Manager as a Leader

operations. You and your partners have little experience in managing a restaurant beyond serving meals or eating in restaurants, and you now face the task of deciding how you will manage the restaurant and what your respective roles will be.

1. Decide what each partner's managerial role in the restaurant will be. For example, who will be responsible for the necessary

departments and specific activities? Describe your managerial hierarchy.

2. Which building blocks of competitive advantage do you need to establish to help your restaurant succeed? What criteria will you use to evaluate how successfully you are managing the restaurant?

3. Discuss the most important decisions that must be

BE THE MANAGER [LO 1-2, 1-5] Problems at Achieva

ou have just been called in to help managers at Achieva,

a fast-growing Internet software company that specializes in busi- ness-to-business (B2B) network software. Your job is to help Achie- va solve some management prob- lems that have arisen because of its rapid growth.

Customer demand to license Achieva's software has boomed so much in just two years that more than 50 new software pro- grammers have been added to help develop a new range of soft- ware products. Achieva's growth

has been so swift that the com- pany still operates informally, its organizational structure is loose and flexible, and programmers are encouraged to find solutions to problems as they go along. Although this structure worked well in the past, you have been told that problems are arising.

There have been increasing complaints from employees that good performance is not being recognized in the organization and that they do not feel equita- bly treated. Moreover, there have been complaints about getting managers to listen to their new

made about (a) planning, (b) organizing, (c) leading, and (d) controlling to allow you and your partners to use organizational resources effectively and build a competitive advantage.

4. For each managerial task, list the issues to solve, and decide which roles will contribute the most to your restaurant's success.

ideas and to act on them. A bad atmosphere is developing in the company, and recently several talented employees left. Your job is to help Achieva's manag- ers solve these problems quickly and keep the company on the fast track.

Questions

1. What kinds of organizing and controlling problems is Achieva suffering from?

2. What kinds of management changes need to be made to solve them?

BLOOMBERG BUSINESSWEEK CASEIN THE NEWS [LO 1-1, 1-2, 1-3, 1-6] Costco CEO Craig Jelinek Leads the Cheapest, Happiest Company in the World

Joe Carcello has a great job.The 59-year-old has an annual salary of $52,700, gets five weeks of vacation a year, and is looking forward to retiring on the sizable nest egg in his 401 (k), which his employer augments with match- ing funds. After 26 years at his company, he's not worried about layoffs. In 2009, as the recession

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deepened, his bosses handed out raises. "I'm just grateful to come here to work every day," he says.

This wouldn't be remarkable except that Carcello works in retail, one of the stingiest industries in America, with some of the most dissatisfied workers. On May 29, Wal-Mart Stores (WMT) employ- ees in Miami, Boston, and the San

Francisco Bay Area began a week- long strike. (A Walmart spokesman told MSNBC the strike was a "pub- licity stunt.") Workers at an Amazon. com (AMZN) fulfillment center in Leipzig, Germany, also recently held strikes to demand higher pay and better benefits. (An Amazon spokesman says its employees earn more than the average warehouse

worker.) In its 30-year history, Car- cello's employer, Costco, has never had significant labor troubles.

Costco Wholesale (COST), the second-largest retailer in the U.S. behind Walmart, is an anomaly in an age marked by turmoil and down- sizing. Known for its $55-a-year membership fee and its massive, austere warehouses stocked floor to ceiling with indulgent portions of everything from tilapia to toilet paper, Costco has thrived over the last five years. While competitors lost customers to the Internet and weathered a wave of investor pes- simism, Costco's sales have grown 39 percent and its stock price has doubled since 2009. The hot streak continued through last year's retirement of widely admired co- founder and Chief Executive Offi- cer Jim Sinegal. The share price is up 30 percent under the leader- ship of its new, plain-spoken CEO, Craig Jelinek.

Despite the sagging economy and challenges to the industry, Costco pays its hourly workers an average of $20.89 an hour, not including overtime (vs. the mini- mum wage of $7.25 an hour). By comparison, Walmart said its aver- age wage for full-time employees in the U.S. is $12.67 an hour. Eighty- eight percent of Costco employ- ees have company-sponsored health insurance; Walmart says that "more than half" of its do. Costco workers with coverage pay premiums that amount to less than 10 percent of the overall cost of their plans. It treats its employ- ees well in the belief that a happier work environment will result in a more profitable company. "I just think people need to make a living wage with health benefits," says Jelinek. "It also puts more money back into the economy and cre- ates a healthier country. It's really that simple."

"They are buying and seil- ing more olive oil, more cran- berry juice, more throw rugs than just about anybody," says David Schick, an analyst at Stifel Nico- laus. And that allows Costco to get bulk discounts from its sup- pliers, often setting the industry's lowest price. Even Amazon can't beat Costco's prices, which means that "showrooming," or browsing in stores but buying online for the better price, isn't much of a con- cern for Jelinek.

Costco's constitutional thrift makes its generous pay and health packages all the more remark- able. About 4 percent of its work- ers, including those who give away samples and sell mobile phones, are part-time and employed by contractors, though Costco says it seeks to ensure they have above-industry-average pay. And while Walmart, Amazon, and oth- ers actively avoid unionization, Costco, while not exactly embrac- ing it, is comfortable that the Inter- national Brotherhood of Teamsters represents about 15 percent of its U.S. employees. "They are philo- sophically much better than any- one else I have worked with," says Rome Aloise, a Teamsters vice president.

Costco may be a different spe- cies than most big-box chains, but it shares genetic material with Walmart, Kmart, Kohl's (KSS), and Target (TGT), all born in 1962 to cater to the boundless consumer appetites of an expanding middle class. The companies had the same inspiration: FedMart, whose founder, Sol Price, opened some of the first discount department stores in San Diego in the early 1950s, for the first time pairing diverse merchandise and bargain basement prices under a single roof. In the wake of FedMart's collapse after a failed acquisition,

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The Issaquah (Wash.) head- quarters of Costco, 20 miles from Seattle, radiate frugality. The floor of the executive wing is covered in faded blue carpet, and in the boardroom, six faux- wood tables-which would look at home in a public school teach- ers' lounge-are jammed together. On the walls are several Van Gogh and Picasso prints (less than $15 at Art.com), along with two badly staged photographs of the com- pany's board of directors. In one, a picture of Jelinek's head has been awkwardly taped onto the frame, hovering above a Weber grill.

Jelinek earned $650,000 in 2012, plus a $200,000 bonus and stock options worth about $4 mil- lion, based on the company's performance. That's more than Sinegal, who made $325,000 a year. By contrast, Walmart CEO Mike Duke's 2012 base salary was $1.3 million; he was also awarded a $4.4 million cash bonus and $13.6 million in stock grants.

No-frills is the defining style of the 627 Costco warehouses around the world. Each stocks around 4,000 different products, and almost everything is marked up 14 percent or less over cost. Items like diapers, suitcases, and wine, which it sells under its in-house Kirkland Signature brand, get a maximum 15 percent bump. All of the stock sits on industrial shelving that the company internally calls "the steel," or in piles that spill from pallets. After accounting for expenses such as real estate costs and wages, Costco barely ekes out a profit on many of its products. Eighty percent of its gross profit comes from membership fees; customers renew their member- ships at a rate of close to 90 per- cent, the company says. It raised its fee by 10 percent in 2011 to few complaints.

division. Jelinek concedes he's in a peculiar position, considering Sinegal's presence and the iron- like grip he had over the company, but he says he's happy to have his former boss around. "It's kind of like, your dad is still your dad, no matter how old he is. So it's been great. He lets me run the business, and every once in a while he says, 'Have you rethought this?"

Another pressing issue is the age of the company's executive team, most of whom are in their late 50s. "We're all old," says Brotman, who is 70. Jelinek says his team talks about succession planning constantly and recently expanded a program to ready the next wave of company lead- ers. It will have to look inside, since Costco does not hire busi- ness school graduates-thanks to another idiosyncrasy meant to preserve its distinct company cul- ture. It cultivates employees who work the floor in its warehouses and sponsors them through gradu- ate school. Seventy percent of its warehouse managers started at the company by pushing carts and ringing cash registers. Employees rarely leave: The company turnover rate is 5 percent among employees who have been there over a year, and less than 1 percent among the executive ranks. That's impressive, but it also suggests the company does not have a regular influx of outside views. Even John Mat- thews, vice president in charge of human resources, calls the com- pany "awfully inbred."

Sol Price's virtuous cycle con- tinues to work for the company- happy employees are more productive, effective workers. Jelinek is content to focus on the future of Costco, vowing to keep prices low, volumes high, and his employees happy. "As long as you continue to take care of the

Price and his son Robert cre- ated Price Club in 1976. The new store stocked only a few thou- sand products, all in large quantity, and marked everything up a set amount in the belief that retailers added only limited value; prices should reflect that. Price, who died in 2009, was a demanding boss known for knocking fragile mer- chandise onto the floor if it blocked customer sightlines. Yet he had a devotion to fair labor practices: He solicited the Teamsters to rep- resent his employees. "Sol's mes- sage was always very much the same if you saw through the rough exterior," says Paul Latham, the vice president of marketing and membership services at Costco, who, like many Costco execu- tives, started his career working for Price. "It was about creating value, about treating your employees and customers well, and respect- ing your vendors-and ultimately rewarding your shareholders in the process."

Sinegal was one of Price's top lieutenants. He brought the Price Club model to Washing- ton in 1983 to start Costco with local attorney Jeff Brotman. Price Club and Costco merged in 1992, and though the combination was troubled and Price left soon after, Sinegal maintained Price's pro- labor principles. Costco went pub- lic in 1985, and over the years, Wall Street repeatedly asked it to reduce wages and health benefits. Sinegal instead boosted them every three years.

Jelinek has a strong opinion about one of Costco's best-known products, the $1.50 hot dog the company makes in a facility in California's Central Valley and dis- tributes to all of its North Ameri- can warehouses. "I'm a purist," he says, noting that he has a hot dog for lunch every day when

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he's traveling. "No mustard. No ketchup. I savor that hot dog. I eat 'em plain." He says he never touches the pizza. (It's good, he says, he just doesn't care for it.)

Like his predecessor, Jelinek, 59, preaches simplicity, and he has a propensity for aphorisms end- ing with "good things will happen to you." "This isn't Harvard grad stuff," he says. "We sell quality stuff at the best possible price. If you treat consumers with respect and treat employees with respect, good things are going to hap- pen to you." He vows to continue Sinegal's legacy and doesn't seem to mind a widespread character- ization of himself as a "Jim clone." "We don't want to be casualties like some of these other big retail- ers, like the Sears of the world and Kmart and Circuit City. We are in for the long haul," he says.

As CEO, his biggest move is increasing Costco's international presence. Over the next two years, Costco will open its first locations in France and Spain. Two-thirds of Costco's expansion over the next five years will be interna- tional, according to Galanti, with a focus on Japan, Taiwan, and South Korea. Jelinek's strategy is to require Costco's suppliers to give it global deals, even if it upsets their relationships with other retailers in different countries. "If you are going to do business with us, you are not going to say that we can't sell to you in this country," he says. "They are not really respecting our business if they do that." Another challenge for Jelinek is making his voice heard over Sinegal's. Even after his official retirement in early 2012, the co-founder stuck around as an adviser for another year, sitting in on meetings and surreptitiously funneling questions through Joseph Portera, executive vice president of Costco's eastern

3. What is Costco's approach to managing its workforce? How has this approach influenced the culture and values of the company?

Source: Brad Stone, "Costeo CEO Craig Jelinek Leads the Cheapest, Happiest Com- pany in the World," Bloomberg Business- week, www.businessweek.com. accessed June 6, 2013.

customer, take care of employees, and keep your expenses in line, good things are going to happen to you," he says. "I don't ever want us to become irrelevant. I hope when I'm 90, and this company is around 30 years from now, I can go eat a hot dog at a Costco food court and hear someone say, 'I remember you."

Questions 1. How does CEO Jelinek's

management approach resemble that of former CEO Sinegal?

2. How would you describe Costco's approach to planning and strategy?

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