity, employers are most concerned

about computer users introducing viruses, leaking confiden-

tial information, and creating a hostile work environment by

downloading inappropriate web content. Sometimes employees

write blogs or post comments online about their company and

its products. Obviously companies do not want their employ-

ees to say bad things about them Also, some companies are

concerned about employees who plug their companies and

products on comments pages without disclosing their relation-

ship with their company. Another practice considered deceptive

is when companies create fictional blogs as a marketing tactic

without disclosing their sponsorship. And in a practice known

as Astroturfing—because the “grassroots” interest it builds

is fake—businesses pay bloggers to write positive comments

about them. A Florida company known as PayPerPost will

match advertisers with bloggers but now requires bloggers to

disclose the relationship. Companies such as Coca-Cola, UPS,

and IBM have established guidelines directing employees to

identify themselves accurately in online communications so

that they can participate in online conversations about their

companies without being accused of deception. 23

Are these examples too small to worry about? What do you

do that has potential ethical ramifications? This chapter will

help you think through decisions with ethical ramifications.

1 |  FIVE PERSPECTIVES SHAPE YOUR ETHICS

The aim of ethics is to identify both the rules that should gov-

ern people’s behavior and the “goods” that are worth seeking.

Ethical decisions are guided by the underlying values of the

individual. Values are principles of conduct such as caring,

being honest, keeping promises, pursuing excellence, showing

loyalty, being fair, acting with integrity, respecting others, and

being a responsible citizen. 24

Most people would agree that all of these values are admi-

rable guidelines for behavior. However, ethics becomes a more

complicated issue when a situation dictates that one value

overrules others. An ethical issue is a situation, problem, or opportunity in which an individual must choose among sev-

eral actions that must be evaluated as morally right or wrong. 25

Ethical issues arise in every facet of life; we concern ourselves

here with business ethics in particular. Business ethics com- prises the moral principles and standards that guide behavior in

the world of business. 26

Moral philosophy refers to the principles, rules, and values people use in deciding what is right or wrong. This seems to

be a simple definition but often becomes terribly complex and

difficult when facing real choices. How do you decide what

is right and wrong? Do you know what criteria you apply and

how you apply them?

Ethics scholars point to various major ethical systems as

guides. 27

We will consider five of these:

1. Universalism.

2. Egoism.

3. Utilitarianism.

4. Relativism.

5. Virtue ethics.

These major ethical systems underlie personal moral choices

and ethical decisions in business.

LO1 Describe how different ethical perspectives guide managerial decision making

ethical issue a situation, problem, or opportunity in which an individual must choose among several actions that must be evaluated as morally right or wrong

business ethics the moral principles and standards that guide behavior in the world of business

moral philosophy principles, rules, and values people use in deciding what is right or wrong

Remembering vocabulary during exams Did you ever forget the definition of a vocabulary term during an exam? You are not alone. The next time you study vocab- ulary, come up with an applied example for each term. For example, Toms Shoes follows the stakeholder theory of corporate social responsibility to meet social goals (help poor children) and economic goals (make a profit). You can apply the vocabulary terms to any organization: a current/past employer, a student club, a sports team, or a local restaurant. Creating applied examples will help you learn the vocabulary better; which may help you earn an A on the next exam.

study tip 4

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CHAPTER 4 | Ethics and Corporate Responsibility 71

1.2 | Egoism According to egoism , individ- ual self-interest is the actual

motive of all conscious action.

“Doing the right thing,” the

focus of moral philosophy, is

defined by egoism as “do the

act that promotes the greatest

good for oneself.” If everyone

follows this system, according

to its proponents, the well-

being of society as a whole

should increase. This notion

is similar to Adam Smith’s

concept of the invisible hand

in business. Smith argued that

if every organization follows

its own economic self- interest,

the total wealth of society will

be maximized.

An example of egoism is how individual

self-interest may have contributed to the sub-

prime mortgage crisis. According to Adam

Smith, individual financial and mortgage pro-

fessionals should have acted in their own best

interest, and ultimately the invisible hand of the

mortgage and financial markets would be the

best control mechanism to ensure the greater

good. If that were the case, why did the housing

market reach an unsustainable level that could

not be maintained? Did opportunism and the

deceptive use of information play a role? Stated

differently, did unethical managerial behavior

contribute to the subprime mortgage crisis?

Some financial and mortgage experts encour-

aged prospective home buyers to purchase

homes that they could not afford by applying for

adjustable-rate mortgages (ARMs). ARMs allow

home buyers to pay a low introductory monthly

payment for a few years; after this period expires,

the monthly payment increases significantly. 32

The experts convinced many home buyers to

assume this risk by pointing out that as long as

the value of their homes continued to rise, their

wealth would increase. Home owners were also

told they could manage their risk by selling their

homes anytime they wanted for a profit.

How did these financial and mortgage

professionals benefit? They received commis-

sions and other fees from the loans they sold.

Higher compensation became a driving force

for these managers to continue pushing high-

risk loans. Others in the financial industry also

profited, including banks, mortgage firms, and

investment companies. 33

1.1 | Universalism According to universalism , all people should uphold certain values, such as honesty and other values that society needs to

function. Universal values are principles so fundamental to

human existence that they are important in all societies—for

example, rules against murder, deceit, torture, and oppression.

Some efforts have been made to establish global, universal

ethical principles for business. The Caux Roundtable, a group

of international executives based in Caux, Switzerland, worked

with business leaders from Japan, Europe, and the United States

to create the Caux Principles for Business .28 Two basic ethi- cal ideals underpin the Caux Principles: kyosei and human dig- nity. Kyosei means living and working together for the common good, allowing cooperation and mutual prosperity to coexist with

healthy and fair competition. Human dignity concerns the value

of each person as an end, not a means to the fulfillment of others’

purposes. Research conducted by the Institute for Global Ethics

identified five core ethical values that are found in all human cul-

tures, including truthfulness, responsibility, fairness, respectful-

ness, and compassion. 29

Universal principles can be powerful and

useful, but what people say, hope, or think

they would do is often different from what they

really do, faced with conflicting demands in real situations. Before we describe other ethical

systems, consider the following example, and

think about how you or others would resolve it.

Suppose that Sam Colt, a sales representative, is

preparing a sales presentation on behalf of his firm,

Midwest Hardware, which manufactures nuts and

bolts. Colt hopes to obtain a large sale from a con-

struction firm that is building a bridge across the

Missouri River near St. Louis. The bolts manufac-

tured by Midwest Hardware have a 3 percent defect

rate, which, although acceptable in the industry,

makes them unsuitable for use in certain types of

projects, such as those that might be subject to sud-

den, severe stress. The new bridge will be located

near the New Madrid Fault line, the source of a

major earthquake in 1811. The epicenter of that

earthquake, which caused extensive damage and

altered the flow of the Missouri, is about 190 miles

from the new bridge site.

Bridge construction in the area is not regulated

by earthquake codes. If Colt wins the sale, he will

earn a commission of $25,000  on top of his regu-

lar salary. But if he tells the contractors about the

defect rate, Midwest may lose the sale to a com-

petitor whose bolts are slightly more reliable. Thus

Colt’s ethical issue is whether to point out to the

bridge contractor that in the event of an earth-

quake, some Midwest bolts could fail. 31

universalism the ethical system stating that all people should uphold certain values that society needs to function

Caux Principles for Business ethical principles established by international executives based in Caux, Switzerland, in collaboration with business leaders from Japan, Europe, and the United States

egoism an ethical principle holding that individual self-interest is the actual motive of all conscious action

A 2012 survey by the Ethics Resource Center found that approximately half of employees of Fortune 500 companies witnessed misconduct at work during the past 12 months. The most common forms of unethical behaviors included personal business on company time, abusive behavior, and lying to employees. The study also found that employees are more likely to engage in bribery and delivering goods not up to specifications when they feel pressure to keep their jobs, meet personal financial obligations, and reach quarterly earnings targets. 30

Did You Know?

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72 PART 2 | Planning

any or little supervision.” 37

This allowed opportunistic financial

and mortgage experts to convince borrowers to assume subprime

mortgages that had “teaser” introductory interest rates for a cou-

ple of years before automatically adjusting upward. Adding to the

rapid growth of the subprime market were the Federal National

Mortgage Association (Fannie Mae) and the Federal Home Loan

Mortgage Corporation (Freddie Mac), two government-sponsored

entities that bought many of these high-risk loans from banks and

then packaged and sold them (as a way to diversity the risk of

the loans) to U.S. and foreign investors. These two companies

ran afoul of U.S. regulators. In 2003 Freddie Mac admitted that it

“underreported earnings by over $5 billion,” and in 2004 Fannie

Mae was under investigation for allegedly committing several

widespread accounting errors. 38

Several former executives from

these firms are facing one or more civil charges ranging from

manipulating earnings to fraud. 39

In 2006 the housing market began to weaken as hous-

ing prices started to decline and inflation started to increase.

Contributing to the decline was the Federal Reserve’s deci-

sion to raise interest rates in order to decrease inflation. This

move led banks to tighten credit and require borrowers to make

larger down payments on homes, while many subprime mort-

gage owners saw their adjustable-rate mortgages increase to

unexpectedly high levels. The net effect was that many home

owners could not make their mortgage payments and began to

default on their loans. 40

Students may want to ask themselves whether decisions

made at the Federal Reserve, Fannie Mae and Freddie Mac,

and other institutions achieved utilitarian outcomes: Did these

decisions result in the greatest good for the greatest number of

home owners? Were the decisions completely rational, or did

subjectivity lead to a suboptimal set of consequences? Was it

egoism on the part of individuals or utilitarianism on the part

of institutions that ultimately caused the subprime mortgage

meltdown?

In 2007–2008 the housing

bubble burst as the economy

went into a recession and

home owners began to strug-

gle to pay their “adjusted”

mortgage payments. The large number of foreclosures and

defaults contributed to a historic shake-up of the financial

industry, including the collapse of Lehman Brothers, huge

losses at Morgan Stanley, Citigroup, and Merrill Lynch, and

unprecedented governmental intervention to help firms like

JP Morgan to purchase Bear Stearns. 34

The fallout of the sub-

prime mortgage and ensuing financial crises will be felt for

many years to come. It is useful to ask yourself the follow-

ing questions: To what degree did egoism motivate individuals

in the mortgage and financial markets to make and sell loans

that became toxic assets? Is there an alternative explanation for

what caused the subprime mortgage crisis?

1.3 | Utilitarianism Unlike egoism, utilitarianism directly seeks the greatest good for the greatest number of people. Refer back to the

subprime mortgage crisis that was just discussed. It may be

possible that certain utilitarian policies and practices that were

implemented after 9/11/2001 and the dot-com meltdown inad-

vertently contributed to the subprime mortgage crisis. In an

effort to do the greatest good for the greatest number of peo-

ple, the Federal Reserve slashed the federal funds rate from

6.5 percent in May 2000 to 1.75 percent in December 2001.

In 2004 the Fed lowered the rate to 1.0 percent. 35

The period

from 2001 to 2004 became known as the “credit boom” when

mortgages, bank loans, and credit cards were easily obtained

at low interest rates. 36

The goal of these rate cuts was to spur

the economy and job creation while also encouraging people

to buy homes. An outcome of this low interest rate policy

was that home ownership was made available to those whose

income level or credit history placed them into a higher-risk

category of borrower.

While some subprime loans were properly documented and

executed, many of these “mortgage loans were created without

● Real estate signs at foreclosed properties.

utilitarianism an ethical system stating that the greatest good for the greatest number should be the overriding concern of decision makers

● The Securities and Exchange Commission has charged six former

executives (including the former CEOs pictured above) of Fannie Mae and

Freddie Mac for allegedly committing securities fraud.

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CHAPTER 4 | Ethics and Corporate Responsibility 73

1.4 | Relativism It may seem that an individual makes ethical choices by apply-

ing personal perspectives. But this view is not necessarily true.

Relativism defines ethical behavior based on the opinions and behaviors of relevant other people.

Relativism acknowledges the existence of different

ethical viewpoints. For example, norms, or standards of expected and acceptable behavior, vary from one cul-

ture to another. A recent study found that the perceived

effectiveness of whistleblowing —telling others, inside and outside the organization, about wrongdoing— differs

across cultures. 41

While U.S. managers believe that

whistleblower hotlines are effective at reducing uneth-

ical behaviors, managers in the Far East and Central

Europe do not believe they are effective. For example,

Chinese employees are less likely to report that their

superiors have engaged in fraud or corruption. The

Chinese government considers this a major problem. It

is believed that guanxi, a Chinese term for personal rela- tionships, prevents many Chinese employees from act-

ing in an independent manner when it comes to blowing

the whistle on unethical managers. 42

Relativism defines

ethical behavior according to how others behave.

1.5 | Virtue Ethics The moral philosophies just described apply differ-

ent types of rules and reasoning. Virtue ethics is a perspective that goes beyond the conventional rules

● Former senior National Security Agency (NSA) senior executive Thomas Drake

speaks to reporters during the Stop Watching Us Rally protesting surveillance

by the United States NSA in October 2013 in front of the U.S. Capitol building

in Washington, D.C. The demonstration was in support of American NSA

whistleblower Edward Snowden who pleaded for new international norms on

surveillance to avoid the kinds of abuses committed by the NSA, especially as

high-tech surveillance practices become widespread worldwide.

Preconventional stage • Make decisions based on immediate self-interest.

• Example: You take a flash drive home from work because you need one and do not want to pay for it.

Conventional stage • Make decisions that conform to expectations of groups and institutions like family, peers, and society.

• Example: You think about taking the flash drive home, but decide against it because it would not look right.

Principled stage • Make decisions based on self-chosen ethical principles.

• Example: You do not consider taking the flash drive from work because you believe that would be wrong.

Source: Adapted from L. Kohlberg, “Moral Stages and Moralization: The Cognitive- Development Approach,” in T. Lickona (ed.], Moral Development and Behavior Theory, Research, and Social Issues (New York: Holt, Rinehart & Winston, 1976], pp. 31–53.

Exhibit 4.2 Kohlberg’s stages of moral development

relativism a philosophy that bases ethical behavior on the opinions and behaviors of relevant other people

virtue ethics a perspective that what is moral comes from what a mature person with “good” moral character would deem right

Kohlberg’s model of cognitive moral development classification of people based on their level of moral judgment

of society by suggesting

that what is moral must also

come from what a mature

person with good “moral

character” would deem

right. Society’s rules provide

a moral minimum; moral

individuals can transcend

rules by applying their per-

sonal virtues such as faith,

honesty, and integrity.

Yet individuals differ in

their moral development.

As illustrated in Exhibit  4.2 ,

Kohlberg’s model of cog- nitive moral development classifies people into categories based on their level of moral judgment.

43 People in the precon-

ventional stage make decisions based on concrete rewards and punishments and immediate self-interest. People in the conven- tional stage conform to the expectations of ethical behavior held by groups or institutions such as society, family, or peers. People

in the principled stage see beyond authority, laws, and norms and follow their self-chosen ethical principles.

44 Some people

forever reside in the preconventional stage, some move into the

conventional stage, and some develop even further into the prin-

cipled stage. Over time, and through education and experience,

people may change their values and ethical behavior.

Returning to the bolts-in-the-bridge example, egoism would result

in keeping quiet about the bolts’ defect rate. Utilitarianism would

dictate a more thorough cost–benefit analysis and possibly the con-

clusion that the probability of a bridge collapse is so low compared

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74 PART 2 | Planning

• CEO pay —Nearly three-fourths of Americans say executives’ pay packages are excessive.

• Commercialism in schools —Parent groups in hundreds of commu- nities have battled advertising in the public schools.

• Religion at work —Many people seek spiritual renewal in the work- place, in part reflecting a broader religious awakening in America, while others argue that this trend violates religious freedom and the separation of church and boardroom.

• Sweatshops —At many colleges, students have formed antisweat- shop groups, which picket clothing manufacturers, toymakers, and retailers.

• Wages —More than half of workers feel they are underpaid, espe- cially because wages since 1992 have not grown as fast as produc- tivity levels.

On Valentine’s Day in 2007, a bad winter storm led to the cancel-

lation or delay of several airline flights throughout the country.

While most of the airlines did the best they could to get through

this difficult situation, JetBlue made the headlines when 21 of its

aircraft were delayed on the runway at Kennedy Airport in New

York for up to 11 hours. Passengers were forced

to stay in the stranded planes, and some bloggers

went so far as to call it a “hostage situation.” As

snack supplies withered and rest room facilities

turned unpleasant, many passengers felt trapped

and angry with JetBlue. After passengers were

eventually allowed to deplane, many found them-

selves stuck in the airport for long hours waiting

for the weather to clear and flights to resume. 51

In the wake of this fiasco, JetBlue compensated

passengers and then introduced a Passengers’

Bill of Rights to guard against this type of poor

treatment of passengers from happening again. 52

Inspired by this initiative, the governments of the

United States, European Union, Canada, and

Australia are taking this issue seriously by consid-

ering or adopting laws to protect airline passenger

rights. 53

2.2 | Ethics and the Law Responding to a series of corporate scandals—

particularly the high-profile cases of Enron and

WorldCom—Congress passed the Sarbanes- Oxley Act in 2002 to improve and maintain investor confidence. The law requires compa-

nies to do the following:

to the utility of jobs, economic

growth, and company growth

that the defect rate is not worth

mentioning. The relativist per-

spective might prompt the

salesperson to look at company

policy and general industry practice, and to seek opinions from col-

leagues and perhaps trade journals and ethics codes. Whatever is

then perceived to be a consensus or normal practice would dictate

action. Finally, virtue ethics, applied by people in the principled

stage of moral development, would likely lead to full disclosure

about the product and risks, and perhaps suggestions for alterna-

tives that would reduce the risk. 45

2 |  BUSINESS ETHICS MATTER

Insider trading, illegal campaign contributions,

bribery and kickbacks, famous court cases, and

other scandals have created a perception that

business leaders use illegal means to gain com-

petitive advantage, increase profits, or improve

their personal positions. Neither young manag-

ers nor consumers believe top executives are

doing a good job of establishing high ethical

standards. 47

Some even joke that business ethics has become a contradiction in terms. Too often,

these opinions are borne out by actual workplace

experiences. In a recent survey of 700 employ-

ees holding a variety of jobs, 39  percent said

their supervisor sometimes didn’t keep prom-

ises, 24  percent said their supervisor had

invaded their privacy, and 23 percent said their

supervisor covered up his or her own mistakes

by blaming someone else. 48

2.1 | Ethical Dilemmas Most business leaders believe they uphold ethi-

cal standards in business practices. 49

But many

managers and their organizations must deal fre-

quently with ethical dilemmas, and the issues

are becoming increasingly complex. Here are

just a few of the dilemmas challenging manag-

ers and employees today: 50

• Brands —In-your-face marketing campaigns have sparked antibrand attitudes among people who see tactics as manipulative and deceptive.

LO2 Identify the ethics-related issues and laws facing managers

In a recent survey ranking 177 nations from most to least honest, the United States came in 19th (tied with Uruguay). The U.S. rating of 7.3 on a 10-point scale placed it among only 22 countries that scored at least a 7.0. The top ratings went to Denmark, New Zealand, and Finland. The bottom- ranked nations, including Afganihstan, North Korea, and Somalia, tend to be among the poorest. Sadly, the combination of corruption and poverty in these nations can literally amount to a death sentence for many of their citizens. 46

Did You Know?

• Have more independent board directors, not just company insiders.

• Adhere strictly to accounting rules.

• Have senior managers personally sign off on financial results.

Sarbanes-Oxley Act an act that established strict accounting and reporting rules to make senior managers more accountable and to improve and maintain investor confidence

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CHAPTER 4 | Ethics and Corporate Responsibility 75

basis of right and wrong. 55

For

example, General Electric’s top

executives have demonstrated a

commitment to promoting high

levels of integrity without sacrificing the company’s well-known

commitment to business results. The measures taken by GE to

maintain a positive ethical climate include establishing global

standards for behavior to prevent ethical problems such as con-

flicts of interest and money laundering. Managers at all levels

are rewarded for their performance in meeting both integrity and

business standards, and when violations occur, even managers

who were otherwise successful are disciplined, sending a power-

ful message that ethical behavior is truly valued at GE. 56

When people make decisions that are judged by ethical cri-

teria, certain questions always seem to get asked: Why did she

do it? Good motives or bad ones? So often, responsibility for

unethical acts is placed squarely on the individual who com-

mits them. But the work environment has a profound influence,

as well. When employees feel pressured to meet unreasonable

goals or deadlines, they may act unethically; but managers are

in part responsible for setting the right standards, selecting

employees with the ability to meet standards, and providing

employees with the resources required for success. Managers

also need to keep the lines of communication open so that

employees will discuss problems in meeting goals, rather than

resorting to unethical and possibly illegal behavior.

Unethical corporate behavior may be the responsibility of an

unethical individual, but it often also reveals a company culture

that is ethically lax. 57

Maintaining a positive ethical climate is

always challenging, but it is especially complex for organiza-

tions with international activities. Different cultures and coun-

tries may have different standards of behavior, and managers

have to decide when relativism is appropriate, rather than adher-

ence to firm standards. Electronics giant Siemens Corporation

of Germany recently agreed to pay $1.6 billion to the U.S. and

German governments for bribing officials in several countries—

Bangladesh, Argentina, Nigeria, Israel, and China—to win

business contracts. Given that the bribery permeated several

parts of the company, the permissive ethical climate of the firm

undoubtedly influenced its managers to engage in this behavior.

Violations could result in heavy fines and criminal prosecu-

tion. One of the biggest impacts of the law is the requirement

for companies and their auditors to provide reports to financial

statement users about the effectiveness of internal controls over

the financial reporting process.

Companies that make the effort to meet or exceed these

requirements can reduce their risks by lowering the likeli-

hood of misdeeds and the consequences if an employee does

break the law. Responding to a directive in the Sarbanes-Oxley

Act, the U.S. Sentencing Commission modified the sentenc-

ing guidelines to say that organizations convicted of federal

criminal laws may receive more lenient sentences if they are

shown to have established an effective compliance and ethics

program. See Exhibit 4.3 for ways that organizations can meet

the requirements of these guidelines.

Some executives say Sarbanes-Oxley distracts from their real

work and makes them more risk averse. Some complain about

the time and money needed to comply with the internal control

reporting—reportedly spending millions of dollars for technol-

ogy upgrades. Others point out that unethical behavior has neg-

ative consequences, especially when it includes illegal actions

that later come to light. For example, companies that set up a

hot-line with which employees can report illegal or unethical

conduct can find out when employees are engaged in fraud. Not

only can fraud hurt customers, but it can also hurt the company

itself when employees find ways to defraud or steal from the

company. The Association of Certified Fraud Examiners found

that U.S. companies lose about 5–6 percent of their annual sales

to fraud, but the losses are less than half that at organizations

with a mechanism for reporting misconduct. 54

Regardless of

managers’ attitudes toward Sarbanes-Oxley, it creates legal

requirements intended to improve ethical behavior.

2.3 |  The Ethical Climate Influences Employees

Ethics are not shaped only by laws and by individual develop-

ment and virtue. They also may be influenced by the company’s

work environment. The ethical climate of an organization refers to the processes by which decisions are evaluated and made on the

Establish written standards of ethical conduct and controls for enforcing them.

Assign responsibility to top managers to ensure that the program is working as intended.

Exclude anyone who violates the standards from holding management positions.

Provide training in ethics to all employees and monitor compliance.

Give employees incentives for complying and consequences for violating the standards.

Respond with consequences and more preventive measures if criminal conduct occurs.

Sources: “2010 Report to the Nations on Occupational Fraud and Abuse,” Association of Certified Fraud Examiners, www.acfe.com/ ; Thompson Hine LLP, “U.S. Sentencing Commission Announces Stiffened Organization Sentencing Guidelines in Response to the Sarbanes-Oxley Act,” advisory bulletin, June 1, 2004, last modified August 31, 2006, www.thompsonhine.com ; R. J. Zablow, “Creating and Sustaining an Ethical Workplace,” Risk Management 53, no. 9 (September 2006).

Exhibit 4.3 Partial list of steps organizations can take to meet SOX guidelines

ethical climate in an organization, the processes by which decisions are evaluated and made on the basis of right and wrong

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76 PART 2 | Planning

consultants were hired to handle bribery payments. After inves-

tigators from several countries—Italy, Germany, Switzerland,

and the United States— discovered the bribery, Siemens agreed

to pay the huge fine, and several of its executives were sent to

jail. 58

2.4 | Danger Signs In organizations, maintaining consistent ethical behavior by

all employees is an ongoing challenge. What are some danger

signs that an organization may be allowing or even encourag-

ing unethical behavior? Many factors, including the following,

create a climate conducive to unethical behavior:

• Excessive emphasis on short-term revenues over longer-term considerations.

• Failure to establish a written code of ethics.

• Desire for simple, “quick fix” solutions to ethical problems.

• Unwillingness to take an ethical stand that may impose financial costs.

• Consideration of ethics solely as a legal issue or a public relations tool.

Siemens has a long history of engaging in such practices. Prior to

1999, bribery was not illegal in Germany, and as a result, many

firms used it as a competitive advantage to land contracts from

foreign officials. After the law was changed, Siemens continued

to engage in bribery but became more secretive in how it was

used; Swiss bank accounts were used to make payments, and

Take Charge Of Your Career Why settle? Find a great place to work!

T he weak job market for college graduates is not going to last forever. Over the next 5 to 10 years, the retirement of millions of baby boomers will create a wide variety of job opportunities. It is a good time to start looking for a great place to work.

There are many lists available to help you find good companies, but one of the most famous lists is the “Fortune’s 100 Best Companies to Work for.” It is coauthored by Robert Levering and Milton Moskowitz of the Great Place to Work Institute.

Which companies made the list in 2011? In first place was SAS, an information technology

and software company, that spoils its employees with lavish benefits. Next was the Boston Consulting Group, which avoided layoffs during the recent recession while providing its

employees with extensive training and develop- ment opportunities. In third place was Wegman’s Food Market, known for taking good care of its employees. Two high-tech firms, Google and NetApp, rounded off the top five best companies to work for thanks to their excellent pay, perqui- sites, and organizational cultures.

Want to learn more about great places to work? Try “Fortune’s Best Small and Medium Companies to work for,” “Fortune’s Best Compa- nies to work for: Minorities,” and “Fortune’s Best Companies to work for: Women.”

SOURCE: www.greatplacetowork.com ; www .moneycnn.com/magazines/fortune/2011 ; L. Petrecca, “Tech Companies Top List of ‘Great Workplaces,’” USA Today, October 31, 2011, p. 7B.

SAS employees staying fit at the firm’s Recreation

and Fitness Center in Cary, NC.

“It takes many good deeds to build a good reputation, and only one bad one to lose it.”

— Benjamin Franklin

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CHAPTER 4 | Ethics and Corporate Responsibility 77

both a “moral person” and also

as a “moral manager,” someone

who influences others to behave

ethically. When you are both personally moral and a moral man-

ager, you will truly be an ethical leader .64 You can have strong personal character, but if you pay more attention to other things,

and ethics is “managed” by “benign neglect,” you won’t have a

reputation as an ethical leader.

IBM uses a guideline for business conduct that asks employ-

ees to determine whether under the full glare of examination by

associates, friends, and family, they would remain comfortable

with their decisions. One suggestion is to imagine how you

would feel if you saw your decision and its consequences on

the front page of the newspaper. 65

This “light of day” or “sun-

shine” ethical framework can be powerful.

Such fear of exposure compels people more strongly in

some cultures than in others. In Asia, anxiety about losing face

often makes executives resign immediately if they are caught

in ethical transgressions or if their companies are embarrassed

by revelations in the press. By contrast, in the United States,

exposed executives might respond with indignation, intransi-

gence, pleading the Fifth Amendment, stonewalling, an every-

one-else-does-it self-defense, or by not admitting wrongdoing

and giving no sign that resignation ever crossed their minds.

Partly because of legal tradition, the attitude often is never

explain, never apologize, don’t admit the mistake, and do not

resign, even if the entire world knows exactly what happened. 66

3.2 | Ethics Codes The Sarbanes-Oxley Act, described earlier, requires that public

companies periodically disclose whether they have adopted a

code of ethics for senior financial officers—and if not, why not.

Often the statements are just for show, but when implemented

well they can change a company’s ethical climate for the better

and truly encourage ethical behavior. Executives say they pay

most attention to their company’s code of ethics when they feel

that stakeholders (customers, investors, lenders, and suppliers)

try to influence them to do so, and their reasons for paying

attention to the code are that doing so will help create a strong

ethical culture and promote a positive image. 67

Ethics codes must be carefully written and tailored to indi-

vidual companies’ philosophies. For example, Coca-Cola’s

44-page code of business conduct covers a variety of topics,

from when written approval is necessary to how to prevent con-

flict of interest. 68

Aetna Life & Casualty believes that tending

to the broader needs of society is essential to fulfilling its eco-

nomic role.

Most ethics codes address subjects such as employee con-

duct, community and environment, share-holders, customers,

suppliers and contractors, political activity, and technology.

Often the codes are drawn up by the organizations’ legal

departments and begin with research into other companies’

codes. The Ethics Resource Center in Arlington, Virginia,

assists companies interested in establishing a corporate code of

ethics. 69

• Lack of clear procedures for handling ethical problems.

• Responsiveness to the demands of shareholders at the expense of other constituencies. 59

To understand your organization’s ethics climate, think about

issues from the employees’ perspective. What do people think

is required to succeed? Do they think that ethical people “finish

last” and that the “bad guys win”? Or vice versa, that the company

rewards ethical behavior and won’t tolerate unethical behavior? 60

Lynn Brewer, who brought to light the financial misdeeds of

Enron, also heard Enron’s management advocate values such as

respect and integrity, but she later determined that these messages

were just “window-dressing” and that people would undermine

one another as they looked out for their self-interests. She even-

tually concluded that “no one cared” about unethical and illegal

behavior in support of the company’s stock price. 61

3 |  MANAGERS SHAPE BEHAVIOR

People often give in to what they perceive to be the pressures

or preferences of powerful others. In the workplace, that means

managers influence their employees for good or for ill. As we’ll

see in the discussions of leadership and motivation later in

the text, managers formally and informally shape employees’

behavior with money, approval, good job assignments, a pos-

itive work environment, and in many other ways. That means

managers are a powerful force for creating an ethical culture.

To create a culture that encourages ethical behavior, managers

must be more than ethical people. They also should lead others

to behave ethically. 62

Sharon Allen, former chair of the board of

the accounting and taxation firm Deloitte LLP, is convinced that

being ethical can give organizations a competitive advantage. She

believes that “the shared language of ethical values that enables

people to conduct business with each other, where a deal can be

sealed with a handshake and your word is your bond,” is essen-

tial. Ethical leadership is also important when it comes to retaining

employees. According to Deloitte LLP’s 2010 Ethics & Workplace Survey, about one-third of Americans plan to look for a new job when the economy improves. Respondents blamed the loss of trust

in their employer and lack of transparent communication from

their organization’s leaders as the primary reasons for wanting to

quit. Given that turnover can be costly and good replacements hard

to find, Allen recommends that leaders work hard to rebuild an eth-

ical climate characterized by trust and open communication. 63

3.1 |  Ethical Leadership It’s been said that your reputation is your most precious asset.

Here’s a suggestion: set a goal for yourself to be seen by others as

LO3 Explain how managers influence their ethics environment

ethical leader one who is both a moral person and a moral manager influencing others to behave ethically

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78 PART 2 | Planning

surveillance and controls on people and impose punishments

on wrongdoers.

Yahoo! is struggling with an ethical dilemma as it makes

decisions about how to operate in China. The Chinese gov-

ernment arrested Wang Xiaoning for “inciting subversion” in

his prodemocracy e-journal and sentenced him to 10 years in

prison. According to the case filed against Yahoo! in the United

States, the Chinese subsidiary of Yahoo! claimed that Wang

provided the information that enabled officials to track him

down. How can an Internet company that values free expres-

sion justify support for a repressive government? Yahoo!’s Jim

Cullinan points out that the company has to obey the laws of

the countries where it operates but adds that the company has

been trying to develop operating principles that will help its

people make ethical decisions in countries where governments

have different values. 74

Integrity-based ethics programs go beyond the mere avoid- ance of illegality; they are concerned with the law but also with

instilling in people a personal responsibility for ethical behavior.

With such a program, companies and people govern themselves

through a set of guiding principles that they embrace.

For example, the Americans with Disabilities Act (ADA)

requires companies to change the physical work environment

so it will allow people with disabilities to function on the job.

Mere compliance would involve making the changes necessary

to avoid legal problems. Integrity-based programs would go

further by training people to understand and perhaps change

attitudes toward people with disabilities and sending clear sig-

nals that people with disabilities also have valued abilities. This

effort goes far beyond taking action to stay out of trouble with

the law.

When top management has a personal commitment to

responsible ethical behavior, programs tend to be better inte-

grated into operations, thinking, and behavior. For example, at

a meeting of about 25 middle managers at a major financial

services firm, every one of them told the company’s general

To make an ethics code

effective, apply the following

principles:

• Involve those who have to live with the code in writing it.

• Focus on real-life situations that employees can relate to.

• Keep it short and simple, so it is easy to understand and remember.

compliance-based ethics programs company mechanisms typically designed by corporate counsel to prevent, detect, and punish legal violations

integrity-based ethics programs company mechanisms designed to instill in people a personal responsibility for ethical behavior

Although many companies have a code of ethics, far fewer have a comprehensive ethics program that includes training, channels for reporting violations, evaluation of ethical conduct, and discipline for violations. 71

Did You Know?

100 20 30 Percent

40 50

43%

23%

7%

Percentage of organizations that . . .

Measure ethical conduct as part of performance appraisals

Have a comprehensive ethics and compliance program

Have no ethics and compliance program

• Write about values and shared beliefs that are important and that people can really believe in.

• Set the tone at the top, having executives talk about and live up to the statement. 70

When reality differs from the statement—as when a motto

says people are our most precious asset or a product is the fin-

est in the world, but in fact people are treated poorly or product

quality is weak—the statement becomes a joke to employees

rather than a guiding light.

3.3 | Ethics Programs Corporate ethics programs commonly include formal ethics

codes articulating the company’s expectations regarding ethics;

ethics committees that develop policies, evaluate actions, and

investigate violations; ethics communication systems giving

employees a means of reporting problems or getting guidance;

ethics officers or ombudspersons who investigate allegations

and provide education; ethics training programs; and disci-

plinary processes for addressing unethical behavior. 72

Ethics programs can range from compliance-based to

integrity-based. 73

Compliance-based ethics programs are designed by corporate counsel to prevent, detect, and pun-

ish legal violations. Compliance-based programs increase

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CHAPTER 4 | Ethics and Corporate Responsibility 79

Moral awareness begins with considering whether a deci-

sion has ramifications that disadvantage employees, the envi-

ronment, or other stakeholders. Then the challenge is to apply

moral judgment.

The philosopher John Rawls created a thought experiment

based on the “veil of ignorance.” 79

Imagine you are making a

decision about a policy that will benefit or disadvantage some

groups more than others. For example, a

policy might provide extra vacation

time for all employees but elimi-

nate flex time, which allows parents

of young children to balance their

work and family responsibilities. Or

you’re a university president con-

sidering raising tuition or cut-

ting financial support for study

abroad.

Now pretend that you belong

to one of the affected groups,

but you don’t know which one—for

instance, those who can afford to

study abroad or those who can’t,

or a young parent or a young sin-

gle person. You won’t find out until

after the decision is made. How would

you decide? Would you be willing to

risk being in the disadvantaged group?

Would your decision be different if you

were in a group other than your own?

Rawls maintained that only a person ignorant of his or her

own identity can make a truly ethical decision. A decision

maker can tactically apply the veil of ignorance to help mini-

mize personal bias.

4.1 |  The Ethical Decision-Making Process

To resolve ethical problems, you can use the process illus-

trated in Exhibit 4.4 . Understand the various moral standards

(universalism, relativism, etc.), as described earlier in the

chapter. Begin to follow a formal decision-making process.

As we will discuss in more detail in Chapter 5, you identify

and diagnose your problem, generate alternative solutions,

and evaluate each alternative. Your evaluation should recog-

nize the impacts of your alternatives: which people do they

benefit and harm, which are able to exercise their rights, and

whose rights are denied? You now know the full scope of the

moral problem.

As you define the problem, it’s easy to find excuses for

unethical behavior. People can rationalize unethical behavior

by denying responsibility (“What can I do? They’re twisting

my arm”), denying injury (“No one was badly hurt; it could

have been worse”), denying the victim (“They deserved it”),

social weighting (“Those people are worse than we are”), and

counsel that they  had never seen or heard of the company’s

ethics policy document. 75

The policies existed but were not a

part of the everyday thinking of managers. In contrast, a health

care products company bases one-third of managers’ annual

pay raises on how well they carry out the company’s ethical

ideals. Their ethical behavior is assessed by superiors, peers,

and subordinates—making ethics a thoroughly integrated

aspect of the way the company and its people do business. Acting with integrity is important not

only to managers in organizations but

also to MBA students. On June 3,

2009, over 400 graduating stu-

dents of the Harvard Business

School’s MBA program took

an oath stating that as future

managers they would “act with

the utmost integrity” and avoid

“decisions and behavior that

advance my own narrow ambi-

tions, but harm the enterprise

and the societies it serves.”

Created by then-MBA student

Max Anderson with encourage-

ment from a few faculty mem-

bers, the oath is meant to signal

that graduating MBA students

are committed to applying eth-

ics and integrity in all of their future

managerial and leadership endeavors. 76

4 |  YOU CAN LEARN TO MAKE ETHICAL DECISIONS

We’ve said it’s not easy to make ethical decisions. Such deci-

sions are complex. For starters, you may face pressures that are

difficult to resist. Also, it’s not always clear that a problem has

ethical dimensions; they don’t hold up signs that say, “Hey, I’m

an ethical issue, so think about me in moral terms!” 77

Making

ethical decisions takes three things:

1. Moral awareness —realizing the issue has ethical implications.

2. Moral judgment —knowing what actions are morally defensible.

3. Moral character —the strength and persistence to act in accor- dance with your ethics despite the challenges. 78

LO4 Outline the process for making ethical decisions

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80 PART 2 | Planning

the AIG division where the com-

pany’s financial problems had

originated. Eventually they had

to concede that these responses

did not really address the ques-

tion of whether the retreat was an

ethical use of company money

at a time when the company—

along with many of the taxpay-

ers whose money was bailing out

AIG—was undergoing an eco-

nomic crisis. 81

4.2 |  Outcomes of Unethical Decisions

You must also consider legal

requirements to ensure full com-

pliance, and the economic out-

comes of your options, including costs and potential profits.

Exhibit 4.5 shows some of the costs associated with unethical

behavior. 82

Some are obvious: fines and penalties. Others, like

administrative costs and corrective actions, are less obvious.

Ultimately the effects on customers, employees, and govern-

ment reactions can be huge. Being fully aware of the poten-

tial costs can help prevent people from straying into unethical

terrain.

Evaluating your ethical duties

requires looking for actions that

meet the following criteria:

• You would be proud to see the action widely reported in newspapers.

• It would build a sense of commu- nity among those involved.

• It would generate the greatest social good.

• You would be willing to see oth- ers take the same action when you might be the victim.

• It doesn’t harm the “least among us.”

• It doesn’t interfere with the right of all others to develop their skills to the fullest. 83

As you can see, making eth-

ical decisions is complex, but

considering all these factors will

help you develop the most con-

vincing moral solution.

appealing to higher loyalties (“It was for a higher purpose,”

or “I’m too loyal to my boss to report it”). 80

Only days after

the U.S. government had posted $85 billion to keep insurance

giant American International Group from collapsing, AIG sent

executives on a luxurious retreat. When asked to justify this,

executives initially replied with excuses: the $440,000 spent

was far, far less than the amount of the government bailout, and

the executives who participated in the retreat did not work in

Source: T. Thomas, J. Schermerhorn Jr., and J. Dienhart, “Strategic Leadership of Ethical Behavior in Business,” Academy of Management Executive (May 2004), p. 58. Reprinted with permission of Academy of Management. Permission conveyed through Copyright Clearance Center.

Level 1 Costs

Government fines and penalties

Less damaging costs, get more executive attention.

More damaging costs, get less executive attention.

Level 2 Costs

Administrative and audit Legal and investigative

Remedial education Corrective actions

Government oversight

Level 3 Costs

Customer defections Loss of reputation

Employee cynicism Lost employee morale

Employee turnover Government cynicism Government regulation

Exhibit 4.5 The business costs of ethical failures

Recognize all moral impacts: –Benefits to some. –Harms to others. –Rights exercised. –Rights denied.

Understand all the moral standards.

Define the complete moral problem.

Determine the economic outcomes.

Consider the legal requirements.

Evaluate the ethical duties.

Propose a convincing moral solution.

Exhibit 4.4 A process for ethical decision making

Source: L. T. Hosmer, The Ethics of Management, 4th ed. (New York: McGraw-Hill/Irwin, 2003), p. 32. © 2003 Reprinted with permission of McGraw-Hill Education.

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CHAPTER 4 | Ethics and Corporate Responsibility 81

have the secret recipe for Coke,

but it did maintain its reputa-

tion as a competitor with integ-

rity. Choosing integrity over

short-term business gain took

courage.

At Marvin Windows and

Doors, which has thousands of

employees working in a dozen

facilities in the United States and

Honduras, workers can go online

to submit anonymous tips and

suggestions in English or Spanish.

The company’s general counsel

says the system not only provides

an early warning in case of prob-

lems as diverse as theft and safety

concerns, but also maintains an

overall culture of valuing ethics. 87

Besides online reporting sys-

tems, such as e-mail and web-

based tools, companies can

use drop boxes and telephone

hotlines. Often these channels

of communication are admin-

istered by third-party organiza-

tions, whose employees protect

whistleblowers’ identity and

have procedures to follow if the

complaint involves higher-level

executives who might be part

of the usual group charged with

responding to reports. 88

Under

the recently passed Dodd-Frank

Act, reporting systems should be

expanded to give access to cus-

tomers, suppliers, shareholders,

associates of employees, and

others who could potentially

report fraudulent acts and viola-

tions of the law. 89

4.3 |  Ethics Requires Courage Behaving ethically requires not just moral

awareness and moral judgment but also

moral character, including the

courage to take actions consis-

tent with your ethical decisions.

Think about how hard it can be

to do the right thing. 84

As you’re

growing up, you have plenty of

peer pressure to conform to oth-

ers’ behavior, and it’s not cool

to be a snitch. On the job, how

hard would it be to walk away

from lots of money in order to

“stick to your ethics”? To tell

colleagues or your boss that you

believe they’ve crossed an eth-

ical line? To disobey a boss’s

order? To go over your boss’s

head to someone in senior man-

agement with your suspicions

about accounting practices? To

go outside the company to alert

others if someone is being hurt

and management refuses to cor-

rect the problem?

PepsiCo managers faced a

difficult choice when an exec-

utive secretary from Coca-Cola

Company’s headquarters con-

tacted them to offer confidential

documents and product samples

for a price. Rather than seek an

unethical (and illegal) advan-

tage, Pepsi’s managers notified

Coca-Cola. There, management

fired the secretary and contacted

the FBI. Eventually the secretary

and two acquaintances were con-

victed of conspiring to steal trade

secrets. 85

PepsiCo still doesn’t

● Signed into law on July 21, 2010, one of the aims of the Dodd-Frank

Wall Street Reform and Consumer Protection Act is to increase the

amount of regulation over financial institutions that operate in the

United States.

“According to a study by the Association of Certified Fraud Examiners, the average loss per case from

workplace fraud is $140,000 and takes about 18 months to detect. ”86

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82 PART 2 | Planning

the ways business should respond. This controversy focused on

the concept of corporate social responsibility —the obligation toward society assumed by business. A socially responsible busi-

ness maximizes its positive effects on society and minimizes its

negative effects. 91

5.1 |  Four Levels of Corporate Social Responsibility

Social responsibilities can be categorized more specifically, 92

as shown in Exhibit  4.6 . The economic responsibilities of business are to produce goods and services that society wants at

a price that perpetuates the business and satisfies its obligations

to investors. For Smithfield Foods, the largest pork producer

in the United States, this means selling bacon, ham, and other

products to customers at prices that maximize Smithfield’s

profits and keep the company growing over the long term.

Economic responsibility may also extend to offering certain

products to needy consumers at a reduced price.

Legal responsibilities are to obey local, state, federal, and relevant international laws.

Laws affecting Smithfield

cover a wide range of require-

ments, from filing tax returns

to meeting worker safety stan-

dards. Ethical responsibilities include meeting other societal

expectations, not written as

law. Smithfield took on this

level of responsibility when

it responded to requests by

major customers, including

McDonald’s and Walmart,

that it discontinue the practice

of using gestation crates to

house its sows. The custom-

ers were reacting to pressure

from animal rights advocates

who consider it cruel for sows

to live in the two-foot by sev-

en-foot crates during their

entire gestation period, which

means they cannot walk, turn

around, or stretch their legs for

months at a time. The practice

had been to move the sows to

a farrowing crate to give birth

and then return them to the

5 |  CORPORATE SOCIAL RESPONSIBILITY

Should business be responsible for social concerns beyond its

own economic well-being? Do social concerns affect a corpo-

ration’s financial performance? The extent of business’s respon-

sibility for noneconomic concerns has been hotly debated for

years. In the 1960s and 1970s, the political and social envi-

ronment became more important to U.S. corporations as soci-

ety focused on issues like equal opportunity, pollution control,

energy and natural resource conservation, and consumer and

worker protection. 90

Public debate addressed these issues and

LO5 Summarize the important issues surrounding corporate social responsibility

Exhibit 4.6 Pyramid of global corporate social responsibility and performance

Be a good

global

corporate

citizen.

Be

ethical.

Obey

the

law.

Be

profitable.

Do what is desired by global stakeholders.

Do what is expected by global stakeholders.

Do what is

required by global stakeholders.

Do what is

required by global

capitalism.

Philanthropic Responsibility

Ethical Responsibility

Legal Responsibility

Economic Responsibility

Source: A. Carroll, “Managing Ethically with Global Stakeholders: A Present and Future Challenge,” Academy of Management Executive (May 2004), pp. 116, 114–20. Reprinted with permission of Academy of Management. Permission conveyed through Copyright Clearance Center.

corporate social responsibility obligation toward society assumed by business

economic responsibilities to produce goods and services that society wants at a price that perpetuates the business and satisfies its obligations to investors

legal responsibilities to obey local, state, federal, and relevant international laws

ethical responsibilities meeting other social expectations, not written as law

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CHAPTER 4 | Ethics and Corporate Responsibility 83

conforming to society’s laws

and ethical customs.

The alternative view of cor-

porate social responsibility,

called the stakeholder model , assumes that managers are

obliged to look beyond prof-

itability to help their organi-

zations succeed by interacting

with groups that have a stake

in the organization. 97

A firm’s

stakeholders include share-

holders, employees, customers,

suppliers, competitors, society,

and the government. 98

As mem-

bers of society, organizations

should actively and responsibly

participate in the community

and in the larger environment.

From this perspective, many

people criticized insurance

companies after Hurricanes

Katrina and Rita devastated

homes and businesses along

the Gulf Coast. From a social

responsibility perspective, it

was wrong for companies to

watch out for their bottom line and avoid paying claims where

they could make a case that the damage wasn’t covered; the

insurers should have been more concerned about their devastated

customers. Or consider how companies have responded to public

criticism that products manufactured in low-wage countries are

produced in “sweatshops,” where employees work in conditions

widely viewed as unacceptable in developed nations such as the

United States. Do U.S. companies have a social responsibility

to insist on better working conditions? Walmart and other com-

panies that buy products made in China have written codes of

conduct and conducted onsite audits. Unfortunately some enter-

prising Chinese consultants have set up services that help facto-

ries hide violations instead of correcting them. Still, as demand

for Chinese-made products and pressure from multinational cor-

porations have both intensified, observers say pay and working

conditions in China have generally improved. 99

5.3 |  You Can Do Good and Do Well

Profit maximization and corporate social responsibility used

to be regarded as leading to opposing policies. But in today’s

business climate, which emphasizes both doing good and doing

well, the two views can converge. 100

The Coca-Cola Company

has set up about 70 charitable projects to provide clean water in

40 countries. These projects are helping some of the 1.2 billion

people without access to safe drinking water. The company is

building structures to “harvest” rainwater in India, expanding the

gestation crate soon after, when they became pregnant again.

Smithfield plans to exchange the crates for “group housing,”

which allows the animals to socialize, even though group hous-

ing costs more. 93

Smithfield is not legally required to make the

change (except in two states), and the arrangement may not max-

imize profits, but the company’s actions help it maintain good

customer relationships and a positive public image.

Finally, philanthropic responsibilities are additional behaviors and activities that society finds desirable and that

the values of the business support. Examples include support-

ing community projects and making charitable contributions.

Philanthropic activities can be more than mere altruism; man-

aged properly, “strategic philanthropy” can become not an oxy-

moron but a way to build goodwill in a variety of stakeholders

and even add to shareholder wealth. 94

Robert Giacalone, who teaches business ethics at Temple

University, believes that a 21st-century education must help

students think beyond self-interest and profitability. A real edu-

cation, he says, teaches students to leave a legacy that extends

beyond the bottom line—a transcendent education. 95

A tran- scendent education has five higher goals that balance self-in- terest with responsibility to others:

1. Empathy —feeling your decisions as potential victims might feel them, to gain wisdom.

2. Generativity —learning how to give as well as take, to others in the present as well as to future generations.

3. Mutuality —viewing success not merely as personal gain, but a common victory.

4. Civil aspiration —thinking not just in terms of “don’ts” (lie, cheat, steal, kill), but also in terms of positive contributions.

5. Intolerance of ineffective humanity —speaking out against unethi- cal actions.

5.2 |  Do Businesses Really Have a Social Responsibility?

Two basic and contrasting views describe principles that

should guide managerial responsibility. The first, known as the

shareholder model , holds that managers act as agents for share- holders and, as such, are obligated to maximize the present value

of the firm. This tenet of capitalism is widely associated with the

early writings of Adam Smith in The Wealth of Nations, and more recently with Milton Friedman, the Nobel Prize–winning econ-

omist of the University of Chicago. With his now-famous dic-

tum “The social responsibility of business is to increase profits,”

Friedman contended that organizations may help improve the qual-

ity of life as long as such actions are directed at increasing profits.

Some considered Friedman to be “the enemy of business

ethics,” but his position was ethical: he believed it is uneth-

ical for unelected business leaders to decide what is best for

society, and unethical for them to spend shareholders’ money

on projects unconnected to key business interests. 96

In addi-

tion, the context of Friedman’s famous statement includes

the qualifier that business should increase its profits while

philanthropic responsibilities additional behaviors and activities that society finds desirable and that the values of the business support

transcendent education an education with five higher goals that balance self-interest with responsibility to others

shareholder model theory of corporate social responsibility that holds that managers are agents of shareholders whose primary objective is to maximize profits

stakeholder model theory of corporate social responsibility that suggests that managers are obliged to look beyond profitability to help their organizations succeed by interacting with groups that have a stake in the organization

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84 PART 2 | Planning

company profitable access to the growing market for environ-

mentally friendly products. 102

The real relationship between corporate social perfor-

mance and corporate financial performance is highly complex;

socially responsible organizations do not necessarily become

more or less successful in financial terms. 103

Some advantages

are clear, however. For example, socially responsible actions

can have long-term benefits. Companies can avoid unnecessary

and costly regulation if they are socially responsible. Honesty

and fairness may pay great dividends to the conscience, to the

personal reputation, and to the public image of the company as

well as in the market response. 104

In addition, society’s prob-

lems can offer business opportunities, and profits can be made

from systematic and vigorous efforts to solve these problems.

Firms can perform a cost–benefit analysis to identify actions

that will maximize profits while satisfying the demand for cor-

porate social responsibility from multiple stakeholders. 105

In

other words, managers can treat corporate social responsibility

as they would treat all investment decisions. This has been the

case as firms attempt to reconcile their business practices with

their effect on the natural environment.

For a clearer link between social and business goals, com-

panies can benefit from integrating social responsibility with

corporate strategy—and society can benefit as well. Applying

the principles of strategic planning (described in Chapter 5),

organizations can identify the specific areas in which they can

capitalize on their strengths to neutralize threats and benefit

from opportunities that result from serving the society of which

they are a part. 106

For example, suppose a company is inter-

ested in exercising social responsibility for the environment by

reducing its carbon emissions. The extent to which this choice

is strategic varies from one company to another. Reducing car-

bon emissions would be a good deed for Bank of America but

not directly related to its strategy, except to the extent it might

(or might not) lower its operating costs. For UPS, reducing car-

bon emissions would directly affect its day-to-day activities

but still might not give the company a competitive advantage.

For Toyota, reducing carbon emissions—say, by leading in the

development and marketing of hybrid technology as well as

by operating more efficiently—can be a significant part of its

competitive advantage.

municipal water supply in Mali, and delivering water purifica-

tion systems and storage urns to Kenya. These projects are aimed

at burnishing the company’s image and targeting complaints

that the company is using too much of the world’s water sup-

ply to manufacture its beverages. From a practical perspective,

Coca-Cola’s strategic planners have identified water shortages

as a strategic risk; from a values perspective, water conservation

remains a key long-term priority. 101

Earlier attention to corporate social responsibility focused

on alleged wrongdoing and how to control it. More recently,

attention has also been centered on the possible competi-

tive advantage of socially responsible actions. DuPont has

been incorporating care for the environment into its business

in two ways it hopes will put it ahead of the competition.

First, the company has been reducing its pollution, includ-

ing a 72  percent cut in greenhouse gas emissions since 1990.

It hopes these efforts will give it an advantage in a future

where the government regulates emissions, requiring compet-

itors to play catch-up. Second, DuPont has been developing

products that are sustainable, meaning they don’t use up the

earth’s resources. Examples include corn-based fabrics and

new applications of its Tyvek material to make buildings more

energy- efficient. DuPont expects these innovations to give the

● Barclays Cycle Hire scheme (or Borris Bikes) part of a green initiative by

Transport for London.

Traditional Thinking Businesses see environmental issues as a no-win situation:

either you help the environment and hurt your business, or

vice versa.

The Best Managers Today Incorporate environmental values into the design and manufacture

of their products; this helps achieve competitive advantage, build

brand value, and reduce costs.

Source: C. Holliday, “Sustainable Growth, the DuPont Way,” Harvard Business Review, September 2001, pp. 129–34.

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CHAPTER 4 | Ethics and Corporate Responsibility 85

to people and the environment.

The fundamental sources of

risk in modern society are the

excessive production of haz-

ards and ecologically unsus-

tainable consumption of natural

resources. 112

Risk has prolifer-

ated through population explo-

sion, industrial pollution, and

environmental degradation. 113

Industrial pollution risks

include air pollution, global

warming, ozone depletion, acid

rain, toxic waste sites, nuclear

hazards, obsolete weapons arse-

nals, industrial accidents, and hazardous products. More than

30,000 uncontrolled toxic waste sites have been documented in

the United States alone, and the number is increasing by perhaps

2,500 per year. The situation is far worse in other parts of the

world. The pattern, for toxic waste and many other risks, is one

of accumulating risks and inadequate remedies.

6.2 |  Development Can Be Sustainable Ecocentric management has as its goal the creation of sustain- able economic development and improvement of quality of life

worldwide for all organizational stakeholders. 114

Sustainable growth is economic growth and development that meet the orga- nization’s present needs without harming the ability of future

generations to meet their needs. 115

Sustainability is fully compat-

ible with the natural ecosystems that generate and preserve life.

Some believe that the concept of sustainable growth can be

applied in several ways:

• As a framework for organizations to use in communicating to all stakeholders.

• As a planning and strategy guide.

• As a tool for evaluating and improving the ability to compete. 116

The principle can begin at the highest organizational lev-

els and be made explicit in performance appraisals and reward

systems.

6 |  THE NATURAL ENVIRONMENT

Most large corporations developed in an era of abundant raw

materials, cheap energy, and unconstrained waste disposal. 108

But many of the technologies developed during that era are

contributing to the destruction of ecosystems. Industrial-age

systems follow a linear flow of extract, produce, sell, use, and

discard—what some call a “take-make-waste” approach. 109

But

perhaps no time in history has offered greater possibilities for a

change in business thinking than the 21st century.

Business used to look at environmental issues as a no-win

situation: either you help the environment and hurt your busi-

ness, or else you help your business at a cost to the environ-

ment. But now a shift is taking place as companies deliberately

incorporate environmental values into competitive strategies

and into the design and manufacturing of products. 110

Why?

In addition to philosophical reasons, companies “go green” to

satisfy consumer demand, react to a competitor’s actions, meet

requests from customers or suppliers, comply with guidelines,

and create a competitive advantage.

General Electric CEO Jeff Immelt used to view environ-

mental rules as a burden and a cost. Now he sees environmen-

tally friendly technologies as one of the global economy’s most

significant business opportunities. Under a business initiative

called Ecomagination, GE is looking for business opportunities

from solving environmental problems. Recently General Electric

announced an “Ecomagination Challenge” in China in which it

(along with seven other firms) will provide $100 million to sup-

port innovations in gas power, including natural gas and biogas. 111

6.1 |  Economic Activity Has Environmental Consequences

We live in a risk society. That is, the creation and distribution of

wealth generate by-products that can cause injury, loss, or danger

LO6 Discuss the growing importance of managing the natural environment

“The essential test that should guide corporate social responsibility is not whether a cause is worthy but whether it presents an opportunity to create shared value—that is, a meaningful benefit for society that is also valuable to

the business.” — Michael E. Porter and Mark R. Kramer 107

ecocentric management its goal is the creation of sustainable economic development and improvement of quality of life worldwide for all organizational stakeholders

sustainable growth economic growth and development that meet present needs without harming the needs of future generations

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86 PART 2 | Planning

water scarcity. About 30 SABMiller sites were in vulnerable areas.

Executives decided to target one of those areas and develop a pro-

cess they could apply elsewhere. They selected South Africa, whose

breweries produce about one-sixth of the company’s beer. Not only

is South Africa facing water shortages, but its government has yet

to provide access to safe drinking water for 5 million of its people.

To get hard information about its water consumption, the

company measured water usage at each stage of its processes,

from growing crops to rinsing out used bottles before recycling.

SABMiller hired a consulting firm for this task. The most water was

used in growing barley, maize (corn), and hops. Together with the

water used in factories, 20 gallons of water are needed to produce

each pint of beer. Based on the data, SABMiller’s initial efforts are

With two-thirds of the world’s population expected to experience

water scarcity by 2025 and shortages forecast for 36 U.S. states

by 2013, businesses are becoming concerned about this essential

natural resource. If you haven’t experienced a water shortage,

water usage might not seem to be an obvious area of concern, but

it should be. For example, Levi Strauss & Company determined

that making a pair of jeans requires about 500 gallons of water for

growing, dying, and processing cotton.

Brewer SABMiller is a leader in making water conservation

part of its strategy. Using an online computer application, the

company submitted the GPS coordinates of factory and farm

locations and learned where its operations are located in areas of

S ince early Roman days, people have used greenhouses to grow plants—particularly to enjoy fruits and vegetables out of season. But not until the 1990s did greenhouses begin to gain popularity in the United States. The tim- ing couldn’t be better. The amount of farm- able land per capita in the world continues to shrink, and over the next 50 years world pop- ulation is expected to increase by 3 billion. At the same time, economists estimate, the demand for farm products will double.

As more regions suffer from drought from climate change and as power short- falls increase, the notion of using glass houses to grow fruits and vegetables has become increasingly attractive. A leader in greenhouse-grown produce, Houweling Nurseries (now Houweling’s Tomatoes) was founded in 1974 by Cornelius Houweling, a Dutch immigrant to the United States and professional horticulturist. Today the busi- ness includes farms in British Columbia and Oxnard, California.

In 2009 the company expanded its Oxnard site with a $53 million, 40-acre greenhouse facility that uses sustainable practices to grow tomatoes year-round. Located in the center of California’s $36 billion farming economy, the greenhouses stand as a tri- umph of 21st-century agricultural science. They are believed to be the world’s first energy-neutral, commercial greenhouses. More than 90 percent of waste is recycled at the nurseries. Solar panels generate

most of the electricity needed to power the greenhouse pumps and climate controls. Energy screens reduce heat loss. Should the temperature drop during the night, the greenhouses are heated with waste heat collected from refrigeration exhaust. The 2.1 megawatts of electricity generated by the greenhouses could power 1,500 homes.

Fully enclosed, the greenhouses are nearly dust-free. Crops grow herbicide-free and nearly pesticide-free, using only about half the fertilizer of conventional crops. Colonies of bumblebees reside on-site and pollinate the crops. Houweling greenhouses use about 20 percent as much water as a field farm and only about a third as much as an ordinary greenhouse. Rainwater and irrigation runoff

are captured in a pond, filtered, and recircu- lated as needed. Watered individually through a complex computerized piping system, green- house-tended tomato plants live far longer than field crops. The plants grow to the ceiling; workers stand on ladders to harvest the fruit.

High-tech growing facilities like Houweling Nurseries yield as much as 24  times more tomatoes per acre than does a conventional farm. It would take more than 3,000 acres of open fields to match the tomato output of Houweling’s 125 acres “under glass.” In addi- tion, at the Oxnard facility alone, Houweling has generated more than 450 full-time, year- round jobs in an industry that, like many in recessionary times, has been hard-hit by unemployment.

High-Tech Greenhouses Are the Next Big Thing

Discussion Questions • How does Houweling’s Tomatoes serve

as a forward-looking example for other agricultural businesses?

• Emerging environmental issues have created significant challenges for farm- ing. Although costly, what could the con- struction of more greenhouses like the Houwelings mean for today’s farmers? For the agricultural industry as a whole?

SOURCES: Company website, www.houwelings. com ; Oppenheimer company website, “Casey

Houweling: Growing with Oppenheimer,” www .oppyproduce.com ; T. Burfield, “Opening of Houweling Nurseries Greenhouse Draws VIPs,” The Packer, May 15, 2009, www.thepacker.com ; S. Hoops, “Environmentally Friendly Greenhouses in Camarillo Impresses Experts,” Ventura County Star, May 15, 2009, www.venturacountystar.com ; J. Hirsch, “Greener Greenhouses Produce 21st Century Crops,” Los Angeles Times, May 14, 2009, www.newsday.com ; D. Babcock, “Grown under Glass: The Future of Greenhouse-Grown Products,” Produce Merchandising, March 2009, http:// producemerchandising.com .

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CHAPTER 4 | Ethics and Corporate Responsibility 87

has begun to use that experi-

ence as a strength—a basis for

expertise it can sell to other

organizations, along with its

computing power and other

consulting services. Thus one

application might be to help clients measure and forecast the car-

bon emissions of their entire supply chain. By running calculations

on its supercomputers, IBM consultants could help the clients find

ways to lower their energy use. 120

You don’t have to be a manufacturer or a utility to jump on the

green bandwagon. Web search giant Google is applying a three-

pronged strategy aimed at reducing its “carbon footprint,”—that is,

its output of carbon dioxide and other greenhouse gases. At Google,

most greenhouse gas emissions are related to electricity consump-

tion by its buildings and computers. So Google is first seeking ways

to make buildings and computers more energy-efficient, such as by

using high-efficiency lighting and installing power management

software in its computers. Second, the company is developing ways

to get more of its power from renewable sources, such as the solar

power system at its facility in Mountain View, California. Finally,

recognizing that its other efforts cannot yet eliminate Google’s

release of greenhouse gases, the company is purchasing “offsets”—

funding projects that reduce greenhouse gas emissions elsewhere. 121

Webs of companies with a common ecological vision can

combine their efforts into high-leverage, impactful action. 122

In Kalundborg, Denmark, such a collaborative alliance exists

among an electric power generating plant, an oil refiner, a bio-

tech production plant, a plasterboard factory, cement producers,

heating utilities, a sulfuric acid producer, and local agriculture

and horticulture. Chemicals, energy (for heating and cooling),

water, and organic materials flow among companies. Resources

are conserved, “waste” materials generate revenues, and water,

air, and ground pollution all are reduced.

Companies not only have the ability to solve environmental problems; they are coming to see and acquire the motivation as well. Some now believe that solving environmental problems is

one of the biggest opportunities in the history of commerce. 123

focusing on identifying and using more efficient irrigation technol-

ogy, preventing waste from runoff and evaporation. 117

Increasingly, firms are paying attention to the total environ-

mental impact throughout the life cycle of their products. 118

Life cycle analysis (LCA) is a process of analyzing all inputs and outputs, through the entire “cradle-to-grave” life of a prod-

uct, to determine the total environmental impact of its produc-

tion and use. LCA quantifies the total use of resources and the

releases into the air, water, and land.

LCA considers the extraction of raw materials, product pack-

aging, transportation, and disposal. Consider packaging alone.

Goods make the journey from manufacturer to wholesaler to

retailer to customer; then they are recycled back to the manu-

facturer. They may be packaged and repackaged several times,

from bulk transport, to large crates, to cardboard boxes, to indi-

vidual consumer sizes. Repackaging not only creates waste but

also costs time. The design of initial packaging in sizes and for-

mats adaptable to the final customer can minimize the need for

repackaging, cut waste, and realize financial benefits.

Profitability need not suffer and may be increased by ecocentric

philosophies and practices. Some, but not all, research has shown a

positive relationship between corporate environmental performance

and profitability. 119

Of course, whether the relationship is positive,

negative, or neutral depends on the strategies chosen and the effec-

tiveness of implementation. And managers of profitable companies

may feel more comfortable turning their attention to the environ-

ment than are managers of companies in financial difficulty.

6.3 |  Some Organizations Set Environmental Agendas

In the past, most companies were oblivious to their negative envi-

ronmental impact. More recently, many began striving for low

impact. Now some strive for positive impact, eager to sell solu-

tions to the world’s problems. IBM has three decades of experi-

ence in lowering its environmental impact through efforts such as

reducing waste in packaging and measuring carbon emissions. It

life cycle analysis (LCA) a process of analyzing all inputs and outputs, through the entire “cradle-to-grave” life of a product, to determine total environmental impact

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

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

Connect ® Management is available for M Management. Additional resources include:

Interactive Applications: • Case Analysis: Danger Signs of Unethical Behavior • Drag & Drop: Ethics and Moral Philosophies • Self Assessment: Your Ethical Decision-Making Skills • Video Case: A Bakery with a Conscience

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

Chapter Video: Cell Phones for Soliders

Young Manager Speaks Out: Megan Gates, Market Development Manager

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88 PART 2 | Planning

Learning Objectives

After studying Chapter 5, you will be

able to

LO1 Summarize the basic steps in any planning process.

LO2 Discuss how strategic planning should be integrated with tactical and operational planning.

LO3 Describe the strategic management process and the importance of SWOT analysis in strategy formulation.

LO4 Analyze how companies can achieve competitive advantage through business strategy.

LO5 Identify the keys to effective strategy implementation.

LO6 Explain how to make effective decisions as a manager.

LO7 Give examples of some individual barriers that affect rational decision making.

LO8 Summarize principles for group decision making.

5 Planning and Decision Making chapter

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CHAPTER 5 | Planning and Decision Making 89

S

or not managers are directly involved in strategic planning for

their firms, they make key decisions that contribute to the suc-

cessful implementation of that strategy. The chapter explores

the types of decisions managers face, the ways they are made,

and the ways they should be made.

enior executives at Royal Dutch Shell (the world’s

second largest oil company) have decided that

China is their number one strategic business priority.

In 2010 China passed the United States to become the top energy—

consuming country in the world, and over the next 20 years China

is expected to “account for almost half of the world’s growth in oil

consumption.” To gain access to this massive market, Shell is part-

nering with PetroChina, China’s largest oil company, in a $1.3 billion

joint venture at the Changbei gas field. The gas field, managed by

Shell, produces over 3 billion cubic meters of gas annually. What

does PetroChina gain? Knowledge. The Chinese want to learn

Shell’s techniques and methods for tapping “unconventional gas

and oil resources, such as shale gas, that require new technolo-

gies to extract.” Similarly, Shell wants more than just access to the

Chinese natural gas and oil markets: senior executives hope that

the Changbei joint venture will help them “gain influence over the

flow of all global resources destined for China, from the Middle East

to Australia.” However, every strategic plan has risks. Shell’s foray

into China may one day backfire if PetroChina, after learning many

of Shell’s extraction techniques and methods, decides that it does

not need a “partner” as much as it once thought. 1

It’s almost impossible to imagine Royal Dutch Shell—or any

organization—meeting significant challenges without develop-

ing a plan beforehand. Planning is a formal expression of man-

agerial intent. It describes what managers decide to do and how

they will do it. It provides the framework, focus, and direction

required for a meaningful effort. Without planning, any improve-

ments in an organization’s innovation, speed, quality, service,

and cost will be accidental, if they occur at all.

“Manage your destiny, or someone else will.” — Jack Welch , former CEO, General Electric

● View of a Shell gas station in Chongqing, China. In an effort to expand

its oil network in the country, Royal Dutch Shell is planning on building

approximately 100 gas stations in Shaanxi province with its Chinese

partners.

This chapter examines the most important concepts and

processes involved in planning and strategic management. By

learning these concepts and reviewing the steps outlined, you

will be on your way to understanding the current approaches

to strategically managing today’s organizations. Also, whether

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90 PART 2 | Planning

LO1 Summarize the basic steps in any planning process

1 |  THE PLANNING PROCESS

Planning is the conscious, systematic process of making decisions about goals and activities that an individual, group, work unit, or

organization will pursue in the future. Planning is not an informal

or haphazard response to a crisis; it is a purposeful effort that is

directed and controlled by managers and often draws on the knowl-

edge and experience of employees at all levels. Exhibit 5.1 shows

the steps in this process. Notice that planning moves in a cycle. The outcomes of plans are evaluated and, if necessary, revised.

Planning gives individuals and work units a clear map to

follow in their future activities yet is flexible enough to allow

for unique circumstances and changing conditions. We now

describe the basic planning process in more detail. Later in this

chapter, we will discuss how managerial decisions and plans fit

into the larger purposes of the organization—its ultimate strat-

egy, mission, vision, and goals.

Step 1: Analyze the Situation Planning begins with a situational analysis . Within their time and resource constraints, planners should gather, interpret, and summa-

rize all information relevant to the planning issue in question. They

study past events, examine current conditions, and try to forecast

future trends. The analysis focuses on the internal forces at work

in the organization or work unit and, consistent with the open-

systems approach (see Chapter 3), examines influences from the

external environment. The outcome of this step is the identification

and diagnosis of planning assumptions, issues, and problems.

A thorough situational analysis will provide information

about the planning decisions you need to make. For example,

if you are a manager in a magazine company considering the

launch of a sports publication for the teen market, your analysis

will include such factors as the number of teens who subscribe

to magazines, the appeal of the teen market to advertisers, your

firm’s ability to serve this market effectively, current economic

conditions, the level of teen interest in sports, and any sports

magazines already serving this market and their current sales.

Such an analysis will help you decide whether to proceed with

the next step in your magazine launch.

Step 2: Generate Alternative Goals and Plans Based on the findings from situational analysis, the planning

process should generate alternative goals that may be pursued

and alternative plans for achieving those goals. This step should

stress creativity and encourage managers and employees to think

broadly. Once a range of alternatives has been developed, their

merits and feasibility will be evaluated. Continuing with our

Exhibit 5.1 Formal planning steps

Step 1: Situational analysis

Step 2: Alternative goals and plans

Step 3: Goal and plan evaluation

Step 4: Goal and plan selection

Step 5: Implementation

Step 6: Monitor and control

magazine publishing example, the alternatives you might want to

consider could include whether the magazine should be targeted at

young men, young women, or both groups, and whether it should

be sold mainly online, through subscriptions, or on newsstands.

Goals are the targets or ends the manager wants to reach. To be effective, goals should have certain qualities, which are easy

to remember with the acronym SMART:

• Specific —When goals are precise, employees know what they need to do to accomplish them.

• Measurable —As much as pos- sible, the goal should quantify the desired results, so that there is no doubt whether it has been achieved.

• Attainable (but challenging) — Employees need to recognize that they can attain their goals, so they won’t become discouraged. However, they also should feel challenged to work hard and be creative.

• Relevant —Each goal should contribute to the organization’s over- all mission (discussed later in this chapter) and be consistent with its values, including ethical standards.

• Time-bound —Effective goals specify a target date for completion.

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wouldn’t be profitable enough to

justify the launch. Perhaps you

could improve profits with an

online edition supplemented by

podcasts.

Step 4: Select Goals and Plans Once managers have assessed the goals and plans, they select

the most appropriate and feasible alternative. The evaluation

process identifies the priorities and trade-offs among the goals

General Electric’s goal of being first or second in all its

markets is a well-known example of a goal that is specific,

measurable, and challenging. SMART goals such as these not

only point employees in the direction they should be going

but also foster acceptance by those who are charged with

achieving them. In other words, they both direct and motivate

employees.

Plans are the actions or means the manager intends to use to achieve goals. In this chapter, we will talk about three plans

commonly used by organizations (see Exhibit 5.2 ). At a mini-

mum, planning should outline alternative actions that may lead

to the attainment of each goal, the resources required to reach

the goal, and the obstacles that may develop. IBM has goals to

increase its profits, and the fastest-growing area of growth is in

software. To meet profit goals, the software unit acquires exist-

ing software companies that have high- potential products but

lack the means to promote them aggressively enough. IBM’s

software group plans how its gigantic sales force will sell the

new products. Those plans include training the salespeople in

what the new software does and how it can help IBM’s clients.

To improve the effectiveness of the sales force, the software

group planned a selling system for categorizing and keeping

track of each salesperson’s leads. 2

Step 3: Evaluate Goals and Plans Next managers evaluate the advantages, disadvantages, and

potential effects of each alternative goal and plan. They must

prioritize the goals and even eliminate some of them. Also,

managers consider how well alternative plans meet high-pri-

ority goals, considering the cost of each initiative and the

likely investment return. In our magazine publishing example,

your evaluation might determine that newsstand sales alone

Exhibit 5.2 Three common plans used by organizations

e.g., British Petroleum’s repeated attempts to stop the oil spill in the Gulf of Mexico in 2010.

Specifies actions when initial plans fail or events

in the external environment create

sudden change.

Is designed to accomplish an

enduring set of goals.

Focuses on achieving non-repeating goals.

e.g., GM’s recent decision to recall 7 million

vehicles to fix multiple problems.

e.g., Zappo’s goal to “Wow!” customers by

delivering over-the-top customer service.

Single-use plan

Standing plan

Contingency plan

Sources: C. Isidore, “GM Recalls Reach Nearly 7 Million,” CNN Money (online), April 1, 2014, http://money.cnn.com ; B. Glassman, “What Zappos Taught Us About Creating The Ultimate Client Experience,” Forbes (online), May 13, 2013, www.forbes.com ; “BP Oil Spill Timeline,” The Guardian (online), July 22, 2010, www.theguardian.com .

LISTEN & LEARN ONLINE

YOUNG MANAGERS

Speak Out! “Be true to yourself. I’ve found when I waiver from my own thoughts and beliefs, that is when I find myself in situations that I’m not comfortable with and don’t come naturally to me.”

—Sheryl Freeman, Program Manager

situational analysis a process planners use, within time and resource constraints, to gather, interpret, and summarize all information relevant to the planning issue under consideration

goal a target or end that management desires to reach

plans the actions or means managers intend to use to achieve organizational goals

91

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92 PART 2 | Planning

Business’s managers were doing—move beyond their fear of change

to find new opportunities in challenging times. Hull counseled the

owner of a real estate investment company to set aside his fears

about the real estate downturn, reevaluate his data on the prospects

for converting a warehouse into a restaurant, and go ahead with

plans for what was in fact a well-researched, practical idea. 3

Step 5: Implement the Goals and Plans Once managers have selected the goals and plans, they must

implement them. Proper implementation is key to achieving

goals. Managers and employees must understand the plan,

have the resources to implement it, and be motivated to do so.

Including employees in the previous steps of the planning pro-

cess paves the way for the implementation phase. Employees

usually are better informed, more committed, and more highly

motivated when a goal or plan is one that they helped develop.

Finally, linking the plan to other systems in the organization,

particularly the budget and reward systems, helps ensure its

successful implementation. If the manager does not have or cannot

find the financial resources to execute the plan, the plan is proba-

bly doomed. Similarly, linking goal achievement to the organiza-

tion’s reward system, such as bonuses or promotions, encourages

employees to achieve goals and to implement plans properly.

Wells Fargo’s top management saw the importance of link-

ing its employees’ pay to a new strategy. Ex-Chairman of the

Board Dick Kovacevich saw that one of the nation’s largest

banks could stay competitive by excelling at “cross-selling,”

that is, encouraging the bank’s existing customers to use more

of its financial services. Bank customers typically go to differ-

ent institutions for different services, but Wells Fargo beat the

odds by getting employees at all levels to focus on customer

needs rather than product lines. Tellers and branch managers

receive training aimed at this goal, and pay systems reward

employees for cross-selling. As a result, Wells Fargo customers

use an average of 5.7 of the bank’s products, roughly double

the average for the industry. Selling to existing customers is

much more profitable than winning new ones, so this strategy

might seem obvious. Perhaps it is, but Wells Fargo board mem-

ber Robert Joss says, “It’s simple in concept but very hard in

execution,” adding that this successful implementation

reflected Kovacevich’s “great capacity to motivate people.” 4

This strategy has helped Wells Fargo to become one of the

world’s largest banks (by market capitalization). 5

and plans. For example, if

your plan is to launch a num-

ber of new publications and you’re trying to choose among

them, you might weigh the different up-front investment each

requires, the size of each market, and which one fits best with

your existing product line or company image. Experienced

judgment plays an important role in this process. As you will

discover later in the chapter, however, relying on judgment

alone may not be the best way to proceed.

Typically a formal planning process leads to a written set of

goals and plans that are appropriate and feasible for a particu-

lar set of circumstances. In some organizations, the alternative

generation, evaluation, and selection steps generate planning

scenarios . A different contingency plan is attached to each scenario. The manager pursues the goals and implements the

plans associated with the most likely scenario. However, the

manager should also be prepared to switch to another set of

plans if the situation changes and another scenario becomes

relevant. This approach helps the firm anticipate and manage

crises and allows greater flexibility and responsiveness.

Looking back to the chapter opening example, Shell managers

undoubtedly developed several contingency plans for each scenario

related to gaining access to Chinese oil and natural gas markets.

A pioneer of scenario planning, Shell needed to have alternative

plans ready in case PetroChina refused to work as its partner.

If a company hasn’t already considered possible scenarios, manag-

ers must be prepared to restart the planning process when an unex-

pected change brings disappointing results. This flexible approach

to planning can help a company survive and even thrive in a tur-

bulent environment. For example, when the economy recently

took a downturn, major clients stopped calling on Cor Business, a

management coaching firm, for help in developing their managers.

Jeffrey Hull and the other partners of Cor Business realized their

firm’s survival required a new plan for bringing in business.

The partners brainstormed ideas for a new business plan.

Looking over the prior year’s results, they noticed that most of

Cor Business’s growth that year had come from small businesses,

even though the partners had been directing most of their energy

toward large companies like MasterCard and AT&T. As a matter

of fact, as the economy had slowed, more and more nervous small

business owners had been looking for help from their firm.

Hull and the other partners drew up a new plan in which they

would focus on serving small clients, helping them do what Cor

scenario a narrative that describes a particular set of future conditions

“Plans are only good intentions unless they immediately degenerate into hard work.”

— Peter Drucker

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CHAPTER 5 | Planning and Decision Making 93

efficiency (a high ratio of out-

puts to inputs). Typical strategic

goals include growing, increas-

ing market share, improving

profitability, boosting return on

investment, fostering quantity

and quality of outputs, increas-

ing productivity, improving

customer service, and contrib-

uting to society. A strategy is a pattern of

actions and resource allocations

designed to achieve the orga-

nization’s goals. An effective

strategy provides a basis for

answering five broad questions

about how the organization will

meet its objectives:

1. Where will we be active?

2. How will we get there (e.g., by increasing sales or acquiring another company)?

3. How will we win in the marketplace (e.g., by keeping prices low or offering the best service)?

4. How fast will we move, and in what sequence will we make changes?

5. How will we obtain financial returns (low costs or premium prices)? 6

Later in this chapter we discuss how managers try to craft a

strategy by matching the organization’s skills and resources to

the opportunities found in the external environment.

Step 6: Monitor and Control Performance Although it is sometimes ignored, the sixth step

in the formal planning process—

monitoring and controlling—is

essential. Without it, you would

never know whether your plan

is succeeding. As we mentioned

earlier, planning works in a

cycle. Managers must contin-

ually monitor the actual per-

formance of their work units

against the unit’s goals and

plans. They also need to develop

control systems to measure that

performance and allow them

to take corrective action when

plans are implemented improp-

erly or the situation changes. In

our magazine publishing exam-

ple, newsstand and subscription

sales reports let you know how

well your new magazine launch

is going. If subscription sales

are below expectations, you may need to revise your marketing

plan. We will discuss control systems in greater detail later.

2 |  LEVELS OF PLANNING

Planning is used by managers at all four levels described in

Chapter 1: top-level ( strategic managers), middle-level ( tac- tical managers), frontline ( operational managers), and team leaders. However, the scope and activities of the planning pro-

cess tend to differ at each level.

2.1 |  Strategic Planning Sets a Long-Term Direction

Strategic planning involves making decisions about the orga- nization’s long-term goals and strategies. Strategic plans have

a strong external orientation and cover major portions of the

organization. Senior executives are responsible for the devel-

opment and execution of the strategic plan, although they

usually do not formulate or implement the entire plan personally. Strategic goals are major targets or end results that relate to

the long-term survival, value, and growth of the organization.

Strategic managers—top-level managers—usually establish

goals aimed at effectiveness (providing appropriate outputs) and

● Wells Fargo rolled out a plan that links employee pay to the practice of cross-

selling; encouraging the bank’s existing customers to use more of its financial

services. Selling to existing customers is more profitable than winning new ones.

Use a study strategy for exams Have you ever had to take two or three exams on the same day or within a day of each other? A good study strategy will help in these situations. Here is a sample strategy you might consider trying. One week before the next exam, make it a point to have finished reading and outlining the chapters, making vocabulary flashcards, reviewing the online materials, and completing anything else you will need to know for the upcoming exams. This should leave you plenty of time to review the study materi- als and those of your other courses before the exams hit.

study tip 5

strategic planning a set of procedures for making decisions about the organization’s long-term goals and strategies

strategic goals major targets or end results relating to the organization’s long-term survival, value, and growth

strategy a pattern of actions and resource allocations designed to achieve the organization’s goals

LO2 Discuss how strategic planning should be integrated with tactical and operational planning

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94 PART 2 | Planning

managers usually focus on routine tasks such as production

runs, delivery schedules, and human resource requirements.

The formal planning model is hierarchical, with top-level

strategies flowing down through the levels of the organization

into more specific goals and plans and an ever-more-limited

timetable. But in today’s complex organizations, planning

is often more dynamic and flexible. Managers throughout an

organization may be involved in developing the strategic plan

and contributing critical elements. Also, in practice, lower-level

managers may make decisions that shape strategy, whether or

not top executives realize it.

When Intel’s former CEO and current senior adviser Andy

Grove suggested that the company exit the computer memory

business, Intel was directing about one-third of its research dol-

lars to memory-related projects. Yet on a practical level, the

company had already been exiting the business; only 4 percent

of its total sales were for computer memory products. Why was

this occurring, if it wasn’t a defined strategy? Finance execu-

tives had directed manufacturing managers to set up factories

in a way that would generate the biggest margins (revenues

minus costs) per square inch of microchips produced. As com-

puter memory became a money-losing commodity, manufac-

turing made fewer of those products. So when Intel announced

it would get out of the memory business, its strategy was catch-

ing up with its operational planning, which had been driven by

tactical plans. 7 The lesson for top managers is to make sure

they are communicating strategy to all levels of the organiza-

tion and paying attention to what is happening at all levels in

the organization.

2.3 |  All Levels of Planning Should Be Aligned

To be fully effective, the organization’s strategic, tactical,

and operational goals and plans must be aligned —that is, they must be consistent, mutually supportive, and focused on

achieving the common purpose and direction. Whole Foods

Market, for example, links its tactical and operational plan-

ning directly to its strategic planning. The strategic goal of

Whole Foods is “to sell the highest-quality products that

also offer high value for our customers.” Its operational

goals focus on ingredients, freshness, taste, nutritional value,

safety, and appearance that meet or exceed its customers’

expectations, including guaranteeing product satisfaction.

2.2 |  Tactical and Operational Planning Support the Strategy

The organization’s strategic

goals and plans serve as the

foundation for planning by

middle-level and frontline

managers. Exhibit  5.3 shows

that as goals and plans move

from the strategic level to the

tactical level and then to the operational level, they become

more specific and involve shorter time periods. A strategic plan

typically has a time horizon of three to seven years, but some-

times it spans decades, as with the successful plan to land a

probe on Titan, Saturn’s moon. Tactical plans may have a time

horizon of a year or two, and operational plans may cover sev-

eral months.

Tactical planning translates broad strategic goals and plans into specific goals and plans relevant to a particular portion of

the organization, often a functional area such as marketing or

human resources. Tactical plans focus on the major actions a

unit must take to fulfill its part of the strategic plan. Suppose

a strategy calls for the rollout of a new product line. The tac-

tical plan for the manufacturing unit might involve the design,

testing, and installation of the equipment needed to produce the

new line. Operational planning identifies the specific procedures and

processes required at lower levels of the organization. Frontline

tactical planning a set of procedures for translating broad strategic goals and plans into specific goals and plans that are relevant to a particular portion of the organization, such as a functional area like marketing

operational planning the process of identifying the specific procedures and processes required at lower levels of the organization

“Think small and act small, and we’ll get bigger. Think big and act big, and we’ll get smaller.”

— Herb Kelleher , Southwest Airlines

Level of planning

Who develops the plan?

How detailed is it?

How long is the plan?

Strategic Top-level managers

Low Long (3–7 years)

Tactical Middle managers Medium Medium (1–2 years)

Operational Frontline managers

High Short (< 1 year)

Exhibit 5.3 Three levels of planning in organizations

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● The Honda HA-420 HondaJet is the first general aviation aircraft developed

by the Honda Aircraft Company. The maiden flight took place in late 2010.

Having achieved FAA certification, the Honda Aircraft Company began

production in fall 2012. With the price tag around $3.65 million, Honda plans

to build 70 jets per year.

CHAPTER 5 | Planning and Decision Making 95

resources, analyze market

conditions, and ensure proper

implementation. The next sec-

tion discusses six steps that

managers can follow to con-

vert strategic ideas into suc-

cessful outcomes like higher

profits, new products, and

greater efficiencies.

3 |  STRATEGIC PLANNING PROCESS

Many organizations are changing the ways they develop and

execute their strategic plans. Traditionally, strategic planning

flowed from the top. Senior executives and specialized plan-

ning units developed goals and plans for the entire organization.

Tactical and operational managers

received those goals and plans,

and then simply prepared pro-

cedures and budgets for their

units. Today, however, senior

executives increasingly are

involving managers through-

out the organization in strat-

egy formulation. 9 In the current

highly competitive and rapidly

changing environment, exec-

utives need to look for ideas

from all levels of the organi-

zation. Although top managers

continue to furnish the organi-

zation’s strategic direction, or

“vision,” tactical and operational managers provide valuable

inputs to the organization’s strategic plan. These managers also

may formulate or change their own plans, making the organiza-

tion more flexible and responsive.

Because of this trend, a new term for the strategic plan-

ning process has emerged: strategic management. Strategic management involves managers from all parts of the organi- zation in the formulation and implementation of strategic goals

and strategies. It integrates strategic planning and management

into a single process. Strategic planning becomes an ongoing

activity in which all managers are encouraged to think strategi-

cally and focus on long-term, externally oriented issues as well

as short-term tactical and operational issues.

Tactical goals include store environments that are “inviting,

fun, unique, informal, comfortable, attractive, nurturing, and

educational” and safe and inviting work environments for its

employees.

At times, a temporary misalignment among the different levels of

planning can ultimately result in a positive outcome for a com-

pany. After founding the Honda Motor Company in 1948, Soichero

Honda wanted to gain a significant share of the motorcycle market

in the United States. Honda leaders decided that a larger motor-

cycle was their best bet to compete against American firms like

Harley-Davidson. However, Honda soon discovered that the larger

bikes were not an immediate hit with American bikers. Quite by

accident, the smaller 50 cc Super Cub caught the attention of a

new, young group of American motorcycle customers, who wanted

“inexpensive, convenient, individual transportation for short

trips around town.” This was in stark contrast to the existing cus-

tomer base of hardcore enthusiasts who preferred large, long-haul

motorcycles. This tactical move of first selling smaller motorcycles

helped Honda gain a foothold in the American market that even-

tually led to gaining market share of larger bikes. Essentially, these

adaptive tactics led to an adjustment in the company’s strategy for

the U.S. market. Honda went from practically no presence in 1959

to more than 60 percent of the current motorcycle market.

Flash forward to today. One of Honda Motor Company’s strate-

gies is to be on the “leading edge by creating new value and providing

products of the highest quality at a reasonable price, for worldwide

customer satisfaction.” Two examples of recent

innovations reinforce Honda’s commit-

ment to their company strategy.

First, Honda and General Motors

have agreed to work together

to develop next-generation fuel

cell system and hydrogen stor-

age technology for automobiles.

By 2020, the two companies

hope to be able to mass-produce

small, medium, and large fuel

cell–powered vehicles that will

offer a 400-mile driving range

and be refueled within three minutes. A second example is Honda’s

new HA-420 HondaJet, the “world’s most advanced light business

jet.” The HA-420’s turbo fan engines and jet production facility are

expected to be fully certified by the end of 2014. HondaJet, whose

manufacturing facilities are located in Greensboro, North Carolina,

plans to produce 80 to 90 jets per year. If he were alive today,

Soichero Honda would undoubtedly be proud of how his strategic

vision continues to make impact in the automobile, motorcycle,

power products, and now aviation industries. 8

Even the best strategies (like at Honda) have to rely on man-

agers’ ability to set tactical and operational priorities, allocate

strategic management a process that involves managers from all parts of the organization in the formulation and implementation of strategic goals and strategies

LO3 Describe the strategic management process and the importance of SWOT analysis in strategy formulation

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96 PART 2 | Planning

City of Redmond, Washington: “Together we create a community of good neighbors.”

Smithsonian: “Shaping the future by preserving our heritage, discover- ing new knowledge, and sharing our resources with the world.”

The most effective vision statements inspire organization members. They offer a worthwhile target for the entire orga- nization to work together to achieve. Often these statements are not strictly financial because financial targets alone may not motivate all organization members. Thus DuPont’s vision refers to being a “dynamic science company” that works toward a “better, safer and healthier life” for people. This vision inspires innovation aimed at making the world better—the type of work that is likely to motivate the scientists and other knowl- edge workers who can give the company an edge, ultimately improving DuPont’s competitive position.

Strategic goals evolve from the organization’s mission and vision. For example, in support of its vision that “creating a community of good neighbors” is best done “together” with all sectors of the community, the City of Redmond has established goals such as these:

• Enhance citizen engagement in city issues.

• Sustain the natural systems and beauty of the community.

• Sustain a safe community with a coherent, comprehensive, cohe- sive approach to safety.

• Maintain economic vitality.

Different city departments would contribute to various aspects of this vision in the way they carry out their operational plans with an emphasis on collaborating with local businesses and residents.

Lofty words in a vision and mission statement cannot be meaningful without strong leadership support. At McDonald’s,

As shown in Exhibit 5.4, the strategic management process has six steps: (1) establishment of mission, vision, and goals; (2) anal- ysis of external opportuni- ties and threats; (3) analysis

of internal strengths and weaknesses; (4) SWOT analysis and strategy formulation; (5) strategy implementation; and (6) strategic control. This planning and decision process resembles the planning framework discussed earlier.

First, Establish a Mission, Vision, and Goals The first step in strategic planning is establishing a mission, a vision, and goals for the organization. The mission is a clear and concise expression of the organization’s basic purpose. It describes what the organization does, whom it does it for, its basic good or service, and its values. Here are some mission statements from firms you will recognize:10

IDEO: “We create impact through design.”

Unilever: “To meet the everyday needs of people everywhere.”

Google: “To organize the world’s information and make it universally accessible and useful.”

The mission describes the organization as it currently oper- ates. The strategic vision points to the future; it provides a perspective on where the organization is headed and what it can become. Here are some actual vision statements:11

DuPont: “To be the world’s most dynamic science company, creating sustainable solutions essential to a better, safer and healthier life for people everywhere.”

mission an organization’s basic purpose and scope of operations

strategic vision the long- term direction and strategic intent of a company

Exhibit 5.4 The strategic management process

Strategy implementation

SWOT analysis and strategy formulation

Analysis of internal

strengths and weaknesses

Analysis of external

opportunities and threats

Strategic control

Establishment of mission, vision, and

goals

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CHAPTER 5 | Planning and Decision Making 97

whether the firm’s purposes and values are compatible with

your own.

Second, Analyze External Opportunities and Threats The mission and vision drive the second component of the stra-

tegic management process: analysis of the external environ-

ment. Successful strategic management depends on an accurate

and thorough evaluation of the competitive environment and

macroenvironment, described in Chapter 3.

As illustrated in Exhibit  5.5 , an environmental analysis

includes many elements.

the commitment of past and present CEOs has played a large

role in the success of the company’s strategy implementa-

tion. Several years ago, the company was floundering as it

lost sight of its commitment to quality, value, speed, and

convenience. Under the leadership of James Cantalupo, the

company created a customer-focused mission statement, “To

be our customers’ favorite place and way to eat.” In support

of this mission, McDonald’s is pursuing strategic goals such

as revamping restaurants for a better drive-through expe-

rience and improving the quality of the menu. When Jim

Skinner took the job of chief executive, he enthusiastically

backed the mission statement and its supporting Plan to Win,

not hesitating to share credit for the company’s continued

success. 12

Large firms generally pro-

vide public formal statements

of their missions, visions,

goals, and even values. The

concepts and information

within these statements should

be communicated to every-

one who has contact with the

organization. Strong leader-

ship provides statements of

vision and goals to clarify

the organization’s purpose

to key constituencies outside

the organization. Clear vision

and goals also help employ-

ees focus their talent, energy,

and commitment. When you

seek employment with a firm,

review the firm’s statements

of mission, vision, and goals;

they can help you determine

“Leadership is the capacity to translate vision into reality.” — Warren G. Bennis

Traditional Thinking Strategic decisions are based on intuition and past experiences.

Source: Adapted from D. Meinert, “Top Performers Boast Analytics over Intuition,” HRMagazine 56, no. 2 (February 2011), pp. 18–19.

The Best Managers Today Use analytics and data to gain insights and formulate strategic

plans.

Industry growth Growth rates for the entire industry and key market segments, and projected changes in patterns and determinants of growth.

Industry forces Threat of new industry entrants, threat of substitutes, economic power of buyers/customers, economic power of suppliers, and internal industry rivalry.

Competitor analysis Goals, strategies, strengths, and weaknesses of each major competitor.

Legal trends Legislation and regulatory activities and their effects on the industry.

Political activity The level of political activity undertaken by organizations and associations within the industry.

Social issues Current and potential social issues and their effects on the industry.

Social interest groups Social interest groups: consumer, environmental, and other activist groups that try to influence the industry.

Labor issues Key labor needs, shortages, opportunities, and problems confronting the industry.

Macro economic conditions Economic factors that affect supply, demand, growth, competition, and profitability within the industry.

Technological factors Scientific or technical methods that affect the industry, particularly recent and potential innovations.

Exhibit 5.5 Elements included in an environmental analysis

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98 PART 2 | Planning

and customers demand low prices. However, some companies

see strategic opportunities in renewable power. German con-

glomerate Schott has developed a solar thermal technology in

which sunlight heats oil in metal tubes enclosed in coated glass;

the heated oil makes steam, which powers a turbine and gen-

erates electricity. Solar thermal energy, although it now costs

more than fossil fuels, is more efficient than the solar panels

installed on some buildings, and it can store extra power to be

used on cloudy days. 15

Similarly, overflowing landfills are an

expensive challenge for many municipalities, but a growing

number are seeing an opportunity in the form of energy gener-

ation. As garbage decomposes, it produces methane gas, which

is used as a fuel to power generators. In East Brunswick, New

Jersey, for example, the Edgeboro landfill generates electricity

that powers the county’s wastewater treatment plant. 16

Third, Analyze Internal Strengths and Weaknesses As managers conduct an external analysis, they should also

assess the strengths and weaknesses of major functional areas

inside their organization. This internal resource analysis has

several components:

• Financial analysis —Examines financial strengths and weaknesses through financial statements such as a balance sheet and an income statement and compares trends to historical and industry figures.

• Human resources assessment —Examines strengths and weak- nesses of all levels of managers and employees and focuses on key human resources activities, including recruitment, selection, place- ment, training, labor (union) relationships, compensation, promo- tion, appraisal, quality of work life, and human resources planning.

• Marketing audit —Examines strengths and weaknesses of major marketing activities and identifies markets, key market segments, and the organization’s competitive position (market share) within key markets.

• Operations analysis —Examines the strengths and weaknesses of the organization’s manufacturing, production, or service delivery activities.

• Other internal resource analyses —Examine, as appropriate, the strengths and weaknesses of other organizational activities, such as research and development (product and process), management information systems, engineering, and purchasing.

Is your firm strong enough financially to invest in new

projects, and can your existing staff carry out its part of the plan?

Is your firm’s image compatible with its strategy, or will it have

to persuade key stakeholders that a change in direction makes

sense? This type of internal analysis provides an inventory of

the organization’s existing functions, skills, and resources as

well as its overall performance level. Many of your other busi-

ness courses will prepare you to conduct an internal analysis.

Resources and Core Capabilities Without question, stra- tegic planning has been strongly influenced in recent years by a

focus on internal resources. Resources are inputs to production

The analysis begins with an

examination of the industry.

Next organizational stakehold-

ers are examined. Stakeholders are groups and individuals

who affect and are affected by

achievement of the organiza-

tion’s mission, goals, and strat-

egies. They include buyers, suppliers, competitors, government

and regulatory agencies, unions and employee groups, the finan-

cial community, owners and shareholders, and trade associations.

The environmental analysis provides a map of these stakeholders

and the ways they influence the organization. 13

Collaborating with key stakeholders can help organizations

successfully develop and implement their strategic plan. At software

company Intuit (maker of Quickbooks and Quicken), President and

CEO Brad Smith launched strategy development by learning what

was on the minds of some key stakeholders. He visited with his

board of directors and investors and set up meetings with groups of

employees who work directly with Intuit’s customers.

Smith asked each group of stakeholders some key questions

related to strategic analysis: “What is Intuit’s biggest untapped

opportunity? What is the biggest risk facing Intuit that keeps you

up at night?” From the answers, Smith gained insights that helped

him establish priorities for Intuit’s strategy.

Smith learned that a sizable number of Intuit’s business cus-

tomers have international activities, so he determined that Intuit

would have to become a more global company. Its QuickBooks

financial software now handles multiple currencies for interna-

tional transactions. In response to the competitive threat of a new

release of financial software from Microsoft, Smith assembled man-

agers to craft a marketing strategy that would convince customers

to wait two more months for the next version of QuickBooks. That

campaign caused QuickBooks sales to jump despite of Microsoft’s

efforts. 14

The environmental analysis also should examine other

forces in the environment, such as economic conditions and

technological factors. One critical task in environmental anal-

ysis is forecasting future trends. As noted in Chapter 3, fore-

casting techniques range from simple judgment to complex

mathematical models that examine systematic relationships

among many variables. Because of biases and limits on human

thinking, even simple quantitative techniques can outperform

the intuitive assessments of experts.

Frequently the difference between an opportunity and a

threat depends on how a company positions itself strategically.

For example, some states have required that electric utilities get

a certain share of their power from renewable sources, such as

wind and solar energy, rather than from fossil fuels, including

coal, oil, and natural gas. This requirement poses an obvious

threat to utilities because the costs of fossil fuel energy are less,

stakeholders groups and individuals who affect and are affected by the achievement of the organization’s mission, goals, and strategies

resources inputs to a system that can enhance performance

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CHAPTER 5 | Planning and Decision Making 99

For the past five years, IBM has been developing its “Smarter

Planet” initiative, which focuses on the company’s core capabilities

in business analytics, e-commerce, and cloud computing. “Smarter

Planet” is a business platform that is aimed at helping “make the

world better through intelligent, connected systems.” Whether it’s

working to improve the efficiency of the Stockholm traffic system

or designing a smart electric grid for the island of Malta, IBM is

staying ahead of the competition by using its resources in ways that

create value while being unique and difficult to imitate. For exam-

ple, IBM deploys large cross-functional, cross-company teams that

have the right skills, knowledge, and experience to address com-

plex client problems. These teams can be formed, disbanded, and

reconfigured to meet the changing and diverse needs of clients.

IBM’s leaders are hoping that the “Smarter Planet” initiative will

make the world more intelligent and interconnected. 21

Benchmarking To assess and improve performance, some companies use benchmarking, the process of assessing how

well one company’s basic functions and skills compare with

those of another company or set of companies. The goal of

benchmarking is to thoroughly understand the “best practices”

of other firms and to undertake actions to achieve better perfor-

mance and lower costs. Benchmarking programs have helped

Ford, Corning, Hewlett-Packard, Xerox, and other companies

make great strides in eliminating inefficiencies and improving

competitiveness.

(recall systems theory) that can be accumulated over time to

enhance the performance of a firm. Resources can take many

forms, but they tend to fall into two broad categories:

1. Tangible assets such as real estate, production facilities, raw materials, and so on.

2. Intangible assets such as company reputation, culture, technical knowledge, and patents, as well as accumulated learning and experience.

The Walt Disney Company, for example, has developed its

strategic plan based on combinations of tangible assets (includ-

ing hotels and theme parks) and intangible assets (brand rec-

ognition, talented craftspeople, culture focused on customer

service). 17

Effective internal analysis provides a clearer understand-

ing of how a company can compete through its resources.

Resources are a source of competitive advantage only under all

of the following circumstances:

• The resources are instrumental for creating customer value —that is, they increase the benefits customers derive from a good or ser- vice relative to the costs they incur. 18 For example, Amazon’s pow- erful search technology, ability to track customer preferences and offer personalized recommendations, and quick product delivery are valuable resources.

• The resources are rare and not equally available to all competitors. At Roche, W.L. Gore, and BASF, patented formulas represent rare resources. Amazon similarly sought a patent for its one-click shop- ping technique. If competitors have equal access to a resource, it can be valuable but cannot provide a competitive advantage.

• The resources are difficult to imitate. Earlier in this chapter, we saw that Wells Fargo has competed with much larger banks by developing expertise in cross-selling. Unlike, say, free checking accounts, this intangible resource is difficult to imitate because the bank has to train and motivate employees at all levels to adopt customer-oriented thinking and collaborate across divisions. 19 As in this example, where success relies on leadership and collabo- ration practices, resources tend to be harder to imitate if they are complex, with many interdependent variables and no obvious links between behaviors and desired outcomes. 20

• The resources are well organized. For example, IBM, known pri- marily for computer hardware until it became more of a commodity than a source of competitive advantage, has organized its staff and systems to efficiently produce a consolidated technology product for its corporate clients—hardware, software, and service in one package. This spares its clients the cost of managing technology on their own.

When resources are valuable, rare, inimitable, and orga-

nized, they can be viewed as a company’s core capabilities.

Simply stated, a core capability is something a company does especially well relative to its competitors. Honda, for example,

has a core capability in small engine design and manufacturing,

and Federal Express has a core capability in logistics and cus-

tomer service. As in these examples, a core capability typically

refers to a set of skills or expertise in some activity, rather than

physical or financial assets.

● Imagine how skilled Coca-Cola’s global network of bottlers are to be able

to deliver their product worldwide and more efficiently than any of their

competitors. Shown here is a truck delivering Coke in India.

core capability a unique skill and/or knowledge an organization possesses that gives it an edge over competitors

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100 PART 2 | Planning

be lack of spare production capacity and the absence of reliable

suppliers. Opportunities and threats arise in the macroenvi-

ronment and competitive environment. Examples of opportu- nities are a new technology that could make the supply chain more efficient and a market niche that is currently underserved.

Threats might include the possibility that competitors will enter the underserved niche once it has been shown to be profitable.

SWOT analysis helps managers summarize the relevant,

important facts from their external and internal analyses. Based

on this summary, they can identify the primary and secondary

strategic issues their organization faces. The managers then

formulate a strategy that will build on the SWOT analysis to

take advantage of available opportunities by capitalizing on

the organization’s strengths, neutralizing its weaknesses, and

countering potential threats.

As an example, consider how SWOT analy-

sis might be conducted at Sony (see Exhibit 5.7 ).

The company’s size $72 billion in sales and

146,300 employees worldwide (in 2013), is an

obvious strength. Also, the firm sells more than

2,000 diversified products from headphones and

printers to movies and televisions. Sony has a

history of “hit products” such as the Walkman,

Trinitron television, Spider Man movie franchise,

the PlayStation 4 video console, Xperia smart-

phones and tablets, and VAIO personal comput-

ers. As for weaknesses, the company’s separate

divisions prefer to act independently and resist

change that might hurt their profitability. Several

Most college students have

probably eaten a fast-food meal

while driving between school

and work, or while taking a

break from studying. A recent

benchmarking study compared the overall service quality of sev-

eral popular fast-food restaurant chains in the United States, includ-

ing McDonald’s, Burger King, Wendy’s, Subway, Arby’s, and

Hardee’s. 22

As illustrated in Exhibit 5.6 , these six restaurant chains

were compared against one another and rank ordered on several

criteria, with the following results (listed with first being best):

There are many uses for benchmarking data. For example,

managers at McDonald’s may be pleased to learn their restau-

rant was ranked first in service response time, proximity to

customer’s home, and price, but not as high as some of its com-

petitors in the other important dimensions of overall service

quality. Customers like Subway for its cleanliness, employee

courtesy, and taste of food; however, the chain failed to make

the top three in terms of service response time and price. As a

result of such benchmarking, managers at Subway may look

for ways to serve customers faster and provide additional dis-

counts like the popular $5 “sub of the month” specials.

Benchmarking against competitors only helps a company per-

form as well as they do, but strategic management aims to surpass

those companies. Besides benchmarking against leading organi-

zations in other industries, companies may address this problem

by engaging in internal benchmarking. That approach involves

benchmarking internal operations and departments against one

another to disseminate the company’s best practices throughout

the organization and thereby gain a competitive advantage.

Fourth, Conduct a SWOT Analysis and Formulate Strategy Once managers have analyzed the external environment and

the organization’s internal resources, they have the information

needed for a SWOT analysis: an assessment of the organiza- tion’s strengths, weaknesses, opportunities, and threats. Strengths

and weaknesses refer to internal resources. An organization’s

strengths might include skilled management, positive cash flow, and well-known and highly regarded brands. Weaknesses might

Criteria Ranked 1st Place Ranked 2nd Place Ranked 3rd Place

Cleanliness Subway McDonald’s Wendy’s

Service response time McDonald’s Wendy’s Burger King

Employee courtesy Subway Arby’s McDonald’s

Healthful food Subway Wendy’s Arby’s

Taste of food Subway Wendy’s Arby’s

Competitive price McDonald’s Wendy’s Burger King

Proximity to customer McDonald’s Wendy’s Subway

Exhibit 5.6 Results of study comparing overall service quality of six fast-food restaurants

● Young adults eating at Subway.

SWOT analysis a comparison of strengths, weaknesses, opportunities, and threats that helps executives formulate strategy

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CHAPTER 5 | Planning and Decision Making 101

warehouse in London by a rioting

mob and a hacker attack that shut

down the PlayStation network. 23

Corporate Strategy A corporate strategy identifies the set of businesses, markets, or industries in which the organi-

zation competes and the distribution of resources among those

businesses. The four basic alternatives for a corporate strategy

range from very specialized to highly diverse:

1. Concentration —focusing on a single business competing in a single industry. Frequently companies pursue concentration strat- egies to gain entry into an industry when industry growth is good or when the company has a narrow range of competencies. C. F. Martin & Company pursues a concentration strategy by focusing on making the best possible guitars and guitar strings, a strategy that has enabled the family-owned business to operate success- fully for more than 150 years.

2. Vertical integration —expanding the organization’s domain into supply channels or to distributors, generally to eliminate uncertain- ties and reduce costs associated with suppliers or distributors. At one time, Henry Ford had fully integrated his company from the ore mines needed to make steel all the way to the showrooms where his cars were sold.

3. Related diversification —moving into new businesses related to the company’s original core business. Since its beginnings as a cartoon studio in the 1920s, Disney has expanded into a global firm known for its broadcast (ABC) and cable (ESPN) television networks, movies, books, TV shows, retail stores, theme parks, music, cruise lines, and more. Each of these businesses within the entertainment industry is related in terms of the products and services it pro- vides, and the customers it attracts. Related diversification applies

recent leaders have tried unsuccessfully to transform the com-

pany into one that is more adaptive and aligned with consumer

interests. Sony’s organizational culture has traditionally placed

more value on hardware than on content like songs and movies.

Beyond internal strengths and weaknesses, the firm’s macro-

environment presents several opportunities. The Internet age

has ushered in consumer demand for connectivity. To tap this

demand, Sony plans to connect all of its devices with all of

its content, including Sony’s 90 million PlayStation users, via

a new Sony entertainment network. This network will allow

a PlayStation user to download music or movies onto a Sony

Tablet or a soon-to-be launched smartphone. (Sony recently

announced that it would be entering the smartphone market in

the United States, where it is currently nonexistent.) Another

opportunity for Sony is to continue to offer financial services

like life and automobile insurance; surprisingly, this area has

been Sony’s most profitable business over the past nine years.

Sony faces many threats from its macroenvironment including

low-priced televisions from competitors Samsung and Vizio.

This is making it very difficult for Sony to compete profitably

in this product category that it once dominated.

Unpredictable natural disasters, like the tsunami and earth-

quake that rocked eastern Japan and floods in Thailand, recently

led to temporary closings of several of both Sony’s and its sup-

pliers’ plants. These supply chain disruptions contributed to a

net loss of $3.1 billion. Other unforeseen factors have hurt the

company’s profitability, including the burning of a CD and DVD

Exhibit 5.7 SWOT analysis at Sony

Internal resources Strengths

Internal resources

Weaknesses

External environment

Opportunities

External environment

Threats

Source: Adapted from B. Gruley and C. Edwards, “Sony Needs a Hit,” Bloomberg BusinessWeek (November 21–27, 2011), pp. 72–77.

corporate strategy the set of businesses, markets, or industries in which an organization competes and the distribution of resources among those entities

concentration a strategy employed for an organization that operates a single business and competes in a single industry

vertical integration the acquisition or development of new businesses that produce parts or components of the organization’s product

related diversification a strategy used to add new businesses that produce related products or are involved in related markets and activities

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102 PART 2 | Planning

• Stars —Businesses with high growth and a strong competitive position require heavy investment, but their strong position lets them generate the needed revenues.

• Cash cows —These low-growth businesses with a strong com- petitive position generate revenues in excess of their investment needs, so they fund other businesses.

• Dogs —These low-growth, weak-competitive-position businesses should be divested after their remaining revenues are realized.

The BCG matrix is not a substitute for management judg-

ment, creativity, insight, or leadership. But along with other

techniques, it can help managers evaluate their strategy alter-

natives. 24

This type of thinking has recently helped Abbott

Laboratories succeed. When Miles White took over as Abbott’s

CEO, he began restructuring the company’s portfolio to empha-

size growth. He sold off much of the company’s diagnostics

business, which was earning low returns, and purchased busi-

nesses with higher risks but potential to be stars. White says his

goal is a portfolio of businesses that are innovative, growing,

and delivering high returns. 25

4 |  BUSINESS STRATEGY After the top management team and board make the corpo-

rate strategic decisions, executives must determine how to

compete in each business area. Business strategy defines the major actions by which an organization builds and strength-

ens its competitive position in the marketplace. A competitive

strengths in one business to gain advantage in another. Success requires adequate management and other resources for operating more than one business.

4. Unrelated diversification — expansion into unrelated busi- nesses, typically to minimize risks due to market fluctua- tions in one industry. General Electric has diversified from its original base in electrical and home appliance products to such wide-ranging industries as health, finance, insurance, truck and air transportation, and even energy, including oil, gas, wind, and electric.

The diversified businesses of an organization are sometimes

called its business portfolio. A popular technique for analyzing a corporation’s strategy for managing its portfolio is the BCG

matrix, developed by the Boston Consulting Group and shown

in Exhibit  5.8 . Each business in the corporation is plotted on

the matrix on the basis of the growth rate of its market and the

relative strength of its competitive position in that market (mar-

ket share). The business is represented by a circle whose size

depends on the business’s contribution to corporate revenues.

There are four categories of businesses in the BCG matrix:

• Question marks —These high-growth, weak-competitive-position businesses require substantial investment to improve their posi- tion, or else they should be divested.

● Kristen Bell and Idina Menzel, voice talent of Anna and Elsa in the Walt

Disney Animation Studios film “Frozen,” pose with Mattel’s feature fashion

dolls during the D23 Expo.

Exhibit 5.8 The BCG matrix

Market

Growth

High

Low

Strong Weak

Relative Competitive Position

Stars

Dogs

Question marks

Cash cows

unrelated diversification a strategy used to add new businesses that produce unrelated products or are involved in unrelated markets and activities

business strategy the major actions by which an organization competes in a particular industry or market

low-cost strategy a strategy an organization uses to build competitive advantage by being efficient and offering a standard, no-frills product

LO4 Analyze how companies can achieve competitive advantage through business strategy

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CHAPTER 5 | Planning and Decision Making 103

offering passengers chicken salad instead of peanuts on some

flights, the chief executive asked whether chicken salad would

help Southwest be “ the low-fare airline.” 27 Companies that suc- ceed with a low-cost strategy often are large and take advantage

of economies of scale—revductions in unit cost from large pur-

chases or manufacturing runs—in production or distribution.

Their scale may allow them to buy and sell goods and services

advantage typically results from business strategies based on

either keeping costs low or offering products that are unique

and highly valued. 26

Businesses using a low-cost strategy try to be efficient and offer a standard, no-frills product. Southwest Airlines’ low-cost

strategy is simply stated: “to be the low-fare airline.” That strat- egy helps with operational planning; when someone suggested

M otorcycles make noise, right? They did until California-based Zero Motorcycles rolled out its new electric models, includ- ing one designed to revolutionize urban commuting. The Zero S is different from the other motorcycles you see on the road in the morning. It is lightweight at 225 pounds and accelerates quickly, with the high performance associated with larger motorcycles. But it has just a barely audible hum that is lost in the background noise of commuter traffic. There’s more to this innovative electric motorcycle. Able to reach speeds of 90 miles per hour, the 2014 models will include a power pack that is designed to last for over 300,000 miles and is capable of exceeding 130 miles on a single battery charge. For many con- sumers, these two attributes will make the motorcycle an attractive transportation option. The Zero’s low maintenance costs and green appeal makes it an attractive option for the 20 police departments that have purchased it for their patrol officers.

Since the Zero S relies on electricity for power instead of fossil fuels, its emissions are—you guessed it—zero. “Although there is some pollution associated with the production of electricity, a Zero motor- cycle produces less than an eighth of the CO 2 pollution per mile [produced by a gasoline-powered] motorcycle,” says the company. In addition, the Zero S has a nontoxic lithium ion battery, and most of the motorcycle body is completely recy- clable. The power pack is approved for disposal in landfills and recharges in less than four hours when plugged into a stan- dard household outlet, which means that owners can easily recharge overnight or while at work, if necessary. All of these

features are vastly different from those of traditional gasoline-powered motorcycles.

How did Zero Motorcycles differentiate itself from its competitors? Through inno- vative management thinking. Founder Neal Saiki is also an inventor. He believes in his vision of an environmentally friendly, eco- nomical motorcycle. With a base price of $13,000—with no costs for fuel—the Zero S is about as inexpensive as transportation can get, except for a bicycle or walking shoes. In addition, the Zero S qualifies for a 10 percent federal plug-in tax credit, a sales tax deduction, and other incentives offered by different state governments. All of these features are attractive, but Saiki had to convince investors to back the Zero S venture. Saiki recalls: “My wife and I put all our savings into the company.”

Yet Saiki didn’t give up. Instead he pressed ahead with what he knew was a good prod- uct that was different from anything else on the market. “Our goal from the beginning

was to engineer a high- performance electric urban street motorcycle that would change the face of the industry. The Zero S is a rev- olutionary motorcycle that is designed to tackle any city street, hill, or obstacle,” Saiki says. “The innovation behind the Zero S is a high-performance motorcycle that also hap- pens to be fully electric and green. The fact that it’s electric means not having to get gas and reduced maintenance.” That’s some- thing different.

Zero Motorcycles Leads the Pack

• The differentiation strategy of Zero S has its advantages. But what might be some of the disadvantages of being a “first mover” in this market?

• How does Neal Saiki’s role as inventor and innovator affect the company’s business strategy? How might the com- pany’s strategy be different if its found- er’s main area of expertise was finance or advertising instead?

SOURCES: Company website, www.zeromotorcycles .com ; S. McKinney, “Why Does Zero Motorcycles’ Sales Strategy Include Going After Police

Departments?” Forbes (online), March 17, 2014, www.forbes.com ; New ‘Life of Motorcycle’ Power Pack,” Marketing Weekly News (November 26, 2011), p. 1612; J. Welsh, “Motorcycle Review: The Zero S,” The Wall Street Journal, May 25, 2009, http:// online.wsj.com ; J.  Madslien, “Electric Bikemaker Woos Commuters,” BBC News, May 12, 2009, http://news.bbc.co.uk ; “Zero Motorcycles Zero S First Look,” Motorcycle USA, April 7, 2009, www .motorcycle-usa.com ; A. Schwartz, “The Zero S All-Electric Street Motorcycle Goes to Market,” Fast Company, April 7, 2009, www.fastcompany .com ; C.  Squatriglia, “Zero Takes Electric Motorcycles to the Street,” Wired, April 7, 2009, www.wired.com .

Discussion Questions

A photo of Zero Motorcycles’ electric motorcycle,

the Zero S . The 2012 model can reach speeds

of 88 miles per hour and travel approximately

100 miles on a single battery charge.

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104 PART 2 | Planning

Patents and scientific expertise can keep an organization in the

lead for years.

Being the first to develop or adopt a new technology does

not always lead to immediate advantage and high profits,

however. Technology leadership imposes high costs and risks

that followers do not have to bear. Interestingly, technology

followership also can be used to support both low-cost and dif-

ferentiation strategies. If the follower learns from the leader’s

experience, it can avoid the costs and risks of technology lead-

ership, thereby establishing a low-cost position. The makers of

generic drugs use this type of strategy.

Followership can also support differentiation. By learning

from the leader, the follower can adapt the products or delivery

systems to fit buyers’ needs more closely. Microsoft is famous

for having built a successful company on this type of follower-

ship. The company’s original operating system, MS-DOS, was

purchased for $50,000 from Seattle Computer Works to com-

pete with the industry’s first desktop operating system, CP/M,

sold by Digital Research. Marketing strength, combined with

incremental product innovations, enabled Microsoft to take the

lead in software categories (for example, Excel’s spreadsheet

program beat Lotus 1-2-3, which had taken share from the

first mover, VisiCalc). 31

Microsoft products, including music

players, video game consoles, and web browsers, have been

launched after technology leaders paved the way.

Whatever strategy managers adopt, the most effective strat- egy is one that competitors are unwilling or unable to imitate. If the organization’s strategic plan is one that could easily be

adopted by industry competitors, it may not be sufficiently dis-

tinctive or, in the long run, contribute significantly to the orga-

nization’s competitiveness. For example, in some industries,

such as computers, technology advances so fast that the first

company to provide a new product is quickly challenged by

later entrants offering superior products. 32

Functional Strategy The final step in strategy formula- tion is to establish the major functional strategies. Functional strategies are implemented by each functional area of the organization to support the business strategy. Major functional

at a lower price, which leads

to higher market share, vol-

ume, and ultimately profits.

To succeed, an organization

using this strategy generally

must be the cost leader in its

industry or market segment.

However, even a cost leader

must offer a product that is

acceptable to customers.

With a differentiation strategy , a company tries to be

unique in its industry or market segment along dimensions that

customers value. This unique or differentiated position within

the industry often is based on high product quality, excellent

marketing and distribution, or superior service. The commit-

ment of Zappos (owned by Amazon) to providing customers

with a “wow” experience is an excellent example of a differen-

tiation strategy. While other online retailers often skimp on this

part of their businesses, Zappos CEO Tony Hsieh is passion-

ate about using every opportunity to connect with and relate to

customers. Customer service representatives are encouraged to

stay on the line as long as it takes to make the customer happy.

Representatives often delight customers with free shipping (both

ways), discounts, flowers, and thank-you notes. To date, the

longest customer service call lasted approximately six hours. 28

Outstanding customer service is a source of sustainable competi-

tive advantage for Zappos. Innovation is another ingredient of many differentiation

strategies. In the market for toilet paper, Scott Paper Company

once determined that it could not afford to compete for institu-

tional sales based on price. Instead the company began offer-

ing institutions a free dispenser that would hold larger rolls of

paper, reducing the labor cost of replacing empty rolls. Scott

initially was the only company selling the larger rolls, so it

gained market share while competitors scrambled to catch up. 29

New technology can support either of these strategies.

It can give the business a cost advantage through pioneering

lower-cost product designs and low-cost ways to perform

needed operations, or it can support differentiation with unique

goods or services that increase buyer value and thus command

premium prices.

Industry leaders such as Xerox, 3M, Google, PlayStation

and Apple built and now maintain their competitive positions

through early development and application of new technolo-

gies. However, technology leadership also imposes costs and

risks: 30

For example, being a “first mover”—first to market with

a new technology—may allow a company to charge a pre-

mium price because it faces no competition. Higher prices and

greater profits can defray the costs of developing new technol-

ogies. This one-time advantage of being the technology leader

can be turned into a sustainable advantage if competitors can-

not duplicate the technology and the organization can keep

building on the lead quickly enough to outpace competitors.

differentiation strategy a strategy an organization uses to build competitive advantage by being unique in its industry or market segment along one or more dimensions

functional strategies strategies implemented by each functional area of the organization to support the organization’s business strategy

Disadvantages of Leading

Greater risks

Cost of technology development

Costs of market devel- opment and customer education

Infrastructure costs

Costs of learning and eliminating defects

Possible cannibalization of existing products

Advantages of Leading

First-mover advantage

Little or no competition

Greater efficiency

Higher profit margins

Sustainable advantage

Reputation for innovation

Establishment of entry barriers

Occupation of best market niches

Opportunities to learn

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● The GE Honda HF120 engine program was launched in 2006 and was

selected to power Honda Aircraft Company’s advanced light jet, the HondaJet.

CHAPTER 5 | Planning and Decision Making 105

corporations and strategy consultants have been paying more

attention to implementation. They realize that clever techniques

and a good plan do not guarantee success.

Organizations are adopting a more comprehensive view of

implementation. The organization structure, tech-

nology, human resources, employee reward

systems, information systems, organization

culture, and leadership style must all sup-

port the strategy. Just as an organization’s

strategy must be matched to the external

environment, so must it also fit the multiple

factors through which it is implemented. The

remainder of this section discusses these fac-

tors and the ways they can be used to

implement strategy.

Many organizations also

are involving more employ-

ees in implementing strate-

gies. Managers at all levels

are formulating strategy and

identifying and executing ways

to implement it. Senior execu-

tives still may oversee the imple-

mentation process but are placing

much greater responsibility and

authority in the hands of others.

In general, strategy imple-

mentation involves four related

steps:

1. Define strategic tasks. Articulate in simple language what a partic- ular business must do to create or sustain a competitive advantage. Define strategic tasks to help employees understand how they contribute to the organization.

2. Assess organization capabilities. Evaluate the organization’s ability to implement the strategic tasks. Typically a task force interviews employees and managers to identify issues that help or hinder effective implementation, and then it summarizes the results for top management.

3. Develop an implementation agenda. Management decides how it will change its own activities and procedures, how critical interdependencies will be managed, what skills and individ- uals are needed in key roles, and what structures, measures, information, and rewards might ultimately support the needed behavior.

4. Create an implementation plan. The top management team, employee task force, and others develop the implementation plan. The top management team then monitors progress. The employee task force provides feedback about how others in the organization are responding to the changes.

This process, though straightforward, does not always go

smoothly. 36

To prevent problems, top managers need to be

actively involved, developing a statement of strategy and pri-

orities that employees will accept. Communication is essential,

including plenty of information shared by top management

areas include production, human resources, marketing, research

and development, finance, and distribution. At Wells Fargo,

the strategy to grow through cross-selling requires functional

strategies for advertising, training employees to cross-sell, and

developing systems for sharing information across

department boundaries. 33

Functional strategies typically are

developed by functional area exec-

utives with input of and approval

from the executives responsible

for business strategy. Senior

strategic decision makers

review the functional strate-

gies to ensure that each major

department is operating con-

sistently with the organiza-

tion’s business strategies. For

example, automated production

techniques—even if they save

money—would not be appro-

priate for a piano company

like Steinway, whose products

are strategically positioned

(and priced) as high-quality and

handcrafted.

At companies that com-

pete based on product innova-

tion, strategies for research and

development are especially crit-

ical. But in the recession that occurred at the beginning of the

2000s, General Electric cut back on research in lighting tech-

nology just as other companies were making advances in LED

lighting. When the economy recovered, customers were look-

ing for innovative lighting, but GE had fallen behind. Based

on that experience, GE committed itself to an R&D strategy of

maintaining budgets even when sales slow down. In the latest

economic downturn, the company continued to fund a project

involving the development of new aircraft engines with Honda

Motor Company. 34

That investment resulted in the creation of

the HF 120 turbofan jet engine that is being used on the new

HondaJet aircraft. 35

5 |  IMPLEMENT THE STRATEGY

As with any plan, simply formulating a good strategy is not

enough. Strategic managers also must ensure that the new strat-

egies are implemented effectively and efficiently. Recently

LO5 Identify the keys to effective strategy implementation

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106 PART 2 | Planning

6 |  MANAGERIAL DECISION MAKING

Managers constantly face problems and opportunities, rang-

ing from simple and routine decisions to problems requiring

months of analysis. However, managers often ignore problems

because they are unsure how much trouble will be involved

in solving the problems, they are concerned about the conse-

quences if they fail, and many management problems are so

much more complex than routine tasks. 39

For these reasons,

managers may lack the insight, courage, or will to act.

Why is decision making so challenging? Most manage-

rial decisions lack structure and entail risk, uncertainty, and

conflict.

Lack of structure is typical of managerial decisions. 40 Usually there is no automatic procedure to follow. Problems are novel

and unstructured, leaving the decision maker uncertain about

how to proceed. In other words, a manager’s decisions most

often have the characteristics of nonprogrammed decisions: 41

With nonprogrammed decisions, risk and uncertainty are the rule. If you have all the information you need, and can pre-

dict precisely the consequences of your actions, you are oper-

ating under a condition of certainty . 42 But perfect certainty is rare. More often managers face uncertainty , meaning they have insufficient information to know the consequences of dif-

ferent actions. Decision makers may have strong opinions—

they may feel sure of themselves—but they are still operating

under uncertainty if they lack pertinent information and cannot

estimate accurately the likelihood of different results.

When you can estimate the likelihood of various conse-

quences but still do not know with certainty what will hap-

pen, you are facing risk . Risk exists when the probability of

with all levels of the organi-

zation. Managers responsible

for strategy implementation

should ensure that the orga-

nization’s various groups are

coordinating their work rather

than working at cross-pur-

poses. Also, lower-level

managers need coaching and

training to help them lead

their groups effectively. If

strategy implementation lacks

solid leadership, managers

who cannot improve their

skills will have to be replaced.

Paying close attention to the

processes by which strategies

are implemented helps execu-

tives, managers, and employ-

ees ensure that strategic plans

are actually carried out. 37

Finally, Control Your Progress The final component of the strategic management process is

strategic control. A strategic control system is designed to support managers in evaluating the organization’s progress

with its strategy and, when discrepancies exist, taking correc-

tive action. The system must encourage efficient operations

that are consistent with the plan while allowing flexibility to

adapt to changing conditions. As with all control systems, the

organization must develop performance indicators, an infor-

mation system, and specific mechanisms to monitor progress.

More than 20 years in development, the HondaJet had to pass a

series of performance milestones before it could be certified as

ready for commercial use. 38

Most strategic control systems include a budget to mon-

itor and control major financial expenditures. In fact, as a

first-time manager, you will most likely work with your work

unit’s budget—a key aspect of your organization’s strategic

plan. Your executive team may give you budget assumptions

and targets for your area, reflecting your part in the overall

plan, and you may be asked to revise your budget once all

the budgets in your organization have been consolidated and

reviewed.

The dual responsibilities of a control system—efficiency

and flexibility—often seem contradictory with respect to

budgets. The budget usually establishes spending limits, but

changing conditions or the need for innovation may require dif-

ferent financial commitments during the period. To solve this

dilemma, some companies have created two budgets: strategic

and operational. For example, at Texas Instruments the strategic

budget is used to create and maintain long-term effectiveness,

and the operational budget is tightly monitored to achieve short-

term efficiency. The topic of control in general—and budgets in

particular—is discussed in more detail in Chapter 14.

Nonprogrammed Decisions

Problem is novel and unstructured, with much uncertainty regarding cause-and-effect relationships.

Decision procedure needs creativity, intuition, tolerance for ambiguity, and creative problem solving.

Examples: diversification into new products and markets; purchase of experimental equipment; reorganization of departments.

Programmed Decisions

Problem is frequent, repetitive, and routine, with much certainty regarding cause-and-effect relationships.

Decision procedure depends on policies, rules, and definite procedures.

Examples: periodic reorders of inventory; procedure for admitting patients.

LO6 Explain how to make effective decisions as a manager

strategic control system a system designed to support managers in evaluating the organization’s progress regarding its strategy and, when discrepancies exist, taking corrective action

certainty the state that exists when decision makers have accurate and comprehensive information

uncertainty the state that exists when decision makers have insufficient information

risk the state that exists when the probability of success is less than 100 percent and losses may occur

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● John Chambers, chief executive officer of Cisco Systems, Inc., the world’s

largest maker of networking equipment.

CHAPTER 5 | Planning and Decision Making 107

6.1 |  Identifying and Diagnosing the Problem

The decision-making process begins with recognition that a

problem (or opportunity) exists and must be solved (or should

be pursued). Typically a manager realizes some discrepancy

between the current state (the way things are) and a desired

state (the way things ought to be). To detect such discrepancies,

managers compare current performance against (1) past per- formance, (2) the current performance of other organizations or units, or (3) future expected performance as determined by plans and forecasts.

44 Larry Cohen, who founded Accurate

Perforating with his father, knew his company was having diffi-

culty making a profit because costs at the metal company were

rising while the prices customers were willing to pay remained

unchanged. However, when the company’s bank demanded

immediate payment of its $1.5 million loan, Cohen realized the

problem had to be solved, or the company would have to sell

off all its assets and close. 45

You will learn more about how

Cohen solved this problem as we look at the subsequent stages

of the decision process.

The “problem” may actually be an opportunity that needs

to be exploited—a gap between what the organization is doing

now and what it can do to create a more positive future. In that

case, decisions involve choosing how to seize the opportunity.

To recognize important opportunities as a manager, you will

need to understand your company’s macro and competitive

environments (described in Chapter 3), including the oppor-

tunities offered by technological developments. According to

Cisco Systems CEO John Chambers, managers who are igno-

rant about technology risk missing important transitions—

dramatic shifts in the ways companies serve customers and

work with their suppliers. Chambers advises managers to stay

current by talking to people who challenge you and are willing

to teach you. 46

Recognizing that a problem or opportunity exists is only the

beginning of this stage. The decision maker also must want to

do something about it and must believe that the resources and

abilities necessary for solving the problem exist. 47

Then the

decision maker must dig in deeper and attempt to diagnose the true cause of the situation. Asking why, of yourself and others,

is essential. Unfortunately, in the earlier example of Accurate

Perforating, Larry Cohen did not ask why profits were declin-

ing; he simply assumed that the company’s costs were too

high. 48

A more thorough approach would include questions

such as these: 49

• Is there a difference between what is actually happening and what should be happening?

• How can you describe the deviation, as specifically as possible?

• What is/are the cause(s) of the deviation?

• What specific goals should be met?

• Which of these goals are absolutely critical to the success of the decision?

an action succeeding is less than 100 percent and losses may

occur. If the decision is the wrong one, you may lose money,

time, reputation, or other important assets. Risk as a qual-

ity of managerial decision making differs from taking a risk. Although it sometimes seems as though risk takers are admired

and that entrepreneurs and investors thrive on taking risks,

good decision makers prefer to manage risk. Knowing that their decisions entail risk, they anticipate the risk, minimize it,

and control it.

For example, Facebook took a risk when it recently pur-

chased WhatsApp for $19  billion. At the time of Facebook’s

largest purchase ever, WhatsApp reported having 450  million

users of its popular chat app. Seventy percent of WhatsApp

users send texts on a daily basis (which is a higher engage-

ment rate than Facebook users). Adding to its attractiveness is

the fact that WhatsApp is dominant in several countries out-

side of the United States. Facebook is hoping this acquisition of

WhatsApp will help the company get closer to reaching its mis-

sion of “connecting everyone in the world.” 43

Was Facebook’s

decision to acquire WhatsApp made under conditions of uncer-

tainty or risk?

Formal Decision Making Has Six Stages Faced with these challenges, how can you make good decisions?

The ideal decision-making process moves through six stages:

1. Identify and diagnose the problem.

2. Generate alternative solutions.

3. Evaluate alternatives.

4. Make the choice.

5. Implement the decision.

6. Evaluate the decision.

These stages are general and applicable to any decision.

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108 PART 2 | Planning

6.3 | Evaluating Alternatives The third stage of decision making involves determining the

value or adequacy of the alternatives that were generated. In

other words, which solution will be the best?

Too often, alternatives are evaluated with insufficient

thought or logic. At Accurate Perforating, Cohen made changes

to cut costs but dismissed the idea to invest in marketing fin-

ished metal products, even though these product lines were

more profitable. Accurate’s general manager, Aaron Kamins

(also Cohen’s nephew), counseled that money spent on fin-

ished metal products would be a distraction from Accurate’s

core business. That reasoning persuaded Cohen, even though it

meant focusing on unprofitable product lines. 54

Obviously alternatives should be evaluated more carefully.

Fundamental to this process is to predict the consequences that

will occur if the various options are put into effect. Managers

should consider several types of consequences. They include

quantitative measures of success, such as lower costs, higher

sales, lower employee turnover, and higher profits. Also, the

decisions made at all levels of the organization should contribute

to, and not interfere with, achieving the company’s overall strat-

egies. Business professors Joseph Bower and Clark Gilbert say

that when it comes to decisions about investing in new projects,

managers typically focus on whether alternatives generate the

most sales or savings without asking the more basic question: In

light of our strategy, is this investment an idea we should support

at all? 55

When the recent downturn in the U.S. economy required

cutbacks, many organizations as diverse as the University

of California system, the State of North Carolina, American

Airlines, and United Parcel Service evaluated the alternatives of

layoffs (permanent job cuts) versus furloughs (requiring employ-

ees to take some unpaid time off until demand picks up again).

In 2009, the total number of furloughed employees in the United

States reached 6.5 million. 56

While layoffs save more money per

employee because the company doesn’t have to continue pay-

ing for benefits, furloughs attempt to maintain relationships with

talented employees, who are more likely than laid-off workers

to return when the company needs them again. Furloughs may

seem kinder to employees, who can hope to return to work even-

tually, but workers may not be eligible for unemployment com-

pensation during the furlough period. 57

The success or failure of the decision will go into the track

records of those involved in making it. That means, as Cohen

eventually learned, the decision maker needs to know when to

call on others to provide expertise. The mistake of not fully

evaluating alternatives and identifying consequences is not

limited to small family businesses. When John Sculley was

Apple’s chief executive, he convinced himself that he was

a technology expert and made some poor decisions related

to Apple’s pioneering launch of a personal digital assistant

(PDA), the now-forgotten Newton. Under Sculley’s direction,

Apple packed the Newton with features, such as handwriting

recognition, that customers didn’t care about and didn’t want to

pay the Newton’s high price to obtain. In contrast, Steve Jobs

6.2 |  Generating Alternative Solutions

The second stage of decision

making links problem diag-

nosis to the development of

alternative courses of action

aimed at solving the problem.

Managers generate at least

some alternative solutions based on past experiences. 50

Solutions range from ready-made to custom-made. 51

Decision makers who search for ready-made solutions use ideas they have tried before or follow the advice of others

who have faced similar problems. Custom-made solutions , by contrast, must be designed for specific problems. This

technique often combines ideas into new, creative solutions.

Potentially, custom-made solutions can be devised for any

challenge. Often, many more alternatives are available than managers

realize. For example, what would you do if one of your com-

petitors reduced prices? An obvious choice would be to reduce

your own prices, but the only sure outcome of a price cut is

lower profits. Fortunately, cutting prices is not the only alterna-

tive. If one of your competitors cuts prices, you should generate

multiple options and thoroughly forecast the consequences of

these different options. Options include emphasizing consumer

risks to low-priced products, building awareness of your prod-

ucts’ features and overall quality, and communicating your

cost advantage to your competitors so they realize that they

can’t win a price war. If you do decide to cut your price as

a last resort, do it fast—if you do it slowly, your competitors

will gain sales in the meantime, which may embolden them to

employ the same tactic again in the future. 52

The example of Accurate Perforating shows the importance

of looking for every alternative. The company had become suc-

cessful by purchasing metal from steel mills, punching many

holes in it to make screenlike sheets, and selling this material in

bulk to distributors, who sold it to metal workshops, which used

it to make custom products. Cohen admits, “We wound up in a

very competitive situation where the only thing we were selling

was price.” Management cut costs wherever possible, avoiding

investment in new machinery or processes. The result was an

out-of-date factory managed by people accustomed to resisting

change. Only after the bank called in its loan did Cohen begin

to see alternatives. The bank offered one painful idea: liqui-

date the company. It also suggested a management consultant,

who advised renegotiating payment schedules with the compa-

ny’s suppliers. Cohen also received advice from managers of a

company Accurate had purchased a year before. That company,

Semrow Perforated & Expanded Metals, sold more sophisti-

cated products directly to manufacturers, and Semrow’s man-

agers urged Cohen to invest more in finished metal products

such as theirs. 53

ready-made solutions ideas that have been seen or tried before

custom-made solutions new, creative solutions designed specifically for the problem

maximizing a decision realizing the best possible outcome

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CHAPTER 5 | Planning and Decision Making 109

will prove to be more accurate than the others. The process

of considering multiple scenarios raises important “what if?”

questions for decision makers and highlights the need for pre-

paredness and contingency plans. As you read this, what eco-

nomic scenario is unfolding? What are the important current

events and trends? What scenarios could evolve six or eight

years from now? How will you prepare?

6.4 | Making the Choice Once you have considered the possible consequences of your

options, it is time to make your decision. Some managers are

more comfortable with the analysis stage. Especially with

all the advanced technology that is available, quantitatively

inclined people can easily tweak the assumptions behind every

scenario in countless ways. But the temptation can lead to

“paralysis by analysis”—that is, indecisiveness caused by too

much analysis rather than the kind of active, assertive decision

making that is essential for seizing new opportunities or thwart-

ing challenges. The decision will differ according to the criteria

and method used: 60

• Maximizing is achieving the best possible outcome, the one that realizes the greatest positive consequences and the fewest nega- tive consequences. In other words, maximizing results in the great- est benefit at the lowest cost, with the largest expected total return.

charged a hardware engineer, Tony Fadell, with the develop-

ment of the iPod, and Fadell decided to collaborate with a firm

that had already developed much of the technology that would

be used in that successful portable music player. 58

To evaluate alternatives, refer to your original goals, defined

in the first stage. Which goals does each alternative meet and

fail to meet? Which alternatives are most acceptable to you and

to other important stakeholders? If several alternatives may

solve the problem, which can be implemented at the lowest

cost or greatest profit? If no alternative achieves all your goals,

perhaps you can combine two or more of the best ones. Several

more questions help: 59

• Is our information about alternatives complete and current? If not, can we get more and better information?

• Does the alternative meet our primary objectives?

• What problems could we have if we implement the alternative?

Of course results cannot be forecast with perfect accuracy.

But sometimes decision makers can build in safeguards against

an uncertain future by considering the potential consequences

of several different scenarios. Then they generate contingency

plans, described earlier in the discussion of strategic planning.

Some scenarios will seem more likely than others, and some

may seem highly improbable. Ultimately one of the scenarios

Take Charge of Your Career Baby Boomers Launch Alternative Careers

I n the United States there are approximately 78 million baby boomers, born between 1946 and 1964. Known for their work ethic, indepen- dent thinking, and growth orientation, many share the belief that with hard work, anything is possible. Without a doubt, boomers have accomplished a great deal in their careers over the past few decades. It is no wonder that, prior to this recent economic downturn, many of these individuals were planning to retire and enjoy life more by traveling, being with family, pursuing hobbies, and the like.

The recent recession has changed that for many boomers. The persistently high unemployment rate, layoffs, frozen pensions, declining equity in homes, age discrimination in hiring, and shrinking value of 401(k) portfo- lios have caused many boomers to postpone

their retirement plans and continue working for many more years.

According to the Bureau of Labor Statistics, the fastest-growing segment of the U.S. workforce between now and 2018 will be employees aged 55 and older. For those who have been laid off, many older workers have difficulty finding full-time, permanent employ- ment with an existing organization. This is motivating a growing number of boomers to follow the “road less traveled” and shift to part-time status, provide consulting services (sometimes for their ex-employers), go back to school, dive into a new “always wanted to do that” career, or start their own ventures. In essence, boomers are reinventing themselves as in a “Career 2.0” sort of way. Consider Lori Bitter, a 50-year-old marketing manager who ran a unit for J. Walter Thompson, the world’s largest advertising agency. After being laid off, she and three other former JWT employ- ees used their severance pay to start a new advertising firm, Continuum Crew. To date, the

new venture has grown to 15 employees and plans to expand further as soon as it raises the capital. Bitter is enjoying her alternative career and relishes the flexible schedule that allows her to spend more time with her hus- band and grandchildren.

Younger generations at work can learn something from baby boomers’ tenacity and can-do attitude. As the old adage says, “when one door closes, another one opens.” Always take charge of your career.

SOURCES: Adapted from D. Rosato, “The Best Reason to Rethink Retirement,” Money (June 2012), p. 98; E. Brandon, “7 Tips for Baby Boomers Turning 65 in 2011,” U.S. News and World Report (January 10, 2011), http:// money.usnews.com ; D. L. Jacobs, “In a Brutal Economy, Boomers Rewrite the Next Chapter,” Investment Guide Issue, Forbes (December 5, 2011), www.forbes.com ; M. Toosi, “Labor Force Projections to 2018: Older Workers Staying More Active,” Monthly Labor Review (November 2009), http://bls.gov/opub/mlr/2009/11/ art3full.pdf ; T. J. Erickson, Retire Retirement: Career Strategies for the Boomer Generation (Cambridge, MA: Harvard Business School Press, 2008).

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110 PART 2 | Planning

decision will “happen”; when people forget

that merely making a decision changes noth-

ing; when meetings, plans, and reports are

seen as “actions,” even if they don’t affect

what people actually do; and if managers don’t

check to ensure that what was decided was

actually done. 62

Those who implement the decision should

understand the choice and why it was made. They also must be committed to its success- ful implementation. These needs can be met

by involving those people in the early stages

of the decision process. At Federal Warehouse

Company, located in East Peoria, Illinois,

executives decided to teach all the employees

how to interpret the company’s financial state-

ments. Managers routinely review the compa-

ny’s performance in detail, and they invite all

employees to participate in solving problems,

including how to reduce costs by making the

workplace safer. Employees—who had once

assumed that if everyone was busy, the com-

pany must be profitable—have begun making

many creative decisions that are helping prof-

its climb. 63

By including all employees in the

decision making, Federal fosters full under-

standing and total commitment.

Managers should plan implementation care-

fully by taking several steps: 64

1. Determine how things will look when the deci- sion is fully operational.

2. Chronologically order, perhaps with a flow dia- gram, the steps necessary to achieve a fully operational decision.

3. List the resources and activities required to implement each step.

4. Estimate the time needed for each step.

5. Assign responsibility for each step to specific individuals.

Decision makers should presume that implementation will

not go smoothly. It is very useful to take a little extra time to identify potential problems and identify potential opportunities associated with implementation. Then you can take actions to

prevent problems and also be ready to seize on unexpected

opportunities.

Many of the chapters in this book address implementation

issues: how to allocate resources, organize for results, lead and

motivate people, manage change, and so on. View the chapters

from that perspective, and learn as much as you can about how

to implement properly.

6.6 | Evaluating the Decision The final stage in the decision-making process is evaluating

the decision. It involves collecting information on how well the

M a x i m i z i n g requires search- ing thoroughly for a com- plete range of a l t e r n a t i v e s , carefully assess- ing each alter-

native, comparing one to another, and then choosing or creating the very best. As a man- ager, you won’t always have time to maximize; many decisions require quick responses, not exhaustive analysis. The necessary analysis requires money as well as time. But for decisions with large consequences, such as determining the company’s strategy, maximizing is worth- while—even essential.

• Satisficing is choosing the first option that is minimally acceptable or adequate; the choice appears to meet a targeted goal or criterion. When you satisfice, you compare your choice against your goal, not against other options, and you end your search for alternatives at the first one that is okay. When the consequences are not huge, satisficing can actually be the ideal approach. But when managers satisfice, they may fail to consider important options. For exam- ple, if you need a new sales manager and your goal is to get this person hired within two weeks, you are satisficing if you hire the first adequate candidate you interview. By not interviewing more candidates, you will miss out on other, potentially better-qualified individuals that could have led your sales team to achieve higher per- formance over the next few years.

• Optimizing means achieving the best possible balance among several goals. Perhaps, in pur- chasing equipment, you are interested in quality and durability as well as price. Instead of buying the cheapest piece of equipment that works, you buy the one with the best combination of attributes, even though some options may be better on the price criterion and others may offer better quality and durability. Likewise, for achiev- ing business goals, one marketing strategy could maximize sales while a different strategy maximizes profit. An optimizing strategy achieves the best balance among multiple goals.

6.5 | Implementing the Decision The decision-making process does not end once a choice is

made. The chosen alternative must be implemented. Sometimes

the people involved in making the choice must put it into effect.

At other times, they delegate the responsibility for implemen-

tation, as when a top management team changes a policy or

operating procedure and has operational managers carry out the

change. Unfortunately people sometimes make decisions but don’t

take action. Implementing may fail to occur when talking a

lot is mistaken for doing a lot; if people just assume that a

A scenario may use numbers that sound reasonable, but you should look at the data in different ways to check your assumptions. As Dean Kamen’s company developed the Segway scooter, Kamen decided that each year Segway could capture 0.1 percent of the world’s population. That percentage might sound conservative, but consider that 0.1 percent of 6 billion people is 6 million Segways a year! Kamen decided to build a factory that could produce 40,000 units a month; five years later, sales had reached fewer than 25,000. 61

Did You Know?

satisficing choosing an option that is acceptable, although not necessarily the best or perfect

optimizing achieving the best possible balance among several goals

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CHAPTER 5 | Planning and Decision Making 111

Why don’t people auto-

matically invoke such ratio-

nal processes? It is easy to

neglect or improperly execute

these processes, and decisions

are influenced by subjective

psychological biases, time

pressures, and social realities.

7.1 | Psychological Biases Decision makers are far from objective in the way they gather,

evaluate, and apply information in making their choices. People

have biases that interfere with objective rationality. Here are

just a few of the many documented subjective biases: 67

• Illusion of control —a belief that one can influence events even when one has no control over what will happen. Such overconfi- dence can lead to failure because decision makers ignore risks and fail to evaluate the odds of success objectively. In addition, they may believe they can do no wrong, or hold a general optimism about the future that can lead them to believe they are immune to risk and failure. 68 In addition, managers may overrate the value of their experience. They may believe that a previous project met its goals because of their decisions, so they can succeed by doing everything the same way on the next project. Rohit Girdhar admits that he held this type of bias until he tried a computer simulation that he assumed would confirm his skills as an experienced man- ager of software programmers. In the simulation, the workload increased, and he hired more workers, as he had in his prior jobs. But the added workers weren’t as productive as his experience told him they would be, and his project fell behind. Girdhar learned to question his assumptions before making decisions. 69 Managers can correct for this problem by developing a realistic picture of their strengths and weaknesses and seeking out advisers who can point out consequences they may not have considered.

• Framing effects —phrasing or presenting problems or decision alternatives in a way that lets subjective influences override objec- tive facts. In one example, managers indicated a desire to invest more money in a course of action that was reported to have a 70  percent chance of profit than in one said to have a 30  percent chance of loss. 70 The choices had equivalent chances of success; the way the options were expressed determined the managers’ choices. Managers may also frame a problem as similar to prob- lems they have already handled, so they don’t search for new alternatives. When CEO Richard Fuld tackled financial problems at Lehman Brothers as the mortgage market tumbled, he assumed that the situation was much the same as a financial crisis in the late 1990s. Unfortunately for Lehman Brothers, the recent crisis was far worse. The firm declared bankruptcy—the largest in U.S. history— helping to send global financial markets into a tailspin. Similarly, when the head of the operations center of the Department of Homeland Security prepared for Hurricane Katrina as it headed for New Orleans, he assumed the storm would be like Florida hurri- canes he had prepared for in the past. As information came in, he focused on the data that fit his expectations, but Katrina turned out to be far more devastating. 71

decision is working. If you set quantifiable goals—a 20 percent

increase in sales, a 95 percent reduction in accidents, 100 percent

on-time deliveries—before implementation of the solution, you

can gather objective data for accurately determining the deci-

sion’s success or failure.

Decision evaluation is useful whether the conclusion is

positive or negative. Feedback that suggests the decision is

working implies that the decision should be continued and per-

haps applied elsewhere in the organization. Negative feedback

means one of two things:

1. Implementation will require more time, resources, effort, or thought.

2. The decision was a bad one.

If the decision appears inappropriate, it’s back to the drawing

board. Then the process cycles back to the first stage: (re)defini-

tion of the problem. The decision-making process begins anew,

preferably with more information, new suggestions, and an

approach that attempts to eliminate the mistakes made the first

time around. This is the stage where Accurate Perforating finally

began to see hope. When cost-cutting efforts could not keep the

company ahead of the competition or in favor with the bank,

Larry Cohen turned the problem over to his general manager,

Aaron Kamins. He gave Kamins 90 days to show that he could

keep the business from going under. Kamins hired a consultant

to help him identify more alternatives and make more profes-

sional decisions about investment and marketing. This stage of

the implementation showed Kamins that the company needed

better-educated management, and he began taking courses in an

executive education program. With what he learned in school

and from his consultant, Kamins realized that the advice he had

received from the managers at the Semrow subsidiary—to invest

in producing finished metal products—was wiser than he had

realized. He arranged new financing to purchase modern equip-

ment, hired salespeople, developed a website, and finally began

to see profits from his improved decision making. 65

7 |  HUMAN NATURE ERECTS BARRIERS TO GOOD DECISIONS

Vigilant and full execution of the six-stage decision-making

process is the exception rather than the rule. But when man-

agers use such rational processes, better decisions result. 66

Managers who make sure they engage in these processes are

more effective.

LO7 Give examples of some individual barriers that affect rational decision making

illusion of control people’s belief that they can influence events, even when they have no control over what will happen

framing effects a decision bias influenced by the way in which a problem or decision alternative is phrased or presented

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112 PART 2 | Planning

proposals until he gave in and launched the new division. It

became one of the company’s fastest-growing operations. 74

Can managers under time pressure make decisions that are

timely and high quality? A recent study of decision- making pro-

cesses in microcomputer firms showed some important differences

between fast-acting and slower firms. 75

The fast-acting firms real-

ized significant competitive advantages without sacrificing the

quality of their decisions. They used three important tactics:

1. Instead of relying on old data, long-range planning, and futuristic fore- casts, they focus on real-time information: current information obtained with little or no time delay. For example, they constantly monitor daily operating measures like work in process rather than checking periodi- cally the traditional accounting-based indicators such as profitability.

2. They involve people more effectively and efficiently in the decision- making process. They rely heavily on trusted experts, and this yields both good advice and the confidence to act quickly despite uncertainty.

3. They take a realistic view of conflict: they value differing opinions, but they know that if disagreements are not resolved, the top executive must make the final choice in the end. Slow-moving firms, in contrast, are stymied by conflict. Like the fast-moving firms, they seek consen- sus, but when disagreements persist, they fail to come to a decision.

7.3 | Social Realities Many decisions are made by a group rather than by an indi-

vidual manager. In slow-moving firms, interpersonal factors

decrease decision-making effectiveness. Even the manager act-

ing alone is accountable to the boss and to others and must con-

sider the preferences and reactions of many people. Important

managerial decisions are marked by conflict among interested

parties. Therefore, many decisions are the result of intensive

social interactions, bargaining, and politicking.

8 |  GROUPS MAKE MANY DECISIONS

Sometimes a manager convenes a group of people to make an

important decision. Some advise that in today’s complex busi-

ness environment, significant problems should always be tackled by groups.

76 As a result, managers must understand how groups

operate and how to use them to improve decision making.

8.1 | Groups Can Help The basic philosophy behind using a group to make decisions

is captured by the adage “Two heads are better than one.” But

is this statement really valid? Yes, it is—potentially. If enough

time is available, groups usually make higher-quality decisions

than most individuals acting alone. However, groups often are

inferior to the best individual. 77

• Discounting the future —in evaluating alternatives, weighing short-term costs and benefits more heavily than longer-term costs and benefits. This bias applies to students who don’t study, workers who take the afternoon off to play golf when they really need to work, and managers who hesitate to invest funds in research and development programs that may not pay off until far into the future. In all these cases, avoiding short-term costs or seeking short-term rewards yields problems in the long term. Discounting the future partly explains government budget deficits, environmental destruc- tion, and decaying urban infrastructure. 72

7.2 | Time Pressures In today’s rapidly changing business environment, the pre-

mium is on acting quickly and keeping pace. The most consci-

entiously made business decisions can become irrelevant and

even disastrous if managers take too long to make them.

To make decisions quickly, many managers rely on sim-

ple rule-of-thumb techniques that have worked in the past and

in so doing, reduce the amount of time they spend analyzing

information relevant to the decision. 73

These strategies may

speed up decision making, but they reduce decision quality. Carl Camden, CEO of Kelly Services, believed that rapid-fire

decisions were the sign of a dynamic executive until he saw

how this approach could hurt decision quality. After Camden

joined Kelly, managers presented a proposal for expanding the

temporary services firm into the business of placing substitute

teachers. Camden quickly came up with a half dozen reasons

to say no. However, the managers kept returning with similar

LO8 Summarize principles for group decision making

● In 2005, the large-scale flooding and damage caused by Hurricane Katrina

in New Orleans and surrounding areas caught many governmental decision

makers by surprise. One reason for the miscalculation was that officials

prepared for the storm and its potential effects by framing it like other, less

damaging hurricanes that had recently hit Florida.

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CHAPTER 5 | Planning and Decision Making 113

clear—the result is the same as it would have been if the dominant individual had made the decision alone. However, the dominant person does not necessarily have the most valid opinions, and even if that person leads the group to a good decision, the process will have wasted everyone else’s time.

• Satisficing is more likely with groups. Most people don’t like meetings and will do what they can to end them. This may include criticizing members who want to continue exploring new and better alternatives. The result is a satisficing, not an optimizing or maximizing, decision.

As summarized in Exhibit  5.9 , how well the group per-

forms depends on how effectively it capitalizes on the poten-

tial advantages and minimizes the potential problems of using

a group. Using groups to make a decision offers at least five

potential advantages: 78

1. More information is available when several people are making the decision. If one member doesn’t have all the facts or the pertinent expertise, another member might.

2. A greater number of perspectives on the issues, or different approaches to solving the problem, are available. The problem may be new to one group member but familiar to another. Or the group may need to consider several viewpoints—financial, legal, market- ing, human resources, and so on—to achieve an optimal solution.

3. Group discussion provides an opportunity for intellectual stimu- lation. It can get people thinking and unleash their creativity to a far greater extent than would be possible with individual decision making.

4. People who participate in a group discussion are more likely to understand why the decision was made. They will have heard the relevant arguments both for the chosen alternative and against the rejected alternatives.

5. Group discussion typically leads to a higher level of commitment to the decision. Buying into the proposed solution translates into high motivation to ensure that it is executed well.

The first three potential advantages of using a group suggest

that better-informed, higher-quality decisions will result when

managers involve people with different backgrounds, perspec-

tives, and access to information. The last two advantages imply

that decisions will be implemented more successfully when

managers involve the people responsible for implementing the

decision as early in the deliberations as possible.

8.2 | Groups Can Hurt Things can go wrong when groups make decisions. Most of the potential problems concern the process through which group

members interact with one another: 79

• Sometimes one group member dominates the discussion. When this occurs—as when a strong leader makes his or her preferences

Advantages Disadvantages

1. More information improves decisions. 1. One person dominates the discussion and undermines the group process.

2 Different perspectives enhance problem solving. 2. Group produces a satisficing, not optimizing or maximizing, decision.

3. Group discussion spurs thinking. 3. Pressure to avoid disagreement leads to groupthink.

4. Involvement in group process leads to enhanced understanding of decisions.

4. Original goals are displaced by new, less important goals.

5. Participation in problem solving increases commitment to decisions.

Source: Adapted from N. R. F. Maier, “Assets and Liabilities in Group Problem Solving: The Need for an Integrative Function,” Psychological Review 74 (1967), pp. 239–49.

Exhibit 5.9 Advantages and disadvantages of using groups

● Groups spur creative thinking, effective problem solving, and goal

commitment. However, not all groups perform to their full potential, as they

are susceptible to domination by a few members, satisficing, and groupthink.

Strong leadership and engaged group members can increase the odds that

the group performs effectively.

discounting the future a bias weighting short-term costs and benefits more heavily than longer-term costs and benefits

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114 PART 2 | Planning

involving differences in ideas and viewpoints, rather than personal. 81

Still, even task-related conflict can hurt performance; 82 disagreement is good only when managed properly. Managers can increase the like- lihood of constructive conflict by assembling teams of different types of people, creating frequent interactions and active debates, and encour- aging multiple alternatives from a variety of perspectives. 83 Methods for encouraging different views include assigning someone the role of devil’s advocate —the job of criticizing ideas. Or the leader may use a process called dialectic , a structured debate between two conflicting courses of action. 84 Structured debates between plans and counterplans can be useful before making a strategic decision—one team might present the case for acquiring a firm while another team advocates not making the acquisition.

3. Enhancement of creativity: To “get” creativity out of other people, give creative efforts the credit they are due, and don’t punish creative fail- ures. 85 Avoid extreme time pressure if possible. 86 Support some innova- tive ideas without heeding projected returns. Stimulate and challenge people intellectually, and give people some creative freedom. Listen to employees’ ideas, and allow enough time to explore different ideas. Put together groups of people with different styles of thinking and behaving. Get your people in touch with customers, and let them bounce ideas around. Protect your people from managers who demand immediate pay- offs, don’t understand the importance of creative contributions, or try to take credit for others’ successes. People are likely to be more creative if they believe they are capable, know that their coworkers expect creativ- ity, and believe that their employer values creativity. 87 A common tech- nique for eliciting creative ideas is brainstorming. In brainstorming , group members generate as many ideas about a problem as they can. As the ideas are presented, they are posted so everyone can read them and use the ideas as building blocks. The group is encouraged to say anything that comes to mind, except to criticize other people or their ideas.

• Pressure to avoid disagreement can lead to a phenomenon called groupthink. Groupthink occurs when people choose not to dis- agree or raise objections because they don’t want to break up a positive team spirit. Some groups want to think as one, tolerate no dissension, and strive to remain cordial. Such groups are overcon- fident, complacent, and perhaps too willing to take risks. Pressure to go along with the group’s preferred solution stifles creativity and other behaviors characteristic of vigilant decision making.

• Goal displacement often occurs in groups. Group members’ goal should be to come up with the best possible solution. With goal displacement , new goals emerge to replace the original  ones. When group members have different opinions, attempts at rational persuasion might become a heated disagreement, and then win- ning the argument becomes the new goal.

8.3 | Groups Must Be Well Led Effective managers pay close attention to the group process;

they manage it carefully. Effectively managing group decision

making has three requirements:

1. Appropriate leadership style: The group leader must try to keep process-related problems to a minimum by ensuring that every- one has a chance to participate, not allowing the group to pres- sure individuals to conform, and keeping everyone focused on the decision-making objective.

2. Constructive use of disagreement and conflict: Total and consistent agreement among group members can be destructive, leading to groupthink, uncreative solutions, and a waste of the knowledge and diverse viewpoints that individuals bring to the group. A certain amount of constructive conflict should exist. 80 Conflict should be task- related,

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

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

Connect ® Management is available for M Management. Additional resources include:

Interactive Applications: • Comprehension Case: SWOT Analysis • Drag & Drop: Psychological Bias in a Job Search • Sequencing/Timeline: Decision Making at Borders

Books • Video Case: Strategy in Action at Panera Bread

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

Chapter Videos: PODS, Ball Corporation

Young Manager Speaks Out: Sheryl Freeman, Program Manager

groupthink a phenomenon that occurs in decision making when group members avoid disagreement as they strive for consensus

goal displacement a condition that occurs when a decision-making group loses sight of its original goal and a new, less important goal emerges

devil’s advocate a person who has the job of criticizing ideas to ensure that their downsides are fully explored

dialectic a structured debate comparing two conflicting courses of action

brainstorming a process in which group members generate as many ideas about a problem as they can; criticism is withheld until all ideas have been proposed

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SmartBook: The First Personalized Reading and Learning Experience

Go to: LearnSmartAdvantage.com

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