Discussion Assignment - Organizations and Teams
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pdf_five_functions_of_effective_management.pdf
Dr. Michael Reilly Ashford University
Dr. Charles Minnick Ashford University
Dr. Don Baack Pittsburg State University,
Pittsburg, Kansas
The Five Functions of Effective Management
Chares R. Minnick, Ph.D. Ashford University
Dr. Michael Reilly, Dr. Charles Minnick, & Dr. Don Baack The Five Functions of Effective Management
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Brief Contents
Chapter 1: Introduction to Management: Achieving Form through Function . . . . . . . . . . . . . . . . 1
Chapter 2: The Planning Function . . . . . . . . . . . . . . . . . . . . . . . . . 27
Chapter 3: The Organizing Function . . . . . . . . . . . . . . . . . . . . . . . 55
Chapter 4: The Staffing Function . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Chapter 5: The Leading Function . . . . . . . . . . . . . . . . . . . . . . . . . 113
Chapter 6: The Controlling Function . . . . . . . . . . . . . . . . . . . . . . 147
Chapter 7: The Five Functions as a Coordinated System . . . . . 177
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201
Contents
About the Authors xv
Acknowledgments xvii
chapter 1 Introduction to Management: Achieving Form through Function 1
1.1 Introduction 2 Ron Jon Surf Shop: Small Start, Big Finish 2 Organizations 4 Organizational Origins 5
1.2 Management Roles 6 Managerial Levels 6 Front-Line Managers or Supervisors 7 Middle Managers 7 Executive Managers 8 Summary 9 Managerial Types 9 Line Managers 10 Staff Managers 10 Managerial Knowledge, Skills, and Abilities 11
Technical Knowledge 11 Human Relations Skills 11 Critical Thinking Abilities 11
1.3 The Five Management Functions 12 Planning 12
Assessing the Environment 12 Determining Organizational Goals 13
CONTENTS
Creating Plans 14 Allocating Resources 15 Summary 15
Organizing 15 Staffing 16 Leading 16 Control 16
1.4 The History of Management Theory 17 The Human Relations Movement 18
Abraham Maslow and Humanism 18 Douglas McGregor’s Theory X and Theory Y 19 Summary 20
Modern Management 20 Systems Theory 20 Contingency Theory 21 Summary 21
Chapter Summary 21 Key Terms 23 Review Questions 24 Analytical Exercises 24
chapter 2 The Planning Function 27
2.1 Introduction 28 Red Bull: Planning a Successful Entry into a New Market 28
The Value of Planning 29 Mission and Vision Statements 30
2.2 Assessing the Environment 31 Internal Operations 31
Strategic Assessment 31 Tactical/Functional Assessments 32 Operational Level Assessments 33
The External Environment 33 Semicontrollable Forces 33 Noncontrollable Forces 35
Forecasting 37 Economic Forecasts 37 Sales Forecasts 37 Technological Forecasts 38
SWOT Analysis 38 Summary 39
CONTENTS
2.3 Determining Organizational Goals 39 Tactical Goals 41 Operational Goals 42
2.4 Developing Quality Plans 42 Strategic Plans and the Strategic Management Process 42
Core Competencies 43 Generic Competitive Strategies 43 Specific Strategies 44 Rapid Growth Strategies 44 Slow Growth Strategies 44 Stability Strategies 44 Decline Strategies 45
Tactical Plans 45 Operational and Short-Term Plans 46
Special Short-Term Plans 46 Contingency Plans 46 Summary 47
2.5 Allocating Resources 47 Incremental Budgets 47 Zero-Based Budgets 48 Rolling Budgets 48 Summary 48
Chapter Summary 49 Key Terms 50 Review Questions 52 Analytical Exercises 52
chapter 3 The Organizing Function 55
3.1 Introduction 56 The Richards Group: Organizing Creativity 57
3.2 Job Design 59 Job Analysis 60 Job Description 61 Job Specification 61 Summary 62
3.3 Departmentalization 62 Departmentalization by Function 62 Departmentalization by Product 63
CONTENTS
Departmentalization by Customer 64 Departmentalization by Geographic Area 64 Departmentalization by Strategic Business Unit 65 Departmentalization by Matrix 65 Summary 65
3.4 Completing the Organization’s Structure 66 Centralization and Decentralization 67
Size and Decentralization 68 Strategies and Decentralization 68 Summary 69
Mechanistic and Organic Structures 69 Characteristics of Typical Organizations 70 An Organization in Crisis 71 Summary 72
3.5 Structural Configurations 72 Simple Structure 72 Machine Bureaucracy 73 Professional Bureaucracy 73 Divisional Structure 74 Adhocracy 74 The Importance of Organizational Goals in Structural Design 75
Chapter Summary 76 Key Terms 76 Review Questions 78 Analytical Exercises 78
chapter 4 The Staffing Function 81
4.1 Introduction 82 Zappos.com: Strategic Staffing 82 The Nature of Staffing 84 Legal Aspects of Staffing 84
Employment at Will 85 Fair Labor Standards Act 85 The Civil Rights Act of 1964 and EEOC 85 Sexual Harassment 85 The Age Discrimination in Employment Act 86 The Americans with Disabilities Act of 1990 86 Family and Medical Leave Act 86
CONTENTS
4.2 Job Design and Human Resource Planning 87 Job Design 87 Human Resource Planning 88
Employee Inventories 88 Skills Inventories 89 Succession Planning 89 Summary 89
4.3 Employee Placement 90 Recruiting 90 Selection 91 Orientation 92
Create a Favorable Impression 93 Enhance Personal Acceptance 93 Reduce Turnover 93
Employee Training 93 E-Learning 94
4.4 The Employment Environment 94 Compensation Management 95
Base Pay 95 Incentives 95 Benefits 96 Summary 97
Performance Appraisal 97 The Appraisal System 98 Performance Appraisal Meetings 99
Employee Discipline Systems 99 Workplace Health and Safety 100
Requirements of Employers 101 Requirements of Employees 101 Employee Health and Wellness 101 Ergonomics 102
4.5 Employee Careers and Union-Management Relations 102 Career Development 102
Employee Preparation 103 Company Preparation: Manager Training Programs 103 Company Preparation: Mentoring and Coaching 105 Overcoming Special Career Challenges 105 Summary 106
Union-Management Relations 106
Chapter Summary 107 Key Terms 108 Review Questions 109 Analytical Exercises 109
CONTENTS
chapter 5 The Leading Function 113
5.1 Introduction 114 Aetna’s Jack Rowe: Transformational Leadership 114 Leading versus Managing 115
Managing as Coping with Complexity 115 Leading as Coping with Change 116
Leadership and Power 117 Legitimate Power 117 Reward Power 117 Coercive Power 117 Expert Power 118 Referent Power 118
5.2 Leadership Theories 119 Trait Theories 119
The Big Five 120 Attribution Models 120
Behavioral Theories 122 The University of Michigan Study 122 The Ohio State Study 123
Situational Theories 123 Theory of Leader Effectiveness 123 Fiedler’s Contingency Model 124 Hersey and Blanchard’s Situational Leadership Model 125 Path-Goal Theory 126
Transformational Leadership Theory 126 Summary 127
5.3 Leadership and Motivation 128 Content Theories of Motivation 128
Maslow’s Hierarchy of Needs 128 Herzberg’s Motivation-Hygiene Theory 129 McClelland’s Acquired Needs Theory 131
Process Theories of Motivation 131 Adams’ Equity Theory 131 Vroom’s Expectancy Theory 132
Locke’s Goal-Setting Theory 133 Summary 133
5.4 Leading and Effective Teamwork 134 Stages of Team Development 134
Forming 134 Storming 135 Norming 135
CONTENTS
Performing 135 Adjourning 135
Types of Teams 136 Cross-Functional Teams 136 Virtual Teams 136 Self-Managed Teams 136
Leading and Team Building 136 Summary 137
5.5 Leadership and Communication 137 Organizational Communication Basics 137 Barriers to Interpersonal Communication 138
Individual Differences 138 Situational Factors 139 Transmission Problems 139
Overcoming Interpersonal Communication Barriers 139 Organization-Wide Communication 140 Barriers to Formal Organizational Communication 141 Overcoming Barriers to Formal Communication 141
Managing the Grapevine 142
Chapter Summary 142 Key Terms 144 Review Questions 145 Analytical Exercises 146
chapter 6 The Controlling Function 147
6.1 Introduction 148 JetBlue: Creating a New Control System 148 The Four Steps of Control 149
Establishing Performance Standards 149 Measuring Actual Performance 150 Comparing Performance to Standards 150 Making Decisions 151
6.2 Functional Area Controls 152 Production and Quality Control 153
Quantity Goals 153 Quality Goals 153 Cost Goals 154 Time Goals 154
Measures of Performance: Production and Quality Control 154 Making Corrections: Production and Quality Control 155
CONTENTS
Marketing and Sales 155 Market Share 155 Sales Quotas 156 Share of Mind 156 Marketing and Sales Costs 156
Measures of Performance: Marketing and Sales 156 Making Corrections: Marketing and Sales 157 Human Resources 157 Measures of Performance: Human Resources 157 Making Corrections: Human Resources 157 Information Technology and Research and Development 158
6.3 Accounting and Financial Controls 158 Profitability Goals 158 Cost of Capital 159 Increasing Efficiencies of Company Operations 160 Ratio Analysis 160
Liquidity Ratios 160 Activity Ratios 161 Leverage Ratios 161 Profitability Ratios 162 Analyzing Ratios 162
The Budgeting Process 162 Forms of Budgets 163 Benefits of Budgeting 163 Budgeting Problems 164 Creating Quality Budgeting Programs 165
Auditing 166 Summary 167
6.4 Other Forms of Control 167 Feedforward Control 167 Concurrent Control 167 Feedback Control 168 Total Quality Management 168
TQM and Organizational Change 169 Control System Challenges 169
Rigid Bureaucratic Behavior 170 Invalid Data Reporting 170 Employee Resistance 171
Characteristics of Effective Control Systems 171
Chapter Summary 174 Key Terms 174 Review Questions 175 Analytical Exercises 175
CONTENTS
chapter 7 The Five Functions as a Coordinated System 177
7.1 Introduction 178 Round Rock Express: Minor League Baseball—Major League Management 178 The Changing World of Business 180 Political Events 180 Social Trends 180
Diversity 181 Economic Trends 181 The Impact of Technology 182
The Changing Nature of Competition 183 Globalization 183
Summary 183
7.2 The Five Management Functions Still Matter 184 Planning Processes 184 Organizing 185
Staffing 186 Leading 188 Controlling 189 Connecting the Five Functions 190
7.3 Management Careers 190 Learn a Second Language 191 Indicate Your Willingness to Learn 192 Improve Your Social Skills 192 Be a Team Player 192 Become a Real Manager, Not a Political Manager 193
Summary 193 Key Terms 194 Review Questions 195 Analytical Exercises 195
Glossary 197
References 201
About the Authors
Dr. Michael Reilly Michael Reilly is the Ashford University Executive Dean of the College of Business and Professional Studies . He previously held faculty and chair appointments at the University of Phoenix and North Central University .
Dr . Reilly teaches courses in management, organizational behavior, human resources, and statistical analysis at both the undergraduate and graduate levels in addition to academic administration work . His academic interests include aligning management systems with organizational strategy and the economic function of the firm . He has also published numerous scholarly and professional journal articles, written and edited college text- books, and served as a peer-review journal editorial board member .
Dr . Reilly earned a Ph .D in Management Decision Sciences from Walden University, a Master of Arts in Human Behavior and Labor Sociology from National University, and a Bachelor of Arts in Industrial Psychology and Personnel Management from Union University .
Dr. Charles Minnick Dr . Charles Minnick has served as Dean of the College of Business and Professional Stud- ies at Ashford since January 2006 . Before Ashford, he spent 10 years at Saint Ambrose University in Davenport, Iowa . His last position there was Associate Director of the Mas- ters of Organizational Leadership program . Minnick’s bachelor’s degree and MBA are both from Saint Ambrose, and his Ph .D . is in Management and Decision Sciences with a concentration in Leadership and Organizational Change from Walden University in Min- neapolis . He has done consulting work in the areas of employee motivation, business eth- ics, improving team performance, strategic planning, and conflict management, and has presented at conferences across the United States . In March of 2011, he was elected to the Board of Directors of the International Assembly for Collegiate Business Education .
In 2009, Minnick was recognized for excellence in teaching by the Commission for Accel- erated Programs . He was one of three award recipients from across the United States . In 2010, he received Bridgepoint Education’s Best in Class award, which is presented to Bridgepoint Education employees who best exemplify Bridgepoint Education’s commit- ment to quality, caring, and innovation .
ABOUT THE AUTHORS
Dr. Donald Baack Dr . Donald Baack is a University Professor of Management at Pittsburg State University, Pittsburg, Kansas . He has an undergraduate degree from Dana College, an MBA from Southwest Missouri State University, and a Ph .D . from the University of Nebraska .
Baack teaches undergraduate level organizational theory and behavior, advanced orga- nizational behavior, and graduate level behavioral management . He is affiliated with the Southwest Academy of Management, the Southern Management Association, and the Nebraska Economics and Business Association .
Professor Baack is the author or coauthor of eight books . Three are college textbooks in the areas of management, organizational behavior, and integrated marketing communica- tions . One is a high school textbook for students studying international business . He has also coauthored the Concise Encyclopedia of Advertising as well as three books that are for the general public . Baack has written over 100 professional journal articles and conference papers . He serves as consulting editor for Pittsburg State’s Journal of Managerial Issues .
Acknowledgments
From Michael Reilly and Charles Minnick We would like to acknowledge the people who made significant contributions to the development of this text . We are extremely grateful to Peter Galuardi, Steve Wainwright, Beth Aguiar, and the entire editorial team for their encouragement, enthusiasm, and guid- ance, without which this effort would have been impossible . We also recognize the sacri- fices made by our spouses during the time we spent writing this text . The compensation for these efforts could not repay their sacrifice of time .
From Don Baack Thanks to John Szilagyi for introducing me to the editorial team, to Anna and Christina for allowing me to give this project priority, and to my wife and family for understanding that I would be pretty busy completing this work .
Jose Fuste Rega/Corbis
chapter 1
Introduction to Management: Achieving Form through Function
Chapter Goals
After reading this chapter, you should be able to • Describe an organization. • Define the concept of management and describe various management roles. • Explain the five management functions. • Recognize key historical characters and their contributions to management theory.
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CHAPTER 1Section 1.1 Introduction
1.1 Introduction Learning Objective #1: What is an organization?
Many people think management is about supervising employees, or that it is an obscure set of practices invented by corporate experts in high-level positions within an organization. Some might associate management to be specific to cer- tain persons, such as Jack Welch, the former CEO of General Electric; Andrew Carnegie, founder of US Steel; John D. Rockefeller, founder of Standard Oil; Ray Kroc, the driving force behind McDonald’s; Sam Walton who created the Walmart empire; Meg Whitman, former CEO of eBay; or any number of well-known leader-managers.
At the most fundamental level management is a discipline that consists of a set of five spe- cific functions: planning, organizing, staffing, leading, and controlling. These five func- tions are part of a body of practices and theories for how to be a successful manager. You will learn more about the five functions throughout this book. We want you to understand that this is founded on research and theory, but it is also about the practices that managers need to implement to support the theories. Typically, managers are managing, while at the same time researchers are evaluating how managers work and applying what they learn to a theoretical perspective.
The analyses of management practices and theories are used to drive new practices and theories for future improvement. Theorists try to bring some meaning to how management impacts overall organizations. The purpose and practical applications for the various manage- ment theories are explained within the five functions. Understanding these five functions and the underlying support theory behind them is the starting point of learning to be a manager.
Chapter 1 introduces several important concepts of effective management and leader- ship. Each serves as a building block to help you to understand and be able to apply the five functions of management. In this chapter we will define management and what an organization is. We will explore the nature of various types of organizations, and we will examine historical figures and their contributions to management theory. Ultimately, you should come to understand the role of management in the success of an organization as you are introduced to the five functions.
Ron Jon Surf Shop: Small Start, Big Finish
In the world of business, many truisms and platitudes exist and are commonly exchanged. One that may have value would be that “Success occurs when preparation meets an opportunity.” Such would be the case for the former surfer-dude, turned successful busi- ness manager, Ron DiMenna.
In the 1960s, surfboard technology began to evolve. Wooden boards, often made at home or in a workshop, were set aside in favor of mass-produced fiberglass models. DiMenna, who loved surfing, decided to go into business and created the first Ron Jon Surf Shop in New Jersey. His business model was to buy three boards and sell two with a mark-up that was large enough to make a profit, which made it possible for Ron to buy the third board.
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CHAPTER 1Section 1.1 Introduction
Over time, the business took off. His company eventually expanded. DiMenna made the Cocoa Beach, Florida, location the centerpiece of the company. The store is open 24 hours per day, 365 days per year—just like the beach. Currently, Ron Jon Surf Shops may be found on both the East and West Coasts. All of the stores carry every form of beach product including swim- wear, sunglasses, surfboards, towels, shorts, shirts, and beach furniture. Most feature refresh- ment areas for patrons to enjoy.
The Ron Jon empire has been built using clas- sic management techniques. DiMenna carefully plans events that create interest and attention. The 40th anniversary of his company serves
as an example. The company planned a series of programs, beginning with a contest in which customers were asked to send in photos, news articles, postcards, and stories about their interactions with Ron Jon Surf Shops. The contributors of the best selections were given gift certificates for merchandise as prizes and rewards.
DiMenna also formed a partnership with Chrysler, leading to the development of lim- ited edition Ron Jon PT Cruiser autos. The cars came with Ron Jon sports bags, blankets, license plates, bumper stickers, key chains, and a T-shirt noting the unique nature of the vehicle. Only 1,000 cars were manufactured. Most were sold, and a select few were offered as prizes for Ron Jon contests. The entire 40th anniversary celebration was featured in various venues, including surfing and travel magazines and in numerous news stories.
Ron Jon Surf Shops are carefully organized. Employees specialize in various types of prod- ucts, thereby making sure customers receive expert attention. The company has partner- ships with major manufacturers to make sure products flow in an efficient manner.
Staffing represents a key ingredient in DiMenna’s management system. Company leaders work hard to make sure that only enthusiastic, knowledgeable people are hired. Incen- tives are used to keep up their interest and loyalty.
The leading aspect of the company began with Ron DiMenna, and it extends to all store managers who make sure operations run smoothly. The store managers seek to highlight the fun, enjoyable aspects of shopping and beach time.
Questions for Students
1. With so many surf shops adorning beaches in Florida, what has made Ron Jon stand out? 2. What is another example of a success story similar to Ron DiMenna’s 3. What essential management techniques helped make DiMenna’s business model a success?
Ryan McVay/ThinkStock
Ron DiMenna began as a surfer-dude and became a successful entrepreneur and manager.
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CHAPTER 1Section 1.1 Introduction
The control function of Ron Jon Surf Shop begins with assessments of product lines. In recent years, company leaders have concluded that while the stores are profitable, expan- sion is possible. This led the company to begin selling items related to skateboarding.
The iconic Ron Jon decal can be found adorning bumpers of cars across the country and around the world. One has even been taken into orbit on a space shuttle. The Ron Jon store in Cocoa Beach is as much a tourist attraction as a retail store. Through all of these man- agement activities, the future remains bright for what started off as one guy with a simple need to better enjoy the waves (Clow and Baack, 2007; http://www.ronjonsurfshop.com, 2011).
Organizations
Every day you encounter numerous organizations. Currently, you are taking a class from an educational organization; later you may visit a grocery store. Those who stop to pay parking tickets encounter a local government organization. In a modern, postindustrial society, interactions with organizations shape the nature of daily living, including main- taining one’s home, being part of social and religious groups, and making a living.
An organization is a collection of people who work together and coordinate their actions to achieve a wide variety of goals or desired future outcomes. The purpose of an organiza- tion is to serve a social need. Organizations take the forms of (a) profit-seeking, (b) non- profit, and (c) government agencies. Organizations are driven by a mission to accomplish a set of agreed-upon goals:
• an economic goal (a profit-seeking entity) • a social good (nonprofit entity) • the general public’s welfare (government entity)
Profit-seeking organizations deliver goods and services that offer value to consumers in exchange for money, normally expressed as sales and other revenues. Other organizations have different concepts regarding their purposes.
Nonprofit organizations are created because there is an expressed social need. Typically, donations are solicited to maintain nonprofit organizations. Sometimes society doesn’t need what an organization produces, and the organization fails.
Organizational Characteristics
Members consist of more than two people. People in the organization routinely interact. Tasks are divided among members (division of labor). Someone is in charge (a hierarchy of authority). Activities are coordinated among members. Members share a common purpose or goal.
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CHAPTER 1Section 1.1 Introduction
Governmental organizations serve different needs, including maintenance of order, provid- ing universal services such as roads and fire protection, and regulating commerce. Gov- ernmental organizations receive revenues through taxes and fees.
Throughout this book we will learn about different types of organizations, how they oper- ate, why they were established, and why some fail while others thrive. The following text box displays other characteristics of organizations.
Organizational Origins
Let’s look at an example of how a for-profit organization might get started. A lone farmer purchases a good sized plot of land and is now ready to start planting on it with the hope of making a profit and providing healthy, farm-fresh produce for the surrounding com- munity. At this stage he has not yet established an organization; he is just one man with a plot of land and some seeds. In order for his farm to become an organization, he will need to figure how much produce he wants to sell, who his market is—that is, which consum- ers in the community will buy his produce—and who his competitors might be, because there could be a farm down the road selling the identical assortment of vegetables that he’s planning to market.
The farmer will also need to assess how much capital, or money, he has, and how much will be needed to sustain the business. When thinking about the financial cost, he will need to take into account how many resources will be needed to operate the farm—human resources and general resources such as tractors, planting materials, and water. After hir- ing the needed human resources, including a manager to oversee these employees, the goal becomes to make a profit on the produce for the organization.
This example provides a simplistic version of a for-profit organization, but with the right managers, planning, organizing, staffing, leading, and controlling, it could become an even larger success than what the farmer had initially hoped for. If that’s the case, he will need to focus on how to progress with the changes that come so that his organization will grow. We will learn more in this chapter and throughout this book about how to keep an organization profitable and relevant. Remember the following facts about organizations while studying the topics in this book:
• Most organizations are small, consisting of fewer than 200 members.
• Most organizations are short-lived. Only 15% of business organizations survive more than two years.
• Organizations go through life cycles: They are born, grow, mature, decline, and many then die.
• Organizations are social systems. The people within them determine the even- tual outcomes.
George Doyle/ThinkStock
Even the smallest farm can evolve into a large business organization.
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CHAPTER 1Section 1.2 Management Roles
1.2 Management Roles Learning Objective #2: What types of managers are included in an organization?
At its most basic level, management theory is the study of the overall manage-ment process. Management has a variety of definitions. Our approach suggests that management consists of all of the techniques that are used to lead the human resources in an organization to become productive. To do so, an organization’s manager must efficiently and effectively carry out the primary management functions. A manager is responsible for helping to achieve an organization’s goals and desired future outcomes. A manager is also responsible for supervising employees and making the most of an orga- nization’s other resources.
Management specialist Peter Drucker (1909–2005) is one of the best-known influential theorists on the subject of management and practice. He wrote articles and books explor- ing how humans are organized across society with regard to business, government, and the nonprofit sectors—the main sectors that organizations encompass. Drucker once said, “Management in turn, is the organ of the institution. It has no function in itself, indeed, no existence in itself” (Drucker, 1985). In essence, management does not exist without an organization.
One of Drucker’s most famous books is The Concept of the Corporation (1946). In it, he analyzes General Motors as a large social institution involved with business activities. Drucker writes about what management is, how organizations select managers, how managers act, and how an organization is structured into units of management such as divisions or sections.
Drucker also explains the role and position of large organizations in a modern society. Even though his important and influential works were written over a half century ago, many of the theories and methods about management presented in them still hold true today. His ideas greatly influenced management theory, because at the time, manage- ment was not considered the most significant part of an organization. The theory during Drucker’s time was that the president or the chief executive of an organization would give orders, and others would simply follow.
By shifting the focus to the study of human interactions within an organization, the flow of information, the decision-making process, and managerial autonomy, Drucker concluded that these factors could highly impact the success of an organization. In today’s world of organizational practices, we understand the central importance of the role the manager plays; in many ways managers are absolutely crucial to the success of any organization.
Managerial Levels
Even though managers function in similar ways, they each perform different tasks and operate on different levels within the organization. Organizations typically have three levels of management: front-line managers (supervisors), middle managers, and top man- agers (executives). Let’s take a closer look at these three different types of managers.
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CHAPTER 1Section 1.2 Management Roles
Front-Line Managers or Supervisors
Front-line managers or supervisors are responsible for carrying out the daily activities of the organization. Front-line managers work in the various divisions, operating units, or departments to assure the short-term goals of the organization are achieved. Examples of front-line manager titles include
• office manager • department manager in a retail store • production line leader or foreman • head server • director of accounts payable/receivable • crew chief on an airline flight
These managers deal with short-term operating decisions and direct the daily tasks of nonmanagerial employees.
An example of a front-line manager would be the supervisor in an automotive parts company. The manager would be responsible for overseeing the employees who work within the distribution division of the organization. The supervisor would be responsible for making sure the parts are distributed to the correct locations and to the customers who ordered them. More specifically, if a large shipment of five thousand parts was to be sent to one of the organization’s best clients, the front-line manager would be the person responsible for making sure the order was correctly filled.
Often, being a front-line manager is the first step of a managerial career. If a supervisor does well and is successful, he or she has demonstrated the potential to move through the ranks of the organization to middle manager, and some day executive manager. The important function of the front-line manager is to provide direction, technical support, and training of personnel. Front-line managers carry out the plans of the middle and executive managers.
Middle Managers
The supervisors of the front-line managers are the middle managers. The middle manager is largely responsible for interpreting the general, long-range objectives set down by the executive management team (Steers, Ungson, & Mowday, 1985). Middle managers are responsible for finding ways to increase efficiency within the organization. For exam- ple, they determine ways to help front-line managers and nonmanagerial employees use resources to reduce manufacturing costs or improve customer service.
Middle managers evaluate whether the goals of the organization are appropriate and make suggestions to executive managers regarding the functionality of certain divi- sions. The suggestions that middle managers make to executive managers can some- times increase organizational performance. An effective middle manager has the ear of the executive manager when it comes to suggesting improvements. A significant part of the middle manager’s job is to develop and fine-tune skills and knowledge
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CHAPTER 1Section 1.2 Management Roles
around areas such as manufacturing or mar- keting expertise; this allows the organization to remain effective. While front-line super- visors occasionally are promoted to become middle managers, most middle managers are professionals with academic credentials and additional corporate-level training. Due to their respective levels of learning and experi- ence, some may have skipped past front-line management altogether.
Executive Managers
We now know that front-line managers report to middle managers, and that middle managers report to executive managers. But what is an executive manager? Executive managers estab- lish organizational goals, decide how depart- ments should interact, and monitor the perfor- mance of middle managers. These executive managers are the elite managers in the organi- zation tasked with planning and implementing strategic goals. The executive is responsible for defining the long-term direction of the organi- zation, including the overall mission or goals, product or service, operating policy, and the specific organizational objectives. They are held accountable to the various stakeholders—
including the board of directors and any stockholders—for the fiscal and operational suc- cess of the organization.
Managers at this level tend to be highly experienced, hold professional degrees such as a master’s of business administration (MBA), and have a documented history of manage- rial successes. Executive managers have a tremendous amount of responsibility. In con- trast to middle managers, executives have responsibilities across the various departments and divisions within the organization. In many cases these managers are responsible for the success or failure of an organization, and they are constantly monitored and checked by internal and external forces around the organization.
A chief executive officer, or CEO, is an organization’s most senior manager. All other exec- utive managers will report to the CEO. Sometimes within an organization, the executive managers will create a top-management team. The top-management team is made up of the CEO; the chief operating officer (or COO); the president of the organization; and the top-level executives, or heads, of the most important departments within the organiza- tion. At the core of the executive manager’s job is the task of planning and organizing to determine the organization’s long-term success. This is where an executive manager will spend most of his or her time.
JupiterImages/ThinkStock
Executive managers are held accountable for the fiscal and operational success of the organization and to the various stakeholders.
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CHAPTER 1Section 1.2 Management Roles
Summary
Organizations have multiple levels of management. These levels are often referred to in pyramidal terms with the CEO shown at the top of the pyramid, various levels of mid- management in the midsection of the pyramid, and front-line supervisors at the bottom. Figure 1.1 suggests the relationships between the various levels of management.
While the distributions of the five functions are not equal across all levels, activities, and varieties of management, all managers are actively involved in the functions on a regular basis. As we’ve learned, executive managers likely do more planning and controlling of outcomes. Mid-level managers have more general function responsibility depending on reporting obligations. Front-line managers do less planning and more leading of front-line workers. The importance of the five functions—planning, organizing, leading, control- ling, and staffing—will differ from manager to manager. This can easily be determined simply by the manager’s position within the managerial pyramid.
Managerial Types
Another way to think of management is by division or type. Some managers are respon- sible for producing products or services, while other managers serve in a supporting role. Each has an important part in the organization and is essential to the success of the
Figure 1.1: Managerial Levels
CEO
Vice Presidents/ General Managers
Director-Level Managers
Mid-Level Managers
Front-Line Supervisors
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CHAPTER 1Section 1.2 Management Roles
firm. Two types of managers appear universally in the organization: line managers and staff managers.
Line Managers
Line managers have the authority to make decisions and usually have people reporting to them. They are directly responsible for a product line or delivery of a service by the organization. This type of manager is often a product manager, marketing manager, pro- duction manager, service manager, or division manager. Such managers are often charged with sales, production, and delivery budgets.
Staff Managers
Staff managers lead departments that serve in supporting roles, including accounting, human resources, procurement, and logistics. While critical to the success of the organization, these functions are not involved in production and typically do not directly produce revenue.
One of the easiest ways to see the distinctions among the varieties, levels, and types of man- agement is through an organization chart. An organization chart uses box-and-line illustra- tions to represent the formal relationships of positions of authority and the organization’s official divisions of labor. Figure 1.2 provides an example of an organization chart. Line management is an extension of the executive office (in a corporate structure this is more often than not the president) down through the vice president of manufacturing, manager of production, and finally to the shop floor supervisor. Similarly, the vice president of human
President
Vice President Manufacturing
Vice President FInance
Vice President Human Resources
Manager Production Accounts PayableRecruitment
Shop Floor Supervisor Accounts ReceivableStaff Development
Figure 1.2: An Organization Chart
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CHAPTER 1Section 1.2 Management Roles
resources and vice president of finance are shown as the left and right arms of the chart because they represent the organization’s staff management.
Managerial Knowledge, Skills, and Abilities
We now understand the roles, responsibilities, and types of management in an organization. Next, we can address some of the important characteristics of managers in the daily exercise of their duties. What is it that managers need to know to be successful? Managers generally need a range of knowledge, skills, and abilities.
Technical Knowledge Technical knowledge is having the job-specific knowledge and techniques required to perform an organizational role. Managers need knowledge appropriate to the areas they oversee. For example, the accounting manager should have high-level accounting expertise with a significant background in the field sufficient to manage the accounts of the organiza- tion. Likewise, the production manager should have sufficient experience and education (likely in engineering, management, or both) to lead a production team to manufacture the product of the organization.
Human Relations Skills Human relations skills are the ability to understand, alter, lead, and control the behavior of other individuals and groups. Managers need to have the ability to lead and motivate others to complete not just the ordinary operations of the department but to energize the team to high levels of activity when business demands it. Building trust is an important component of human relations.
Critical Thinking Abilities Critical thinking abilities, or conceptual skills, are the ability a manager needs to analyze and diagnose a situation and to distinguish between cause and effect. Managers must be problem solvers and have a variety of skills (operational, technical, mathematical, etc.) to draw on as problems present themselves in the business.
Such knowledge, skills, and abilities are critical to managers as they engage the five func- tions of management during the workday. Table 1.1 suggests the relative emphasis on technical, human relations, and conceptual skills at various organizational ranks.
Comstock/Thinkstock
Human relations skills are part of every level of management.
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CHAPTER 1Section 1.3 The Five Management Functions
TABLE 1.1: MANAGERIAL FOCUS
Rank
Strategic High Conceptual, Low Technical High Human Relations
Tactical Moderate Conceptual, Moderate Technical
High Human Relations
Operational Low Conceptual, High Technical High Human Relations
1.3 The Five Management Functions Learning Objective #3: What are the five management functions?
The management functions include planning, organizing, staffing, leading, and con-trolling human and other resources to achieve organizational goals. All organizations, regardless of their levels of performance or profit motives, have a management struc- ture and management staff. While the organization exists for a particular purpose, such as producing a product or service, the responsibility for mission achievement requires a central figure, and in some cases figures, to coordinate these five primary activities.
Planning
Managers use planning to choose appropriate organizational goals and identify courses of action to best reach those goals. Managers will engage in a variety of planning activities in the course of their work to achieve organizational or departmental goals. The following steps are involved in planning:
1. Examining the company’s internal and external environments to discover com- pany strengths and weaknesses and emerging opportunities and threats
2. Determining which goals the organization will pursue 3. Choosing strategies, tactics, and operational plans to achieve company goals 4. Allocating organizational resources to pursue the company’s goals
Assessing the Environment Planning begins when managers understand the contexts in which they operate. The management team commences the planning process by first examining the company’s operations. They may discover that the organization has a powerful sales force or a cre- ative research and development department (R&D). The overall assessment of the firm’s internal environment should establish the company strengths and weaknesses in the minds of the management team. Weaknesses include any poorly managed company operations, including production, quality control, sales, accounting, or information technology efforts. A Web site that is difficult to navigate and that turns away potential customers represents a company weakness.
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CHAPTER 1Section 1.3 The Five Management Functions
Also, every firm, no matter how large or small, is part of a larger environment. In that environment a series of forces can affect a company’s operations, including
• political and legal forces • social trends • economic conditions • technological changes • competitive forces
Opportunities may arise from any of these factors. When the government shifted television programming from analog signals to high definition, a series of companies were able to take advantage by creating new television sets, antenna adapters, and other products. Social trends affect fads and fashions, which result in new opportunities to sell products. Economic conditions shift purchasing habits. Technology changes create new products and improved products. Competitors may seek to merge to build a more powerful alliance.
Threats may result from poor economic conditions, new competitors, bad publicity, or products nearing the ends of their life cycles, such as traditional photography products (film), landline telephones, and walk-in movie rental stores. New tax laws can create advantages for some firms and threats to others.
The combination of internal and external forces creates what is known as SWOT analysis, which stands for Strengths, Weaknesses, Opportunities, and Threats. Additional informa- tion about environmental analyses will be provided in the planning section of this course.
Determining Organizational Goals Company leaders establish goals and objectives on at least three levels: strategic, tactical, and operational. Strategic goals are the long-term, sweeping targets a company seeks to pursue. Peter Drucker identified a set of strategic goals that would apply to a variety of organizations.
These more general performance outcomes are then subdivided into tactical goals, which have a more immediate impact. Tactical goals are set in the following functional areas:
• production • quality control • marketing • sales • accounting • finance • information technology • research and development • human resources
These goals guide managers in the various areas. The top management team makes sure that tactical goals mesh with strategic goals.
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Finally, the company identifies operational goals. These are the performance targets for everyday activities such as sales quotas, production quotas, completing daily reports and paperwork, and processing the flow of raw materials into the company and finished goods to customers.
At each of these levels, two common denominator concepts are efficiency and effectiveness.
Efficiency measures how productively resources are used to achieve a goal. An organiza- tion’s efficiency, or performance level, is based on how well managers plan and develop strategies to meet those goals. Efficiency has been described as “doing things right” with little wasted motion or resources. Effectiveness, in contrast, is “doing the right things.” Effectiveness means that company efforts help achieve the goals that will allow the com- pany to survive, grow, and thrive over time (Drucker, 1985).
Creating Plans The development of goals at the three basic levels leads to the creation of plans to achieve those outcomes. A strategy is a cluster of decisions about what goals to pursue, what actions to take, and how to use resources to achieve goals. An example of a strategy would
be to implement a plan that would sell directly to consumers, rather than going through an already existing company that acts as an inter- mediary seller. This way the profits remain with the producing company. Various forms of strate- gies designed to achieve rapid or slow growth, stability, or to respond to decline are presented in the section of this course regarding planning.
Tactics are the plans that support strategies. An example of a tactic would be to increase adver- tising in order to reach customers without using an intermediary. Another tactic in the same stra- tegic program would be to create a more effi- cient shipping system, which entices customers to make purchases more quickly and more often.
Strategic Goals
Market Share Innovation Productivity Physical and Financial Resources Profitability Manager Performance and Development Employee Performance and Attitudes Social Responsibility Source: Peter Drucker (1972). Management, Tasks, Responsibilities, Practice. New York: Harper and Row.
Felipe DuPouy/ThinkStock
Successful organizations must be both efficient and effective.
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Operational plans direct daily activities. They include items such as work schedules, ordering inventory, and routinely updating a Web site. Operational plans help ensure that front-line supervisors and company employees are clear about their everyday responsibilities.
Allocating Resources The final part of the planning is deciding how to obtain the necessary labor (human resources) and parts (general resources) to build the product or service that is for sale, and decide how much of these resources will be needed to meet company goals. It is also nec- essary in the planning stage to assess the cost of purchasing resources as well as paying employee salaries. Assessing any competition and determining the product’s place in the market is another important planning component.
Summary Planning a strategy is complex and can be challenging because it is done under the umbrella of uncertainty; the result is unknown. Uncertainty means that managers must sometimes take risks when they pledge organizational resources to execute a particular strategy. The uncertainty involved makes the planning process subject to change as the organization grows and its intended goals evolve. At the same time, the fundamental elements of plan- ning apply to any organization—no matter how large or small—and the nature of that orga- nization’s goals.
Organizing
Organizing is the process of establishing task and authority relationships that allow peo- ple to work together to achieve the organization’s goals. A function of the manager’s role in organizing is determining the best way to organize all resources. Organizing consists of three primary tasks, which will be explored in detail in subsequent chapters: job design, departmentalization, and creating an organizational structure.
Job design occurs when managers determine the tasks needed to be done, who will do these, and what selection criteria will be used to choose employees and place them on the job. Departmentalization involves organizing people into different departments or divisions in which collections of tasks are placed together, such as accounting, market- ing, and production. Creating an organizational structure occurs as managers identify the amount of influence and responsibility each of these different individuals and groups should have. Drucker pointed out that “Organizing often requires designing and eval- uating organizational processes and systems to initiate work and to determine if any changes need be made” (Drucker, 1985).
The intended outcome of organizing is to create an organizational structure, which is a formal system of task and reporting relationships that coordinates the activities of members so that they work together to achieve organizational goals. The organiza- tional structure determines how an organization’s resources can be best used to cre- ate goods and services. Organizational design is the process by which managers make specific organizing choices that result in the particular kind of organizational structure they will utilize.
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CHAPTER 1Section 1.3 The Five Management Functions
Staffing
Staffing includes the recruiting, selecting, training, evaluating, compensating, and dis- ciplining of employees within the organization. Staffing has become a preeminent func- tion of contemporary managers. In today’s organizations a manager is sometimes more responsible for recruiting, selecting, evaluating, and hiring employees than an organiza- tion’s human resources department. This was not the case until recently and has meant more responsibility and accountability on the part of the manager for hiring effective and successful employees. Managers are responsible for bringing together the team of employees and assigning tasks to make the best use of available resources for the comple- tion of the organization’s goals and activities.
Leading
Leading means motivating, coordinating, and energizing individuals and groups to work together to achieve organizational goals. Managers lead by explaining a clear organi- zational plan for its employees to accomplish, and then energizing and enabling those employees so that it is clear to each individual what part he or she needs to play in help- ing to achieve the organization's intended goals. Managers must utilize their authority, personality, influence, persuasion skills, and communication skills to coordinate people and groups to create a harmony between all employees within the organization or its divisions. Encouraging, supporting, and mentoring employees can also be beneficial in helping the organization achieve its goals.
An effective leader will be able to maintain a motivated and committed workforce. An example of leading effectively would be a manager who stays calm, cool, and collected. A leader remains open to suggestions from colleagues and takes the time to listen to and mentor employees. This type of leading can only strengthen an employee’s commitment to meeting the overall goals and strategies of the organization he or she works for. Theo- rist Mary Parker Follett (1868–1933), who was a trailblazer in researching theories of orga- nizational behavior, wrote, “Managers often influence others to get things done” (Parker Follett, 1949). Effective leaders prepare employees for change and provide a guide to the future by setting goals, motivating employees, and determining employee growth. Lead- ing is often the most critical function in the success of the organization.
Control
Control establishes accurate measuring and utilizes monitoring systems to evaluate how well the organization has achieved its goals. Control systems provide standards for assessing and monitoring the use of resources and the quality and quantity of productiv- ity. Control systems assess effectiveness at the strategic, tactical, and operational levels. These systems, found throughout the organization, include financial controls, budgets, authority structures, production planning, and quality control. The standard control pro- cess consists of four steps:
1. Establish and review standards set in the planning process. 2. Measure performance at the strategic, tactical, and operational levels. 3. Compare performance outcomes with the standards that were set. 4. Make a decision:
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CHAPTER 1Section 1.4 The History of Management Theory
• Successful performance should be rewarded. • Unsuccessful performance should be corrected.
Monitoring is an essential aspect of control. Oftentimes, a manager’s best-laid plans do not work out the way they were intended. The con- trolling function allows managers to ensure goals are met through monitoring. If standards are not being met, managers seek out ways to improve performance in order to meet those standards.
The ability to measure performance accurately and regulate organizational effectiveness is the outcome of the control process. To exercise control, managers must decide which goals to monitor. Goals pertaining to productivity, quality con- trol, or customer service will need to have control systems that will deliver the information necessary to determine performance and whether or not the goals have been met. The control system also allows managers to evaluate how well they themselves are performing.
1.4 The History of Management Theory Learning Objective #4: What historical figures have shaped current management theory?
In the eyes of most management historians, the field of management began when Henry R. Towne, a manufacturer, presented a paper entitled “The Engineer as Economist” to the American Society of Mechanical Engineers in 1886 (Towne, 1886). The paper argued that the study of management was equal in importance to the study of engineering and should have its own body of research and its own professional organizations.
Soon after, Frederick W. Taylor merged scientific theory with management theory, lead- ing to the field he labeled as scientific management. The following box illustrates the four principles. The program produced dramatic increases in productivity levels of individual workers. The labor movement achieved dramatic legislative gains during the scientific management era due to complaints that such programs created sweatshop-like condi-
Taylor’s Four Principles of Scientific Management
1. Development of a true science of managing with clearly stated laws, rules, and prin- ciples that replace rule-of-thumb methods.
2. Scientific selection, training, and development of workers for specific jobs. 3. Cooperation with workers to make sure work is completed using scientific principles. 4. Equal division of tasks and responsibilities between workers and management. Adapted from Arthur G. Bedeian (1986). Management. Chicago: The Dryden Press.
iStockphoto/Thinkstock
Building the Pyramids is an example of successful management in ancient times.
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CHAPTER 1Section 1.4 The History of Management Theory
tions. The U.S. government and individual unions fought to protect workers from unfair management tactics (Vaughan, 1912).
In spite of the concerns, Frank B. and Lillian M. Gilbreth (1915) applied many of the prin- ciples of scientific management to create a program known as the time and motion study. By using both film and a stopwatch to observe work being performed, it was possible to devise the most efficient method to complete a task.
During the same time period, Henri Fayol (1916) wrote in his native French about the importance of the classic management functions of planning, organizing, staffing, direct- ing, and controlling. The ideas paralleled the principles of scientific management in the United States and became widely implemented throughout Europe.
The Human Relations Movement
Mary Parker Follett questioned the wisdom of scientific management, arguing that the program ignored the human element in the organizational equation. She believed that managers should serve as coaches and facilitators rather than as monitors and supervisors (Parker, 1949).
The human relations movement gained momentum in the late 1920s. Researchers Elton Mayo and Fritz Roethlisberger conducted the Hawthorne Studies, in which the primary focus was on people, rather than solely on productivity. The subjects in the study responded to positive and pleasant interactions with researchers by increasing productivity rates on the job.
Later in the seven-year study, some of the tasks performed by supervisors were taken over by entry-level employees. This also increased production. Some workers found the experience to be “fun” and free of anxiety about being disciplined for poor performance.
Mayo and Roethlisberger found that employees formed informal groups that were cohe- sive and loyal to one another. These groups established information norms or rules about levels of productivity. Anyone who overproduced became a “slave” or “speed king.” These individuals were derided and even physically punched in the arm (binging) by other employees. Anyone who failed to do their fair share of work was labeled a “chiseler” and
was told to keep up with the group.
It became clear that more than money motivated workers. Social interactions were a key part of the organizational experience. Individual attitudes and collective employee morale are significant determinants of productivity levels. Mayo and Roethlisberger suggested that company manag- ers should consider human emotions and inter- actions in order to achieve the highest levels of success (Urwick, 1960; Bedeian, 1986. pp. 50–52).
Abraham Maslow and Humanism Clinical psychologist Abraham Maslow was among the first to shift views on the nature of
Brand X Pictures/ThinkStock
The human relations movement shifted the focus of management theory from the production process to an emphasis on people.
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CHAPTER 1Section 1.4 The History of Management Theory
human beings. Maslow argued for humanism, a perspective that suggests the basic inner nature of a person is inherently good. In the hierarchy of needs theory, the argument expands to suggest that the process of life is, in essence, a process of “getting better.” The ultimate expression of life, self-actualization, is performing work that is helpful and meaningful to others while at the same time staying true to one’s own sense of self.
Maslow’s work influenced the fields of psychology, social psychology, sociology, and man- agement. Much of the research and theory-building that took place in the years following the publication of the hierarchy of needs is based on humanist assumptions. As a result, the scientific management method, which relied on money and fear as primary motives, was replaced with newer, more positive views of employees (Gomez-Mejia, Balkin, & Cardy, 2005, p. 29).
Douglas McGregor’s Theory X and Theory Y In The Human Side of Enterprise, Douglas McGregor (1960) proposed two companion theo- ries that summarize the differences between scientific management and the human rela- tions movement. Theory X, as shown in Table 1.2, expresses the scientific management view of workers as the assumptions and conclusions leaders in that category have about their followers. A Theory X leader assumes his or her followers lack ambition, prefer direc- tion, and inherently dislike work, so the leader concludes that only external motives (e.g., money and fear) will work. He or she should focus on production as dictated by scientific management theory.
In contrast, a Theory Y leader represents a much different perspective on the nature of employees, both in terms of assumptions that they are self-motivated and the conclusions made by leaders as a result of these assumptions. A Theory Y leader assumes employees want to work, are naturally motivated, and have underutilized talents. This leader con- cludes motivation is innate, and he or she should focus on leading as a facilitator or coach.
TABLE 1.2: MCGREGOR’S THEORY X AND THEORY Y
Assumptions of Theory X Assumptions of Theory Y
1. People dislike work. 1. Wanting to work is natural.
2. People avoid responsibility. 2. People seek responsibility.
3. People prefer direction. 3. People enjoy autonomy.
4. Most people have little ambition. 4. Most employees are only partially utilized in terms of talents and abilities.
5. Given the opportunity, employees will generate ideas to help themselves and the company.
Conclusions of Theory X Conclusions of Theory Y
1. Leaders should be production-oriented. 1. Leaders should be people-oriented.
2. Employee motivation is derived from money and fear.
2. Motivation comes from within the individual.
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CHAPTER 1Section 1.4 The History of Management Theory
McGregor argued that Theory Y leaders unleash human potential and would succeed in the long term (McGregor, 1960).
Summary The human relations movement greatly influenced management theory during the period from approximately 1930 to 1960. At that point, influenced by improvements in technol- ogy and computers, globalization, and other trends, the world began to change. Conse- quently, neither the scientific management approach nor the humanistic vantage point is a complete perspective, and new ideas and concepts about the most effective ways to manage employees continued to emerge in the modern era.
Modern Management
Another key historical figure in the study of management theory is Chester I. Barnard (1886–1961), an American business executive and a public administrator. He authored Functions of the Executive in 1938, a pivotal book on management theory and organizational studies, which explains the functions of executives within an organization by focusing on the theory of organization, also known as organizational science. The theory of organization or organizational science includes the systematic study and application of knowledge about how people act within organizations. Barnard defined an organization as “a system of consciously coordinated personal activities or forces” (1938).
Consider Barnard’s conceptualization of an organization as a starting point. Based on Barnard’s definition, we can envision a potential organization with a purpose or goal, coordinating systems, people to carry out the necessary tasks for success, and managers who guide the entire process toward the expected outcomes. This simple form is often the way organizations work today.
Typically, in an operating unit, otherwise known as a part of a larger division or company, the leader of the unit, division, or company is a trained and experienced manager. An oper- ating unit, division, or department consists of a group of people who work together and pos- sess similar skills or use the same knowledge, tools, or techniques to perform their jobs. In each case, the managers and other members of the organization accept the mission to achieve the stated purpose and work to those ends. Typically, it will fall on the managers to plan, organize, and strategize how to carry out the organization’s mission.
Systems Theory Barnard introduced systems concepts to the business world. Later, general systems theory con- ceptualized an organization as a set of interrelated parts working together in a holistic fashion.
In a business system, inputs include raw materials, financial resources, and human resources. The transformation process is the company’s production function, including the assembly of physical products and the development of intangible services. Outputs are the finished, final goods and services sold to the public. The feedback mechanism provides cor- rection and adjustment, keeping the organization in tune with its environment.
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CHAPTER 1Chapter Summary
Contingency Theory If one phrase summarizes contingency theory, it might be, “There is no one best way to manage.” In organizational behavior, there is no one best motivational system, no one best leadership style, and no one best form of organizational structure and design. Instead, flexible approaches to management are required. Many of the recently developed man- agement theories reflect contingency thinking, where management adapts to the situa- tion, company employees, and other circumstances that are present.
Summary In the modern era, the work of Barnard and others points out that organizations constantly change. Thinking of a company as a still photo is not accurate. A business organization runs much more like a motion picture. Successful managers adapt to changing circum- stances, often using contingency approaches to adjust to a changing world.
Chapter Summary
An organization consists of two or more people in a social setting, with division of labor, a hierarchy of authority, coordination of activities, and a common purpose or goal. Profit-seeking organizations try to make money. Nonprofit organizations serve various organizational needs. Governmental organizations oversee the well-being of a population of citizens.
Management plays a critical role in the success of the organization. An organization’s management team is charged with the effective use of the resources available to them to achieve planned outcomes. Drucker (1985) made the distinction between efficient and effective management skills in respect to the organization’s performance. “Performing an activity swiftly and economically is efficient, while doing the right thing well is effective. The wrong thing, however, is ineffective by definition.”
The five management functions include planning, organizing, staffing, leading, and con- trolling. Managers coordinate these functions at the strategic, tactical, and operational levels. To do so requires technical, human relations, and conceptual skills.
The history of management theory began with the scientific approach. Later, the human relations movement shifted the focus from sheer productivity to a greater emphasis on employees and their well-being. Modern management theory incorporates elements of system theory and contingency theory to describe and manage the complex organizations present in today’s business environment.
Possessing strong management abilities and skills such as the ones discussed in this chapter will guide potential or new managers toward achieving the organizational goals and help them to be highly effective. This chapter is your first step in improv- ing and fine-tuning the set of managerial skills you will employ during the course of a career.
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CHAPTER 1Chapter Summary
Case Study: The Insurance Agency
Jose Morales graduated from college and entered the workforce as an insurance salesper- son for a large agency in metropolitan Albuquerque, New Mexico. He was excited about taking a position that he believed genuinely helped people by protecting them and aiding them when difficult situations arose.
The agency had begun actively seeking out the local Hispanic market. The number of poten- tial customers had grown, and an increasing number of them had moved into the category of lower middle class. At the least, these individuals might become interested in basic insur- ance such as term life insurance and other moderately priced policies. Jose knew he would be asked to seek out and reach this target market because he spoke both English and Span- ish fluently.
At first, Jose was able to achieve modest success. Using carefully designed research meth- ods, he was able to identify households that were most likely to purchase insurance. The prospects were all dual-income families who had children and who were purchasing rather than renting their homes. All potential clients owned more than one car.
Just as Jose believed he was getting established in the market, two events occurred. The first was a major economic recession, fueled in large part by a collapsing housing market in which homes began to lose value. Many individuals in his area were losing jobs, especially in the service sector. Continuing to make sales under those circumstances was unlikely.
The second event was a sales contest that the regional manager, Michael Dunn, announced would take place over a three-month period. The agencies were assigned to compete with ten others in the region, including Taos in New Mexico and Phoenix in Arizona. Individual salespeople who exceeded their quotas would receive bonuses and other prizes; however, the biggest rewards were set aside for the agency-versus-agency level of competition.
Jose knew he was in a difficult situation. He was expected to compete by trying to make sales to a group of individuals without the resources to buy. He was in a rotation for refer- rals, but with the large number of agents, it only amounted to two prospects per week. The only other potential customers he would meet were walk-ins, who were much less likely to make a purchase on the first visit.
It was not long until Jose was receiving dirty looks from other agents. His agency was in fourth place in the contest, and he was nearly last in individual sales. At one point he believed he heard an ethnic slur in the break room related to his being unreliable and incompetent. Jose was angry, frustrated, and ready to quit his job.
Michael Dunn traveled to the Albuquerque location after the first month of the contest. He took Jose into a conference room. Michael asked Jose how he felt about his job. Jose responded that he enjoyed the challenge and serving people, but that the contest was put- ting him in a bad situation, especially given current circumstances. He did not mention the racial comment. Jose did note that a pleasant work environment would benefit the entire agency. Michael responded that if Jose couldn’t do the job, he would look around for some- one who could. Jose left the meeting feeling angry and frustrated.
By the end of the contest, Jose had moved into 15th place out of the sixty individual com- petitors. His agency finished third in the contest. Jose believed he was the scapegoat for the agency not placing higher. (continued)
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CHAPTER 1Chapter Summary
Key Terms
effectiveness measures the company’s efforts to achieve the goals that will allow it to sur- vive, grow, and thrive over time.
efficiency measures how productively resources are used to achieve a goal.
management all of the techniques used to lead the human resources in an organization to become productive.
management functions planning, organizing, staffing, leading, and controlling human and other resources to achieve organizational goals.
management theory the study of the overall management process.
manager the person responsible for helping to achieve an organization’s goals and desired future outcomes.
operational plans plans that direct daily activities.
organization a collection of people who work together and coordinate their actions to achieve a wide variety of goals or desired future outcomes.
organizational structure a formal system of task and reporting relationships that coordi- nates the activities of members so that they work together to achieve organizational goals.
strategy a cluster of decisions about what goals to pursue, what actions to take, and how to use resources to achieve goals.
SWOT analysis assessing company strengths and weaknesses plus opportunities and threats in the external environment.
tactics the plans that support strategies.
Jose had begun to develop a positive relationship with his agency’s manager, Marty. He was able to complain about how the contest had put him at an unfair disadvantage and damaged his interactions with coworkers. Marty commented that Michael Dunn was just a “suit” with no real understanding of front-line salespeople. Marty said that he had formu- lated a plan to more efficiently identify potential customers and another to more quickly settle claims. He also developed an organization chart that more clearly assigned sales- people into teams that would better serve customer needs. Michael’s response was that these activities “are not your job.”
Within one year, Jose had left the agency and joined a company that sold wireless phone service, specializing in connections to the Hispanic community. Marty moved into another agency with the same insurance company that placed him under a different regional super- visor. Soon after, his new supervisor implemented many of his ideas.
1. Explain how the sales contest was a planning failure. 2. Of the five management functions, which area did Michael Dunn fail to understand? 3. Of the three primary management skills, which did Michael Dunn fail to exhibit? 4. If you were Michael Dunn’s manager, what steps would you take with him? 5. How should the insurance agency change to become a more effective operation in the
future?
Case Study: The Insurance Agency (continued)
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CHAPTER 1Chapter Summary
Review Questions
1. Define the term organization and list the main forms of organizations. 2. Define the terms management theory, management, and manager. 3. What are the three most basic managerial levels in organizations? 4. What are the primary activities of line managers and staff managers? 5. What three managerial skills and abilities help an individual achieve success? 6. What are the five management functions? 7. What four steps are associated with planning? 8. Explain the natures of efficiency and effectiveness in organizational
management. 9. Name and define three levels of plans created in business organizations. 10. What three tasks are associated with organizing? 11. What are the four steps of the control process? 12. What is scientific management? 13. Explain humanism and the human relations movement in management. 14. Explain the four parts of a system and how they relate to a business enterprise.
Analytical Exercises
1. Access the Web sites of Ron Jon Surf Shop http://www.ronjonsurfshop.com/ and Hilo Hattie http://www.hilohattie.com/aloha/ (a similar retailer in Hawaii). Explain how the two are similar and how they are different. Can you find ele- ments of planning, organizing, staffing, leading, and controlling in these Web sites? Provide specific examples.
2. In three columns labeled (a) profit-seeking, (b) nonprofit, and (c) governmental, make a list of the differences for each type of organization in the following areas. Compare your answers with others in the class. • sources of revenue • types of expenses • organizational goals • measures of organizational success • differences in management styles
3. Make a list and provide answers in three columns for (a) front-line supervisors, (b) middle managers, and (c) executive managers. Give an example for each answer. • types of duties (specific, general, or both) • basic orientation (technical, conceptual, or both) • time spent planning (least, moderate, most) • time horizon for planning (short-term, medium-range, long-term)
4. Table 1.1 suggests that the managerial focus for each level includes a high human relations element. Explain how human relations activities would be different for front-line supervisors, middle managers, and executive managers. Explain the common elements in each.
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CHAPTER 1Chapter Summary
5. Perform a SWOT analysis for each of the following companies: • Walmart • a local dry cleaner in your hometown • Blockbuster video stores • General Motors • Facebook
6. Using the list of strategic goals provided in section 1.3, give specific examples of how each would be related to the following companies: • Coca-Cola • Allstate Insurance • a local radio station • United Way
7. Explain how each of the following activities at McDonald’s is an example of a strategy, tactic, or operational plan. • merging with Papa John’s Pizza to create a wider customer base • adding heart healthy menu items • expanding into a new country • creating new methods for serving customers at the drive-through window • releasing a new advertising campaign for holiday seasons • improving the purchasing system to keep food fresher
8. Explain how the following sets of functions are interrelated: • planning and organizing • planning and staffing • organizing and staffing • staffing and leading • planning and control
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Bob Rowan; Progressive Image/CORBIS
chapter 2
The Planning Function
Chapter Goals
After completing this chapter, you should be able to • Explain how a company’s mission and strategic vision statements shape its planning processes. • Describe how internal and external environments influence a company’s plans. • Analyze and develop sets of goals at the strategic, tactical, and operational levels. • Implement the three types of plans managers create. • Allocate the proper amount of resources to carry out the plan.
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CHAPTER 2Section 2.1 Introduction
2.1 Introduction Learning Objective #1: How do a company’s mission and strategic vision statements shape its planning processes?
Planning is a systematic process in which managers make decisions about future activi-ties and the key goals that the organization will pursue. One primary element, strate-gic planning, focuses on planning for the future of the organization. It is a purposeful effort directed by management within an organization, which, if done effectively, draws on the knowledge, skills, and abilities of employees at all levels of the organization. Strategic plans are designed to integrate all company activities into one coherent course of action (Bedeian, 1986, p. 100). As noted in Chapter 1, the following steps are involved in planning:
1. examining the company’s internal and external environments to discover com- pany strengths and weaknesses and emerging opportunities and threats;
2. determining which goals the organization will pursue; 3. choosing strategies, tactics, and operational plans to achieve company goals; and 4. allocating organizational resources to pursue the company’s goals.
Each of these activities can help you become a more successful manager.
Red Bull: Planning a Successful Entry into a New Market
Many social and economic trends have their origins in recent history. One social trend might be that an increasing number of people want help in two areas—waking up and keeping moving. Energy products take various shapes and forms, from 5-ounce energy drinks, to pills, to an old-fashioned cup of coffee. In Australia, the energy product Red Bull was introduced in 1984. As one early fan noted, it tastes sweet and lemony and melts like a lollipop. The standard Red Bull can holds 8.3 ounces. Its price is typically higher than a 16-ounce bottle of soda.
The new product was an immediate success. Its target market included those who needed to stay up all night studying, working, and partying. Another group that quickly embraced Red Bull was extreme-sports enthusiasts. It did not take Red Bull’s management team long to decide to expand the company’s scope and enter the U.S. market.
The decision to enter a new country is a strategic plan. Doing so was a long-term decision that committed the entire Red Bull company to achieving a new goal. Only the executive management group could make such a choice.
The strategic plan resulted from a careful analysis of the environment. The primary ingredi- ent in Red Bull, taurine, occurs naturally in the human body but is lost during periods of high stress or physical exertion. Red Bull replaces taurine and combines it with carbohy- drate glucuronolactone, which helps the body detoxify. Caffeine is another component, along with acesulfame K, sucrose, glucose, B-vitamins, and aspartame. The management team would first need to determine the legal status of each of these chemicals to make sure the product could be sold over the counter (it is banned in Canada). Because they performed an analysis of the environment, they were confident that the social trend— needing to stay awake—was also part of the American culture.
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CHAPTER 2Section 2.1 Introduction
The management team then set its strategic goal: to become the dominant new energy drink in the United States within five years. The goal was met: by 2001, the drink held a 70% market share, and annual sales topped $140 million.
After establishing the strategic direction, tactical plans were put in place, including those regarding physical distribution of the product. Red Bull spent considerable time developing a marketing plan to help reach its strategic goals of a dominant market share. The company created a group of “consumer educators” who traveled to various locations and gave out free product samples. They attended events such as cliff diving, games at sports arenas, and skateboarding contests. The theme was that Red Bull is “sleek, sweet, and full throttle.”
At the operational level, individual brand champions brought the product to various parties and gatherings. Advertising on traditional media such as television and radio was highly limited. The company relied on word-of-mouth endorsements instead.
Red Bull faced little early competition. It had taken the energy drink market by storm, most notably by being offered as a contrast to products such as Gatorade. Effective environmental scanning plus careful planning and execution of the plan helped Red Bull succeed, and other competitors were left far behind (Clow & Baack, 2010, pp. 270–271; www.redbull.com).
Questions for Students
1. What environmental factors should the management team at Red Bull have considered prior to launching the product in a new country?
2. What core competence helped make Red Bull a successful product? 3. What products and brand names are Red Bull’s chief competitors?
The Value of Planning Have you ever heard this? A failure to plan is a plan to fail. In today’s complex and rapidly changing environment, it might be easy to conclude just the opposite, that planning is a waste of time, because things happen so quickly. In reality, planning is as important as ever. Successful companies follow the steps and principles of planning, specifically because of environmental volatility. In essence, quality managers know that (1) planning helps company leaders anticipate change, and (2) planning helps managers make changes.
In this chapter, you will discover that the planning process begins with a careful analysis of the company’s internal and external environments. As a result, company leaders are able to anticipate change. Through careful forecasting and other environmental scanning programs, the company becomes less likely to be taken by surprise. When other firms fail
Chris Cheadle/Photolibrary
Red Bull’s strategic decision to enter the United States market paid big dividends.
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CHAPTER 2Section 2.1 Introduction
to spot trends or changes, a company can take advantage by being able to move ahead. For example, Amazon.com was able to forecast a trend in which people would become more and more comfortable with online shopping, and an e-commerce retailing giant was born.
Planning helps company leaders implement change. Step-by-step programs make it pos- sible to avoid missteps and confusion. A well-executed plan may be one of the biggest time savers in business. The steps of planning take place under the banner of the firm’s overall statements about its direction and purpose.
Mission and Vision Statements
Organizations are created to meet various needs and provide various goods and services. Business organizations are founded with a major guiding idea in mind. A company’s mis- sion statement expresses a clear and concise reason for why the organization exists. In essence, the mission statement answers the question, “Why are we in business?” Outside of obvious answers, such as “to make money,” mission statements define the overall orga- nization (Smith, Arnold, & Bizzell, 1985). The following list provides examples of mission statements of several well-known companies. Other statements go into substantially more detail than these.
Examples of Mission Statements
Aflac To combine aggressive strategic marketing with quality products and services at competitive prices to provide the best insurance value for consumers.
AutoNation To be America’s best run, most profitable automotive retailer.
Bristol-Myers Squibb To discover, develop, and deliver innovative medicines that help patients prevail over serious diseases.
ConocoPhillips Use our pioneering spirit to deliver energy to the world.
Ford Motor We are a global family with a proud heritage passionately committed com- pany to providing personal mobility for people around the world.
Harley-Davidson, Inc. We fulfill dreams through the experience of motorcycling, by providing to motorcyclists and to the general public an expanding line of motorcycles and branded products and services in selected market segments.
Manpower To be the best worldwide provider of higher-value staffing services and the center for quality employment opportunities.
The Walt Disney Company To be one of the world’s leading producers and providers of entertainment and information. Using our portfolio of brands to differentiate our content, services and consumer products, we seek to develop the most creative, innovative and profitable entertainment experiences and related products in the world.
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CHAPTER 2Section 2.2 Assessing the Environment
Accompanying a mission statement will be the organization’s strategic vision statement, which points toward the organization’s future. The statement offers direction about where the organization is heading and what it hopes to become. It articulates the long-term direc- tion of the company. Walmart’s vision statement is “To be the worldwide leader in retail.” These statements are used to inspire organizational members and provide a worthwhile purpose to work together to achieve the vision. Many times these statements are not financial in nature, because such visions might not appeal to everyone in the organization. In the new millennium, many statements of strategic vision have incorporated concepts about globalization and the use of Internet technology to build toward the future.
The important point to remember is that mission statements and strategic vision state- ments are the basis from which all planning begins. Any strategic, tactical, or operational plan that violates these key statements takes the company off course and can create seri- ous complications in the future.
2.2 Assessing the Environment Learning Objective #2: What roles do a company’s internal and external environments play in planning for the future?
Would it surprise you to find out that some of the earliest ideas about strategic plan-ning came from a Chinese general? Over 2,500 years ago, Sun Tzu wrote The Art of War. The book explains how to develop military strategies that lead to victory. Sun Tzu argues that intelligence and cunning are often more effective than violence and destruction. Alliances make it possible for a military leader to expand an empire without losing soldiers and depleting other resources. When in battle, the best approach is to attack the enemy’s weak points and take advantage of the strengths of one’s own army. In essence, the first environmental analysis was part of a military operation a very long time ago.
Assessing the environment involves two key activities: (a) examining the company’s internal operations and (b) analyzing the external environment. The combination of the two factors helps guide the management team in creating the correct plans.
Internal Operations
Various levels of analysis can be combined to understand the well-being of a company. Normally, the assessment of the internal environment takes place at the strategic, tactical, and operational levels. It is tempting to think that the greatest amount of consideration should be given to the strategic level; however, actions at the lower levels can contribute greatly to a company’s success.
Strategic Assessment Strategic business units are clusters of activities typically held together by a common thread, such as a product type or type of customer served. A strategic business unit will be ana- lyzed as a “company within the company.” As an example, the 3M Corporation could establish one division devoted to magnetic tape (video and audio) and another to adhesive
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CHAPTER 2Section 2.2 Assessing the Environment
tape (Scotch tape, duct tape, packing tape). The evaluation of strategic business units will be devoted to understanding whether these portfolios of activities mesh and provide the company with a viable future.
Profit centers are business units treated as being distinct from one another in terms of generating revenues and creating expenses so that profitability can be measured. A profit center manager will be responsible for cost controls and creating revenue streams (Clow & Baack, 2010, p. 398).
A strategic analysis involves the assessment of how all operating divisions, profit centers, subsidiary companies, and other major elements are working together. Managers con- sider the group of activities to see how each performs individually and how it contributes to the organization’s overall well-being. One division may not make a great deal of profit, but it may still contribute by providing low-cost supplies or services to the other divisions (Thompson, Strickland, & Gamble, 2008).
Tactical/Functional Assessments The second level of analysis focuses on the various departments or functions within the company. Tactical assessments help the management team identify more concrete areas in which companies have strengths and weaknesses. As a simple example, the Aflac duck advertising campaign has created strong brand recognition in the company’s marketing program and constitutes a key strength. Southwest Airlines' Web site is easy to navigate and makes purchasing tickets less complicated. The FedEx tracking system for packages creates consumer confidence in the company. Tactical functional assessments involve ask- ing the right questions about all of the firm’s operations, including the items shown in Table 2.1.
A tactical analysis will be similar to a strategic analysis in the sense that each of these func- tions will be assessed not only individually but also in terms of how well they contribute to
TABLE 2.1: TACTICAL/FUNCTIONAL ANALYSES
Function Examples of Factors to Analyze
Production costs, on-time delivery rates, consumer views of quality
Quality Control rates of defects/returns
Marketing market share, brand loyalty or power
Sales by total volume, product lines, individual products
Accounting errors noted by auditors
Finance cost of capital, liquidity, leverage (debt ratio)
Information Technology quality of Web site, online ordering systems, support of internal operations
Research and Development number of innovations adopted
Human Resources rates of absenteeism, tardiness, turnover
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CHAPTER 2Section 2.2 Assessing the Environment
company success. As was noted in the first chapter, line managers have different respon- sibilities and objectives than staff managers. Time frames must also be considered. It may take Research and Development several years to finalize an innovation. Absenteeism, tar- diness, and turnover rates are normally examined on an annual basis. Company sales can be studied in shorter time frames, especially under circumstances such as a major season (Christmas, summer vacation) versus off-season.
Operational Level Assessments Front-line supervisors may contribute information to the planning process by providing additional details. Each of the functions assessed at the tactical level can be studied in greater deal at the operational level. The goal of internal assessments in general is to pro- vide as complete a picture as possible for managers to commence with planning decisions.
The External Environment
Any number of factors, events, trends, and crises that occur outside of a company can have a powerful impact on what takes place inside of that same company. To fully under- stand the organization’s current situation, top-level managers are expected to know what is happening in the world. The external environment consists of the total set of forces that influence a company but are not within its boundaries. A standard analysis of the external environment consists of two major components:
1. Semicontrollable forces influence a firm, but the company can influence them in return.
2. Noncontrollable forces influence the firm, and the company cannot influence them in return.
Semicontrollable Forces Managers at all three levels—strategic, tactical, and operational—interact with members of other organizations and other entities such as governments and special interest groups. These individuals and groups influence the company’s success. Part of the planning pro- cess involves examining these relationships to discover any problems or opportunities. Semicontrollable forces include
• customers • suppliers • financial institutions • unions • the local community • shareholders
A company’s customers can take many forms. For a major manufacturer, one potential set of primary customers is either wholesale or retail middlemen. The manufacturer does not sell directly to individual consumers, but rather to other companies. A company finds a second type of customer when it sells products, component parts, or supplies to other companies. These types of customers are called B2B, b-to-b, or business-to-business cus- tomers. For retailers, customers are the consumers who travel to the store.
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CHAPTER 2Section 2.2 Assessing the Environment
Customers clearly influence a company’s opera- tions. If a local restaurant serves items that cause food poisoning and many customers become ill, that restaurant may not survive. If Walmart decides to take a product off its shelves, the com- pany that provided the product may have a big problem. Consequently, managers know that customers are influenced through the four Ps of marketing:
• Products • Prices • Place (distribution) • Promotion
Influencing customers involves creating desired products at acceptable prices with distri- bution systems that make it easy to buy items and with promotional programs that attract and keep people coming back.
Suppliers provide the raw materials and support services necessary to keep a company functioning. If a supplier raises prices or provides low-quality materials, the company has been affected. To influence suppliers, company leaders rely on bargaining processes.
Financial institutions influence a company by either lending or refusing to lend money. Credit terms including interest rates, collateral, and repayment programs influence how a firm’s financial team operates. To return influence, company leaders keep quality records that make it clear the firm is a good credit risk.
Unions influence a company’s bottom line. Arrangements between unions and companies range from cooperative to combatant. Managers are able to influence unions through the ways in which employees are treated in terms of hiring, firing, layoffs, discipline, pay, and benefits. Management also influences unions through concessions and demands at the bargaining table.
The local community can grant either favorable or unfavorable treatment to an organiza- tion. Local governments can create business tax incentives but also instruct local law enforcement to keep a careful eye on a company. Local citizens can respond positively to a company, leading members to seek employment in the organization or to spread negative word-of-mouth comments about the firm. To influence the local community, managers engage in positive public relations activities. Human resource departments work hard to make sure the company is perceived as a fair and compassionate employer.
Shareholders influence an organization through voting and by purchasing or stock or not. At the extreme, shareholders can overthrow a board of directors and elect new members. Top managers try to keep shareholders happy by maintaining favorable dividend pay- ments and by releasing documents such as annual reports that demonstrate that the com- pany is in good hands (Trewatha, Newport, & Johnson, 1997).
Tetra Images/Photolibrary
The local community can play a major role in the success or failure of a company.
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CHAPTER 2Section 2.2 Assessing the Environment
Noncontrollable Forces Another set of factors demands the management team’s attention. Noncontrollable forces shape the planning process by presenting opportunities and posing threats. The tradi- tional list of noncontrollable forces includes the following:
• political and legal forces • social trends • economic conditions • technological changes • competitive forces
Political and legal forces can have a profound impact on business activity. Governments have various goals and agendas in place. Many of these can make a company’s busi- ness environment more favorable or create tremendous obstacles. Table 2.2 displays seven ways in which governments influence business.
Social trends constantly change. Managers are expected to monitor and adjust to various social circumstances such as when one state bans same-sex marriages (California) while another makes them legal (Iowa). Individuals who might transfer from one state to the other may have powerful feelings about such controversies. Some of the following social trends currently have an impact on business:
• Rising levels of education but greater educational disparity in the population • Changing expectations related to gender roles • Family size and composition • Population locations and movements of populations (rural to urban; the North-
western United States to the South) • Aging of the population • Spending/saving rates
Each of these can influence a business in subtle or dramatic ways. For example, ris- ing saving rates during recessions can impact discretionary spending. Smaller family sizes have changed food packaging, especially as more households consist of only one person who is divorced or widowed, or two people living together. Leaders consider the impact on social trends on their company’s specific products, services, and mana- gerial style.
Economic forces often make news headlines. Boom and bust economies shape purchasing habits, the costs of raw materials, and company activities. A firm responding to a reces- sion is likely to cut back on payroll, traveling expenses, and inventories. A company will react to a growing economy by offering new products, adding personnel, and expanding other activities.
Technological changes have changed the business landscape in major ways over the past several decades. In essence, technology has restructured the entire conduct of business. Technology affects planning for the following reasons:
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CHAPTER 2Section 2.2 Assessing the Environment
• It leads to new products. • It creates product improvements. • It improves production methods. • It changes how jobs are performed.
A job at the lowest levels of a company, such as office assistant, has been dramatically affected by new technologies. Such an employee now needs to know how to use the Inter- net and a laptop to conduct daily business. At the extreme, technology has shaped new industries, including e-commerce and biomedical research and products.
Competitive forces are among the most powerful noncontrollable influences. Company leaders monitor competition at three levels: (a) product versus product (Ford Focus versus
TABLE 2.2: HOW GOVERNMENTS INFLUENCE BUSINESS
Laws, Regulations, and Regulatory Agencies
Examples: Occupational Safety and Hazards Act Environmental Protection Agency (and Act) Family and Medical Leave Act Civil Rights Act Sarbanes-Oxley Act
Courts and Court Decisions
Examples: Liability lawsuits Size of judgments and awards Employment discrimination cases
Taxation and Tax Policies
Examples: Tax rates on individuals Tax rates for corporations Tax loophole
Subsidies and Loans
Examples: Student loans Loans to businesses and industries Subsidies for farmers Subsidies for oil companies
Government Competition with Private Enterprise
Examples: U.S. Postal Service (versus FedEx, UPS) National Park Service campgrounds (versus private camping sites)
Government Intrusion into the Economy
Examples: Activities of the Federal Reserve Board Deficit/Surplus spending
Protection of Private and Intellectual Property
Examples: Private ownership Patents and copyrights
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CHAPTER 2Section 2.2 Assessing the Environment
Toyota Corolla), (b) company versus company (Ford versus Toyota), and (c) industry versus industry (automobile versus high speed rail). Companies compete for customers, suppliers, key employees, financial resources, and physical resources. Effective planning includes respond- ing to moves made by the competition (Bedeian, 1986, pp. 156–178).
Forecasting
To further assist managers in the process of plan- ning, various forecasts will be prepared. These create additional insights into the company’s current circumstances and provide direction regarding plans to pursue. Managers examine three types of forecasts as part of the planning
process: (a) economic forecasts, (b) sales forecasts, and (c) technological forecasts. Each provides valuable planning information.
Economic Forecasts Economic conditions influence a company’s plans in direct ways. Recession sensitive com- panies experience sales that follow economic conditions. Housing, airline travel, and automobile companies are recession sensitive. Other firms experience the phenomenon in reverse. Home gardening equipment, auto parts stores, and lower-end fast food restau- rants often enjoy rising sales in bad economies. Figure 2.1 models an economic business cycle, which typically lasts from three to seven years.
If management believes that economic conditions will decline and the company is reces- sion sensitive or reverse recession sensitive, some plans such as the following will change:
• orders of raw materials • inventory levels • sales force expenditures, including travel and entertainment • size of the work force • company lending and borrowing • advertising expenditures • creating or delaying the development and release of new products
Sales Forecasts Accurately projecting anticipated revenues constitutes a key component of effective plan- ning. Sales forecasts can be based on numbers (quantitative) and management opinion (qualitative). Both are designed to make sure individual departments and activities will have sufficient funding to conduct operations without being wasteful. The sales forecast shapes the company’s budget, one of the primary short-term plans.
Ian Murray/Photolibrary
Managers consider competitors in their analysis of the external environment.
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CHAPTER 2Section 2.2 Assessing the Environment
Technological Forecasts Technological forecasts are designed to predict changes and trends that affect a firm’s long- term operations. Companies that effectively predicted that mobile phone technology would reach nearly everyone in the United States were able to aggressively move into markets sell- ing phones and connecting services. Those who predicted that mobile technologies would move into apps and Internet access gained a major advantage in their process planning.
SWOT Analysis
As was noted earlier, the combination of internal and external environmental forces, assisted by quality forecasting techniques, creates what is known as SWOT analysis, which stands for strengths, weaknesses, opportunities, and threats. Examples of company strengths include well-respected brands, a highly skilled workforce, and financial stabil- ity. Weakness may come from the lack of reliable suppliers or a key product nearing the end of its life cycle. Opportunities emerge from underserved markets; newly developed technologies that could lead to additional products or product improvements; or social trends, such as new forms of distance learning. Threats result from declining markets, bad economies, technologies that replace a firm’s technology, or competitive actions.
Consider the four possibilities presented in Figure 2.2. In the first situation (1), an oppor- tunity has presented itself in an area where the company is strong. This will likely lead to a plan designed to take advantage of the situation. In the second box (2), an opportunity exists in an area where the company is weak. Managers in that circumstance will decide whether committing resources to strengthen the company and pursue the opportunity should be the plan or to let some other firm that is better suited to the situation move for- ward. In the third circumstance (3), a threat exists where the company is strong. Managers will monitor this situation and take action as needed. In the fourth box (4), a threat exists in an area where the company is weak. Failure to respond may lead to the downfall of the company (Gomez-Mejia, Balkin, & Cardy, 2005, pp. 280–282).
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Figure 2.1: The Economic Cycle
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CHAPTER 2Section 2.3 Determining Organizational Goals
Summary
The analysis of a company’s internal and external environment constitutes a critical part of the planning processes. Without an evaluation of semicontrollable and noncontrollable forces, combined with a SWOT analysis and various forecasts, managers are more likely to be “shooting in the dark” as they make plans. When the company has sufficient infor- mation about these factors and remains true to its mission and vision, quality planning goals can then be established.
2.3 Determining Organizational Goals Learning Objective #3: What kinds of goals are set at the strategic, tactical, and operational levels?
Company leaders establish goals and objectives on at least three levels: (a) strategic goals, (b) tactical goals, and (c) operational goals. Strategic planning involves chart-ing the direction of the organization in regards to its long-term goals, objectives, and strategies. In most organizations the senior-level managers are responsible for devel- opment and execution of the strategic plan. Strategic goals are major end results that relate to the long-term growth and survival of the organization. Strategic goals are the long-term, sweeping targets a company seeks to pursue, including the following (Drucker, 1972):
1. Plan to Pursue 3. Monitor
Opportunity Threat
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s
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ENVIRONMENT
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2. Decide to Pursue or Not
4. Plan to Fend Off Threat
Figure 2.2: SWOT Analysis
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CHAPTER 2Section 2.3 Determining Organizational Goals
• market share • innovation • productivity • profitability • physical and financial resources • manager performance and development • employee performance and attitudes • social responsibility
Market share represents the company’s share of total industry sales. In the opening case regarding Red Bull, it was noted that the company held a 70% share of the energy drink market in 2001. Market share goals tend to be set in two areas: (a) expanding the company’s share to increase sales, which involves taking customers away from other firms, or (b) holding share in a growing market, which results in increased sales (see Figure 2.3).
Innovation includes any kind of creative solution. Innovation goes beyond research and development of new products or product improvements. It also includes new methods of delivery, new ways to contact customers, better accounting systems, an updated Web site, and other changes. Innovative companies stay ahead of the curve and keep competitors off guard and catching up.
Productivity means “output per worker.” Companies that succeed in this area do so by finding ways to help workers accomplish more in the same amount time by working smarter, not harder. One way to maintain a competitive edge is to find ways to increase revenues without increasing employees.
Profitability may be the goal everyone thinks you should seek to achieve first. Unfortu- nately, seeking profits above all other things often makes a company shortsighted and
Company Share
Target Increase
Target Increase
Projected Market Growth
Company Share
Increase Share in a Stable Market
Hold Share in a Growing Market
Company Share
Company Share
Figure 2.3: Market Share Goals
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CHAPTER 2Section 2.3 Determining Organizational Goals
willing to cut corners. Profits should result from improvements in efficiency and effective- ness. Profits are needed to maintain a company in the long run. They cannot be ignored, nor should they be overemphasized in the short term.
Physical and financial resources include the company’s plant and equipment, delivery fleet, computer systems, and other tangible, physical assets. Financial resources are needed to purchase and maintain the best possible equipment.
Manager performance and development reflect how well a company recruits, rewards, trains, promotes, and retains quality managers. A company needs a line of succession to ensure its success over time.
Employee performance and attitudes indicate how well the company has done in the same basic areas: recruiting, rewarding, training, and retaining employees. A company culture in which workers feel empowered bodes well for present and future circumstances.
Social responsibility indicates the type of global citizen a company wishes to become. Socially responsible companies eliminate negative activities, including discrimination, pollution, tax evasion, and other legal and ethical violations. Socially responsible compa- nies also become involved in positive activities, such as training the unemployed, giving to charities, and participating in community-building activities. Socially responsible com- panies are less likely to invite legal scrutiny and are more likely to receive a fairer hearing
should an action be called into question. Some may argue that unethical activities can enhance profits in the short term; however, firms that do so are not likely to survive for long.
Tactical Goals
Strategic goals are then subdivided into tacti- cal goals, which have a more immediate impact. Tactical goals are set in the functional areas, including
• production • quality control • marketing • sales • accounting • finance • information technology • research and development • human resources
Creating tactical goals requires coordination of the deliberations of middle-level and functional- level managers. Marketing and sales will need to cooperate with information technology when building a Web site. Human resources can find
HBSS/Photolibrary
Strategic managers plan for the company's future operating needs.
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CHAPTER 2Section 2.4 Developing Quality Plans
successful job candidates only when the other departments spell out the types of people and skills that are needed. Accounting departments need to know how to value assets on their books to best facilitate overall company financial success. Many times it takes the direction of the top management team working with middle managers to establish quality, functional-level tactical goals. The top management team makes sure that tactical goals mesh with strategic goals.
Operational Goals
Operational goals are the performance targets for everyday activities, such as making sales and production quotas, completing daily reports and paperwork, and processing the flow of raw materials into the company and the finished goods to customers.
2.4 Developing Quality Plans Learning Objective #4: What kinds of plans do management teams create?
The development of goals at the three basic levels leads to the creation of plans to achieve those outcomes. A strategy is a cluster of decisions about what goals to pur-sue, what actions to take, and how to use resources to achieve the goals. Tactics are the plans that support strategies in the functional area departments. Operational plans direct daily activities. A fully developed and coordinated planning process specifies plans in each of these areas.
Strategic Plans and the Strategic Management Process
The executive management team holds the responsibility of maintaining the company’s vision and mission. To do so, the efforts of all levels of management are coordinated into a unified course of action. This process is called strategic management. Table 2.3 displays the steps involved in the strategic management process.
TABLE 2.3: STEPS OF STRATEGIC MANAGEMENT
Step Activity
Analysis and Diagnosis The Company The Environment SWOT
Identify Strengths and Weaknesses Identify Opportunities and Threats Combined Analysis: Strengths, Weaknesses, Opportunities, Threats
Strategy Generation Create a list of strategic options
Strategy Evaluation and Choice Select one or more strategies
Strategy Implementation Put strategies into action at all levels
Strategic Control Evaluate strategic effectiveness
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CHAPTER 2Section 2.4 Developing Quality Plans
In terms of strategic options, we will examine three categories of strategies: (a) those based on core competencies, (b) generic strategies, and (c) more specific strategies.
Core Competencies A core competence represents the most profi- ciently performed internal activity that is cen- tral to the firm’s strategy and competitiveness. Core competencies are based in knowledge and people, not capital and assets. In this approach to strategic planning, the goal becomes to develop a distinctive competence, which is something a com- pany performs at a better level than all its com- petitors. Crest has devoted considerable effort to being known as the “cavity fighter” as its distinctive competence. German auto manufac- turer Mercedes Benz focuses on engineering as its key core competence. Discovering core and distinctive competencies is also known as the resource-based approach to strategic plan- ning (Wernerfelt, 1984).
Generic Competitive Strategies The second perspective regarding strategic planning is choosing one of the generic com- petitive strategies (Porter, 1980). Generic strategies provide overall guidelines for the entire organization. These strategies include the following:
• Low-cost provider strategy: seeking to achieve the lowest overall costs as compared to competitors, and therefore being able to compete with price.
• Broad differentiation strategy: seeking to make the organization’s products unique when compared to competitors, and therefore being able to compete based on those differences.
• Best-cost provider strategy: giving customers the most value for their money. It combines some uniqueness with lower costs and lower prices.
• Focused market niche based on cost: concentrating on a market segment and out- competing rivals based on price.
• Focused market niche based on differentiation: concentrating on a market segment and out-competing rivals based on some form of differentiation.
Differentiation means different and better. It allows company leaders to charge a higher price and to market products based on characteristics such as quality or exclusivity. Examples of differentiation in retailing would be Saks Fifth Avenue or Macy’s. Low-cost approaches seek to attract a wider number of customers more interested in price than sundries such as displays or brand names. Walmart and Southwest Airlines use the low-cost approach. The hybrid of these methods would be the best-cost provider method, utilized by numerous companies seeking to be both distinctive and price competitive. Focused market niche strate- gies identify certain groups and concentrate on cost or differentiation. Centrum vitamin products target seniors with differentiated characteristics (e.g., Centrum Silver for senior men). MasterCuts targets adults who want low-cost hair care, rather than high-end cuts.
Stefan Kiefer/Photolibrary
McDonald’s management stresses its core competence with the acronym QSC: quality, service, cleanliness.
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CHAPTER 2Section 2.4 Developing Quality Plans
Specific Strategies As the executive team manages the organization’s portfolio of activities, various strategic options emerge. These may be divided into four categories, as shown in Table 2.4.
TABLE 2.4: TYPES OF STRATEGIES
Rapid Growth Slow Growth Stability Decline
• Merger/Acquisition/ Takeover
• Vertical Integration • Horizontal
Integration • Joint Venture • Globalization
• Incremental Growth • Efficiency
• Customers • Suppliers • Refinance Company
Debt • Repurchase Stock • Retire Debt
• Divestment • Liquidation • Retrenchment
Rapid Growth Strategies Rapid growth strategies may be used when the top management team has identified an opportunity. Mergers, acquisitions, and takeovers of other companies are designed to build company strength by combining with another organization. Vertical integration involves taking over a new aspect of the marketing area, such as when a manufacturer either sets up its own distribution systems or opens its own retail outlets. Horizontal integration strategies are designed to widen relationships with distributors with the goal of increasing market share and/or controlling the channel of distribution. Another form of rapid growth takes place through cooperative agreements between firms to mutually market products or to create joint venture arrangements. Globalization also can create rapid growth, as shown in the Red Bull example at the beginning of this chapter.
Slow Growth Strategies Slow growth strategies are best when a company’s environment and internal circum- stances indicate that its rapid growth is not feasible. Incremental growth involves the firm seeking either to add more customers in existing markets or to gradually expand into new markets. Efficiency strategies seek to build profits by eliminating waste or finding new ways to do things that take less time or use fewer resources.
Stability Strategies When companies operate in mature, highly competitive markets, top management may decide on a stability strategy that maintains the status quo. Long-term contracts with sup- pliers and/or retail outlets are used to ensure the continuing relationships between vari- ous companies. A company may also work to build strong relationships with customers and use contracts to ensure stability with retail outlets and wholesalers. Stability strate- gies also include refinancing company debt to take advantage of favorable interest rates, repurchasing stock to ensure ownership without the possibility of hostile takeovers, and retiring debt to open credit lines for the future.
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CHAPTER 2Section 2.4 Developing Quality Plans
Decline Strategies An executive management team will employ decline strategies when it determines that a hostile environment or dire circumstances within the company dictate dramatic change. Types of decline strategies include divestment, liquidation, retrenchment or turnaround programs, and downsizing.
A divestment involves selling part of the company, thereby yielding cash. The purchasing company views the part that is sold as an opportunity to expand or to turn around a fail- ing enterprise.
Liquidation means that the company stops an operation and sells off the component parts. Many times a company’s management team will use liquidation when it is unable to com- plete a divestment deal. Company leaders may decide it is best to close the plant, sell the building, equipment, delivery trucks, and other assets, and simply move on.
Retrenchment or turnaround programs have one common denominator: the objective of becoming smaller but stronger. This can be accomplished by the following strategies:
• reducing outlets • reducing the number of products and services • eliminating entire markets • eliminating employees
The hamburger chain White Castle is one example. It was retrenched in the 1960s after McDonald’s had made major inroads. KMart closed numerous stores in order to survive and rebuild. In 2008, Starbucks adopted the same strategy. By concentrating efforts on the most profitable units and cutting those that are not doing well, a firm can prepare for growth at some point in the future.
Possibly one of the more famous examples of retrenchment by reducing products occurred when Chrysler cut nearly 500 products from its lines as part of a major reorganization in the 1980s. The goal was to sell only items with which the company had expertise and some type of technological or market advantage.
Downsizing involves the elimination of employees. The impact on morale will be negative. At the same time, it may be the only option a company has available (Hoskisson, 1994).
Tactical Plans
Tactical plans support strategies. In essence, each department or function will be assigned the task of outlining activities in its individual area. For example, in the area of market- ing, tactical plans would include decisions about (a) advertising, (b) selling techniques, including promotions, (c) packaging and labeling changes, (d) pricing and discounts, and (e) other marketing activities such as sponsorships and cooperative agreements with other companies.
Gillette has been a dominant provider of shaving products for many decades. The tactics employed by Gillette to maintain the company’s position include making product changes
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CHAPTER 2Section 2.4 Developing Quality Plans
and moving from a single-edge blade to two, then three, then four, then five blades in a razor. Products and advertisements have changed with the times, including a much greater focus on women as consumers. Coupons are used to discount razors. Free samples are often provided to college students in dormitories to encourage them to try the blades.
Similar efforts are made in all of the other func- tional areas. Most recently, many organizations have established a presence on Facebook and Twitter to support other efforts to sell products. Most tactical plans have time horizons of three years or less.
Operational and Short-Term Plans
Operational plans direct daily activities. They include items such as making work schedules, ordering inventory, and routinely updating a Web site. Operational plans help ensure that front-line supervisors and company employees are clear about their everyday responsibilities.
Special Short-Term Plans Two types of plans are developed for specific company circumstances. A project is a plan for a single-time activity. When the activity is complete, the plan will be discarded. For this reason, projects are also known as single use plans. Examples of projects include a plan to redesign the interior of a retail store; a plan to build and pave a parking lot for custom- ers; or a plan for a special occasion, such as a company’s 50th anniversary.
A program consists of a set of projects that changes a company’s direction. Adding an e-commerce component to a brick-and-mortar retail store is a program. The projects would include choosing the right equipment, building a Web site, establishing shipping meth- ods, and other activities. Another program involves introducing a new product. Projects include producing the product’s design, creating packaging and labeling, test marketing the product, and creating a rollout.
Projects and programs should be coordinated with all other types of plans. Company managers make sure that they maintain the strategic direction of the company and do not interfere with tactical or operational plans.
Contingency Plans At all three levels of planning, things can go wrong or not work out. Contingency plans are designed for the “what if” circumstances that routinely appear in an unstable envi- ronment (Gomez-Mejia, Balkin, & Cardy, 2005, pp. 204–205). In recent years, oil prices have risen and fallen dramatically in relatively short periods. Companies that have
Mark Henley/Photolibrary
Tactical plans in the shaving industry have included frequent product modifications.
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CHAPTER 2Section 2.5 Allocating Resources
energy-saving contingency plans are better able to adapt to rising energy prices. Prior to any major election, tax policies will be debated. Should a different party take power, taxation systems can change dramatically. As a result, many organizations develop con- tingency plans so that the company will be prepared no matter what the outcome of the election is.
Summary Strategic plans are made as the result of a careful analysis of the environment, combined with an examination of the company’s current situation. Strategic controls are designed to provide the types of information that will guide these decisions as the organization moves forward. Tactics, operational plans, and special short-term plans must all work in concert to achieve efficiency and effectiveness.
2.5 Allocating Resources Learning Objective #5: How do managers allocate resources?
A plan is not complete until the necessary labor (human resources) and parts (general resources) to build the product for sale have been allocated. The primary device used to allocate resources is a company’s budget. A budget is an annual financial plan.
Budgets are similar to road maps. They map out where the money will come from (sales and other revenues) and where it will go (individual departments and activities). Often, a pro-forma income summary spells out revenues and expenses for the coming year. Three types of budgets are common in business: (a) incremental budgets, (b) zero-based bud- gets, and (c) rolling budgets.
Incremental Budgets
Incremental budgets remain basically the same from year to year. Managers use the cur- rent budget to develop one for the next year. Only incremental or marginal changes are made to the budget. These changes take two forms:
• across-the-board, where each department receives a uniform percentage budget change, and
• relative amount, where some departments receive more and some receive less.
Across-the-board adjustments are the easiest to calculate. If a 4% across-the-board increase is in order, each department receives that percentage for the next year’s budget. In many cases, employees then know they will receive a 4% pay raise as well.
Relative amount adjustments are made when one department’s needs are determined to be greater. A company’s executive team may determine that the delivery fleet is outdated. To purchase new vehicles, the team will grant an uneven amount of budget.
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CHAPTER 2Section 2.5 Allocating Resources
Zero-Based Budgets
Zero-based budgets are used when departmental leaders begin with zero in their budget accounts. Department managers then must justify expenses in order to receive funding. The term applied to zero-based budgeting is “cost/benefit” analysis. Financial resources are allocated to departments and activities with the best ratios. Zero-based budgeting is designed to “cut the fat” out of bud- gets that have become bloated over time. Unnec- essary and low-priority activities get the axe.
Rolling Budgets
Rolling budgets are used when company lead- ers adjust departmental budgets throughout the course of the year, based on actual revenues. For example, if sales are off by 10% in the first quarter, the management team knows that less money was spent on raw materials, production, shipping, and sales force commission. The budget can then be adjusted at that time. Budgets may be rolled quar- terly, semiannually, or even more often. Many elec- trical providers roll budgets each month, because weather conditions determine a great deal of revenue. A warm January may mean lower revenues due to less heating; a cool summer month also reduces revenues. Therefore, the budget can be adjusted right at the time.
The most efficient possible budget is a rolling, zero-based budget. When used, managers have the greatest degree of control over funding. Firms with major financial crises may resort to this approach.
Summary
Remember that budgets should reflect the company’s strategies. Any major changes, such as an acquisition or the development of a new product, will require that the right amounts of resources are devoted to the task.
In the early 2000s, Holiday Inn’s company leaders determined that the firm was losing business due to outdated décor in many of the units. The decision was made to sell the least profitable units and to use the funds to update and improve the remaining hotels. Additional funds were devoted to developing new signage and a new logo for the com- pany. Many times, modernization programs such as these are undertaken. The accounting department works in conjunction with top management to develop a plan to put the right amount of resources into the program.
Pixtal Images/Photolibrary
Electrical providers may use rolling budgets due to fluctuating revenue streams.
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CHAPTER 2Chapter Summary
In summary, crime fighters often know the best way to catch a criminal is to “follow the money.” In business operations, organizational priorities are easily discovered by follow- ing the money. Projects and activities that receive funding are clearly the ones that are most important to company leaders.
Chapter Summary
Planning involves managers making decisions about future activities and the key goals the organization will pursue. Planning begins with a company’s statements of mission and strategic vision. Everything else flows from those documents. Planning consists of the following steps: (a) examining the company’s internal and external envi- ronments, (b) setting goals, (c) choosing strategies, tactics, and operational plans, and (d) allocating organizational resources to pursue the company’s goals.
Assessing the internal environment takes place at the strategic, tactical, and operational levels. Company strengths and weaknesses should be identified during this process. Assessing the external environment involves the analysis of the semicontrollable and non- controllable forces an organization encounters. The goal will be to discover opportunities and threats. Forecasting of future economic conditions, sales, and changes in technology should be part of this process. These sets of information can then be combined into a SWOT analysis.
Strategic, tactical, and operational goals will be combined into one logical set of objec- tives. From these, actual plans are developed. Strategic plans can be based on an orga- nization’s core competencies. They may be devised to focus on cost, differentiation, or both. Rapid growth strategies are prepared to take advantage of key opportunities. Slow growth strategies are useful when no major opportunities exist. The same holds true for stability strategies. Decline strategies are employed when the firm encounters turbulent circumstances.
Tactical plans are designed to support strategies in the company’s departments or func- tional areas. Operational plans direct daily activities. Special short-term plans, including projects and programs, help managers make needed changes.
Funding for the company’s goals and plans gets channeled through the organization’s budget. Incremental budgets use previous figures to develop future allocations. Zero- based budgets require managers to justify their activities in order to be funded. Rolling budgets are adjusted as revenue figures become available.
The planning process sets the stage for every other company activity. Firms that fail to plan tend to drift, encountering problems that should not have occurred in the first place that must then be solved, a situation known to managers as firefighting. The opposite of firefighting is enjoying the benefits of getting things done more quickly and efficiently by simply following the plan.
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CHAPTER 2Chapter Summary
Key Terms
Case Study: Planning in the Rapidly Changing World of Book Publication
Technological innovations drive change in the business world. Each generation experiences new technologies that alter the ways people live their lives. In the past half century, inven- tions and product improvements have permeated nearly every business sector. In some instances, entire industries have been spawned, such as e-commerce. In others, a series of new companies have been formed to compete with longstanding organizations, such as Sprint and U.S. Cellular in the world of telecommunications. Clearly, technology creates major opportunities and dramatic threats.
The book publishing industry had been relatively stable for many years. Technological improvements made the process of composing and printing books faster and cheaper; however, the basics of the industry remained the same. Any aspiring author looking to have his or her work published would need to go through a kind of filtering system, as editors from small and large book publishing companies would sift through what they call “slush piles” of manuscripts and book proposals. A fortunate few would end up seeing their words in a bound book format.
For a time, new technologies helped spread printed books to larger audiences. The birth and growth of Amazon.com made online book purchases possible. Many bookstores dis- covered marketing techniques in which mega stores offered more than books; many fea- tured coffee shops and children’s play areas. Large reading areas transformed the store into something more like a library.
Now, the landscape has changed. With desktop and printing technologies widely available, anyone with a few dollars can see his or her name on the cover. Further, the Internet now makes it possible to write and publish an e-book without the use of a major publisher.
More direct challenges now face major book companies. The invention of the Kindle began a wave in which books could be transformed from printed words into document files and sent electronically to buyers. By 2011, Amazon’s e-book sales surpassed paper- back books. Additional competitors have entered the market. At this point, a book can be downloaded to a mobile phone or computer. In addition, anyone who follows the cor- rect format can publish an e-book on the Kindle system. Publishers have a difficult time adjusting to the new world. E-books are sold at dramatically lower prices
budget an annual financial plan.
core competence the most proficiently per- formed internal activity that is central to the firm’s strategy and competitiveness.
distinctive competence something a company performs at a level that is better than all rivals.
external environment consists of the total set of forces that act on a company but are not within its boundaries.
mission statement a document that expresses a clear and concise reason for why the organi- zation exists.
operational plans plans that direct daily activities.
planning a systematic process in which man- agers make decisions about future activities and the key goals that the organization will pursue.
(continued)
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CHAPTER 2Chapter Summary
than hardbound books. Recovering the costs of signing writers and developing manu- scripts has become increasingly difficult.
In 2011, the Macmillan company refused to allow Amazon’s Kindle to sell its books at a predetermined $9.99 price. In response, Amazon stopped selling Macmillan products on its Web site. Clearly, a power play based on which company should set prices was underway. Eventually Amazon relented and allowed Macmillan to charge higher prices for e-books.
It may not be long until the e-books trend moves into the traditional textbook marketplace. Beyond the advantage of keeping book prices lower, a student with a Kindle or an iPad would be able to seamlessly move from the book manuscript to other resources, includ- ing magazine and newspaper stores, a dictionary, and even blogs. Study guides and other materials are already available online as well as some texts for Internet courses. The trend seems likely to continue.
Some hail these changes as the free market driving down prices and making the free exchange of ideas possible. Others suggest that, just like the Internet, readers will be bom- barded with low-quality, inaccurate information created by people with agendas not cen- tered on the truth or objectivity. No matter what your opinion, it is clear that publishing “books” will never be the same.
1. If you are a manager in a publishing company, what are the major opportunities and threats created by technology?
2. If you are the manager of an e-book company, what are the major opportunities and threats presented by book publishers?
3. Use the Internet to investigate the strengths and weaknesses of the Kindle and Ama- zon. How might these affect future plans?
4. If you were the manager of a book publishing company, what strategies would you employ to adapt to this new landscape?
5. If you were the manager of an e-book company, what strategies would you employ? 6. How are e-books similar to digital music files? How are they different? What are the
implications of digitizing content for music companies as compared to book publishing companies?
Case Study: Planning in the Rapidly Changing World of Book Publication (continued)
strategic management coordinating the efforts of all levels of management into a uni- fied course of action.
strategic planning a purposeful effort that is directed by management within an organiza- tion and, which if done effectively, draws on the knowledge, skills, and abilities of employ- ees at all levels of the organization.
strategic vision statement a document that offers direction about where the organization is heading and what it hopes to become.
strategy a cluster of decisions about what goals to pursue, what actions to take, and how to use resources to achieve the goals.
SWOT analysis the careful study of a compa- ny’s strengths and weaknesses combined with the opportunities and threats present in the external environment.
tactics the plans that support strategies in the functional area departments.
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CHAPTER 2Chapter Summary
Review Questions
1. Define planning and strategic planning. 2. Explain the concepts associated with a mission statement and a strategic vision
statement. 3. When assessing the internal environment and operations, what three levels are
examined? 4. Explain the difference between semicontrollable and noncontrollable forces in
the external environment. 5. What semicontrollable forces influence business operations? 6. What noncontrollable forces influence business operations? 7. What three types of forecasts are used to assist in the planning process? 8. What are the four possible outcomes of a SWOT analysis? 9. Explain the differences between strategic, tactical, and operational goals. 10. What are the steps of strategic management? 11. Define and explain the concepts of core competence and distinctive competence. 12. Describe the five basic generic competitive strategies. 13. Name the rapid and slow growth strategies company leaders can employ. 14. Name the stability and decline strategies company leaders can employ. 15. Define the following terms: project, program, and contingency plan. 16. What is a budget, and how is it like a road map? 17. Name and briefly describe the three main types of budgets.
Analytical Exercises
1. Write a mission and strategic vision statement for the following companies: • Red Bull • Phillip Morris Tobacco Company • Applebee’s • Allstate Insurance
2. What specific factors should be analyzed as part of a tactical/functional analysis for the Yum! Brands company? Do the concepts of strategic business units and/ or profit centers apply to this organization? Explain your answer.
3. What links exist between the following strategic goals? Explain how they are interconnected. • market share • innovation • productivity • profitability • physical and financial resources • manager performance and development • employee performance and attitudes • social responsibility
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CHAPTER 2Chapter Summary
4. In the SWOT analysis shown as Figure 2.2, which strategies match with each of the four boxes from the following categories? (Some of the answers may fit into more than one box.) • core competence and distinctive competence • low-cost provider/differentiation/best-cost provider • rapid growth/slow growth/stability/decline
5. Outline what you believe is the distinctive competence and core competence of the following companies. Outline what you believe is the generic strategy used by each of those companies. Explain specifically which type of strategy the com- pany should undertake in the coming years: rapid growth, slow growth, stability, decline. Defend your choices. • British Petroleum • Facebook • Hyundai • Dunkin' Donuts • Netflix
6. Using the Internet, write a brief report on how the decline strategies utilized by the following companies made them “smaller but stronger” and then allowed them to rebound. • Kmart • Starbucks • Chrysler Corporation • White Castle
7. If you were managing a thriving organization, which of the three types of bud- gets would be best? Why? If you were managing an organization that “could do better,” which of the three types of budgets would be best? If you were managing a company in crisis, which of the three types of budgets would be best? Can you think of times when the traditional response would be wrong? If so, explain how.
8. Relate the concepts of mission and strategic vision statements to the following: • core and distinctive competence • the five generic strategies
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Sean Justice/Corbis
chapter 3
The Organizing Function
Chapter Goals
After completing this chapter, you should be able to • Connect the organizing function with company success. • Explain the basic principles of job design. • Employ the best form of departmentalization for a specific company. • Finalize the structure of a company. • Describe various types of organizational configuration.
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CHAPTER 3Section 3.1 Introduction
3.1 Introduction Learning Objective #1: What role does organizing play in company success?
One key part of a manager’s job is to identify the best way to organize and run a company or organization. Well-organized companies are often recognized as being the most efficient, effective, and productive within an industry group. A well-organized company is critical to success. Having a manager who can work with and implement the structures and plans of a company is vital.
Organizing is a normal process that flows naturally from the human tendency for coopera- tion. People are predisposed to cooperate with one another. Early humans used cooperation behaviors and organizational skills, familiar to us today, initially as survival techniques. As humanity progressed, cultural technologies were developed to enhance success in life.
While some cooperative human behaviors are likely instinctual, the majority are learned through various interactions with the environment, family, school, and culture. Many people learn early in life to keep their bedroom clean and orderly. They later learn to keep a school locker orderly, and eventually how to organize computer files and MP3 music files on portable music devices. The progression of organizational abilities throughout history indicates that humans have a natural understanding that everything has its place. Organizing complex structures, however, such as a large-scale manufacturing plant or a 500-guest-room resort requires sophistication beyond basic socialization.
Organizing may be defined as the process of efficiently and effectively bringing people and resources together to create products and services. Organizing establishes task and authority relationships that allow people to work together to achieve the organization’s goals. Organizing consists of three primary activities: (a) job design, (b) departmentaliza- tion, and (c) completion of the organizational structure.
In a business organization, the focus should be on creating a structure within the orga- nization as a social institution. The structure of the organization is made up of the func- tional jobs within an organization, and they represent “the skeleton of the organizational system” (Steers, Ungson, & Mowday, 1985). This structural “skeleton” holds up the entire organization and allows it to move forward to achieve its plan for success. An organiza- tional structure is a formal system of task and reporting relationships that coordinates the activities of members so that they work together to achieve organizational goals.
The organizational structure determines how an organization’s resources can be best used to create goods and services. Organizational design is the process by which managers make specific organizing choices that result in the particular kind of organizational struc- ture they will utilize.
In this chapter, we introduce the organizing function and divide it into three primary steps: job design, departmentalization, and specification. Job design creates the individual job units, departmentalization categorizes the jobs into logical groups, and specification of authority-responsibility relationships finalizes the company structure.
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CHAPTER 3Section 3.1 Introduction
The Richards Group: Organizing Creativity
The Richards Group, based in Dallas, Texas, is America’s largest independent advertising agency. The company generates billings in excess of $1 billion annually and employs over 650 marketing professionals. Its list of clients includes a variety of well-known companies, such as Orkin, Fruit of the Loom, T.G.I. Friday’s, Zales, Red Lobster, Farmer’s Insurance, and others. Graphic Design USA has listed The Richards Group as one of the six most influ- ential agencies in the United States. The firm has also received many awards, including Adweek magazine’s Agency of the Year numerous times.
Beyond these simple statistics is a story that owner-founder Stan Richards once described as “a rocket ride,” in an April 6, 2006, article printed in the Dallas Business Journal, which led to his being named as one of The Wall Street Journal’s “Giants of Our Time.” Other agencies have emulated many of the tactics employed by The Richards Group. Rich- ards notes that his company utilized them first and still utilizes them best. He has creatively employed the fundamentals of organizing to help the company achieve such dramatic success.
The Richards Group is founded on key core principles in its mission statement and its over- all strategy. In a 2010 interview with Don Baack, Richards expressed his company’s phi- losophy when he said, “Some companies push products. Some sell ads. We sell the truth.” The approach clearly works. “When we are hired by a client,” Richards notes, “it’s not just to make ads. We do so many things that are extremely important. That ad is what the consumer ultimately sees, but in order to get there, you have to have a dead-on strategy, if you’re going to be successful. You go through the strategic process, you get to the right answer, and then you can execute against that answer.”
Based on this foundation, the company's organizational structure has been built. The Richards Group carefully engaged in job design. A small advertising agency will hire gen- eralists, who take care of a variety of assignments. As the organization grows, jobs become more specialized. The Richards Groups employs highly skilled specialists in every aspect of advertising, from creating contracts with prospective clients, to purchasing media time, to making advertisements, to evaluating their success.
Departmentalization is where Stan Richards moved away from traditional models. The firm, which at one point consisted of fewer than 60 workers all located on one floor of an office building, expanded to a major office building on the North Central Expressway in Dallas, Texas. Employees in The Richards Group work in open offices with no doors or walls. More significantly, Richards notes:
What we do is co-mingle all the disciplines, so that in every cluster of spaces we will have an art director who sits next to a brand manager, who, for exam- ple, sits next to a print production manager, so that, in those interdisciplinary villages that everyone here occupies, nobody’s next door neighbor does the same thing that he or she does. What you don’t get is all the creative people sitting on this floor, then all the account management people on the next floor, and the media people on the floor above that.
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CHAPTER 3Section 3.1 Introduction
The reason I did that in the first place was that when we were 50 or 60 people, there was an extraordinary level of energy and electricity that just flowed through the place. You could just walk in and feel it. A lot of it was created by the casual contact people had with each other. When you have 50 or 60 people packed into a tight space, you see everybody every day.
What agencies have always done, is when they reach that 120 to 130 person size, they then had to move to multiple floors. And the minute they do, they take a tight-knit bunch of people who really liked each other and understood each other, because they saw each other every day, and divide them up into tribes. These tribes don’t always get along.
There are lots of occasions where a cre- ative will butt heads with a planner, because they have a different point of view. When you are packed into a tight space, and when you have a great deal
of casual contact going on all day, every day, you get over that stuff, because they are your friends. When you’re on a different floor, you seldom see them and you decide, “That’s a different tribe up there, and they drive me crazy.” By moving away from traditional forms of departmentalization, the company has avoided many of those problems. (S. Richards, personal communication, February 2010)
The organizational structure at The Richards Group consists of fairly standard authority- responsibility relationships. Individuals continue to report to supervisors who are in charge of the basic functions, such as media selection. At the same time, to continue the creative cooperative spirit built by comingling specialists, staff meetings are often held in the stairwells between floors to help maintain egalitarian and positive relationships among all of the employees.
Some of the successful campaigns initiated by The Richards Group include the long- standing Chick-fil-A cow campaign, the Motel 6 campaigns, and the company’s 2010 and 2011 Super Bowl commercials for Bridgestone. The next time you view a commercial for Corona beer that features a laid-back setting on a beach in the Caribbean where you leave the cares of the world behind you, Richards suggests, you will also be viewing another company success story. Corona has become the number one imported beer in the United States, passing Heineken—due, in part, to a successful advertising management program assisted by The Richards Group (Richards, 2010).
Stockbyte/Thinkstock
A unique organizational structure has helped The Richards Group become one of America’s top advertising agencies.
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CHAPTER 3Section 3.2 Job Design
3.2 Job Design Learning Objective #2: How does a company design jobs?
A major component of the organizational structure within a company is coming up with a job design for all levels of employees. The first step is to define the types of jobs the company will need to meet its objectives. A job is a set or series of tasks performed by an individual on behalf of an organization. A task is a single chore that is part of something larger—the job. A mechanic in a car dealership may be asked to sweep the floor (task one), change the oil in a truck (task two), and sometimes drive patrons from the shop to their work or homes (task three). Most jobs require the completion of many tasks throughout the day. Jobs may be assigned to categories, such as those displayed in Table 3.1.
TABLE 3.1: TYPES OF JOBS
Category Examples
Unskilled Blue Collar Housekeeper Trash Hauler
Semiskilled Blue Collar Assembly Line Employee Truck Driver
Skilled Blue Collar Electrician Plumber Carpenter
Front-Line White Collar Retail Clerk Bank Teller
Semiprofessional Paralegal Paramedic Dental Hygienist
Professional Doctor Attorney CPA
Specialized Professional Research Scientist
Questions for Students
1. How are jobs in advertising agencies different from jobs in other companies? 2. Do you think comingling specialists, such as is the case in The Richards Group, would
work in other companies? 3. What types of individuals should The Richards Group hire, and what types would not fit
with the company?
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CHAPTER 3Section 3.2 Job Design
Job design progresses when managers deter- mine the tasks needed to be done, who will do them, and what selection criteria will be used to choose employees and place them on the job. The standard approach to job design involves three steps: (a) job analysis, (b) job description, and (c) job specification.
Job Analysis
The process of assigning tasks to jobs, called job analysis, will be conducted by the human resource department working in conjunction with departmental managers. There are three forms of commonly employed job analysis: (a) comparison with other companies, (b) experi- mentation, and (c) reflective planning.
Comparison with other companies can result from something as simple as a phone call to a friend in another firm to ask how that company defines duties for a particular job. For exam- ple, the position of administrative assistant varies widely, depending on the industry. Some- one assigned to manage a new walk-in emergency care facility might call leaders of similar organizations for advice. Comparisons can take place more formally. This normally involves using a resource such as the Dictionary of Occupational Titles (U. S. Department of Labor, 1977).
Experimentation methods begin with simply trying various methods to learn which is most effective and efficient for performing a job. This allows managers to evaluate workload to aid the organization of workflow. For instance, if an employee cannot keep up with every- thing, tasks can be removed; if an employee is bored, additional tasks may be assigned. One more sophisticated form of experimentation is the time-and-motion study designed by Frank Gilbreth. In these cases, jobs are performed in various ways and observed using a stopwatch and sometimes even through filming of specific tasks. The goal is to eliminate wasted motion and create an efficient set of job tasks.
Reflective planning requires managers to give thought to how processes are completed. In some organizations, the public relations function will be performed by specialists trained in media relations and writing. Those jobs are clearly spelled out as more managerial in nature. In other companies, a job in the public relations department is more of a market- ing activity, with an emphasis on finding sponsorships with charities and other groups to generate positive publicity. The job title is the same, but the job itself will be quite dif- ferent. Therefore, it requires reflection on the part of managers to determine the goals of particular jobs before deciding who is most qualified to execute them.
Markus Brunner/Photolibrary
The time-and-motion study is a classic example of job design through experimentation.
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CHAPTER 3Section 3.2 Job Design
Job Description
When the manager and human resource specialist have agreed on the tasks that belong to each job, the next organizational step in job design takes place—creation of a job description. A job description is a formal list of tasks and duties that is used in two main ways. First, job descriptions are part of the recruiting process that allows appli- cants to review what exactly a job entails by reading the job description. Second, job descriptions often appear in a company manual, handbook, or on an organizational Web site. Managers and employees can then refer to the listing to see which employee is responsible for any given task. Indeed, writing clearly articulated job descriptions is an essential part of organizing a business.
Job Specification
Once job descriptions are created, organizers generate a list of requirements that appli- cants must have in order to be considered for a particular job. This list is called a job specification, and it lists the eligibility requirements or qualifications needed to per- form a job. Table 3.2 identifies the standard set of specifications. Job specifications are often posted on Web sites and in publications that are associated with the recruiting process. The usual order of operations at this level of organizational development is as follows: First, specifications are published online and in some cases, in print media, most notably newspapers and trade journals. Second, job specifications are published in particular employment markets where pools of employers and job seekers meet, such as LinkedIn, Career Finder, and Monster.com. This helps streamline the appli- cation process. Third, specifications may be published at a trade show for those in a particular industry.
TABLE 3.2: COMPONENTS OF JOB SPECIFICATIONS
Qualification Examples
Level of Education high school diploma, associate’s degree, college degree, M.B.A., Ph.D.
Amount and Types of Experience number of years, job experience
Special Skills—Physical ability to lift heavy weights, work outdoors
Special Skills—Technical ability to use software programs
Personality Characteristics outgoing, self-starter, confident, effective public speaker
Legal Requirements meet current laws for employment
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CHAPTER 3Section 3.3 Departmentalization
Summary
Jobs form the building blocks for the creation of the organization’s structure. Carefully designed jobs allow workers to succeed by being responsible for appropriate and manage- able levels of work. Precise job descriptions give workers clarity about what they are and what they are not assigned to do. Well-written job specifications enhance the odds that the proper person will be hired to complete the assigned tasks.
3.3 Departmentalization Learning Objective #3: What types of departmentalization can company leaders use?
Departmentalization is an effective organizational tool in that it involves dividing people up into different departments or divisions in which collections of tasks are placed together, such as accounting, marketing, and production. Although there are several additional ways in which departmentalization may also be utilized, Table 3.3 summarizes some of the various types and when each is most helpful to the management team.
TABLE 3.3: TYPES OF DEPARTMENTALIZATION
Departmentalization by: Found in:
Function small, single product/service firms
Product growing, few product companies
Customer firms selling the same product to diverse customers
Geographic Region branch banking, retail chains, franchise operations
Strategic Business Unit conglomerates
Matrix high-tech firms, multinational companies
Departmentalization by Function
Departmentalization by function is the most common form, because most companies are smaller and offer one main product or service. Figure 3.1 is a simplified organization chart for a firm using this approach. Functional structure allows for top-level control with expertise maintained in the individual departments. Jobs are easily matched to functional specialties (Mintzberg, 1979).
Henry Mintzberg (1983) recognized five coordinated flows linking the common parts of departmentalization:
• Authority. Authorization is needed to move the structural part forward and com- plete job tasks.
• Work material. Raw material and supplies are essential to start and complete tasks.
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CHAPTER 3Section 3.3 Departmentalization
• Information. Data is required to inform decision making at every level of the organization.
• Decision process. Timely decision making allows for the continual operation of job tasks.
• Ideology. An organization’s unique vision, theories, culture, and traditions con- tribute to its structure.
Mintzberg’s coordinated flows are essential to begin operating activity as well as to mea- sure progress. They are well served by a functional form of departmentalization.
Departmentalization by Product
Multiproduct firms use departmentalization by product, that is, placing all activities related to a product or service in one department under one executive or senior manager.
See Figure 3.2 for an example as applied to the Bic company. As shown, Bic is divided into the products sold. General Motors, Dupont, and other firms learned that growth and expansion of product lines require a form of structure that facilitates the differences in products and at the same time allows for some specialists to serve all parts of the company. Departmentaliza- tion by product meets these needs and demands (Ranson, Hinings, & Greenwood, 1980).
President Bic, Inc.
Vice President Pens
Production Sales Production Sales Production Sales
Vice President Razors
Vice President Lighters
Vice President Accounting
Figure 3.2: Departmentalization by Product
President
Vice President Sales
Vice President Production
Vice President Accounting
Vice President R & D
Figure 3.1: Departmentalization by Function
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CHAPTER 3Section 3.3 Departmentalization
Departmentalization by Customer
Many companies offer the same product to divergent customers. As depicted in Figure 3.3, departmentalization by customer allows for specialization based on customer differences. A company such as Dell Computers has three distinct groups: (a) other businesses (indus- trial sales), (b) the government, and (c) individual consumers. The most notable advantage of this form of structure is that it optimizes service to these groups, which have different purchasing needs and purchasing methods. For example, individuals buy online or at the store, whereas businesses tend to make purchases at trade shows or through a purchas- ing department, and governments must follow specific purchasing procedures. The three groups also have different servicing needs such as repair contracts and warranties.
Departmentalization by Geographic Region
When a company is divided by territories or regions, terms such as district, zone, and area are assigned to the departments. Figure 3.4 displays an example of departmentalization by geographic region. Departmentalization by location is also known as parallel depart- mentalization, because the levels in the organizational hierarchy contain managers who
President
Vice President Western Region
Vice President Eastern Region
Vice President Central Region
District Manager
Store Managers
District Manager
Store Managers
District Manager
Store Managers
Figure 3.4: Departmentalization by Geographic Region
President
Industrial Sales Division
Government Sales Division
Consumer Sales Division
Vice President Accounting
Figure 3.3: Departmentalization by Customer
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CHAPTER 3Section 3.3 Departmentalization
perform the same duties in different regions, such as at branch banks or fast food loca- tions. Geographical departmentalization makes it possible to tailor managerial efforts that address territorial differences. For example, a Sears retail store in Florida will sell different items than one in Minnesota during the winter months; however, the department names remain the same. A food chain such as Subway may offer region-specific menu items, while the basic model of operation remains the same in all locations.
Departmentalization by Strategic Business Unit
As noted in the previous chapter, strategic business units are clusters of activities typically held together by a common thread, such as a product type or type of customer served. A strategic business unit will be analyzed as a “company within the company.” Many major corporations align strategic business units by products, customers, geographic region, manufacturing methods, and other common elements, as depicted in Figure 3.5.
Departmentalization by Matrix
Matrix organizations are also called two-boss systems. As shown in Figure 3.6, each employee answers to a functional area supervisor as well as a product manager. Matrix organiza- tions create circumstances in which maximum flexibility and adaptability in operations are possible. Workers must be able to adjust to change and accept some role ambiguity as part of the daily routine. The tasks they work on tend to vary. The only constant will be the employee’s functional supervisor.
An adaptation of the matrix organization is to design the company by product and by country. Products must often be adapted when they are moved into new areas, due to differences in electrical systems (AC versus DC) and in measurements such as ounces versus grams. Product managers are asked to identify national differences and help adapt production systems, marketing programs, and other activities to the new circumstances.
Summary
The most rudimentary form of structure, by function, is also the most common. As compa- nies add products and services, as well as additional specialists and activities, the degree of complexity rises. Departmentalization by products, customers, geographic areas, and
President
Vice President SBU 1
Vice President SBU 2
Vice President SBU 3
Vice President SBU 4
Figure 3.5: Departmentalization by Strategic Business Unit
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CHAPTER 3Section 3.4 Completing the Organization’s Structure
strategic business units helps the manager adapt to increasing complexity. The matrix organization grants the manager the highest degree of flexibility and adaptability.
3.4 Completing the Organization’s Structure Learning Objective #4: What additional activities must an organization undertake to complete its structure?
Completion of an organizational structure occurs as managers identify the amount of influence and accountability for these different individuals and groups, along with other elements of organizational design. The organization charts shown in the previous section hint at the first key activity that is part of completing the organization’s structure: drawing lines of authority and responsibility. In each of the models, any vertical line from one position to the next lower (or higher) position depicts an authority-responsi- bility relationship. In essence, a president holds authority over his or her vice presidents; those VPs are responsible for carrying out the instructions and decisions of the president.
Authority, then, consists of the right to direct with permission to act. This means that authority has two key components. The right to direct means the right to give orders and oversee activities. The manager of an auto repair shop has the authority to ask a worker who is changing a tire to stop and help another employee pull the transmission from
Vice President Product 1
Vice President Product 2
Vice President Production
Vice President Accounting
Vice President SalesTop-Level
Management Team
Production Group
Product 1
Accounting Group
Product 1
Sales Group
Product 1
Production Group
Product 2
Accounting Group
Product 2
Sales Group
Product 2
Figure 3.6: Departmentalization by Matrix
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CHAPTER 3Section 3.4 Completing the Organization’s Structure
another car being repaired. Permission to act rep- resents the right to make decisions on behalf of a company. The auto repair manager may have made the decision to work on the transmission first because the tire repair can be completed later, and the customer will not return until the next day. The transmission repair is more urgent and deserves attention first.
Responsibility, or accountability, is the obliga- tion to complete tasks as assigned. Someone who is responsible follows directions and is expected to follow them correctly and completely. The mechanic who has been asked to assist in the transmission repair should do so until the job has been successfully completed.
The noted French management expert Henri Fayol was among the first to describe the con- cept of parity of authority and responsibility. The concept suggests that anyone who holds a posi- tion of authority should be held accountable for how that authority is used. Anyone who is responsible for an outcome should have suffi- cient authority to carry out the assignment.
In today’s modern organizations, three forms of authority are found. Line authority is direct for-
mal authority, the type shown on the lines of an organization chart. Staff authority consists of the right to advise or give advice. A company’s legal department provides legal advice to all levels in the company. An accountant gives tax advice to all departments. Functional authority has been described as the right to direct, but not to discipline. It is found when a person has been placed in charge of a task force or committee. The individual is charged with the responsibility of getting something done (direct), such as completing a safety committee report; however, committee members may or may not follow directions and complete the task on time. Functional authority relies on employee professionalism to accomplish goals. Due to the increasingly complex nature of work, the reliance on func- tional authority has risen as the number of teams and groups increases. When the first process in completing the structure of an organization, outlining authority-responsibility relationships, is complete, then other decisions can be made.
Centralization and Decentralization
Another key set of decisions to be completed includes those regarding the delegation of authority. Centralization and decentralization refer to the degree of delegation of decision making, authority, and power within an organization. A highly centralized organization is one in which authority is not delegated. The executive management team, for example, makes key decisions and issues orders that direct company activities. Other members of the
Wavebreak Media/Photolibrary
Outlining authority/responsibility relationships helps complete the company’s structure.
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CHAPTER 3Section 3.4 Completing the Organization’s Structure
organization must take and follow orders issued by the executive management team. In a highly decentralized firm, front-line supervisors make important organizational decisions.
Size and Decentralization Peter Blau (1970) suggests that a strong relationship exists between the size of an organi- zation and the degree of decentralization. In essence, smaller firms are likely to remain centralized, because managers are aware of all activities and know each employee. This places them in the position to make all decisions. As a firm grows, the company begins to add specialists and new departments. The sheer volume of decisions to be made rises. The top manager becomes less able to direct everything, which means delega- tion begins to take place. At the same time, the top manager wants to retain a degree of control, which leads to (a) standardization, (b) formalization, and (c) mechanization/ computerization.
Standardization is the use of a series of job titles that are exactly the same, and the workers perform the same activities. Formalization refers to the presence of rules and procedures. Mechanization/computerization measures the reliance on computers and technology to maintain operations (Blau & Schoenherr, 1971).
As an example, consider the differences between managing a “stop and shop” conve- nience store and a Walmart superstore. In the convenience store, the manager knows all the employees and every aspect of the store’s operations, so he or she can make every decision. At the Walmart superstore, the manager would not even know the names of all employees. The store employs specialists in many areas, including automotive, lawn and garden, jewelry, men and women’s clothing, and others. The Walmart store manager is best served by a classic management cliché: Let experts make decisions. The manager delegates to the specialists (decentralization). At the same time, Walmart hires many indi- viduals with titles such as “stocker” and “cashier” (standardization), the rules for rotating inventory on the shelves and for checking out customers are the same for every stocker and cashier (formalization), and the store uses computers to track sales, inventory, and other statistics (mechanization).
Strategies and Decentralization In 1962, Alfred Chandler proposed a relation- ship between company strategies and company structure. His work suggests that organizational structure may be a matter of managerial design that evolves over time and as organizational con- ditions change. Chandler’s analysis is grounded in historical research. An in-depth review of case histories of a number of major U.S. companies reveals four stages of structural development that were consistently present (see Table 3.4).
MIXA Co. Ltd./Photolibrary
Organizational structure changes when a small-sized company grows into a larger, more sophisticated company.
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CHAPTER 3Section 3.4 Completing the Organization’s Structure
TABLE 3.4: STRATEGY AND STRUCTURE
Stage 1 Most firms begin with a single product and a centralized, functional form of structure.
Stage 2 Successful firms tend to grow by adding products and services, the strategy known as product diversification.
Stage 3 The demands of the new products and services become so great that the company becomes inefficient, and eventually a crisis develops.
Stage 4 To resolve the crisis, company leaders adopt new forms of structure that are product- based and decentralized.
As Table 3.4 indicates, Stage 2 holds a strategy; Stage 4 suggests a corresponding change in structure. The historical information corresponds with the work of Blau in that firms in Stage 1 are likely to be small and centralized. Stages 2 and 3 add the complexity of added decisions and specialists. Stage 4 indicates that decentralization better serves a larger company.
Summary Centralization and decentralization change job descriptions and job specifications. In a highly centralized operation, individuals at the lowest levels must understand they will not be allowed to make decisions and will be expected to follow orders. Front-line supervi- sors in the company will experience the same situation. In highly decentralized companies, individuals who are willing to take the initiative, make key decisions, and work with others are more likely to be hired. Delegation and decentralization rely on cooperation between managers and employees to make the best decisions and take the proper course of action.
Mechanistic and Organic Structures
Another key element of organizational design regulates company flexibility and adapt- ability. Mechanistic organizations are characterized by the high use of rules and proce- dures, a greater number of levels in the organization, formal relationships between work- ers, and, as a result, a less flexible method of operation. Organization charts in mechanistic organizations tend to be tall and thin, with many ranks and fewer people at each rank.
Organic structures employ few rules and procedures, have a small number of organiza- tional levels and ranks, allow for informal relationships among workers and supervisors, and are much more flexible and adaptable as a result. Organic structures are short and squat, with few ranks and many people in each rank.
Joan Woodward (1965) and her associates engaged in a major research project in Great Britain in the 1950s. The purpose was to seek out the causes of structure in effective orga- nizations. These efforts identified a consistent pattern in which the technology of a firm could be matched to its structure, as displayed in Table 3.5.
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CHAPTER 3Section 3.4 Completing the Organization’s Structure
TABLE 3.5: TECHNOLOGY AND STRUCTURE
Type of Technology Type of Structure
unit, small batch organic
large batch, mass production mechanistic
process production organic
Unit or small batch technology occurs when units are made one-by-one (repairing a car; tai- loring a suit), or in small lots or batches, such as the amount of marinara sauce prepared for daily use in an Italian restaurant. Remaining flexible and adaptable best serves that type of operation, at least in terms of profits, growth, and other measures of company success.
Large batch assembly line operations create standardized products. Carefully following rules and procedures increases efficiency. Many production facilities are mechanistic in their structural design.
Process production includes unique circumstances such as chemical manufacturers, some utilities, and breweries and distilleries. In these organizations, problems tend to be unusual and require investigation. The more flexible and adaptable organic structure fits these circumstances.
Characteristics of Typical Organizations
German sociologist Maximilian C. Weber (1864–1920) in his work published posthu- mously in 1922, suggested organizations share certain characteristics in addition to goal orientation (Weber, 1947). The final design of the organization should account for each of these characteristics, which include the following:
1. Division of Labor (Labor Specialization). Tasks in organizations tend to be grouped to maximize productivity and are often based on some inter- or extra-organizational criteria. Typically, work specialization is broken down by specific job tasks or work skills, such as machinists, equipment operators, quality control inspectors, accountants, and salespeople. Seldom does an organization efficiently operate for long without labor specialization.
2. Span of Control. A superior cannot man- age an unlimited number of subordinates, as it is unwieldy and ineffective. Subor- dinates require feedback, direction, and often correction. Organization theory suggests limiting the number of subor- dinates, and the number depends on the nature of the work to be completed by the subordinates, and the distance from the center of control. The span should be kept as manageable as possible.
iStockphoto/Thinkstock
An organic form of structure matches a unit, or small batch technology.
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CHAPTER 3Section 3.4 Completing the Organization’s Structure
3. Formalization. Almost all organizations have rules, whether written or unwritten. Most modern organizations use the term policy or work rules, but in every case the rules are intended to guide action and decision making across the organiza- tion. The more clear, detailed, and specific the rules of the organization, the more formal the organization.
4. Number of Authority Levels. Organizations may have very few authority levels (flat) or several (tall), depending on the nature of the organization and its plan of operation. Organization theory suggests the wider the span of control (more subordinates reporting to a superior), the flatter the organization; and the nar- rower the span of control (fewer subordinates reporting to a superior), the taller the organization’s structure.
Weber suggested the coordination of these characteristics could happen only through effective communication by organizational members and through standardizing work processes. As work becomes more complex, direct supervision becomes a more important factor in maintaining standardized work outputs. Weber’s concept of formalization is a natural efficiency-improving process that happens within the organization and may occur by several means: by the job, by work, or by way of rules.
An Organization in Crisis
There are times when events in an organization’s environment threaten internal opera- tions. J. D. Thompson (1967) developed a view of organizational structure in which the core technology a company utilizes becomes the key. In an organizational system, such as the one displayed in Table 3.5, inputs are regulated by the buffers, which lead them into the technical core. Outputs are moved into the external environment through various departmental activities. In essence, management develops departments (the buffers in Figure 3.7) to protect and facilitate the core technology.
When a threat emerges in the external environment, such as a dramatic rise in prices for raw materials, a natural disaster, a terrorist action, negative publicity, or a new competing technology, company leaders tend to respond by creating a new buffer or department to defend against the threat. When mad cow disease threatened the U.S. beef industry, one response would have been to create a new layer of inspectors to make sure the disease did not infect local herds. Many information technology departments have specially assigned units to defend against virus attacks, bombs, and other malware.
From Thompson's Model of Technology and Structure in Thompson, J. D. (1967). Organizations in action. New York: McGraw-Hill. Reprinted by permission.
Inputs
Labor Funding Materials
Buffers
HRM Finance
Purchasing
Buffers
Sales Warehouse
Shipping
Technical Core
New Buffer
THREAT
Outputs
Goods &
Services
Figure 3.7: Technology and Structure
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CHAPTER 3Section 3.5 Structural Configurations
Summary
Organizational design consists of far more than simply drawing an organization chart. After jobs have been specified, company structure consists of the form of departmentalization to be used along with other elements of structure. Beyond authority-responsibility relation- ships, management teams dictate the degree of delegation to be used on a company-wide basis. The level of centralization or decentralization that is present influences the jobs to be performed and the people selected to perform those jobs. Mechanistic organizational structures match with more standardized operations. Organic structures are best suited to problem-solving situations in which organizations must remain flexible and adaptable. Most forms of structure are relatively standardized, specifying the level of job specializa- tion and the number and types of managers. When an environmental crisis emerges, one natural tendency is to develop a new department or buffer to defend against the threat.
3.5 Structural Configurations Learning Objective #5: What kinds of structural configurations are found in various companies?
Structural configurations constitute the final element of organizational design. The dominant part of the organization is the major factor in the structural configuration of the organization. Management theorist Henry Mintzberg (1983) suggested that there are five common parts in any organization:
• Operating core. The subordinate workers who perform the basic labor in the orga- nization that is related to the production of goods or services.
• Strategic apex. Top-level managers charged with ensuring the organization serves its mission in an effective way.
• Middle line. The managers who connect the strategic apex with the operating core. • Technostructure. The analysts who design, change, plan, or train the operating core. • Support staff. The specialists providing the direct support services for the
organization.
These core elements then dictate the design of the organizational structure. Mintzberg identified five common structures: simple structure, machine bureaucracy, professional bureaucracy, divisional structure, and adhocracy.
Simple Structure
Small entrepreneurial businesses often use a simple structure. The local dry cleaner, the corner restaurant, the auto repair shop, and many others are likely organized as simple structures. This form of organization is dominated by the “Strategic Apex,” but has less formalization and complexity. Almost everyone reports directly to the owner of the busi- ness, so the organization chart is depicted as flat with few, if any, reporting layers.
When should this structure be used? Typically, this structure is used when the organiza- tion is “small or in the formative stage of development” (Robbins, 1990).
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CHAPTER 3Section 3.5 Structural Configurations
Machine Bureaucracy
The trademark of the machine bureaucracy is standardization. The structure features highly routine operating tasks typically grouped together into functional departments with high formalization and central authority, and the decision making flows through a chain of com- mand. Machine bureaucracies work best in large organizations such as manufacturing or service, where large volumes are produced, resulting in a routine. In machine bureaucracy, standardized production work is the norm. These structures utilize elaborate work rules, considerable numbers of middle-line managers, and distinctive line and staff manage- ment configurations. Organization charts are depicted with multiple management layers between top management and the shop floor, where production or services are delivered.
Such structures require a simple and stable operating environment, which may be the single greatest weakness of this type of organizational design. Machine bureaucracies have diffi- culty adapting to changes in the environment, such as significant product changes brought about by market demand. Business history is filled with accounts of large manufacturing firms that could not change to meet emerging environments and as a result collapsed in bankruptcy. Few people remember Nash Motors (part of Nash-Kelvinator Corporation) or Hudson Motors. While each was a technology innovator in its time and a designer/builder of beautiful automobiles, eventually, market instability forced their merger and then a later merger with Kaiser-Jeep Corporation to form American Motors Corporation (AMC). Then, in 1987, the Chrysler Corporation bought out AMC/Jeep.
When should a machine structure be used? Typically, this structure is most “efficient when matched with large size, a simple and stable environment, and a technology that contains routine work that can be standardized” (Robbins, 1990, p. 285). This is the typical structure of large manufacturing firms, large insurance firms, and even state and federal prisons systems.
Professional Bureaucracy
A professional bureaucracy may be used when an organization depends on highly skilled professionals delivering goods or services at the core of the organization. “Obvious examples include hospitals, school districts, universities, museums, libraries, engineering
design firms, social service agencies, and pub- lic accounting firms” (Robbins, 1990, p. 289). In this type of structure, professionals self-impose standardization and formalization, often in com- pliance with governing bodies (e.g., licensing agencies or professional associations or both), typically due to the complexities in the operat- ing environment. For example, certified pub- lic accounting firms are licensed in most states and have a professional organization (American Institute of Certified Public Accountants) and several governing bodies, including the Finan- cial Accounting Standards Board and the Secu- rities and Exchange Commission. Accounting professional training incorporates the standards of conduct, legal requirements, and the skills
Polka Dot Images/Thinkstock
Professional bureaucracies are best suited to professional, white collar companies.
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CHAPTER 3Section 3.5 Structural Configurations
appropriate to the profession. As such, accountants have a degree of autonomy within the organization and in the exercise of professional judgment.
When should professional bureaucracy be used? Typically, this structure is most effective when the environment is stable and complex, and when formalization and standardiza- tion are internalized through professionalization.
Divisional Structure
The divisional structure is actually a set of autonomous units, each typically a machine bureaucracy unto itself, coordinated by a central headquarters (Robbins, 1990). The divi- sional structure is widely used across the postindustrialized business world, and exam- ples include General Motors, Microsoft, 3M Company, AT&T, General Electric Company, International Business Machines, Coca-Cola Company, United Technologies Corporation, and The Walt Disney Company. Divisions are created (or acquired) to serve a market and are given operating control to make decisions appropriate to meeting the needs of that market. This could be a category of a market such as with Chevrolet Motors. Chevrolet manufactures automobiles in the mid-priced category of a market ($25K to $40K sales price), or the luxury market category such as Cadillac ($35K to $70K sales price). Both are generally autonomous divisions of General Motors.
Among the many weaknesses of the divisional structure is the duplication of activities and the potential for counterproductive inter-market competition for customers, which is not only inefficient but can limit opportunities for cooperation across market segments and waste resources. This was a significant factor leading to GM’s 2009 bankruptcy reor- ganization and federal government bailout. Now reorganized with fewer divisions and dealers, GM may be able to rebuild its business and value.
When should the form of divisional structure be used? Typically this structure is most effective when the organization selects the diversification strategy; that is, when the orga- nization decides to become a multi-market or multi-product operation. It is important to note here that the organization’s technology must be divisible without significant deterio- ration of economies of scale gained as a machine bureaucracy.
Adhocracy
Most people working in an organization have experienced a project team, task force, or a cross-functional team. When you participated, you were part of an adhocracy. Adhocra- cies are organic and dynamic in nature and have limited formalization and standardiza- tion, and tend toward decentralized decision making. Little is routine in an adhocracy. Adhocracies live during the life of the project and are disbanded afterward. Adhocracies are largely populated by professionals with high levels of skills and abilities to contribute to the completion of the project. Adhocracies are flexible and adaptable. That is the reason they exist at all.
A commercial building construction project is an example of an adhocracy. A project man- ager takes the plans from the building’s architect and assembles a project team that includes internal (assistant superintendent, construction site managers, etc.) and external members (the trades appropriate for the work required). The work begins once a calendar is created
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CHAPTER 3Section 3.5 Structural Configurations
and contracts are established, and continues in a planned sequence until all work is com- plete, final inspection is made, and the building is handed over to the owner/user. The project is over, and all project members move on to other projects. They may participate in a project together in the future or maybe never see any of the project team again.
A weakness of the adhocracy structure is the stresses placed on participants during the life of the project. There are limited boundaries and few vertical relationships (boss-subordi- nate) to mitigate tensions. Many participants have difficulty working in temporary work environments subject to rapid change or operating in ambiguity. As a result, adhocracy structures are difficult to establish and to dismantle once they are operating.
Typically, the adhocracy structure is most effective when used for developing nonroutine solutions and projects, and where flexibility is required. Use of this structure is best when solutions or projects have a short life cycle and high levels of professionalism are resident or available. Table 3.6 summarizes the five organizational configurations.
TABLE 3.6: SUMMARY OF THE FIVE ORGANIZATIONAL CONFIGURATIONS
CHARACTERISTIC SIMPLE STRUCTURE
MACHINE BUREAUCRACY
PROFESSIONAL BUREAUCRACY
DIVISIONAL STRUCTURE
ADHOCRACY
Specialization Low High Functional
High Social High Functional
High Social
Formalization Low High Low High within Divisions
Low
Centralization High High Low Limited Low
Environment Simple and Dynamic
Simple and Stable
Complex and Stable
Simple and Stable
Complex and Dynamic
General Structural Classification
Organic Mechanistic Mechanistic Mechanistic Organic
From Robbins, S. P. (1990). Organization theory: Structure, design, and applications, Prentice-Hall, p. 305. Reproduced by permission of Pearson Learning, Upper Saddle River, NJ.
The Importance of Organizational Goals in Structural Design
Organizations exist for a purpose. The purpose of the organization, or the plan, also influ- ences the structure of the organization. The purpose of a small shop operator located on Main Street in your hometown likely will be to meet small capital financing needs, design an informal mission, and employ less than 25 employees who report directly to the owner. The planning process of this small shop focuses on the needs of its community by maintaining inventory, appropriate capital availability, and a sensitivity to the com- munity’s standards. On the other hand, a multiunit retail operator with 100,000 square- foot, large-scale retail stores located in and across several states or the entire nation, may have 10,000 employees, high capital demands, a well-defined mission statement, and sophisticated marketing needs. Such a large organization likely has a long-range strate- gic plan, complex operational plans, and several levels of management, each with very specific performance expectations.
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CHAPTER 3Chapter Summary
authority the right to direct with permission to act.
centralization/decentralization the degree of delegation of decision making, authority, and power within an organization.
departmentalization organizing people into different departments or divisions in which collections of tasks are placed together, such as accounting, marketing, and production.
formalization the presence of rules and procedures.
job a set or series of tasks performed by an individual on behalf of an organization.
job analysis the process of assigning tasks to jobs.
job description a formal list of tasks and duties.
Chapter Summary Organizational design involves numerous activities. These include designing jobs, depart- mentalizing decisions, completing the company's structure, and outlining the best struc- tural configuration.. The five forms of configuration can be applied to ensure the highest possible level of success. Configurations include specialization, formalization, centraliza- tion, environmental, and general structural classification components.
Key Terms
Case Study: Starbucks’ Structure
What happens when a highly successful business formula begins to run out of steam? For more than two decades, Starbucks had reconfigured the coffee marketplace by changing the way people viewed the product. Until the company entered the market, coffee was often perceived as a rather banal item consumers purchased as needed. Price often deter- mined which brand someone would buy at the store.
Howard Schultz became convinced that he could turn coffee drinking into a cultural expe- rience. He had traveled to Italy and watched with interest as city dwellers would stop to begin the day at a coffee bar. Using the same type of model, Schultz purchased and opened his first location as Il Giornale. The company evolved into Starbucks, where multitudes of consumers began purchasing designer coffees, such as espresso, cappuccino, and cof- fee mocha. Store interiors encouraged lounging and relaxing with a newspaper, magazine, laptop, or friends. Each cafe featured enticements such as jazz music in the background, additional merchandise to examine, and comfortable seating.
The original Starbucks chain emphasized location. Cafes were placed on commuter routes and in other places where people were likely to gather and socialize. Over time, units expanded into other major traffic routes, including airports.
Starbucks employs people who enjoy coffee. They are retrained using motivation programs that include buy-in options. They are known as baristas, or bar persons, rather than serv- ers, who become experts in coffee brewing while providing friendly service to patrons. The company insists on a diverse workforce that reflects the makeup of the local commu- nity. Employees are also encouraged to pass along ideas about how to improve operations. Those who make suggestions that are adopted are rewarded. (continued)
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CHAPTER 3Chapter Summary
job design what occurs when managers determine the tasks that need to be done, who will do them, and what selection criteria will be used to choose employees and place them on the job.
job specification a list of the eligibility requirements or qualifications needed to per- form a job.
mechanistic organization characterized by high use of rules and procedures, a greater number of levels in the organization, and for- mal relationships between workers, and that is, as a result, a less flexible method of operation.
mechanization/computerization measures the reliance on computers and technology to maintain operations.
organic structures that employ few rules and procedures, have a small number of organi- zational levels and ranks, allow for informal relationships among workers and supervisors,
and are much more flexible and adaptable as a result.
organizational design the process by which managers make specific organizing choices that result in the particular kind of organiza- tional structure they will utilize.
organizational structure a formal system of task and reporting relationships that coordi- nates the activities of members so that they work together to achieve organizational goals.
organizing the process of bringing people and resources together to create products and ser- vices in an efficient and effective manner.
responsibility (or accountability) the obliga- tion to complete tasks as assigned.
standardization the use of a series of job titles that are exactly the same, and the assignment of workers to perform the same activities.
Until the 2008 recession, Starbucks had continued to grow. Some of the units in larger cit- ies experimented with selling additional products, including lunch service. Then a quickly collapsing economy, possibly coupled with other problems, including overexpansion, sent the corporation on a downhill slide. Founder Howard Schultz worried that the addition of so many locations had watered down the Starbucks experience.
Increased competition became an additional factor that led to declining sales, the closing of stores, and a loss rather than profit at the corporate level. McDonalds, Dunkin’ Donuts, and numerous smaller operations began to chip away at Starbucks’ share of the market. Many analysts believed that when Starbucks was no longer the only place to purchase high-quality coffee products, and when others were selling at least acceptable brews at lower prices, the drop in sales would became inevitable.
Schultz, who had previously stepped down as CEO, returned to try to bring Starbucks back to prominence. As the economy continues to recover, time will tell if the company will return to its previous status.
1. Complete a job description and job specification for a Starbucks employee. 2. What form of departmentalization should Starbucks use? Should the form be changed
in stores offering food products and lunch? Why or why not? 3. When the company began to experience financial problems, should the leadership
have tried to centralize power and decision making, or decentralize the operation? 4. What form of organizational configuration best fits Starbucks?
Case Study: Starbucks’ Structure (continued)
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CHAPTER 3Chapter Summary
Review Questions
1. Define organizing, organizational structure, and organizational design. 2. What is a job? 3. What are the three steps of job design? 4. Define departmentalization and name the six major forms. 5. What types of companies match with departmentalization by: a. function b. product c. customer d. geographic region e. matrix 6. Define authority and responsibility. 7. Define centralization/decentralization, standardization, formalization, and
mechanization/computerization. 8. Define mechanistic and organic forms of structure. 9. What four characteristics apply to most organizations, according to Max Weber? 10. What kinds of companies should employ the simple structure organizational
configuration? 11. What kinds of companies should use the machine bureaucracy form of structure? 12. What kinds of organizations should feature a professional bureaucracy form of
structure? 13. What kinds of firms should use the divisional form of structure? 14. What types of organizations are best suited to the adhocracy form of structure?
Analytical Exercises
1. The analogy has been made that an organization’s structure is its skeleton. If so, what part is the company’s mission? What parts are individual jobs? What parts are the departments?
2. How could a company such as FedEx or UPS utilize the time-and-motion study process in conducting its operations in the following areas: • receiving packages for delivery at designated stores • sorting packages • delivering packages to individual customers and businesses
3. Create job specifications for the following positions: • laborer at Burger King • heavy equipment operator for a construction company • salesperson for tractors and farm equipment • information technology specialist to be a web master
4. Which form of departmentalization best matches the following companies? Explain your answer. • local dry cleaner • T.G.I. Friday's • Greyhound Bus Lines • GEICO Insurance • Ford Motor Company International
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CHAPTER 3Chapter Summary
5. Marjorie is the chief accounting officer in her company. She has five junior accountants under her supervision. She serves as head of the workplace safety committee in the firm. She has expertise in the area of internal auditing, and lately the firm’s CEO has asked her numerous questions about the firm’s most recent audit. What types of authority does Marjorie hold in her current situation? Can you think of ways in which the forms of authority may be in conflict with one another? Explain your answer.
6. Explain how the following personality characteristics would fit with a central- ized and mechanistic organization, or would better match a decentralized and organic organization. • high need for autonomy • high need for continuing performance feedback • enjoys working with others • enjoys problem solving • prefers direction and role clarity
7. “Among the weaknesses of the divisional structure is the duplication of activi- ties and potential of counter-productive inter-market competition for customers, which is not only inefficient but can limit opportunities for cooperation across market segments and waste resources.” This statement applies to conglomerate organizations. Can you think of a form of structure that is better suited to multi- product, multiservice companies? Defend your answer.
8. Explain how the following somewhat match each other: • functional structure with simple structure • machine bureaucracy with centralized, mechanistic structure • professional bureaucracy with decentralized, organic structure • divisional structure with departmentalization by product
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Peter M. Fisher/Corbis
chapter 4
The Staffing Function
Chapter Goals
After completing this chapter, you should be able to • View staffing as an organization-wide activity taking place in a complex legal environment. • Design jobs and plan for future human resource requirements. • Conduct employee placement in a manner that leads to quality hires. • Maintain an effective workforce through compensation policies and other staffing activities. • Explain how staffing is related to building careers and working with unions.
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CHAPTER 4Section 4.1 Introduction
4.1 Introduction Learning Objective #1: What factors must be considered when staffing an organization in a complex legal environment?
In the first chapter, we defined management as the process that consists of the tech-niques that are used to lead the human resources in an organization to become produc-tive. Notice that a key element of that definition is the human resource component. Indeed, the people who work for an organization are its most valuable resource, because they convert raw materials into finished products and services, which leads to profits for the business. People also design products and make decisions about when and how products and services are distributed to maximize organizational effectiveness. People usually are the most valuable asset of the organization. However, people are typically the most expensive part of running a business, and they often present the most challenges to management (Mathis & Jackson, 1997).
Zappos.com: Strategic Staffing
One out of every three sales is lost in shoe stores because the customer’s size is not in stock. This factor explains some of the success and growth of online shoe sales. The online shoe market share has reached over $3 billion. Zappos.com, which is an adaptation of the Spanish word for “shoe,” has captured a 20% share of the overall shoe market. The orga- nization has moved into sales of various products beyond footwear, increasing sales and market awareness. New product lines include clothing, electronics, and accessories.
Nick Swinmurn founded Zappos.com in 1999 after spending a day walking the mall look- ing for a pair of shoes and being left frustrated by his inability to find the pair he wanted. His first business concept was to create an inventory so large that the odds of the customer finding exactly the right pair would be very high. Zappos.com now stocks more than 4 million pairs of shoes in its inventory.
The Zappos.com business model dictates that key customer contacts are made via the phone center. If a customer cannot locate the exact pair of shoes he or she wants, the center’s service representative will direct the person to two or three other companies that might have the item. Each phone operator is required to consistently exhibit a friendly, upbeat, and helpful demeanor.
Zappos.com represents a a prime example of a company that effectively completes the staffing function.The overall mission for the organization combines employee satisfaction with customer satisfaction. The quality of the company’s service begins with the com- pany’s culture.
The company’s recruiting and selection processes reflect a commitment to the overall mis- sion. Employees are carefully selected, with those who show positive, customer-oriented attitudes being chosen. New employees are required to enroll in a four-week training ses- sion that prepares them to work in the call center. During the course of the training, company CEO Tony Hsieh personally offers to “buy them out” with a cash payment (up to $2,000) that leaves the individual free to quit the company with money in his or her pocket. Those
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CHAPTER 4Section 4.1 Introduction
who remain—the majority of employees—are reminded of the importance of excellent customer service. Many are placed in non-phone related jobs such as order fulfillment, inventory control, or finance. A graduation ceremony finalizes the training process, complete with the employees' recitation of Zappos.com’s 10 core values, which include phrases such as “Deliver WOW,” “Create fun,” “A little weirdness,” “Pursue growth,” “Be passionate,” and “Be humble.”
The employee environment reflects the compa- ny’s culture. Cubicles can be individualized and personalized to suit the temperament and pref- erences of their occupants. An abundance of free food is available every day. Employees are encouraged to be spontaneous and energetic, and to have fun. In contrast to the free-flowing and short-lived dot-coms of the 1990s, Zappos.com’s employees have been well-trained, and they are constantly reminded that the customer is their top priority.
Meeting customer needs is part of the company’s compensation system. Employees who remain
at Zappos.com receive excellent compensation, full health insurance, and dental ben- efits. Why not relocate the call center to somewhere cheaper? “We don’t think you’re going to give great customer service by outsourcing it,” Tony Hsieh calmly states. Hsieh, who already made a fortune with another Internet company, receives compensation from Zappos.com of about $36,000 per year. He works in a small cubicle at the center of the plant.
The majority of Zappos.com’s sales come from online purchases. Each order is shipped at no cost to the customer in both directions. Customers receive their purchase within just a few days of placing their order. And if the shoes do not fit, they can be returned for a full credit, with shipping paid, up to one year after the original purchase date.
Why don’t other companies follow this business model, including the staffing system? Tony Hsieh speculates that “You don’t really see the payoff right away.” Building a com- pany in this way takes time. On the other hand, 75% of Zappos.com’s business comes
Questions for Students
1. How has Zappos.com managed to capture 20% of the overall shoe market? 2. In what way does Zappos.com's mission contribute to its success? 3. How does CEO Tony Hsieh's staffing function model differ from other companies' model?
Stockbyte/Thinkstock
Zappos.com has established a high-quality staffing program based on the commitment to customer service.
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CHAPTER 4Section 4.1 Introduction
from repeat customers. Most would agree that Zappos.com fulfills its mission: To Live and Deliver WOW (Clow & Baack, 2010, p. 255; Dirst, 2008; ABC News Nightline, 2008).
The Nature of Staffing
Staffing is the achievement of organizational goals through the effective and efficient deployment of people. Staffing deals with people as a resource in the organization. It is more than a department called human resources or the personnel department.
The typical human resource or personnel department deals with the design of formal systems to assist and support managers in the staffing function; however, staffing is a dis- tributed function of management itself. All managers are responsible for staffing within the organization and not just one department. No matter the process in the organization, managers make hiring and termination decisions, conduct training or supervise it, evalu- ate worker performance, assess worker suitability for advancement, discipline workers when necessary, and are responsible for the labor budget. In almost all cases, it is a man- ager in the organization who is responsible for maximizing the worker’s efficiency and achieving the highest grade of work output of which the worker is capable (Taylor, 1911). This is the essence of the staffing function.
The organization’s strategic plan forms the foundation of staffing. People are the most critical asset in building and maintaining organizational capability. In principle, “Build- ing organizational capability requires very specific talent or competencies” (Christensen, 1997). Staffing the organization must be viewed by managers “in the same context as financial, technological, and other resources that are managed in organizations” (Mathis & Jackson, 1997, p. 199). To do otherwise does not appropriately align organizational resources to meet future operational demands. Staffing and human resource management programs consist of at least twelve major activities or functions. The following text box displays each.
Legal Aspects of Staffing
The staffing function takes place in a complex and changing environment. Social trends, shifting demographics, and legal regulation influence the employment process. As the
Job design Human resource planning Recruiting Selection Orientation Employee training
Compensation management Performance appraisal Employee discipline systems Workplace safety Career development Union-management relations
Human Resource Activities
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CHAPTER 4Section 4.1 Introduction
population becomes more diverse and new legal issues arise, one key part of effective staffing will be adapting to these trends and rulings. The organization’s policies and work rules—combined with a myriad of national, state, and local laws and regulations—govern the workplace. While this is not a law text, we will address the most significant and recent areas of concern to managers.
Employment at Will One of the most significant and misunderstood legal doctrines is that of “at will” employ- ment. In essence, this means that workers are free to sell their labor services to any employer, and employers may employ whomever they prefer and terminate that employ- ment arrangement at any time and for any reason. There are, however, limitations to the application of employment at will. Laws restrain employers from termination for reasons of discrimination, retaliation for whistle-blowing, service in the military (e.g., called to duty in the reserves or National Guard), and jury service. In other instances, employers and employees are able to sever the employment relationship as long as both employer and employee comply with applicable laws.
Fair Labor Standards Act The Fair Labor Standards Act (FLSA) was signed into law by Franklin D. Roosevelt in 1938. The law provides for a minimum wage ($7.25 effective July 24, 2009), overtime pay for hours worked in excess of 40 hours in the workweek for nonexempt (hourly) employ- ees, workweek standardization, child labor restrictions, and standardized record keeping. The primary purpose of FLSA is to protect workers, but these standards help managers plan and budget work schedules and provide clear guidelines for supervising employees.
The Civil Rights Act of 1964 and EEOC The Civil Rights Act was signed into law during the Lyndon B. Johnson administration with the expressed purposes of eliminating discrimination, and defined such discrimina- tion to include race, creed, color, sex, and national origin. While the Act makes discrimi- nation illegal in a variety of life experiences, in respect to employers the Act specifically defines what constitutes illegal discrimination in employment relationships.
The Act also created the Equal Employment Opportunity Commission (EEOC). No other regulatory area impacts staffing more than the EEOC and its influence over the organiza- tion and its managers. All aspects of employment management are impacted, including hiring, recruiting, training, compensating, disciplining, and terminating.
Sexual Harassment “Sexual harassment is unwelcome sexual attention that affects an employee’s job con- ditions or creates a hostile working environment” (Liuzzo & Bonnice, 2010). It is also a form of discrimination as defined in the Civil Rights Act and EEOC regulations. There are numerous types of sexual harassment, but the two most widely recognized are displayed in Table 4.1 (Weitzer, 2002).
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CHAPTER 4Section 4.1 Introduction
TABLE 4.1: FORMS OF SEXUAL HARASSMENT
Quid pro quo Sexual advances or sexual favors are exchanged for favorable treatment, including • better job assignments • undeserved performance evaluation ratings • promotions • pay raises
Hostile environment
Sexual innuendos in language including jokes, sexual references, and inappropriate comments about appearance and dress; unwanted touching, signage (“girlie” calendars, cartoons), and conduct toward the other gender or those with a different sexual orientation that suggests a discrepancy in how people are treated.
The Latin term quid pro quo literally means this for that. In the work environment, quid pro quo occurs when a subordinate’s job benefits are directly tied to his or her submission to unwel- come sexual advances. Hostile working envi- ronments are created in various ways that lead to impaired job satisfaction. While impairment could be a subtle or significant condition, the employee has a right to be free from such acts in the work environment.
The Age Discrimination in Employment Act This 1967 federal statute is intended to protect workers over the age of 40 against discrimina- tion based on age. The effect of the law is to cre- ate an age-protected class of workers to prevent older workers from being subjected to employ- ment actions based on age status.
The Americans with Disabilities Act of 1990 The Americans with Disabilities Act (ADA) is designed to protect individuals with dis- abilities from employment discrimination. The law does not provide protection from short-term or temporary disabling health or injury conditions but from long-term, signifi- cant life impairment conditions. The ADA requires employers to make reasonable accom- modation for such disabilities in employment staffing arrangements unless providing such an accommodation would place an undue hardship on the employer.
Family and Medical Leave Act In 1993, the Family and Medical Leave Act (FMLA) was enacted to cover circumstances in which various events disrupt an employee’s ability to perform effectively. The law requires larger employers to provide employees job-protected unpaid leave due to a serious health condition that makes the employee unable to perform his or her job, or to care for a sick family member, or to care for a new child. The child can be natural-born or adopted. The law also covers caring for an injured member of the armed services.
BananaStock/Thinkstock
The Family and Medical Leave Act allows parents to spend time with newborn and newly adopted children.
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CHAPTER 4Section 4.2 Job Design and Human Resource Planning
4.2 Job Design and Human Resource Planning Learning Objective #2: How do managers design jobs and plan for future human resource needs?
Staffing has a close connection with the organizing function. The first step of organi-zation, job design, results from the collaboration between functional managers and the human resource department. Individual jobs require analysis of the tasks to be completed as well as the identification of skills and talents needed to complete those tasks. After company managers have assigned the jobs, they can then begin the process of plan- ning for current and future personnel needs.
Job Design
As noted in the previous chapter, job design occurs when managers determine the tasks that need to be done, who will do them, and what selection criteria will be used to choose employ- ees and place them on the job. This means that job design is the process of “organizing tasks, duties, and responsibilities into a productive unit of work” (Mathis & Jackson, 1997).
Job design involves identifying appropriate, job-related knowledge, skills, and abilities to ensure the work planned can be completed successfully. Designers consider the work, the environment, and the impact of the work on employees. As was noted in Chapter 3, the standard approach to job design involves three steps: (a) job analysis, (b) job description, and (c) job specification. To understand the impact of job design on employees who will actually carry out the work, Hackman and Oldham (1976) explain the potential motivating factors of a job for a worker. The five dimensions used in the analysis are displayed in Table 4.2.
TABLE 4.2: CORE JOB DIMENSIONS
Skill variety the number and degree of skills, abilities, and talents used in performing the job
Task identity the degree to which the job includes a complete and identifiable piece of work
Task significance the personal impact on other people through human interaction
Autonomy the amount of freedom, independence, and working without supervision present in the job
Feedback performance-related knowledge and information
These five elements combine to reinforce three factors. Experienced meaningfulness expresses whether the employee sees the job as important, valuable, and worthwhile. Experienced responsibility measures the degree to which the employee feels personally accountable for outcomes. Knowledge of results suggests whether the person readily knows if the job has been done well or not (Nadler, Hackman, & Oldham, 1979).
Once jobs have been designed and staffed, managers track job success, review job content and growth, and conduct ongoing job analysis in order to redefine or refine jobs to ensure that they continue to meet expectations. One of the final acts of this process is the development of a job or position description incorporating all job-related information, so managers have a tool kit at their disposal to recruit, select, train, compensate, and evaluate worker performance.
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CHAPTER 4Section 4.2 Job Design and Human Resource Planning
Human Resource Planning
Just as job design has a close connection with organizing, human resource planning has an obvious tie to planning processes. Human resource planning consists of analyzing and preparing for future personnel needs. The process of human resource planning includes assessment of at least four levels: (a) entry-level employees, (b) front-line supervisors, (c) middle managers, and (d) executive managers. Various factors affect all four levels. When a company is growing, management must make certain an adequate number of entry-level employees can be attracted to the company. Declining firms require managers who can either rejuvenate the organization or find ways to stabilize the company with fewer staff.
As part of the human resource planning process, managers conduct labor force analysis to determine the number of potential employees with the proper knowledge, skills, and abilities within the appropriate population. Next, they complete requisite salary surveys to assess market pay rates in order to develop a strategic recruitment plan. Recruitment plans may employ a variety of approaches such as employing a headhunter, using social media sites, attending networking events, and posting ads online and in print publica- tions. These are just a few ways to recruit new talent, and the method used depends on how best to access the employable population. But recruiting processes must always consider legal compliance issues, diversity, appropriate knowledge, skills, abilities, and labor pricing.
Employee Inventories Two methods are used as part of the planning process and the analysis of employees. The first, an employee inventory, involves examining all current employees at the four levels as well as projecting future needs in those areas. Individual workers are noted, including those who are about to retire, those at risk of termination, and those who are viable candi- dates for promotion. The company can use two methods to fill the positions that are about to open: (a) a promote-from-within policy and (b) external recruiting.
Promote-from-within policies give priority to advancing current employees to higher ranks. Firms dedicated to this approach need quality manager-training programs along with recruiting systems that identify individuals who wish to join a company and stay by moving up through the ranks over time. Promote-from-with policies help build morale, as employees believe they can advance without having to change companies. This often inspires additional effort and creativity on the job.
The disadvantages of promote-from-within policies begin with promotion decisions. Those who are passed over often have hard feelings about not getting the promotion. Also, when outsiders are not attracted into the firm, the company risks becoming “stale,” without new employees to bring in new, innovative ideas.
External recruiting exhibits the opposite advantages and disadvantages. Employee morale may suffer, as a person believes he or she has to “move on to move up.” Further, when there are no internal opportunities for promotion, the firm’s best employees may become the first to leave. These individuals will be the ones with the greatest number of options.
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CHAPTER 4Section 4.2 Job Design and Human Resource Planning
Conversely, external recruiting infuses new ideas and energy into a company. External managers are often hired to shake things up. They can view company programs and prob- lems from a more objective vantage point.
The compromise between the two approaches is an open listing, in which both internal and external candidates are considered. The method takes advantage of the potential for new ideas and new blood, but leaves the possibility of being promoted open for the company’s top employees.
Skills Inventories A second method of analyzing employees, a skills inventory, breaks down the employee’s resume or performance record into sets of strengths and talents the employee exhibits. The skills inventory method has several uses. First, it can be a major asset when making a promo- tion decision by matching the right person to a supervisory position. Second, skill sets can be combined to create effective teams and task forces. When one person has excellent organizing abilities and another has expertise in a key task, such as designing a new package or label for a product, these talents can be added with other skills for a more successful product launch or relaunch. Third, inventory information can become a useful part of the performance appraisal process, indicating the individual’s strengths as well as areas that could be improved.
Succession Planning A major element of the strategic human resource planning process is the line of succession. Well-managed firms not only have capable CEOs and executive managers in place, they also
set out procedures to identify the type of man- ager, or the actual individual, who will move into the organization’s top spot. These plans are often made after consulting with the organization’s board of directors. At times, a person within the company appears to be well suited to taking the reins. In others, a series of potential external can- didates will be identified before a CEO announces plans to retire or move on. Companies that fail to make contingency plans for top management positions leave themselves open to dramatic tur- moil when turnover in these ranks occurs.
Summary Human resource planning demands attention at every level in the hierarchy. The more complete the information is, the better the strategic human resource plans will be. Employee inventories and skills inventories can assist in the process of iden- tifying company strengths as well as company weaknesses. Succession planning represents the highest level of preparation in the area of human resource planning.
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Succession planning helps ensure continuity in the management of an organization.
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CHAPTER 4Section 4.3 Employee Placement
4.3 Employee Placement Learning Objective #3: What activities are involved in making quality hiring decisions?
A simple way to explain the human resource function would be that it is designed to identify the required kinds of jobs and then to find the right person for each job. Once jobs are designed, managers can begin the process of recruiting employees for the various positions available.
The employee placement process consists of four activities: (a) recruiting, (b) selection, (c) orientation, and (d) employee training. These four steps constitute a key organizational function. When the right person takes the job, the entire organization reaps the benefits of a good hire. Someone who does not fit and cannot do the job will experience—and per- haps cause—problems almost immediately.
Recruiting
Recruiting provides an example of a staffing activity that is more than something per- formed by the human resource department. Anyone in the organization can encourage a qualified person to submit an application or an indication of interest in working for the company. In the most general terms, effective recruiting systems are (a) ongoing, (b) sys- tematic, and (c) geared to the company’s needs.
Recruiting should be an ongoing process. Quality organizational leaders, working in con- cert with the human resource department, work to make sure the company always has a list of potential employees from which to begin a candidate search. This means recruiting on a year-round basis.
Effective recruiting will be systematic. Every single place in which a potential quality applicant might be found should be explored. Systematic recruiting consists of both inter- nal and external sourcing. Internal sourcing means that company employees can encourage their friends and colleagues to submit applications. Leaders and supervisors attending conferences, civic events, and other public forums will be looking for qualified prospects. External sourcing involves making contact with all viable options shown in the following text box (Chruden & Sherman, 1980).
External Recruiting
Advertisements (want ads) Public employment agencies Private employment agencies—search firms Private employment agencies—temporary employment agencies Educational institutions Referrals from other companies—suppliers and retail outlets Unsolicited applications (walk-ins) Professional organizations Labor unions
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Emerging technology and a mobile workforce have changed recruiting. Many organizations now post job specifications online and receive appli- cations in the same way. Paper cover letters and resumes, while still common, are giving way to some extent to electronic submission. The general idea in recruiting remains to generate candidates that will be the “best fit” for employment to be evaluated by the department manager. Recruiting is an expensive process. The narrower the search is on the relevant characteristics, the more likely the organization will have a set of qualified candi- dates from whom to select the best hire.
Selection
Selection processes involve choosing those who hold the relevant qualifications, as defined in the job or position, from among the appli- cants for the organization's available jobs. Selection should be designed to comply with organizational policy and labor laws. A job specification enumerates standard selection criteria. As noted in the previous chapter, the criteria normally include
• level of education • amounts and types of experience • special skills—physical • special skills—technical • personality characteristics • legal requirements
The standard selection process consists of the steps displayed in the following text box.
Steps of Selection
1. Position announcement 2. Accept applications 3. Initial screening of applications 4. Preliminary interview 5. Contact references and previous employers 6. Selection of finalists 7. Final interview, including the position’s supervisor 8. Selection and notification of all finalists
Position announcements should allow sufficient time for prospective employees to become aware that the job is open. A closing date will normally be set for accepting applications. The initial screening quickly narrows the field to a viable list of candidates. The preliminary interview will be brief, sometimes over the phone. It should provide additional insight
Creatas Images/Thinkstock
The interview is often a key factor in the decision to hire a candidate.
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into whether a person should remain in the running for the job. References may not always provide the best information, because candidates are going to offer only the names of trusted associates and friends who may not give the entire picture about the person’s readiness for a job. Previous employers often offer guarded responses. Their answers should be considered carefully. An applicant’s current employer can be contacted only when the candidate grants permission to do so.
The finalist list normally consists of three to five individuals who are the best prospects. The final interview with the human resource specialist, the supervisor, and other key parties provides the best idea about who will fit. Intangibles such as chemistry and personality are assessed at that time. After an individual has been chosen and has accepted the position, common courtesy indicates that all applicants should be notified of the decision. While mak- ing a selection remains a bit of an art, recruitment of qualified candidates and well-defined selection criteria tend to improve the likelihood of a superior hire. The final step in the hiring process often requires that the person offered the position undergo a background and/or credit check. Though some companies do allow new hires to start their jobs before the results come back, it is known that continued employment is contingent upon the results. This step is particularly important in fields where people work with vulnerable populations, or those careers in which employees have access to sensitive information or company funds.
Orientation
After making the hiring decision, work must be completed to successfully move the per- son into the organization. Orientation consists of a series of seemingly mundane activities; however, they can have a major impact on the employment experience. Typically, orienta- tion programs include the following:
• paperwork and forms • introductions, work rules, company history, expectations, and tour • physical examination (when required) • answering questions
The paperwork includes tax forms such as the W-4, insurance forms, and other information, including “contact in emergency” documents. The introduction-and-tour session should be designed to show the person where to park, to assign a locker or storage area if one is pro- vided, and to assist the person in understanding the locations of all departments, and it includes meetings with key people in the worker’s assigned department. A physical exam may be required for some positions. It will be given to make sure the person is physically capable of performing the job. All questions should be answered in a friendly way. The new employee may be nervous and worried he or she is asking something “dumb.” The individual should be reassured that the company wants the person to feel as comfortable as possible.
Almost all new hires need to “learn the ropes.” Every company has its own ways of doing things, which are important for all employees to understand. A few hours of orientation
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during the first day or two on the job helps ease new hires into the company’s way of doing things (Mathis & Jackson, 1997, p. 440). The orientation process serves several pur- poses: (1) to create a favorable impression, (2) to enhance personal acceptance, and (3) to reduce turnover.
Create a Favorable Impression A quality orientation program creates a favorable impression of the organization and its work. The impression may in part be built before the new employee reports to work. Pro- viding sufficient information about when and where to report the first day, handling all relevant paperwork efficiently, and having personable and efficient people assist the new hire all contribute to creating a favorable sense of the organization. First impressions mat- ter. New employees who feel their induction into a company is a professional and friendly experience will quickly develop positive attitudes about the organization.
Enhance Personal Acceptance Orientation helps ease the employee’s entrance into the work group. Meeting peers is a common concern among new employees. Information presented at the formal orientation may not always parallel the expectations of a group of employees. Many organizations use a “buddy” system, which pairs an existing employee with a new employee as part of the orientation process. This type of socialization can be advantageous to newcomers and to the ongoing employee. Both may feel the company is trying to make the transition move as smoothly as possible.
Reduce Turnover Recruiting and selection are time-consuming and expensive. Companies that fail to ade- quately orient new workers often experience first-day or first-week quits. Then the com- pany must conduct the entire hiring process again. An effective orientation program can foster lower absenteeism and create higher job satisfaction, and most important, it can help reduce employee turnover by creating a stronger loyalty and greater commitment to organizational goals and values. These efforts are imperative, as employee turnover can cost 1.5 to 2.5 times the worker’s annual salary (Bliss, 2009).
In summary, while orientation may not seem glamorous, it has a bottom line. Orienta- tion goes beyond what takes place in the human resource office. Ongoing employees and supervisors play key roles in helping new employees feel welcome and accepted.
Employee Training
Employee training takes place in two ways. As shown in Table 4.3, on-the-job and off-the job methods are used. Managers select the combination that fits the position and the indi- vidual’s level of experience and training.
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E-Learning Many companies are using electronic media to deliver training instead of relying solely on traditional classroom approaches. When training is delivered using electronic-based tech- nologies, it is referred to as e-learning. E-learning processes include web-based learning, computer-based learning, virtual classrooms, and digital collaboration. A major advan- tage of e-learning technology is that it allows employees to develop their competencies at their own pace and at a time that is convenient to them. For companies, it is less expensive than sending employees to traditional classroom training.
The goal of any training system or program will be to make sure the employee is com- pletely competent and can perform the assigned tasks. Any worker who feels unprepared will quickly come to believe the organization does not care. Many of these employees become early quits or terminations. Well-prepared employees tend to be grateful for the help and support the company has provided.
4.4 The Employment Environment Learning Objective #4: How can a company maintain an effective workforce through compensation policies and other staffing activities?
Employees on the job quickly absorb the nature of the workplace environment. A series of factors determine employee reactions to the overall organization. There are four key areas of concern for the management team: (a) compensation management, (b) performance appraisal, (c) employee discipline systems, and (d) workplace health and safety. The human resource department, in consultation with other managers and leaders, develops systems that best serve the staff.
TABLE 4.3: EMPLOYEE TRAINING METHODS
On-the-Job
Demonstration A seasoned employee shows the worker how to perform the task; then the new hire does the job as the seasoned employee watches and provides feedback
Apprenticeship The method normally used for skilled blue-collar jobs (e.g., plumber, electrician, heavy equipment operator) and in some semiprofessional and professional occupations (e.g., nursing trainee)
Sink-or-Swim Learn by doing
Off-the-Job
Simulation The employee practices doing the job away from the shop or sales floor
Film and Classroom The new worker watches films or videos and receives additional training in a classroom setting
Vestibule Self-study and learning using a training manual or Web site
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Compensation Management
Compensation programs balance labor costs with the ability to attract and keep employees by providing fairness of rewards. The compensation structure should also support orga- nizational objectives and strategies. It may come as a surprise to some people that com- pensation programs actually are based on one of two philosophies: equity versus exchange.
The equity philosophy reflects the belief that company leaders try their best to make the compensation system fair to employees. Many times, pay systems based on this philoso- phy rely on rate cards, across-the-board pay raises, and other methods that treat workers in the most uniform manner possible.
The exchange philosophy indicates management’s belief that some work skills and some employees are more valuable to the company than others. The company establishes a pay system that reflects performance incentives and premiums for various skills, talents, and contributions to the organization.
After establishing the philosophy, other ingredients in the compensation system follow. Compensation has three major parts: base pay, incentives, and benefits.
Base Pay There are four main ways of establishing pay systems (see Table 4.4). In most organiza- tions, being hired means a guarantee of some basic level of pay—assuming that an employee comes to work and satisfactorily performs the job functions. Employees that are paid what is on par with the market average, or even above the market average, are more likely to believe that they are being paid fairly than those who are being paid below the market average.
TABLE 4.4: FORMS OF PAY
By time hourly, shift rate, day rate
By the unit piece-rate pay
By the sale commission
Professional/annual salary
When an employee thinks the level of pay is inadequate or that he or she is not being treated fairly, that person becomes more likely to leave the organization.
Incentives Incentive pay systems should be designed to encourage superior performance. Incentive pay systems take the forms of pay raises, bonuses, prizes in contests, and profit sharing.
Pay raises take two forms: (a) across-the-board and (b) merit raises. Across-the-board incentives are more likely to reflect the equity philosophy. Merit raises provide larger incentives for employees to stand out in the crowd.
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Bonuses can be paid to individuals and to groups. Individual bonuses often take the form of a year-end payment for excellent work. Group bonuses can be tied to sales contests, production contests, or periods of time, such as quarterly team incentives. Company lead- ers should take care to make sure employees understand that higher levels of performance are required to receive the payments. If not, they start to believe the checks are simply part of the regular pay system.
Prizes in contests are similar to bonuses. The primary difference is that the prize can be something other than money. It can take the form of merchandise, a prepaid vacation trip, and other creative awards for winning a production, sales, or specially created contest.
Profit sharing plans are long-term incentives to continue to work at high levels. They may be pegged to a stock price or bottom-line profits, take the form of actual shares of stock, or be paid out in some other way.
The goal of linking pay to strategically important outcomes will be to improve organi- zational productivity. In addition, incentives can lead employees to believe the company notices and rewards their efforts, thereby creating a stronger sense of loyalty to the company.
Benefits Employee benefits are in-kind payments or services provided to employees for their membership in the organization. The law requires certain benefits, including social
security contributions, unemployment compen- sation, and workers compensation insurance. Employers may voluntarily offer other benefits. Typically, larger organizations offer health care, life insurance, disability insurance, and retire- ment pensions or savings plans. With the pas- sage of the “Patient Protection and Affordable Care Act of 2010,” all employers will eventually be required to offer minimum employee health insurance coverage unless specifically exempted. For further information and a timeline that describes when these changes will go into effect, visit http://www.healthcare.gov/law/timeline/index .html. Benefit programs also include pay for time not at work: vacations, holidays, sick days and absences, and short breaks during the regular workday. Unlike base pay, which differs accord- ing to the job a person holds, full-time employ- ees in an organization generally all receive the same benefits.
Choosing which benefits to offer employees is a complex and important issue due to three fac- tors: (a) recruiting, (b) retention, and (c) costs. Recruiting will be affected, as savvy applicants
Getty Images/jupiterimages/Thinkstock
Offering inexpensive health insurance is often a key enticement in the recruiting process.
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will move beyond base pay issues to find out if health insurance will be offered, the amount of vacation time allowed, and other enticements. Potential hires will compare packages being offered by competing employers.
Retention results largely from two benefits: health insurance and pension plans. Many lower-level employees will stay on a job they don’t exactly love in order to maintain health insurance coverage for their families. Pension plans have been called the “golden fetters” that retain workers who stay with a company in order to build a better retirement.
Costs are a primary factor considered by the management team. Estimates suggest that most benefit packages range from 20% to 30% of a person’s base pay. In other words, someone earning $40,000 in base pay receives an additional $8,000 to $12,000 in benefits. The human resource department tries to maintain a reasonable level of cost relative to the organization’s situation.
Summary Like many other aspects of an organization’s approach to managing human resources, compensation efforts can facilitate or interfere with achieving various organizational initiatives. Two main objectives of particular importance to compensation are attracting and retaining the talent required for a sustainable competitive advantage and maximiz- ing productivity. Compensation can help ensure that the rewards offered are sufficient to attract the right people to do the right job at the right time. Effective compensation policies can also be used to help retain an organization’s best employees.
Performance Appraisal
Performance appraisal consists of assessing an employee’s performance and providing feedback. This staffing task has two purposes. First, performance appraisal helps employ- ees understand how they are doing in relation to objectives and standards as well as in relation to other workers. Supervisors are asked to make judgments about the employee’s contributions. Second, performance appraisals assist in training and personal develop- ment programs. They can be used to coach and counsel employees. There are two general types of appraisals: objective and subjective.
Objective appraisals are based on fact and are often numerical. In these types of apprais- als, supervisors and the human resource department track various items, such as how many units of a product an employee sold in a month, the number of customer complaints filed against an employee, or total units of production by an individual worker. Objec- tive appraisals measure results. Human resource professionals point out that, just as in business we measure sales, profits, and shareholder value, it is also important to measure employee performance, benefit costs, and so forth to aid strategy (Steibel, 1999).
Subjective appraisals often supplement the information provided by objective appraisals. They normally include managerial perceptions of an employee’s traits and behaviors. Trait appraisals are ratings of subjective attributes such as attitudes, initiative, and leader- ship. Trait evaluations may be easy to create and use; however, their validity is question- able because the evaluator’s personal bias can affect the rating.
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Behavioral appraisals measure specific, observable aspects of performance, including punctuality or regularly arriving on time for work. These eval- uations can also be somewhat subjective. As an example, the behaviorally anchored rating scale (BARS) rates employees in gradations of perfor- mance according to scales of specific behaviors. A five-point BARS rating scale about attendance might go from “Always early for work and has equipment ready to fully assume duties” to “Frequently late and often does not have equip- ment ready for going to work,” with gradations in between. The rater defines “always” and “fre- quently,” which leaves room for interpretation and bias.
The Appraisal System Managers working in conjunction with human resources conduct most performance appraisals. Other people who have knowledge about particular employees may provide appraisal information to add different perspec- tives. Among the additional sources of information are (a) peers and subordinates, (b) customers and clients, and (c) employees themselves.
Peers and subordinates see different aspects of an employee’s performance. Such information can be useful for development, although it is not enough for a complete evaluation. Custom- ers and clients at some organizations, such as hotels and restaurants, ask customers and clients for appraisals on employees. Automobile dealerships may send follow-up questionnaires to car buyers. Self-appraisals are useful in judging how employees rate their own performance on the job. While there can be an inherent bias for employees to “overrate” their own per- formance, self-appraisals help employees become involved in the overall evaluation process and may make them more receptive to feedback about areas needing improvement.
Peers, subordinates, customers, and the employee are combined in a 360-degree assess- ment technique. Typically, an employee chooses between 6 and 12 other people to com- plete evaluations, who then anonymously fill out performance appraisal forms. The results are then tabulated. The employee reviews results with a manager. Together they prepare a long-term plan for performance goals.
Steps of a Formal Performance Appraisal
1. Schedule the meeting in advance so that both the supervisor and employee can prepare. 2. Meet in a comfortable setting such as a conference room or break room. 3. Begin with a review of the employee’s strengths. 4. Discuss employee weaknesses and problem areas. 5. Set goals for the next time period. 6. Present the employee with a pay raise, if one is merited (optional).
George Doyle/Collection: Stockbyte/Thinkstock
Behavioral appraisals are based on observable aspects of performance.
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Performance Appraisal Meetings The goal of the performance appraisal system is to stimulate better job performance. Per- formance appraisal meetings are used to present information and consult with individual employees. Two kinds of appraisal meetings take place: formal and informal.
Formal appraisals are conducted at specific times throughout the year. Newer employees may be evaluated more frequently than experienced workers. The reviews are based on previously established performance measures.
The sixth step, talking about a pay raise, depends on management preference. Some worry that when an employee knows the discussion includes a raise, the individual will not pay close attention to the other parts of the meeting. Others believe that the formal performance appraisal meeting represents the best opportunity to establish a clear link between perfor- mance and rewards in the employee’s mind. A compromise is to present a proposed pay raise, to be given at a later date, if the employee makes progress on the goals set in step 5.
Informal appraisals are meetings between a supervisor and employee that provide an oppor- tunity to discuss job performance and any concerns by both parties. Informal appraisals are the equivalent of occasional pop quizzes and short papers or drop-in visits to the pro- fessor’s office to see how you are doing—you have more frequent feedback about your performance. Informal appraisals are conducted on an unscheduled basis and consist of less rigorous indications of employee performance. Providing performance feedback is one of the most important parts of the manager’s job.
In summary, the performance appraisal process offers managers a format to help employ- ees achieve success with the company. Effective appraisal systems require quality infor- mation that is as unbiased as possible. Employees must believe the program serves their best interests in order for it to succeed.
Employee Discipline Systems
Discipline is a form of training that enforces organizational rules. The following text box provides guidelines for rule systems. Two goals are associated with discipline systems. The first is to prevent disciplinary problems. The second is to provide counseling and direction, especially for those troubled with additional problems beyond a violation of the rules.
Employee Rules
Rules should be . . . • presented in writing when the worker begins the job, • enforced only after fair warning, • enforced only once per violation, • enforced uniformly, • established for activities at work, unless an off-work behavior affects employee per-
formance, and • updated when necessary.
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By making employees aware of the rules, they are less likely to commit violations. Fair warn- ing helps to reinforce the message. The system works better when an immediate supervisor and not a series of other people deals with a viola- tion. Rules must apply to everyone, or else the system will lead workers to believe the managers are playing favorites.
Typically, a sequence of steps will be followed. Often, a first violation results in a meeting with the employee’s immediate supervisor and a warning. A second violation brings about another meeting with the supervisor regard- ing why a certain kind of behavior should be
stopped. The next infraction often results in a meeting with the supervisor and a member of the human resource department. The offender may be sent home for the day, without pay, and told any further violations will result in termination. If an employee improves his or her performance and has no further violations during a specified period, the personnel file may be updated to reflect the employee’s progress.
One area of controversy concerns off-work behavior. Many substance abuse problems may be limited to time away from the office, yet still interfere with work. Counseling can become part of the overall discipline system in these situations. In such instances, the focus should be on fact-finding and guidance to encourage desirable behavior instead of using penalties to discourage undesirable behavior.
Rules are updated when necessary. A generation ago, males wearing jewelry such as ear- rings would not be tolerated. Today such adornments are common. Currently, far stricter penalties are imposed for the use of language, especially ethnic slurs and slurs about a person’s sexuality. Also, many firms more carefully monitor and discipline those who violate sexual harassment codes.
In summary, the discipline system should train workers to avoid problems and correct those who fail to do so. Management should make sure to deliver sanctions in an unemo- tional, even-handed manner that does not give the impression the worker is being “picked on” or singled out.
Workplace Health and Safety
Employers are obligated to provide employees with a safe and healthy work environment. The Occupational Safety and Health Act, which was passed in 1970, provides guidelines for workplace safety programs. The essence of the law can be summarized in two areas: (a) requirements of employers and (b) requirements of employees. The overall goal of the Act is to ensure safe and healthy working conditions through education. Regulations are numerous, and businesses are required by law to adhere to these regulations. Occupa- tional Safety and Health Administration (OSHA) inspectors visit job sites and issue mon- etary fines for regulation infringements. However, since OSHA’s inception, the number of workplace fatalities has declined by over 60%, and work-related injuries have declined by
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When should off-work behavior be included in the discipline system?
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almost 70% (Occupational Safety and Health Administration, 2006). OSHA has helped to significantly reduce the number of workplace injuries and fatalities in the United States.
Requirements of Employers In essence, OSHA requires employers to make work as safe as possible. Some jobs are inher- ently dangerous, such as working in heights, with hazardous materials, or in locations such as on highways and roads. Still, employers can provide as much protection as possible, including masks for chemicals, safety gear for various types of jobs, and warning signs. Fail- ure to do so can lead to fines imposed by the Occupational Safety and Health Administration.
Requirements of Employees OSHA imposes two requirements on employees. The first is to follow all established safety rules. Employers use the company’s discipline system when individuals ignore safety protocols, such as wearing hard hats in restricted areas or loose clothing in places where it could get caught in equipment and harm the worker.
Second, OSHA requires workers to report hazardous conditions. If uncovered wires are discovered, managers and the human resource department should be notified. If sharp metal might cut or injure someone, it is the employee’s legal duty to make the company aware of the problem.
Human resource departments track safety records. When workers consistently are injured while performing a specific job or in a certain area, steps should be taken to correct the problem. Workers who violate safety rules will have the behavior noted in their employ- ment records. Frequent safety rule violations are grounds for termination.
Employee Health and Wellness Many company leaders have become aware that the poor health of employees incurs. Employees who smoke, use narcotics and other substances, and those who are overweight tend to call in sick more often and use the health care system more frequently, which
increases health insurance costs.
In response, many progressive firms have estab- lished wellness programs designed to help workers enjoy healthier lifestyles. Weight loss and stop-smoking programs are common incen- tives. Counseling programs for substance abuse issues are also found in many firms. Research- ers realized that wellness programs benefit both the employee and the employer as they tend to decrease the costs associated with absenteeism, loss of production, and work-related injuries. Wellness programs are successful because they focus on preventive health measures like pro- viding gym memberships and dietary guidance, or intervention methods like drug and alcohol
IT Stock/Thinkstock
Employee wellness programs have become increasingly popular.
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counseling. Wellness programs have been incentivized by introducing programs that reduce worker medical co-pay amounts, offering better medical plans, or utilizing reward plans for those who participate.
In addition, workplace wellness now includes prevention of workplace injuries, most nota- bly, repeated trauma disorders. Repeated trauma happens over time, such as with consis- tent exposure to high levels of noise, repetitive motions, or even long durations of standing or sitting without movement. Nearly 70% of injuries reported are the result of repeated trauma ailments (U.S. Bureau of Labor Statistics, 2003). Given the degree of automation in both industrial and service jobs, workers are experiencing ever-increasing levels of repeated trauma, which has caused many companies to invest in ergonomic workstations.
Ergonomics The physical problems that emerged as a result of the kinds of work people do in modern society led to the study of ergonomics, or the design of work areas to minimize physical stress. The implementation of ergonomics has led to a reduction in workplace repetitive motion maladies like carpal tunnel, sciatica, and bursitis. Ergonomics takes the approach of redesigning the task to alleviate the problem, like building in routine breaks in repeti- tive work schedules, adjusting work speeds to appropriate levels, redesigning the work area or tools used to ensure they are adjusted for individual worker differences, and heightening worker awareness of how they are using their bodies.
In addition to accommodating the physical requirements of employees, companies are also finding that they must be equipped to handle emotional challenges as well. Workplace stress can cost the employer lost productivity in missed work, staff turnover, and workers’ compen- sation costs. Stress factors at work include lack of recognition or fair compensation, unrealistic workloads and deadlines, personality conflicts, interruptions, equipment problems, and lack of a sense of independence or control over our jobs. These factors can be heightened when we are dealing with stresses from commuting, problems at home, or personal challenges.
4.5 Employee Careers and Union-Management Relations Learning Objective #5: How is staffing related to building careers and working with unions?
Two final elements are part of the staffing function. Both involve the efforts of employ-ees across the organization as well as the human resource department. Career development takes place through a partnership between the employee, coworkers, managers, and human resources. Union-management relations involve the management team establishing and maintaining a relationship with one or more labor unions, espe- cially in larger organizations.
Career Development
Career development programs are designed to help employees grow in order to move into new jobs in the organizational hierarchy (Trevor, 2001). At the same time, career
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development should be viewed as a two-way street. Employees wishing for promotion must invest their time and energies into the program. Career development, then, consists of three elements: (a) employee preparation, (b) company preparation, and (c) overcom- ing special career challenges.
Employee Preparation You can think of a career somewhat in the same way as an accountant views assets and liabilities. Your assets are the knowledge, skills, and talents you bring to the organization. Your liabilities are any weaknesses, including lack of training and temperament issues. To increase the asset column, employees can work on four areas:
• education • experience • personal characteristics and skills • networks of contacts
Additional schooling—taking the right kinds of courses to support career ambitions, earn- ing good grades while in class, completing various degree programs, and completing any required or voluntary retraining programs that are available—strengthens educational assets. Experience can be gained through involvements at work and outside of work. For example, an employee can demonstrate leadership potential by volunteering for programs such as United Way, which indicates his or her interest in the community while providing him or her a chance to lead. Personal characteristics and skills can be assets or liabilities. Someone who is afraid of public speaking can take courses and practice in front of any available audience. An employee who tends to be shy in a public setting may work on becoming more asser- tive. Everyone can work on ceremonial skills and other behaviors, including table manners and other elements of common courtesy. Networks of contacts consist of persons who help you along in a career, including those who will be listed as references and persons with the same professional interests. Community organizations such as Rotary and Optimists provide opportunities to develop greater networks of personal friends and professional relationships.
Company Preparation: Manager Training Programs Many companies help employees prepare for promotion by engaging them in a series of activities. Three of the more common are (a) management training programs, (b) mentor- ing programs, and (c) coaching systems.
Management training programs are designed to improve employee competencies in prep- aration for future promotions. A management training program includes the following standard steps:
• goal setting • employee selection • selection of training methods • follow-up systems
Goal setting involves identifying the primary goals for manager training. Goals are set in three areas: (a) technical, (b) managerial, and (c) socialization. Technical goals include
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CHAPTER 4Section 4.5 Employee Careers and Union-Management Relations
making certain the trainee will be ready to manage the actual tasks such as selling, account- ing, information technology, quality control, and others. Managerial training involves the components covered in this book and course. Socialization means that former entry- level workers and front-line supervisors must come to realize they will be leading former friends and peers. In essence, they are resocialized to “think like a manager” in what sometimes is an “us versus them” world of workers and bosses.
Employee selection requires the establishment of selection criteria. The criteria include tech- nical expertise, social skills, and managerial aptitudes. Then individual candidates are assessed, and those ready for the program are selected.
Training methods include both on-the-job and off-the-job programs. Table 4.5 shows some of the more common training methods. A combination of both types will normally be included in a management training system. Before sending an employee to a develop- ment program, a needs analysis is conducted to identify that person’s particular strengths and development needs. For beginning supervisors and managers, development needs often include strengthening the ability to set goals with others and learning how to negoti- ate interpersonal conflicts.
TABLE 4.5: MANAGER TRAINING METHODS
On-the-Job Off-the-Job
Incrementally assign new tasks Outside reading (technical and managerial)
Lateral promotions Additional education (in-house; on campus)
Leadership of teams and committees Specially designed programs Attending conferences and seminars
On-the-job, incrementally assigning tasks allows the trainee to gradually learn more about the company. A job rotation program can be used to move an individual around the com- pany. A lateral promotion means giving the individual a new title or a pay raise while not moving the person to a higher rank in the organization. It is sometimes called the “illusion of upward movement,” because someone who was a manager trainee is not necessarily called an assistant or associate manager. Leading teams grants the person the opportunity to practice managing in a real-work situation.
Off-the-job, outside reading enhances other training activities, as do educational involve- ments. Many large companies have actually built company “universities” complete with classrooms, dorm rooms, and other amenities found at traditional universities. Specially designed programs include Hamburger University (McDonald’s) and the well-respected manager training systems at IBM and Sherwin Williams. Conferences and seminars enhance all three aspects: technical, managerial, and socialization.
Follow-up systems allow mid-managers and management trainers to query supervisors post-training to assess supervisory skills improvement and determine if the trainee now contributes more to the organization’s profit margin (or other metric). The follow-up sys- tems also allow trainers to assess the real value of training processes, training content, and
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realized value (Kirkpatrick, 1998). Once such follow-up is conducted, trainers and manag- ers may make appropriate corrections in the training and begin the process all over again.
Company Preparation: Mentoring and Coaching Mentoring occurs when an established employee guides the development of a less experi- enced worker to increase the employee’s competencies, achievement, and understanding of the organization. Many times, mentors also learn from the less experienced employee as well. The responsibility for setting up meetings, deciding what to talk about, and deciding when to end the relationship is in the hands of the partner and the mentor. Mentoring pro- grams can be formally prescribed or simply evolve as part of the employment experience.
Coaching occurs when an expert observes the employee in his or her job over a period of weeks or months and provides continuous feedback and guidance on how to improve. Most coaches also encourage their trainees to discuss difficult situations as they arise and work through alternative scenarios for dealing with the situations. Although coaching is rapidly growing in popularity, it is a relatively new technique and few guidelines are available to evaluate whether a coaching relationship is likely to succeed. Part of the prob- lem is the ambiguity associated with the term coaching. Many different views of what that entails exist.
Overcoming Special Career Challenges Employees encounter various issues as their careers unfold. Caring organizations and managers try to assist as these career challenges arise. Four of the more common chal- lenges include (a) dual career marriages, (b) stress management, (c) midlife crisis prob- lems, and (d) employee outplacement.
Dual career marriages face the stresses of deciding which spouse’s job takes priority, mak- ing decisions about having and raising children, and dealing with the daily grind associ- ated with balancing home and life. In-house child care facilities, flextime working hours, and other programs can make a firm more family friendly.
From the company’s perspective, stress management begins with identifying people with stress-related problems and establishing methods to help them. Courses teaching how to cope with stress are widely available. Company leaders can identify potential sources of stress within the organization and try to reduce those factors.
Midlife crises tend to emerge at about the age when a person reaches the higher levels of the organization. To help individuals cope, counseling programs are made available along with other resources. Many employees find that becoming a mentor provides a new chal- lenge and can begin an interesting new phase in a career.
Employee outplacement programs assist individuals leaving the company. They are estab- lished to help in three areas: (a) terminations, (b) layoffs, and (c) retirements. Terminated employees can receive help in finding a job that fits them better. Layoff programs can help employees until the company recovers and can rehire them. Retirement programs include phased retirements and other methods designed to ease the transition.
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CHAPTER 4Section 4.5 Employee Careers and Union-Management Relations
Summary Career development should be thought of as a three-legged stool. If any one of the legs is missing—individual preparation, company preparation, or programs to overcome special career challenges—the entire system is off balance. Successful careers are built when the company and the employee take the time to prepare for the future.
Union-Management Relations
A union is a formal association of workers that promotes the interests of its members through collective action. The legal environment surrounding union-management rela- tions is complicated and has been developed over the years in legislatures, the courts, and in employment settings. Legally, unions have two rights:
1. The right to collectively bargain
2. The right to take grievances to management
When employees choose a union to represent them, management and union representa- tives enter into a formal collective bargaining agreement over such issues as pay scales, benefits, and working conditions. Once these issues are resolved in a labor contract, man- agement and labor representatives must work together to manage the contract and make sure all provisions are upheld by both sides—management and labor.
Grievances are formal complaints filed by work- ers with management. The three most common types of complaints are
• violations of the contract • unfair or unequal treatment by a
manager • jurisdictional disputes over which per-
son should perform a job
Violations of the contract occur when union rep- resentatives believe management has failed to uphold the terms of a collective bargaining agree- ment. Unfair or unequal treatment takes the forms of harassment, discrimination, or simply a supervi- sor who “picks on” an employee he or she does not like. Jurisdictional disputes arise when two employ- ees both believe a job should be assigned to them.
Collective bargaining and grievance procedures are two important interfaces that occur between management and labor unions once a union has gained recognition as a legal representative of employee interests. Collective bargaining and the resolution of grievances are the processes
Keith Morris/photolibrary
Effective union-management relations reduce conflicts.
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CHAPTER 4Chapter Summary
whereby representatives of management and workers negotiate over wages, hours, and other terms and conditions of employment. They are give-and-take processes between rep- resentatives from two organizations for the benefit of both. It is a power relationship. This power relationship involves conflict, and the threat of conflict seems necessary to maintain the relationship. But perhaps the most significant piece of collective bargaining is that it is an ongoing relationship that does not end immediately after agreement is reached.
Chapter Summary Numerous factors dictate whether a person enjoys a successful career. The responsibility rests with the employee on the job and the company where the individual works. Suc- cessful management of the staffing function includes the oversight of a wide variety of activities and processes. Investing in the staffing function can become one of the primary factors in a firm’s long-term success.
Case Study: This Just Isn’t Right
Susan was on the verge of tears on a day when she should have been happy and excited. Just two weeks earlier, she had completed a master’s degree. That week her boss had informed her she was going to receive a substantial pay raise.
Susan had completed her undergraduate degree five years earlier in a nursing program at a local college. She had taken a few jobs, but they interfered with family life and often had bad schedules, such as third-shift time slots.
Finally, Susan began working for a physician, Dr. Charles Morrison, who was impressed with her knowledge and nursing skills after seeing her work in a temporary role during the flu season. After two years of part-time afternoon work, Susan’s hours expanded to full days, but only on a four-day workweek. Dr. Morrison’s office was closed on Thursdays, so Susan could use that day to run errands and relax.
The only difficulty Susan encountered in Dr. Morrison’s office was coping with coworkers. She functioned well with the other nurse who worked in the office, but was frustrated by the secretarial and receptionist staff. These employees considered themselves peers to the nurses, even though Dr. Morrison had told Susan to assume a more supervisory relation- ship with them. Susan tried not to confront the staff, but was often irritated by what she perceived as their lack of respect for her.
To make matters worse, Susan discovered that while her pay was good, $20 per hour, the secretarial staff was being paid far above their market values. Susan was being paid below what other nurses in the area received. She also did not receive benefits, such as contribu- tions to a pension plan, regularly scheduled holidays, and vacation pay. She did not need health insurance because her family was covered by her husband’s policy. She had tried to make peace with the discrepancy by reminding herself about the flexibility of having extra free time.
After two years had passed, Susan returned to school. She always liked college and was able to obtain a master’s of nursing degree as a part-time student. During that (continued)
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CHAPTER 4Chapter Summary
Key Terms
time, conditions deteriorated at Dr. Morrison’s office. He relied on his support staff a great deal, and so even though they were disrespectful, they were clearly secure in their jobs. Susan reasoned that the only reason for staying was her loyalty to the doctor, whom she personally liked a great deal.
During the first year of her master’s program, Susan was given a $2.00 per hour raise. She felt good about it until she found out everyone in the office received the same raise. She also discovered that some of the support staff had received raises when she did not.
When graduation arrived, Susan was in high spirits. Her level of education was far superior to anyone else in the office, including the other nurse. Her children were nearly grown, which meant she had even more flexibility in terms of her working situation.
Dr. Morrison took Susan to lunch and expressed his delight in her accomplishments. He indicated that he was “adjusting” her pay to match her new educational status. He also gave her a private office.
The fateful day came when Dr. Morrison told Susan her raise would be $4.00 per hour. She was excited and told her family and friends that she was finally receiving the status she deserved. That afternoon, Susan was in her new office hanging her diploma. She overheard the secretary tell the receptionist how she was about to buy a new car. The reception- ist asked how she could afford such an extravagance. The secretary replied, “Well, when I found out Susan got a $4.00 raise, I went in and raised hell with the doctor. So he decided to give everyone a $4.00 raise. I mean, he can afford it, so why not?” Susan sat down and buried her face in her hands. “This just isn’t right,” she mumbled.
1. Did Dr. Morrison use the proper recruiting and selection methods for his office? 2. Was Dr. Morrison using an equity or an exchange philosophy regarding pay and benefits? 3. What would you expect to happen with every nurse who works in Dr. Morrison’s office? 4. How could Dr. Morrison change the office dynamic using job descriptions for future
employees, especially nurses? 5. How could Dr. Morrison change the office dynamic using employee training methods,
coaching, and mentoring?
Case Study: This Just Isn’t Right (continued)
360-degree assessment an employee chooses between 6 and 12 other people to complete evaluations, they then anonymously fill out performance appraisal forms, and the results are then tabulated.
coaching what occurs when an expert observes the employee in his or her job over a period of weeks or months and provides continuous feed- back and guidance on how to improve.
employee inventory examining all current employees at all levels as well as projecting future needs in those areas.
equity philosophy reflects the belief that company leaders try their best to make the compensation system fair to employees.
exchange philosophy indicates management’s belief that some work skills and some employ-
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CHAPTER 4Chapter Summary
Review Questions
1. Explain why staffing is more than the activities conducted by the human resource department.
2. Name the laws that shape the environment around staffing activities. 3. What are the two forms of sexual harassment that are against the law? 4. What are the three steps of job design? 5. Define human resource planning. 6. Explain the natures of an employee inventory and a skills inventory. 7. List the three main elements of a recruiting system. 8. Identify the steps of the selection process. 9. What three purposes should an orientation program serve? 10. What are the on-the-job and off-the-job training methods used to prepare new
employees? 11. Describe the equity and exchange philosophies associated with compensation. 12. What kinds of pay incentives are used by company managers? 13. Describe objective, subjective, and behavioral performance appraisals. 14. What is a 360-degree assessment program? 15. Finish this phrase: rules should be . . . 16. What are the two main areas covered by the OSHA law? 17. What are the three main elements of a career development program? 18. What on-the-job and off-the-job training methods can be used to prepare
managers? 19. What special career challenges influence employees? 20. What are the two main rights held by unions?
Analytical Exercises
1. Explain how the following laws have changed the staffing process: • employment at will • Fair Labor Standards Act • The Civil Rights Act of 1964 • EEOC regulations concerning sexual harassment
ees are more valuable to the company than others.
human resource planning analyzing and pre- paring for future personnel needs.
job design managers determine the tasks that need to be done, who will do them, and what selection criteria will be used to choose employees and place them on the job.
mentoring occurs when an established employee guides the development of a less experienced worker to increase the
employee’s competencies, achievement, and understanding of the organization.
promote-from-within giving priority to advancing current employees to higher ranks.
skills inventory a breakdown of the employ- ee’s resume or performance record into sets of strengths and talents the employee exhibits.
staffing the achievement of organizational goals through the effective and efficient deployment of people.
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CHAPTER 4Chapter Summary
• Age Discrimination in Employment Act • Americans with Disabilities Act • Family and Medical Leave Act
Then, explain how the following governmental activities also influence staffing: • Social Security premiums • Social Security disability insurance • Unemployment insurance • Federal income tax
2. Explain how each of the five core job dimensions may or may not motivate employees. Use individual personality characteristics, personal talents, per- sonal preferences, and individual skill levels as part of your answer. • skill variety • task identity • task significance • autonomy • feedback
3. Explain how promote-from-within and external recruiting can help or hurt a company in the following circumstances: • successful and growing • stable with slight growth • declining slowly • in crisis
4. Using the list of external recruiting sources presented in Section 4.3, explain which should be used for the following types of jobs: • unskilled blue collar • semiskilled blue collar • skilled blue collar • first-level white collar • semiprofessional • professional
5. Explain the relationships between orientation and the following outcomes: • first week quits • commitment to the company • trust in company leaders • role clarity (understanding how to do the job)
6. Using the list of employee training methods provided in Table 4.3, explain which should be used for the following jobs: • salesperson: retail • salesperson: business-to-business • plumber • fast food employee • professional football player
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CHAPTER 4Chapter Summary
7. Explain how the equity and exchange philosophies would be related to the four forms of pay: by time, unit, sale, and professional/annual. How would the two philosophies be related to incentives and benefit packages?
8. The primary problem with performance appraisal programs is supervisory bias when making judgments. How can a company attempt to identify and reduce appraisal bias?
9. Describe how a system of rules would apply to the following behaviors. • unsafe work actions • sexual harassment • alcohol abuse on personal time • alcohol use over the lunch hour • theft of property • using company computers to surf pornography on the Web
10. Make a list of the personal skills you believe you have that will enhance your career. Ask three friends to prepare a list of what they think about your skill set. Compare the lists. Repeat the activity for your weaknesses.
11. How can coaching and mentoring help with the four special career chal- lenges: dual career marriages, stress management, midlife crisis, employee outplacement?
12. Using the Internet, look up the concept of a right-to-work state. Explain how it would affect the two primary union activities: collective bargaining and pro- cessing grievances.
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Helen King/Corbis
chapter 5
The Leading Function
Chapter Goals
After completing this chapter, you should be able to • Understand the functions of leading, managing, and using power. • Apply theories of leadership to various management circumstances. • Motivate employees to achieve at high levels. • Establish and successfully direct teams and groups. • Communicate effectively with others.
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CHAPTER 5Section 5.1 Introduction
5.1 Introduction Learning Objective #1: What are the key elements of leading, managing, and using power?
The fundamental goal of effective leadership is to get extraordinary results from ordinary people. In an effective organization, leadership is present at all levels. The concept of leadership can be interpreted in various ways. To different individuals, leadership can be exhibited through vision, enthusiasm, trust, courage, passion, coaching, developing others, intensity, love, and even serving as a parent figure.
Leading in a business context, consists of all activities undertaken to help people achieve the highest level of performance. Leadership is influencing behaviors in organizations. Note that effective leaders influence behaviors in positive ways. Ineffective leaders also influence behavior, but do not achieve desirable results.
In this chapter, after first presenting a series of theories about the nature of leadership, we will examine key activities primarily consisting of the following:
• The use of power • Motivation • Teamwork • Communication
An effective leader demonstrates skills in all of these areas.
Aetna’s Jack Rowe: Transformational Leadership
You have probably heard that “one person can make a difference.” In the case of Aetna Insurance, the “one person” was Jack Rowe, who took the reins of the company in a time of crisis. When Rowe arrived, Aetna was losing $1 million per day. Five years later, the same company enjoyed profits of over $1.4 billion.
As a health and medical insurance company, Aetna had gotten into trouble due to poor rela- tionships with every key group served by the company. A series of doctors and healthcare providers had become so disenchanted with the firm that they filed a class-action lawsuit over unsavory billing practices. The problems quickly extended to patients and plan spon- sors. Eventually company employees became demoralized.
Jack Rowe began by distinguishing between management and leadership. He believed a leader had to be self-aware and know his or her strengths and weaknesses in order to operate effectively. In his own case, Rowe was self-confident enough to select people with comple- mentary talents and expertise. It also meant removing nearly 75% of the former staff.
Rowe’s leadership style began with a strategic vision to rebuild the organization by rebuild- ing relationships. He knew it would take time.
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CHAPTER 5Section 5.1 Introduction
To improve relations with physicians, Rowe went against a great deal of advice and quickly settled the lawsuits related to billing practices. He received a great deal of criticism due to the already-existing cash problems in the company, but the effort paid off.
The next step was to rebuild relationships with Aetna’s customers. Rowe established tactics to deliver high-quality insurance and supporting services. He redirected employees toward the culture that had built the company in the first place. That culture was based on integrity and protection of the company’s customers.
To return to the core culture, Rowe relied on constant communication. As he put it, “A com- pany cannot communicate too much. If I’d done the managerial tasks, I wouldn’t have been out communicating.” The outcome of his efforts was that Fortune magazine gave Aetna the Turnaround of the Year Award. Jack Rowe has moved on from Aetna, but the sound principles he established through his transformational style of leadership contin- ued to pay dividends well beyond his tenure with the company (Katzenbach Partners, 2006; Clow & Baack, 2010, pp. 395–396).
Questions for Students
1. How was Jack Rowe distinguishing between managing and leading? 2. Jack Rowe began by fixing relationships with outside groups and then worked on those
within the firm. Was this a risky approach? Explain your reasoning. 3. Explain why you think this style of leadership would or would not be effective in all
types of companies.
Leading versus Managing
Many times, the terms leading and managing are used interchangeably; however, there are subtle differences between the two terms. Harvard Business School professor John Kotter (2001) suggests that one is not better than the other, but rather that the two concepts are actually complementary. The differences between leading and managing are subtle:
1. Managing is about coping with complexity. 2. Leadership is about coping with change.
Managing as Coping with Complexity Management is necessary because without it organizations may be riddled with chaos. Indeed, without effective management, a company is destined to fail. One significant
Getty Images/Photos.com/Thinkstock
Jack Rowe was able to restore trust between Aetna and health care providers.
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reason managers are necessary to a company is that those in management processes deal with complexity throughout the organization in three vital ways:
• Managers do what needs to be done through planning and budgeting. • Managers provide people to accomplish organizational agendas through orga-
nizing and staffing. • Managers help ensure that people can do their jobs through control processes
and problem solving.
Planning and budgeting activities take care of what needs to be done. These activities establish goals for the future, prescribe methods to achieve those goals, and provide the resources necessary to accomplish them.
The organizing and staffing functions are what carry out the process of providing people to accomplish organizational agendas. Management accomplishes its plans and goals through effective organizing and staffing. Creating organizational structures and hiring qualified people to fill the needed roles are key parts of management.
Ensuring people do their jobs occurs through controlling and problem solving. To reach organizational goals, managers monitor results versus the plan in detail by producing reports, holding meetings, and using other reporting mechanisms. They then identify and solve problems as they arise.
Leading as Coping with Change As the business world continues to change, grow, and evolve, doing business the way we have always done it is no longer enough. Many changes are often needed for organiza- tions to survive and grow in an ever-increasing competitive global market. Making neces- sary changes even when they involve difficult decisions is at the very heart of leadership. Kotter (2001) identified three ways that leaders deal with change. Note the subtle differ- ences between managing complexities and coping with change:
• doing what needs to be done by providing direction • providing the people to accomplish organizational agendas by aligning people • ensuring people do their jobs through motivating and inspiring them
Leaders provide the direction in order to do what needs to be done. Leaders set the stage for positive change by providing direction. They develop a vision for the future of the organi- zation in conjunction with strategies for realizing the needed changes.
Providing the people to accomplish organizational agendas results from the leader’s ability to align people. While managers focus on organizing and staffing people, leaders are more focused on aligning people. They communicate a new direction to people to help in under- standing the vision and to build the necessary change agents that will help realize the vision.
Leaders ensure people do their jobs through motivation and inspiration. While managers concentrate their efforts on controlling and problem solving, leaders focus on trying to achieve their vision by motivating and inspiring. They tap into employees’ values and emotions. Leaders attempt to ensure that people keep moving the change initiative for- ward despite some of the obstacles that arise.
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Managers hold the legitimate power that we will look at next. It comes from the posi- tions they hold within their organizations. Possessing this power allows them to hire, fire, reward, and punish. Many managers plan, organize, and control, but do not necessarily have the characteristics necessary to be leaders.
Leadership is more visionary than management. Leaders inspire others, provide neces- sary emotional support, and work to rally employees around a common goal or vision. Leaders also create a vision and strategic objectives for the organization, while managers are tasked with implementing the vision and strategic objectives.
Ideally, a person in a managerial role has both management skills and leadership skills. Organizations count on both skill sets to accomplish objectives and continue operations.
Leadership and Power
One significant part of leadership presents a key challenge: the exercise of power in the context of a business. Most of you have encountered someone who is “into power” and exerts it at any opportunity. These people generate resentment, which inhibits their ability to lead. Consequently, in order to have a more complete understanding of leadership, we need to examine the concept of power. Power is control over formal and informal means of influence. Within organizations there are typically five sources of power, or means of influence, that leaders may use: legitimate, reward, coercive, expert, and referent (French & Raven, 1959).
Legitimate Power Legitimate power arises from one’s formal position in an organization. Managers hold legitimate power over their employees due to their positions. The major factor with legiti- mate power is how the manager uses it to achieve organizational goals or simply to dem- onstrate personal authority.
Reward Power Power rests with those who can influence behavior by giving or promising rewards. Managers possess reward power that results from their authority to reward employees. These rewards range from praise to pay raises and from recognition to promotions. One of the most effective ways a manager can reward an employee is with a simple and sin- cere “thank you.” Reward power also has informal sources. Someone who lets you in on key organizational gossip is also using reward power. Informal groups reward people by including them in group activities.
Coercive Power The ability to influence behavior by threatening or punishing is coercive power. Managers possess the coercive power that results from the manager’s authority to punish employees through verbal or written reprimands, demotions, or even termination. Some organiza- tions also allow their managers to fine or suspend subordinates. Coercive power can eas- ily be misused. Managers who are constantly negative and punishing quickly produce resentment and ill will among employees.
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The informal side of coercive power can be equally damaging. Any person who can make a coworker the butt of jokes or harass someone through intimidation exerts coercive power. Part of being an effective leader is eliminating this type of coercive activity on the job.
Expert Power Some workers are able to influence behavior due to their expertise. Expert power emerges from specialized information or expertise, which can take different forms. Knowing answers to questions can make you appear to be an expert. One person who can possess expert power is an administrative assistant, especially if that individual has been in the position a long time and knows all the necessary contacts. Expert power can also stem from having specialized knowledge such as medical or technology expertise. Informal power also results from expertise when people see someone as a role model or mentor.
Referent Power Referent power results from one’s personal attributes. This type of power characterizes strong visionary leaders who are able to influence their followers by their personality, atti-
tudes, and behaviors. Referent power can lead to being promoted through the formal organization or by becoming an informal leader among peers.
In summary, legitimate power has only a formal side. The other four—reward, coercive, expert, and referent power—have both formal and informal sources and uses. An important part of leadership involves influencing the behaviors of other people. Power can be used to lead others to get things done. It is the ability to make things happen for the good of the group. The following text box lists other sources of power as identified by various authors.
The Aston Group (Hickson et al., 1971) suggests that any person or group with control over the
Sources of Power
According to . . .
French & Raven legitimate, reward, coercive, expertise, referent
The Aston Group closeness to production
J. D. Thompson boundary spanning
Others control over policy making control over funding decisions control over status symbols
Digital Vision/Thinkstock
Referent power results from a leader’s personality, attitudes, and behaviors when interacting with others.
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CHAPTER 5Section 5.2 Leadership Theories
production process possesses a great deal of power. This viewpoint explains the power of labor unions that through tactics such as strikes and work slowdowns can inhibit the production process. It also suggests that support staff positions not directly related to the production process (such as janitorial) will have substantially less power.
J. D. Thompson (1967) argues that anyone who serves as a “go-between” has boundary spanning power. Someone who bargains with other organizations, including suppliers, retail outlets, and the government, has power by translating the uncertainty that has been created by external forces. When the government investigates a business practice, the person dealing with governmental authorities has power. Boundary spanning also takes place across internal boundaries. Mediators who negotiate between union leaders and management have power because they have access to both sides.
Control over policies, funding, and status symbols also generate power. These factors influence the conduct of work and employee jobs. Individuals with control over them can exert power. Effective leaders use that power wisely.
5.2 Leadership Theories Learning Objective #2: How can you apply the various theories of leadership to influence employees in positive ways?
The ability to lead has been observed and reported on for many centuries. Many ancient writings tell tales of leaders who served in battle, who commanded nations, and who taught religious ideas. More recently, researchers seeking to identify leader character- istics as well as to develop programs to train leaders and improve their skills have studied leadership. The following text box identifies four main categories of leadership theories.
Trait Theories
Trait theory became the successor to what was called the great man theory of leadership. The theory was built on the assumption that great men, or great leaders, were born that way. As a modification of this thinking, trait theory suggests that through experience and learning, leaders can be developed. Leader traits are physical and personality character- istics that differentiate leaders from followers (Kinicki & Kreitner, 2009, p. 347). This early approach in leadership studies involved the search for universal traits that separate effec- tive and ineffective leaders. Table 5.1 displays the traits and characteristics that were stud- ied over a period of nearly 60 years.
Key Leadership Theories and Approaches
Trait theories Behavioral theories Situational theories Transformational theories
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CHAPTER 5Section 5.2 Leadership Theories
TABLE 5.1: POTENTIAL TRAITS AND CHARACTERISTICS OF EFFECTIVE LEADERS
Physical Characteristics
Personal Traits Personality Traits Social Traits
height verbal skills ambition empathy
strength wisdom confidence tact
physical attractiveness judgment initiative patience
stamina intellect persistence trusts
vitality capacity for work imagination status
Source: Baack, D. (1998). Organizational behavior. Houston: DAME Publications, p. 282. Also, Yukl, G. (1981). Leadership in Organizations. Englewood Cliffs, NJ: Prentice-Hall.
Clearly, many of these are admirable traits and personal strengths. Unfortunately, a great deal of research indicates that they are not universal for successful leaders. They may be found in many leaders, but leaders can be successful without them.
The Big Five Another approach in addressing the importance of leadership traits is the five-factor model of personality, more commonly called the Big Five. The following are the Big Five factors:
1. Extroversion: This factor covers one’s comfort level with relationships. People who are extroverts tend to be outgoing, assertive, and sociable. Introverts tend to be reserved, timid, and quiet.
2. Agreeableness: This factor refers to one’s tendency to defer to others. Highly agreeable people are cooperative, warm, and trusting. People who are less agree- able tend to be disagreeable, cold, and untrusting.
3. Conscientiousness: This factor refers to reliability. A highly conscientious person is responsible, organized, and persistent. Less conscientious people are easily distracted, disorganized, and unreliable.
4. Emotionally stable: This factor refers to a person’s ability to deal with stress. Emotionally stable people tend to be calm, self-confident, and secure. Less emo- tionally stable people tend to be nervous, anxious, depressed, and insecure.
5. Open to different experiences: This factor refers to a person’s range of interests and fascination with unique experiences and adventures. Open people are cre- ative, curious, and ask many questions. People who are less open tend to be con- ventional, a bit rigid, and to like the status quo (Goldberg, 1993).
In order to be most effective, leaders must recognize the importance of having an appro- priate mix of the Big Five traits, because an overreliance on any one trait can result in less than optimal personal and organizational performance.
Attribution Models Attribution theory is an umbrella term that covers a series of theories. It is based on the concept that people cannot see what might be termed the “real world.” Instead, percep- tions hold the key to what people believe they have observed. These observations lead to
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CHAPTER 5Section 5.2 Leadership Theories
attributions, or beliefs about cause and effect. A simple attribution would be, “If I eat right and exercise, I will lose weight.” Remember, however, that an equally plausible attribu- tion is, “No matter what I do, I can’t lose weight.” Both are valid attributions because these perceptions are simply based on an indi- vidual’s experience of reality.
The attribution model of leadership seeks to dis- cover the cause-effect relationships that apply to leaders or potential leaders. It can be summa- rized as follows:
1. Every individual has what is essentially an implicit theory of leadership, which represents his or her thoughts about the nature of an effective leader.
2. Individuals constantly test their own theories and attributions. Figure 5.1 displays such a test.
3. If the test is confirmed, as shown in the two boxes of Figure 5.1, two personal attributions are strengthened: • the individual’s belief about the spe- cific person’s ability to lead or not lead • the individual’s attribution about the nature of an effective leader
Confirmed Attribution
Refuted Attribution
Success Failure
Fa ilu
re
R E
A L
O U
T C
O M
E
PREDICTION
S u
cc es
s
Refuted Attribution
Confirmed Attribution
John Lund/Drew Kelly/photolibrary
People observe individuals in leadership roles, like political candidates, to see if they confirm or refute their personal attributions.
Figure 5.1: Test of Attribution
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CHAPTER 5Section 5.2 Leadership Theories
4. If the test is refuted, as shown in the boxes of Figure 5.1, the individual will • modify his/her theory • ignore the test
The essence of each individual’s theory is the observation of behaviors. Most of these behaviors reflect leader traits and characteristics. When someone is promoted to the role of leadership, or elected to a role such as governor or president, each person decides if that individual “acts like a leader.” Over time, evidence will surface as to whether the individ- ual was a success or failure. Those who predicted success and observe success experience confirmed attributions. Those who predicted failure and observe failure also experience confirmed attributions. They then believe they were right about the person involved as well as their understanding of leadership.
When a test does not reveal accurate results, the attribution is refuted. The person will either modify his or her own personal theory to account for new circumstances or simply ignore the results of the test.
The attribution model helps us understand who is most likely to be promoted or moved into a leadership role, which is the person who is perceived as having leadership characteristics. Unfortunately, leadership characteristics may have no basis in fact. Height, attractiveness, gender, race, and other traits that have already been discounted as universal leadership qualities (Myers, 1990; Baack, 1998, pp. 283–284).
Trait theories remain popular to this day. People apparently wish to believe something universal about leadership exists. To the contrary, effective leaders come in all shapes, sizes, nationalities, age groups, levels of attractiveness, and gender. It is not useful to con- tinue with stereotypes that hold no basis in fact. There is evidence, for example, that the Big Five are common in effective leaders, although not in every single case. This encour- ages the use of these traits as selection devices in promotion decisions.
Behavioral Theories
The onset of World War II resulted in a series of new leadership research initiatives in the United States. The types of theories that emerged have been characterized as the behavioral era of leadership study (Yukl, 1981). Two studies that are foundational to the investigation of leadership behavior came out of the University of Michigan and The Ohio State University.
The University of Michigan Study In the late 1940s, researchers at the University of Michigan developed what came to be known as the University of Michigan Leadership Model. A team studied the effects of leader behavior on job performance by interviewing a number of managers and subordi- nates. As a result of their research, the investigators identified two leadership styles: job centered and employee centered (Likert, 1961).
Job-centered behaviors occur when managers pay more attention to the job and related work behaviors. Their principle concerns are meeting production goals, keeping costs in line, and meeting schedules.
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CHAPTER 5Section 5.2 Leadership Theories
Employee-centered behaviors take place when managers pay more attention to employee satisfaction and making work groups more cohesive. By focusing on employees’ needs, managers hope to build effective and high-achieving work groups.
The Ohio State University Study Another study that examined leadership behavior took place at The Ohio State Univer- sity (Stogdill & Coons, 1957). From surveys of leadership behavior, two major dimen- sions of leader behavior were identified (Shartle, 1979). They were initiating structure and consideration.
Initiating structure is leadership behavior that organizes and defines what group mem- bers should be doing. It involves the efforts the leader makes to get things done. This is similar to the job structure behavior identified in the University of Michigan study.
Consideration is leadership behavior that expresses concern for employees by establish- ing a warm, supportive, friendly climate. This behavior, which is similar to employee- centered behavior identified in the University of Michigan study, is sensitive to employee ideas, feelings, and trust.
The Ohio State University study leaders concluded that effective leaders demonstrated both initiating structure and consideration. Effective leaders tended to have positive, sup- portive, employee-centered relationships and used group rather than individual methods of supervision that encouraged setting high performance goals. At the same time, they were able to focus on the accomplishment of tasks.
Situational Theories
In the 1950s, the concept emerged that no single universal style of leadership is effective. Instead, leaders can be chosen because they “fit” a situation or can adapt their leader- ship styles to a situation. As a result, theories in this area are known as the situational approaches to leadership.
Theory of Leader Effectiveness Robert Tannenbaum and Warren Schmidt (1973) were among the first to suggest the third key leadership variable: effectiveness. Their view of leadership expresses leader style in terms of the delegation of authority. At one extreme, an authoritarian leader retains total control. At the other is the leader who pushes for employee participation and autonomy. In between is a variety of delegation of authority dictated by the amount that would be most effective for each employee.
William Reddin (1970) identified the two main dimensions of leadership as being rela- tionship-oriented and task-oriented. In a manner similar to the original Ohio State Uni- versity studies, Reddin combined the two orientations to create four outcomes. Reddin prescribed the same concept as Tannenbaum and Schmidt—that the potential for effec- tiveness should determine the mix of task- and relationship-orientation.
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CHAPTER 5Section 5.2 Leadership Theories
Fiedler’s Contingency Model Fred E. Fiedler’s contingency model suggests that leadership success depends on a match between the leadership style and the demands of the situation. Rather than try to train leaders to adapt to a new style, Fiedler believes that leaders should match their styles with situations that are the best fit.
According to the theory, people’s leadership styles tend to be either task or relationship motivated. People-oriented leaders score highly on a test known as LPC, which stands for least preferred coworker. Production-oriented leaders generate low LPC scores when given the test. Fiedler suggests that neither style is effective all the time; instead, each is most effective when used in the right situation. In order to effectively diagnose leadership situations, three contingency variables must be identified:
1. Leader-Member Relations: the extent to which a leader has, or does not have, the support and loyalty of the work group.
2. Task Structure: the extent to which tasks are routine, unambiguous, and easily understood. The more structured a task is, the more influence a leader holds.
3. Position Power: the degree of power a leader has to reward and punish. More power equates to more control and influence.
Using these three dimensions, Fiedler constructed the “dimension of favorability,” as shown in Figure 5.2. The research Fiedler and many others conducted led to the construction of the “dimension of effectiveness.” As shown in the figure, at the two extremes, effectiveness
Adapted From: Fiedler, F. E. (1974, Autumn). The Contingency Model— New Directions for Leadership Utilization, Journal of Contemporary Business
High
Most Favorable
Mixed Most Unfavorable
Low
Low LPC
High LPC
D IM
E N
S IO
N O
F E
F F
E C
T IV
E N
E S
S
SITUATIONAL FAVORABILITY
Situational Favorability Based on:
(Where: High = Most Favorable)
Low vs. High
Low vs. High
Low vs. High
Leader-Member Relations
Task Structure
Position Power {
Figure 5.2: Fiedler’s Contingency Theory Results
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CHAPTER 5Section 5.2 Leadership Theories
is higher for production-oriented leaders. In mixed favorability situations, people-oriented leaders become more likely to succeed. The concept was that managers should understand their situations and then restructure that situation to fit personal leadership styles.
The contingency theory approach generated considerable debate regarding its value. The primary complaint was that most leaders would be unable to truly restructure their situ- ations, giving the theory little practical value. Also, a series of challenges to the research methods were raised.
Contingency theory moved the study of leadership more into the realm of collecting and analyzing data to support or refute various propositions. It also added to our understand- ing of the conditions under which leaders operate.
Hersey and Blanchard’s Situational Leadership Model The Situational Theory leadership model described by Paul Blanchard and Ken Hersey (1977) reflects how a leader should adjust his or her leadership style according to the readiness of the followers. The model suggests that leaders should be flexible in choosing a leadership behavior style and become sensitive to the readiness of the follower. Readi- ness refers to the extent to which a follower possesses the ability and readiness to perform a given task. Employees with a high level of readiness require a different leadership style than an employee with a low level of readiness. Table 5.2 identifies the possible leadership styles that result from different combinations of task-oriented and relationship behaviors.
TABLE 5.2: MATCHING SITUATIONS TO LEADER STYLES
Situation Characteristics Leadership Style
High Task Behavior/Low Relationship Telling and directing
High Task Behavior/High Relationship Selling and coaching
Low Task Behavior/High Relationship Facilitating and counseling
Low Task Behavior/Low Relationship Delegating
The telling and directing style is characterized by one-way communication where the leader tells the follower what, how, when, and where to accomplish various tasks. It fits when the work to be performed is straightforward and simple and when the leader does not bond or relate to followers.
The selling and coaching style is characterized by the direction the leader provides. The leader introduces two-way communication to get the followers to “buy into” decisions. It matches situations where the work is straightforward and uncomplicated but the leader wants to build bonds with followers.
The facilitating and counseling style is characterized by leaders who share decision mak- ing with followers because the emphasis is on building relationships. The leader exhibits facilitation behaviors, or works to make it easier for employees to make decisions, because the followers have the ability and knowledge to perform these tasks.
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CHAPTER 5Section 5.2 Leadership Theories
In a delegating style, the leader lets the followers run the show. No strong relationships are built, and the followers have the ability and are both willing and able to perform the task at hand.
Leaders using this model must be able to imple- ment alternative leadership styles as needed. This model also implies that if the correct styles are used in lower readiness situations, followers will mature and grow in ability, willingness, and confidence. This allows the followers to grow and the leader to become less directive.
Path-Goal Theory Robert House (1971) proposed the Path-Goal The-
ory. It suggests that an effective leader is one who clears and clarifies paths for employees to accomplish both personal and professional goals. Clearing the path refers to a leader who helps people move toward their goals, removes barriers, and provides appropriate guide- lines for accomplishing assigned tasks. House identifies four leadership behaviors associated with the theory: (a) directive leadership, (b) supportive leadership, (c) achievement-oriented leadership, and (d) participative leadership.
The directive leadership style is one in which the leader lets employees know what is expected by giving directions for how and what to do. The directive leader also maintains standards of performance, and clarifies his or her role in the group. Supportive leadership is a style in which the leader treats group members as equals by being approachable and by show- ing concern for the well-being of employees. Achievement-oriented leaders set challenging goals, expect a high level of performance, and emphasize continuous improvement in per- formance. Participative leadership involves including employees in decision making, con- sulting with employees, and implementing employee suggestions when making decisions.
Path-Goal Theory suggests that a manager should use leadership styles that complement the needs of the situation. Two contingency factors are employee characteristics and envi- ronmental factors. Five employee characteristics include focus of control, task ability, the need for achievement, experience, and the need for clarity. Two environmental factors are independent task structures and interdependent task structures.
In essence, effective managers clarify paths to goals by (a) clarifying jobs and assignments and by (b) rewarding successful performance. This simplified explanation of the model explains the two main things that can be done to improve your leadership style (Baack, 1998, p. 298–299).
Transformational Leadership Theory
Transformational leaders garner trust, seek to develop leadership in others, exhibit self- sacrifice, and serve as moral agents. They tend to focus on objectives that transcend the more immediate needs of the work group (Dumdum, Lowe, & Avolio, 2002). The follow- ing key leader behaviors have been identified in the transformational leadership literature:
Getty Images/Jupiterimages
Effective leaders understand their situations and adapt accordingly.
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CHAPTER 5Section 5.2 Leadership Theories
• inspirational motivation • idealized influence • individualized consideration • intellectual stimulation
Inspirational motivation establishes an enticing vision of the future with persuasive and emotional arguments combined with enthusiasm and optimism. Idealized influence refers to sacrificing for the good of the group, acting as a role model, and displaying high ethi- cal standards. Individualized consideration includes providing support, giving encourage- ment, enabling empowerment, and coaching employees. Intellectual stimulation means that transformational leaders encourage employees to question the status quo and seek innovative and creative solutions to organizational problems.
The transformational leader exhibits these behaviors, which can result in powerful effects on followers and improved outcomes, as displayed in Table 5.3.
TABLE 5.3: TRANSFORMATIONAL LEADERSHIP EFFECTS
Followers and Work Groups Outcomes
Increased intrinsic motivation, achievement orientation, and goal pursuit
Personal commitment to leader and his/her vision
Increased identification and trust with the leader Self-sacrificial behavior
Increased identification and cohesion with group members
Organizational commitment
Increased self-esteem and self-efficacy, and intrinsic interests in goal accomplishment
Task meaningfulness and satisfaction
Shared perceptions of goal importance Increased individual, group, and organizational performance
Transformational leadership theory has gained a great deal of traction in the new millen- nium. Many companies believe finding such leaders and training others in these behav- iors are true keys to organizational success.
Summary
Each of the four categories of leadership theories has contributed to our understanding of the process. The trait theories indicate that while there are no ironclad rules, certain leader characteristics are desirable. The attribution model helps to explain how certain individu- als end up in leadership roles. The Ohio State University and University of Michigan studies teach us that some leaders tend to be more interested in the job, while others are more in tune with their followers. The situational theories note that at times company circumstances favor task-oriented leaders and at other times a people-oriented approach works best. Path-goal theory explains the basic steps one can take to become a better leader. Transformational leadership theory builds on this idea by establishing relation- ships between various behaviors and eventual organizational outcomes.
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CHAPTER 5Section 5.3 Leadership and Motivation
5.3 Leadership and Motivation Learning Objective #3: How do leaders motivate employees to achieve at high levels?
Another key aspect of the leading function is motivating workers. Effective lead-ers motivate individuals to increase the level, direction, and persistence of effort expended at work. Motivated employees work hard; unmotivated employees do not. Motivation may be defined as (a) what starts behaviors, (b) what maintains behaviors, and (c) what stops behaviors. Leaders are interested in inspiring employees to engage in various behaviors. Table 5.4 provides some examples.
TABLE 5.4: MOTIVATED BEHAVIORS AT WORK
Start and Maintain Stop
punctuality (arrive on time) unhealthy habits (smoking, drugs)
attendance (arrive every day) unethical activities
effort/productivity conflicts
cooperativeness politics
share information
To achieve these goals, leaders can take lessons from the many types of theories of motiva- tion. Three categories of motivation theories are (a) content theories, (b) process theories, and (c) goal setting theories.
Content Theories of Motivation
Content theories explain the specific factors that motivate people, most notably in the area of human needs. They help explain what drives human behavior. Three major con- tent theories of motivation include Maslow’s hierarchy of needs, Herzberg’s motivation- hygiene theory, and McClelland’s acquired needs theory.
Maslow’s Hierarchy of Needs Abraham Maslow’s hierarchy of needs (1943) provides an important foundation of leader- ship thinking. The model shown in Figure 5.3 employs a satisfaction-progression approach. A person will not progress to the next level of needs until the immediate need has been routinely satisfied.
Lower-order needs include physiological needs, safety needs, and social concerns for belongingness and love. Physiological needs on the job include rest breaks, physical com- fort, and reasonable work hours. Safety needs include safe working conditions, job secu- rity, and base compensation and benefits. Social needs are met through interactions with friendly coworkers, customers, and a supportive supervisor.
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CHAPTER 5Section 5.3 Leadership and Motivation
The higher order needs include self-esteem and self-actualization concerns. Self-esteem needs include responsibility for an important job, job promotion, and praise and recognition from the leader. Self-actualization results from creative and challenging work, active participation in decision making, and job autonomy. Self-actualization is realized only if the employees perform tasks and work that express their inner self—that is, the person they wish to become.
Maslow’s hierarchy has been widely criticized. Comments include that the theory does not explain how strongly a need must be satisfied before progression to the next level can take place. Others suggest that this order of needs is far too rigid and that many people experience them in a far different order. For example, for some, social needs for belongingness and love are far more important than self-actualization. Another problem is the short list of needs. Far more needs exist, including needs for power. Finally, the theory has been criticized for being too vague, that is, not truly explaining how someone would seek to fulfill a need.
In spite of these criticisms, Maslow’s hierarchy built the foundation for other theories of motivation. It also stresses the role needs play in motivation.
Herzberg’s Motivation-Hygiene Theory Frederick Herzberg’s motivation-hygiene theory (1964), also known as the two-factor the- ory, proposed that work satisfaction and dissatisfaction arise from two different factors. Work satisfaction is associated with motivating factors, and work dissatisfaction comes from hygiene factors. Hygiene factors are those things not directly related to the actual work done, but they play a critical role in preventing employee dissatisfaction. Table 5.5 displays the hygiene factors and the motivation factors.
From Maslow, Motivation and Personality, 3rd ed. Copyright © 1987. Reproduced by permission of Pearson Learning, Upper Saddle River, NJ.
Self-Actualization
Self-Esteem Needs
Belongingness & Love Needs
Saftey & Security Needs
Physiological Needs
Figure 5.3: Maslow’s Hierarchy of Needs
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CHAPTER 5Section 5.3 Leadership and Motivation
TABLE 5.5: HERZBERG’S TWO-FACTOR THEORY
Hygiene Factors (Dissatisfiers) Motivators (Satisfiers)
wages achievements
hours recognition
working conditions chance for advancement
supervisory practices responsibility
rules and procedures meaningful work
The factors leading to job satisfaction are sepa- rate and distinct from those that lead to job dis- satisfaction. Leaders who eliminate factors that create job dissatisfaction may bring about peace but not necessarily motivation. They may be attempting to appease the workforce rather than trying to motivate them. When these factors are satisfactory, employees will not be dissatisfied; neither will they be satisfied. The term hygiene was chosen with a hospital in mind. A clean and germ-free hospital will not necessarily make you well; however, an unsanitary hospital can make you sick. The best leaders can hope for with the hygiene factors is to keep them neutral. In other words, a company that offers fair wages and has a reasonable vacation policy likely will not con- tribute to an employee’s dissatisfaction, whereas the absence of these are likely to cause employee dissatisfaction.
Factors associated with the work itself inspire motivation in workers. Herzberg believed employees find these characteristics intrinsically rewarding. One management program that can help build motivators, job enrichment, is designed to add higher levels of the motivators to jobs.
The two-factor motivation-hygiene theory has been criticized for assuming that motivation and satisfaction are one and the same. In reality, it is possible to be either unmotivated and satisfied or motivated and dissatisfied. The theory does not account for those circum- stances. Also, the sample used to collect the data was taken from professional engineers and accountants. Many have speculated that if Herzberg had asked the same research questions of a different group, such as unskilled or semiskilled blue-collar workers, the answers might have been quite different.
Digital Vision/Thinkstock
Two-factor theory suggests that employee dissatisfaction comes from things other than just the work itself and includes wages, hours, and working conditions.
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The motivation-hygiene theory does explain many of the factors that make people unhappy on the job. Leaders and managers can work to eliminate these issues and find other means to motivate employees.
McClelland’s Acquired Needs Theory David McClelland developed another motivation theory, called the acquired needs theory, that is based on individual needs. The need for achievement is the desire to do something better or more efficiently to master complex tasks. The need for power is the desire to control other people, to influence that behavior, or to be responsible for them. The need for affilia- tion is the desire to establish and maintain positive and supportive relationships with other people. People develop these needs over time as a result of individual life experiences.
The implications of these needs for leaders are found in three areas. First, high needs for achievement are associated with performance on the job. McClelland believed it was pos- sible to instill greater needs for achievement within workers, using the proper training techniques (Heckhausen & Krug, 1982).
Second, people should be placed on jobs that match their levels of need for achievement, power, and affiliation. Someone who has high affiliation needs should work with people. Someone with achievement needs will be more successful in a job that provides consistent feedback.
Third, managers can create challenging task assignments and goals in order to build goal commitment. This, in turn, leads to higher levels of performance (Kinicki & Kreitner, 2009, p. 147).
Process Theories of Motivation
Process theories of motivation explain how reasoning processes are associated with moti- vated (and unmotivated) behaviors. People need to see what is in it for them and have a sense that fairness is extended to all involved. Two major process theories include Adams’ equity theory and Vroom’s expectancy theory.
Adams’ Equity Theory The equity theory of motivation was developed by J. Stacy Adams (1963). The funda- mental premise of the theory is that perceived inequity plays a major role in motivational processes. The theory may be explained in five steps.
Step one. At work, people exchange inputs for outputs. Inputs are the elements workers trade to the organization, such as time, effort, training, and creative ideas. Outputs are what the organization trades to workers in the forms of pay, praise, the chance to be pro- moted, challenging work, and other items.
Step two. People have a natural tendency to compare themselves to one another. At work, one special comparison will be made with a referent other, who has been singled out.
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CHAPTER 5Section 5.3 Leadership and Motivation
Step three. The nature of the comparison is between input-output ratios, as follows:
Inputs of employee Inputs of referent other ___________________ versus ______________________
Outputs of employee Outputs of referent other
Step four. If the comparison of the input-output ratio seems in balance, equilibrium, or equity, then behavior will be maintained. In essence, motivation continues when employees believe they are being treated fairly.
Step five. If the comparison of the input-output ratio seems unequal or inequitable, then there will be a strong motivation force to reestablish equilibrium.
To restore equilibrium, employee behaviors can be adjusted in various ways, including
• changing work inputs by putting less effort into their jobs; • changing work outputs by asking for better treatment, a pay raise, or other rewards; • attempting to change the work outputs of a referent other, causing the individual
to give greater effort; • changing the comparison by finding ways to make things seem better; • changing the situation by transferring or quitting the job.
Effective leaders anticipate perceived negative inequities whenever rewards such as pay or promotions are allocated. Instead of letting inequities get out of hand, they carefully communicate the reasons for giving out the rewards.
Vroom’s Expectancy Theory Victor Vroom (1964) introduced the expectancy theory of motivation, which asks the ques- tion: What determines the willingness of an individual to work hard on tasks important to the organization? Vroom summarized that people will do what they can do when they want to do it. Three expectancy factors impact motivation:
• Expectancy (E): An employee’s belief that working hard will result in a desired level of task performance being achieved.
• Instrumentality (I): An employee’s belief that successful performance will be fol- lowed by rewards and other desirable outcomes.
• Valence (V): The value an employee assigns to the possible rewards and other work-related outcomes.
Vroom summarized that in order for motivation to be present, expectancy, instrumental- ity, and valence must all be present at the same time. In other words:
Motivation = E × I × V
If any of the three expectancy factors were missing, zero motivation would be present. The higher the values of E, I, and V, the more powerful the motivational situation. Leaders can take advantage of the principles of Expectancy Theory by (a) understanding worker valences (knowing what employees value); (b) clarifying the work situation (making it seem more likely to the employee that successful performance is possible); and (c) rewarding
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CHAPTER 5Section 5.3 Leadership and Motivation
successful performance with the valences held by employees. Expectancy theory has received a great number of favorable research results. Lead- ers enjoy the benefit of an easy-to-apply system of motivation using the theory.
Locke’s Goal-Setting Theory
Goals in the form of clear and important per- formance targets are the basis of Edwin Locke’s (1968) goal-setting theory. A goal is what an individual is trying to accomplish; it is the object or aim of an action. The theory’s basic premise is that task goals can be highly moti- vating if they are properly set and if they are well managed. The foundation for this premise comes from four concepts:
• Goals direct attention toward relevant activities and away from unnecessary activities.
• Goals regulate effort by focusing on the most important action to be taken. • Goals increase persistence, leading the worker to stay on task. • Goals foster the development and application of task strategies and action plans.
Goals clarify performance expectations, establish a frame of reference for feedback, and provide a basis for self-management. In these ways, Locke believed that goal setting can enhance work performance and job satisfaction.
A key component of the theory is that managers and leaders must work with others to set the right goals in the right ways. Goals must be difficult but achievable, specific, measur- able, realistic, and timely. It is important that both the leader and subordinate be active participants in setting the desired goals.
A substantial amount of research supports goal-setting theory. An institution program that supports goal-setting is management by objectives. It is a participative goal-setting pro- gram in which supervisors and employees negotiate goal lists and performance objectives on an annual basis.
Summary
Leaders inspire motivation and must understand worker needs and help them satisfy those needs by creating a supportive work environment. Leaders know that workers compare themselves to one another. In response, effective leaders strive to make the reward system as fair and equitable as possible. Quality leaders comprehend the relationship between knowing what workers want, showing them how to effectively complete assigned tasks, and rewarding successful employees with the things they want. Goal-setting systems allow leaders to establish meaningful performance targets and reward subsequent perfor- mance. A program such as management by objectives can institutionalize the goal-setting process throughout the organization.
Comstock/Thinkstock
Expectancy theory explains the relationships between rewards, effort, and the belief that success will be recognized.
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CHAPTER 5Section 5.4 Leading and Effective Teamwork
5.4 Leading and Effective Teamwork Learning Objective #4: How can leaders establish and successfully direct teams and groups?
In today’s complex world of business activity, many projects cannot be completed by a single worker. Instead, teams are formed, using the distinct talents of each member to more efficiently and effectively finish the project. A team is a small group of people with complementary skills who work together to achieve a common purpose and hold themselves mutually accountable for accomplishing its goals.
A common misconception is that groups and teams are the same thing. A group consists of a collection of people, and a team is a unit of collective performance. Let’s consider the difference. A group is two or more people interacting who share collective norms and goals, and have a common identity. One group could be a collection of twelve employees meeting to exchange information about how various company policies or procedures will affect them. The essence of a team is a common commitment. An example of a team would be a collection of 2 to 10 employees who are meeting to make recommendations about changing the vacation policy at their place of employment. A group becomes a team when the following criteria are met (Katzenbach & Smith, 1999):
• Leadership becomes a shared activity. • Accountability shifts from strictly individual to both individual and collective. • The group develops its own purpose or mission. • Problem-solving becomes a way of life, not a part-time activity. • Effectiveness is measured using the group’s collective outcomes and products.
In essence, groups evolve into teams under the proper circumstances. The leader can tell the difference by observing instances of shared sacrifice and commitment to the group’s success by individual members.
Stages of Team Development
Both groups and teams go through stages of development. One theory proposes five stages of development: forming, storming, norming, performing, and adjourning (Tuck- man, 1965). Let’s look at each of the stages, keeping in mind that the different stages do not necessarily take the same amounts of time.
Forming Forming is the process of getting oriented and getting to know each other. This stage is characterized by a high degree of uncertainty as members try to break the ice and figure out who is in charge and determine what the group’s goals will be. At this point, trust is low, and people tend to hold back to see who takes charge and how that person will lead. The formal leader may assert some level of authority to establish the team’s operation and to build trust among members.
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Storming Storming takes place as the presence of indi- vidual personalities, roles, and conflicts emerge within the group. The storming stage may be short or very long and painful depending on the clarity of goals and the commitment and maturity of the members. It is a time of testing. Individuals test the leader’s policies and try to figure out where they fit in the group. Sub- groups may take shape. Groups will stall here if power and political struggles go unconstrained and turn into open rebellion. Groups that over- come this stage do so because a respected mem- ber, usually not the leader, challenges the group to resolve its differences.
Norming In this stage the storming conflicts have been resolved. Close relationships begin to develop, and unity starts to evolve. Teams set guidelines related to what they will do together and how they will accomplish tasks. Questions regard- ing team authority have been resolved through frank discussions. A feeling of team spirit exists because members have found their role within
the group. Positive group cohesiveness can become a major outcome of the norming stage.
Performing In the performing stage, members focus on solving problems and completing their assigned task. The main concern for the team becomes, “Can we do the job right?” Members assist each other, and conflicts are resolved constructively. Members become committed to the group’s success.
Adjourning In the fifth and final stage, members prepare to disband the group. Having worked hard to collaborate and accomplish their assigned task, many times members feel a sense of loss, even though a party or celebration may be taking place.
As a leader, a major thing to remember is that building a high-performing team requires time and hard work. But the end result is a stronger, better-performing work unit. Qual- ity leaders focus on task roles and maintenance roles. Task roles keep the group on track in terms of the work to be performed. Maintenance roles keep the group together in supportive and constructive ways. Leaders coordinate both types of roles in order to achieve success.
Pixland/Thinkstock
Conflicts often arise in the storming stage of team development.
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Types of Teams
Effective teams are normally composed of around 10 members. Too few members cre- ate problems in terms of assigning tasks that members will be required to undertake. Too many members lead to breakdowns in communication and the inclusion of additional per- sonal agendas, which can lead to conflict. The most common types of teams employed in today’s workplace include (a) cross-functional teams, (b) virtual teams, and (c) self-man- aged teams. Each helps the leader complete the organization’s objectives more efficiently.
Cross-Functional Teams Organizations today emphasize horizontal integration, problem solving, and informa- tion sharing. They also attempt to eliminate the tendency of workers to work in silos, which prohibits communication across departments within the organization. Members of cross-functional teams come together from different functional areas of the organiza- tion to work on a particular problem or task and work together for the betterment of the company. They share information, explore new ideas, work toward creative solutions, and don’t limit their ideas to their own functional areas.
Virtual Teams The use of the Internet and specially designed software can support meetings between geographically dispersed employees. Team members from widely dispersed locations can deal effectively and efficiently with issues in a timely fashion. Such meetings can also pose challenges, particularly when team members’ working relationships are depersonalized and some of the benefits of face-to-face interactions are lost. The growing internationaliza- tion of business has led to increased usage of virtual teams.
Self-Managed Teams Self-managed work teams are groups of employees who perform highly related or inter- dependent jobs and take on many of the responsibilities of their former supervisors. These responsibilities can include planning and scheduling work, assigning tasks to team mem- bers, controlling the pace of the work, making operating decisions, and taking action with problems. Things to consider when introducing self-managed teams are the strength and makeup of team norms, the types of tasks the team undertakes, and the reward structure, which can impact how well the team performs.
Leading and Team Building
Team building consists of all activities designed to improve the internal functioning of work groups. Team builders use techniques such as trust exercises, role-playing, and competitive games. Standard goals of team building include (a) increasing trust between members, (b) reducing conflict between members, (c) building better channels of com- munication among members, and (d) increasing the levels of support that team members give to one another. Of these four goals, trust is a key. Trust requires communication, respect, fairness, consistency, and leader/member competence. When teammates do not trust each other, the quality of the team quickly deteriorates. Distrust can become a pri- mary destructive force in organizations.
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CHAPTER 5Section 5.5 Leadership and Communication
Summary
It takes a talented leader to turn a group into a team. The leader must be willing to take the time and make the effort to resolve the issues present during the stages of forming, storming, norming, performing, and adjourning. As the complexity of work continues to increase, and as business becomes more global in nature, the use of cross-functional, virtual, and self-managed teams will also rise. Leaders determined to build the best team possible should conduct team-building programs designed to build trust, support, and communication while reducing conflicts.
5.5 Leadership and Communication Learning Objective #5: How do leaders effectively communicate with others?
Communication is transmitting ideas from one person to another or from one person to a group of people. It is the flow of information within an organization. No group or organization can exist without communication. Communication is far more complex than simply delivering a message and hoping that people understand. Commu- nication must include both the transference and the understanding of the meaning.
Communication and leading intersect on many levels. A leader or manager communicates with other individuals throughout the day. The same manager will be part of an overall communication system within the organization. Communications at both levels (individ- ual and company-wide systems) share some common characteristics.
Organizational Communication Basics
Communication is a process that includes several basic principles. These principles hold true throughout all types of organizations. These basic principles tell us that communica- tion is
• dynamic • continuous • unrepeatable • irreversible • complex
Communication is dynamic because it constantly undergoes change. One message feeds another message, and one type of experience feeds other experiences. The communication process is continuous because it never stops. Even by saying nothing, a leader is communi- cating something about what she or he values. Silence can be of one of the most powerful communication tools. Everything a leader says or does not say communicates something.
Communication is unrepeatable. The very same message delivered to two different people is essentially two different messages. That holds true when we deliver the same message twice to the same listener. A leader must frame the message for the intended audience. An example would be how a leader would deliver financial information to finance people and nonfinance
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CHAPTER 5Section 5.5 Leadership and Communication
people. Nonfinance people do not have the technical knowledge that finance-savvy people possess. An effective communicator frames the message to match the intended audience.
Some processes can be reversed. Communication remains irreversible. We may wish that we could take something back that we said, but we cannot. All we can try to do is to clear up any confusion, perhaps apologize, and try to restate our position, but we cannot “unsay” something that has already been said.
Communication is highly complex, not only because of the pieces of the communication puzzle but also because it involves human beings. People are all different and they bring different experiences, insights, and biases to a conversation. There is nothing totally straightforward about the ways people communicate or interact with each other.
Barriers to Interpersonal Communication
As people at work interact with each other, a series of barriers can interfere with effective interpersonal communication. Table 5.6 presents some of the more common barriers.
TABLE 5.6: BARRIERS TO INTERPERSONAL COMMUNICATION
Individual Differences Situational Factors Transmission Problems
age emotions, such as mood and tone language
gender distractions slang
exclusive language settings technical terminology
educational level disability – sender
organizational rank disability – receiver
personalities nonverbal contradictions
Individual Differences Managers and supervisors are normally of dif- ferent ages, which can create a generation gap in conversations. Substantial evidence suggests that women and men communicate in differ- ent ways on the job, especially when one gender supervises the other. Exclusive language means using words and concepts known only to a select group (think of sports metaphors), thereby excluding others (people who do not follow sports). Entry-level workers and workers with low levels of education may have trouble follow- ing some specialized conversations related to high-level duties.
Creatas Images/Thinkstock
Differences between individuals can disrupt effective communication.
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People at a higher organizational rank are often intimidating to subordinates. At other times, the leader suffers from a lack of credibility. Without trust between the leader and the follower, communication tends to be flawed. We tend to believe the messenger before we believe the message, which makes trust and credibility problems destructive to clear communication.
And finally, some people just do not get along, meaning their personalities can get in the way. Big egos can cause political battles, turf wars, and the overzealous pursuit of power and resources. Egos influence how we treat each other and how receptive we are to being influenced by others.
Situational Factors Numerous situational factors can derail an interaction with a colleague at work. It is important to be aware of your mood and tone when you speak to others, as things said in the heat of the moment often come back to haunt you. It is also important to be aware of distractions, such as construction noise near an office meeting, that may prevent people from giving their full attention to the conversation. In addition, it is important to be aware of the timing and setting of sensitive communications or announcements, especially when they involve layoffs and terminations, closing a location, or the death of an employee. In each of these scenarios, it is difficult to both transmit and receive significant information.
Transmission Problems Language and slang can create confusing messages in domestic and international settings. Someone who is not versed in popular culture may not understand some current term, such as “bling,” introduced in the early part of the 2000s. Conversations become far more complex when two people who have different first languages attempt to communicate.
Technical terminology includes the usage of terms specific to ones’ vocation or occupation. Technical terms are used in many areas, including information technology, accounting, research and development, and others.
Sender disabilities are mostly related to speech and speech impairments. Receiver disabili- ties include hearing and sight problems. Nonverbal contradictions occur when a person’s body language does not match the verbal message. Someone who says, “Yeah, that’s great work,” while looking disinterested and bored is not exactly sending a ringing endorse- ment, and the employee will pick up on the disconnect when a leader delivers informa- tion in this way.
Overcoming Interpersonal Communication Barriers
The sender and receiver both have important duties when carrying on a conversation. Fulfilling your end of the conversation can help you to avoid problems associated with miscommunication, especially those that lead to unnecessary conflicts. The duties for the two persons engaged in a conversation are provided in Table 5.7.
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CHAPTER 5Section 5.5 Leadership and Communication
TABLE 5.7: CREATING QUALITY INDIVIDUAL COMMUNICATION
Sender Duties Receiver Duties
awareness of barriers listen actively
empathy seek clarification of the message
careful attention to nonverbal cues provide constructive feedback
confirmation of the message
Senders should be aware of all types of barriers. Effective leaders are especially gifted at understanding what might prevent a message from arriving as it was intended. They exhibit empathy and understanding of the audience by “walking a mile in their shoes.” Quality communicators make sure what they say verbally matches their body language, including posture, eye contact, physical distance from the other person, and other nonver- bal messages. Effective leaders make sure messages arrive as they are intended. They confirm by asking simple questions, such as, “Do you understand?”
Remember that a sender or speaker makes up only half of the formula. All members of an organization appreciate effective receivers who are well versed in the following active listening skills:
• Listen for content: try to hear exactly the content of the message. • Listen for feelings: find out how the source feels about the message. • Respond to feelings: let them know their feelings are recognized. • Note cues: be sensitive to verbal and nonverbal messages.
Receivers who work well with others seek clarification when a message is unclear. It is bet- ter to say, “I don’t understand” than to simply guess at a sender’s meaning. This will be especially important when carrying out orders or following a supervisor’s directions.
Quality receivers offer constructive feedback. This includes telling others how you honestly feel about something they said or did. Be sure to provide feedback with real feeling based on trust. Make the feedback specific and not general. Give the feedback when the receiver is ready to receive it. Finally, offer the feedback in smaller doses; never give more than the receiver can handle.
Successful interpersonal communication involves a shared commitment by two people. It is easy to multitask while on the phone, avoid eye contact and remain disinterested toward someone of lower rank, or send messages in other ways that communicate the person and his or her message are not that important. Quality leaders avoid making those kinds of mistakes. If you’ve ever seen someone who makes everyone around him or her “feel” important, you have been watching an effective communicator.
Organization-Wide Communication
Two communication systems pass messages throughout the organization. The formal communication system is composed of every organizationally approved channel. These
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CHAPTER 5Section 5.5 Leadership and Communication
include letters, memos, meetings, direct conversations, bulletin boards, the company’s Web site, company magazines and newspapers, satellite transmissions, cell phones, and interconnected laptop systems, including those with GPS locators. The second network, the grapevine, or informal communication, emerges through social interactions among employees.
Barriers to Formal Organizational Communication
Communication systems in organizations require careful construction and constant main- tenance. As new technologies have merged, the number of potential barriers to quality communication has risen. Effective leaders recognize the importance of efficient communi- cation systems. The barriers that can inhibit formal communication include (a) information overload, (b) physical barriers, (c) interpersonal barriers, and (d) informal contradiction of the formal message.
Information overload problems have grown in the past two decades, primarily due to the influence of additional new technologies. Any manager who takes time away from the job will likely return to a filled e-mail inbox. People can be reached through a variety of means, and monitoring each communication takes time. The possibility of lost messages or misunderstood messages results from information overload.
Some physical barriers include time zone differences, telephone line static, and computers that crash. Office walls can also provide physical barriers to effective communication, which is one reason why many organizations are adapting open floor plans with cubicles instead of traditional walls.
All the interpersonal barriers that interrupt communication between individuals can also create formal communication problems. Issues such as organizational rank and personali- ties are primary examples of these problems.
Informal communication, or gossip, is fun. Consequently, rumors often continue even after management has disputed them through the formal communication system. The persis- tent rumor problem can affect morale when the stories are about layoffs, no pay raise years, and terminations of popular managers.
Overcoming Barriers to Formal Communication
To make sure messages and information travel efficiently and effectively through an orga- nization, the company should establish and maintain a quality management information system (MIS). A well-designed management information system consists of the people and technologies used to collect and process organizational information. An effective MIS begins with effective people who know how to collect important organizational infor- mation. These individuals are found in many areas, including accounting, forecasting, production, quality control, human resources, and at executive levels in the organization.
An effective MIS maintains the best technologies. Company phone systems should be easy to use, the Web site should be easy to negotiate, and systems should be in place to make sure that key decisions and announcements reach every person who should hear them.
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CHAPTER 5Chapter Summary
An effective MIS carries quality information. Key company information will be timely, accurate, important, and summarized. A manager should be able to quickly access important statistics and information for decision-making processes. Individual employees should be able to find the types of data that help them perform their jobs most effectively. For example, a customer service representative should be able to access informa- tion about previous contacts a person or busi- ness has made with the company in order to best serve the client’s needs.
Managing the Grapevine The grapevine has three main characteristics.
First, an organization’s leadership does not control it. Second, many times the information is perceived as accurate and believable, even more so than a formal communication issued by top management. Third, it is largely used to serve the self-interests of the people within the grapevine stream. One important consideration is what gets the grapevine rolling.
Many employees assume that rumors start because they make very interesting gossip. Actually, the grapevine is fed by (a) situations that are important to people, (b) ambigu- ity in the workplace, and (c) conditions that arouse anxiety in employees. The grapevine flourishes in organizations because work situations frequently contain these three ele- ments. The secrecy and competition that typically are present in organizations around issues such as a new boss coming on board, downsizing, and organizational realignment create the conditions that both encourage and sustain the grapevine.
While managers cannot eliminate the grapevine, they can manage it by infusing as much correct information into the front end of the communication pipeline as is possible. They can also quickly deal with false rumors, both through formal denials and by exerting pres- sure on the informal channel. Effective leaders also recognize the potential of the grapevine to pass along compliments to a worker through the employee’s social network on the job.
The terms complement and supplement have been applied to the grapevine. It adds richness to formal communication channels. When managed correctly, its damaging effects can be limited, and positive aspects can be accentuated.
Chapter Summary Communication systems are the lifelines of organizations. Effective communicators often enjoy successful careers and personal lives. They understand the factors that can disrupt quality communication and take steps to overcome those problems. They are good listen- ers. They also monitor messages in the formal and informal communications channels to make certain the proper information arrives where it is needed and when it is needed. Someone who can “work a room” or make an impressive speech has a major advantage in the area of leadership and communication.
Getty Images/Jupiterimages/Thinkstock
Persistent rumors can distort accurate formal communication messages.
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CHAPTER 5Chapter Summary
Case Study: Who’s Next?
Jim Logan was at the end of a long and successful career as an entrepreneur and manager. He had started his business 30 years earlier by purchasing what was a small brokerage ser- vice for farm animals (farm futures, plus auctions of cattle and horses) and turning it into a significant Midwestern empire. The firm had expanded into shipping, oil futures, chemical products, trucking, and several smaller ventures.
The eclectic nature of the operation had taught Jim the value of delegation, although he kept an eye on all activities. He was quick to demand a full report if a problem developed. He often made firsthand inspections and conducted one-on-one meetings if he was told a dif- ficulty was evolving with any one of his subsidiaries. At the same time, he was not known as a dictator. He did command respect due to his expertise and manner of treating employees.
Jim’s style of leadership was based on delegation and rewards. He paid his “lieutenants” handsome salaries for their loyalty and expertise. The company offered a bonus plan based on departmental return on investment. Any dishonest or unethical tactics received harsh treatment. Jim wanted only positive publicity for the company.
As he pondered retirement, Jim knew the biggest issue was to choose a successor. None of his children was interested in the job. Jim had four viable candidates: Marcie Benson, Vincent Will, Richard Jorgenson, and John Cullen.
Marcie Benson was the youngest of the group at 47. She had single-handedly broken down the company’s “good old boy” network. She held a powerful role as Director of Logistics. She was a strong advocate for women, minorities, and any other person she deemed underuti- lized. Her efforts had resulted in tremendous profits for the company. She had won several community awards.
Marcie was small and dynamic. She tended to see the world in terms of accomplishment. She was kidded for “keeping score” on every front. Her manner was direct and to the point. She was not prone to smiling or laughing, although Jim had been told that, away from work, Marcie was a completely different person. Marcie was also the classic “team player,” able to subsume her own ego for the betterment of the group. Her technical skills were excellent.
Vincent Will was a technocrat. His understanding of computers and systems exceeded everyone else's. Vincent was impatient with people who failed to understand his systems. On the other hand, he had bailed out people who had made mistakes and saved the com- pany from several major problems with their computer systems.
Vincent was 53 years old. He held a master’s degree in computer science. He was a worka- holic with limited interpersonal skills. His technical skills combined with his knowledge of the company’s operations were what made him a finalist for the CEO position.
Richard Jorgenson was probably the most different from Vincent Will. Richard was Director of Sales, a loose title that matched his fluctuating job description. Richard was a “people person” who was gifted at making people feel comfortable and happy. His style worked well with members of the sales force who were willing to put in long hours to keep things moving. Richard rewarded his staff with happy hours that included lunches, dinners, and small parties that he paid for out of his own pocket.
Richard was quick moving, funny, and a back slapper. Some considered him a chauvinist, because he used lots of “Little Missy” type language when dealing with female employ- ees. Of interest to Jim was that Marcie Benson reported that she had “no (continued)
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CHAPTER 5Chapter Summary
Key Terms
communication an act or instance of transmit- ting information.
consideration a leadership behavior that expresses concern for employees by establish- ing a warm, supportive, friendly climate.
expectancy an employee’s belief that working hard will result in a desired level of task perfor- mance being achieved.
formal communication system messages that travel through organizationally approved channels.
goal what an individual is trying to accom- plish; it is the object or aim of an action.
group two or more people interacting who share collective norms, goals, and have a com- mon identity.
informal communication messages that travel through social interactions among employees.
initiating structure a leadership behavior that organizes and defines what group members should be doing.
problem” with Richard, because he was willing to promote and identify talented, success- ful female sales reps and promote them to supervisory positions. Richard’s other liabilities included inattention to detail and less sophisticated understanding of how the organization functioned. Employee loyalty and human relations skills were his strongest selling points.
John Cullen was Jim’s right-hand man. Most employees assumed John would be the suc- cessor, because he had the most complete knowledge of how Jim ran the firm. John was 63 years old, however, and on the verge of retirement. He had experienced one heart attack and openly talked about moving on. At the same time, he had more than once voiced his pleasure at the idea of being able to “take the reins” for a time.
On the surface, John seemed to be the ideal choice as a transitional leader. He was mature, intelligent, experienced, good with people, and a tremendous organizer and implementer. He was also probably the most popular senior staff member, because he was approachable and easy-going.
Jim knew each candidate would be surrounded by quality senior staff members who would help keep the company running smoothly. He also had time to train the new CEO. After speaking with the people in human resources and formulating a series of criteria, Jim was ready to make the choice.
1. Apply the trait theories of leadership to the four candidates. 2. Apply the contingency theories of leadership to the four candidates. 3. Apply the transformational theory of leadership to the four candidates. 4. What are the communication styles of the four candidates? Which is best for this position? 5. Which candidate appears to have the best team-building skills? Which would have the
worst? 6. Which person should Jim choose? Defend your answer.
Case Study: Who’s Next? (continued)
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CHAPTER 5Chapter Summary
Review Questions
1. Define leading, and explain how it is different from managing. 2. What is power, and what are the five main sources of power? 3. What are the four main categories of leadership theories? 4. What are the names of the three trait theories of leadership? 5. Explain how someone deals with a confirmed and a refuted test using the attri-
bution theory of leadership. 6. What two schools are associated with the behavioral theories of leadership? 7. What are the names of the situational theories of leadership? 8. What are the four styles of leadership in the Hersey and Blanchard situational
leadership model? 9. What are the four styles of leadership in path-goal theory? 10. Define motivation. 11. What are the five needs in Maslow’s hierarchy? 12. What are the two factors in Herzberg’s theory, and how do they influence
workers? 13. What three needs are present in McClelland’s need theory? 14. What are the five steps in Adams’ equity theory? 15. What three motivational factors are present in expectancy theory? 16. Define team and group. 17. What are the stages of team development? 18. What types of teams are present in today’s organizations? 19. What are the three categories of barriers to individual interpersonal
communication? 20. What can the sender and receiver do to improve individual interpersonal
communication? 21. What are the barriers to formal communication? 22. What is the grapevine?
instrumentality an employee’s belief that successful performance will be followed by rewards and other desirable outcomes.
leadership influencing behaviors in organizations.
leading in a business context, consists of all activities undertaken to help people achieve the highest level of performance.
management information system consists of the people and technologies used to collect and process organizational information.
power control over formal and informal means of influence.
team a small group of people with comple- mentary skills, who work together to achieve a common purpose, and hold themselves mutually accountable for accomplishing its goals.
transformational leaders individuals that engender trust, seek to develop leadership in others, exhibit self-sacrifice, and serve as moral agents, focusing themselves and their followers on objectives that transcend the more immediate needs of the work group.
valence the value an employee assigns to the possible rewards and other work-related outcomes.
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CHAPTER 5Chapter Summary
Analytical Exercises
1. Explain how each of the following is an example of leadership or management: • creating a budget • making a speech to employees about a vision for the future • setting the goal to hire four new high-quality employees • comforting an employee who has just lost a loved one and was informed about
this at work
2. Three tactics employees use to gain power include acclaiming, visibility, and impression management. Acclaiming is taking credit for someone else’s work or success. Visibility is making sure you are seen with the right people and in the right places. Impression management involves manipulating people to think you hold greater status than you actually possess. Relate these tactics to the sources of power described in this chapter.
3. Name five traits that you believe you possess that would make you an effective leader. Ask three of your friends or classmates to make a similar list about you. Does your list agree with their list? What can you learn from this?
4. How do the concepts provided in the attribution model of leadership explain why it is harder for women and minority group members to be perceived as hav- ing “leadership potential”?
5. What common elements are present in Hersey and Blanchard’s situational lead- ership model, path-goal theory, and transformational leadership theory? How do these theories differ from one another?
6. Are there any common elements in Maslow’s hierarchy of needs, Herzberg’s motivation-hygiene theory, and McClelland’s need theory? How are they related? What are the primary differences among the three theories?
7. Explain how the concepts contained in Locke’s goal setting theory can be incor- porated into Vroom’s expectancy theory. Explain how the concepts contained in Adams’ equity theory can be incorporated into expectancy theory.
8. Explain how the stages of team development would be different in a virtual team as opposed to an on-site cross-functional team.
9. A semantics problem occurs when a word or comment could be interpreted in different ways. When a leader tells a subordinate, “I need this project completed as soon as possible.” What does the leader mean? Is the meaning potentially dif- ferent from what employee hears? List five additional examples of semantics and language problems that could occur at work. Share your answers with the class.
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Klaus Tiedge/Blend Images/Corbis
chapter 6
The Controlling Function
Chapter Goals
After completing this chapter, you should be able to • Complete the four steps of the controlling process. • Prescribe specific corrections for problems identified at the functional/departmental level. • Use accounting and financial controls to improve company-wide performance. • Finalize all other aspects of the control process.
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CHAPTER 6Section 6.1 Introduction
6.1 Introduction Learning Objective #1: What are the four steps of the controlling process?
The modern organization exists in a complex, ever-changing environment. The exter-nal operating environment is highly competitive with ever-increasing expectancies on the part of customers, clients, and key stakeholders. Competitors are also con- stantly vying for a share of the market. Control systems and methods assist managers by providing information on the state of the organization’s production expectancies, finan- cial condition, employee demands, operating systems, market, governmental influences, and other factors as they arise. Such information is essential to drive manager course cor- rection decisions (Etzioni, 1964).
Successful organizations utilize effective and appropriate control systems in order to obtain organizational goals and objectives. This chapter will explore those control systems and their importance to overall organizational success.
JetBlue: Creating a New Control System
In the early 2000s, JetBlue Airways was a popular airline with a solid reputation for quality customer service. Customer satisfaction ratings were among the best in the industry, based on criteria that included low ticket prices, comfortable seats, and quality in-flight entertain- ment. Then, in 2007 a well-publicized incident quickly damaged the airline’s image.
A massive snowstorm hit the East Coast of the United States, badly affecting New York’s John F. Kennedy Airport. JetBlue’s ground crews at the airport made several mistakes during the storm, most notably boarding passengers onto planes that stayed on runways for as long as 11 hours, only to have the flights eventually cancelled. Three days later, the airline’s management team had not yet been able to reschedule stranded passengers, flight attendants, and pilots.
The story received national attention. JetBlue CEO David Neeleman knew he had a major problem. His decision was to respond proactively. He appeared on numerous nationally televised programs expressing remorse. Neele- man used terms such as “mortified” and “humili- ated” in the apology. He then promised sweeping reforms in the JetBlue system (msnbc.com, 2007).
Even though flight bookings were dropping, Neeleman proceeded. The first major step was to create JetBlue's Customer Bill of Rights, which promised that customers will be (a) notified about delays prior to the scheduled departure, (b) told about cancellations and the cause for them, and (c) informed about flight diversions and the cause for them.
The Customer Bill of Rights stated that when the company made a mistake, termed a “controllable
iStockphoto/Thinkstock
JetBlue’s quick response to a crisis helped save the company’s reputation.
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CHAPTER 6Section 6.1 Introduction
irregularity,” each passenger would receive a voucher for $25. A ground delay would result in a $50 voucher per person, whether an arrival or delayed departure caused the problem. An overbooking reimbursement for a person who was not able to get on a flight would be $1,000.
JetBlue then took further steps to please customers. The company began efforts to become as environmentally friendly as possible and provided better onboard entertainment when they upgraded to a DIRECTV package.
Two years after the snowstorm, JetBlue had returned to top customer satisfaction ratings. The lessons to be learned are that an effective control system can help a company turn a problem into an advantage. Neeleman’s willingness to respond to the crisis quickly, with humility, and with an eye toward the future saved the company’s long-term repu- tation (Weiss, 2007).
Questions for Students:
1. What aspects of an airline flight are most important to you? 2. Why do you suppose JetBlue had not put a plan into place prior to the snowstorm,
when other companies had experienced similar problems in the past? 3. What measures of performance would you say are most important in the airline industry?
Controlling is the process of evaluating performance against established goals and creat- ing methods appropriate to take corrective action to maintain or improve performance in any area of the organization. Controlling systems allow managers to analyze the state of the organization and its various constituent parts to determine if the plan and structural system are achieving expected results.
The Four Steps of Control
Planning and controlling are inseparable parts of the management system. Standards are set in planning, and the controlling system uses those standards to identify and correct problems. The standard control process consists of four steps (Steers, Ungston, & Mow- day, 1985):
1. Establish and review standards set in the planning process. 2. Measure performance at the strategic, tactical, and operational levels. 3. Compare performance outcomes with the standards that were set. 4. Make a decision:
• Successful performance should be rewarded. • Unsuccessful performance should be corrected.
Establishing Performance Standards Control processes are carried out on three levels: company-wide, departmental or func- tional area, and individual. These are the same three levels in which plans were written.
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CHAPTER 6Section 6.1 Introduction
At the company-wide level, the executive team will be responsible for the evaluation of activities. Departmental managers assess success in their functional areas. Supervisors working in concert with the human resource department conduct individual perfor- mance appraisals.
Planning is one key to an effective control system. Managers who fail to prepare quality standards have no basis from which to evaluate performance. The goal-setting literature (Locke, Shaw, Saari, & Latham, 1981) has taught us that quality goals contain the follow- ing characteristics. They are:
• difficult but attainable • measurable • clearly stated • flexible
At all three levels, members of the organization should be challenged to achieve at the highest levels. Difficult but attainable goals establish an environment in which employees are not tempted to slack off when goals are too easy and are readily met, or to give up when goals are too hard. Measurable goals are a necessity. Without tangible performance targets, control systems cannot work. Clearly stated goals eliminate hedging and fudging. Managers and workers at all levels are accountable for results. Accomplishing the objec- tives that have been set forms the basis for promotion decisions and other rewards. Goal setting should remain flexible. When organizational circumstances change, the planning and goal-setting systems should be adjusted to the new circumstances.
Measuring Actual Performance Numerous individuals and departments gather data to conduct performance analysis. This data can be quantitative, qualitative, or both. Staff in various positions make reports that measure actual performance across the company.
Top management examines the documents in reports that contain information regarding strategic goals, such as market share, profitability, and the well-being of various strategic business units. Judgments are made about the numbers as well as more subjective con- cepts, such as the strength of the company’s brand name and image.
Departmental leaders report on statistics from each area. Examples include the items shown in Table 6.1. In the performance analysis process, individual measures are devel- oped for the performance appraisal process: Production workers are assessed with mea- sures of individual output. Salespeople face sales quotas. Each area has goals that have been set for individual employees.
Comparing Performance to Standards Once performance data is gathered, it is compared with the established standards. For example, the budget is compared to the actual department income statement. The vari- ance between the actual performance and the budget allows the manager to assess how
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CHAPTER 6Section 6.1 Introduction
he or she performed during the period in question. When making comparisons, five out- comes are possible:
• The person or unit greatly exceeded the standard. • The standard was met. • The standard was missed slightly. • The standard was missed. • The standard was badly missed.
As an example, a product has been on the market for six months. A sales goal was estab- lished with 100,000 units to be produced and sold in the coming year. If the total turned out to be 150,000, the standard was greatly exceeded and management will try to establish a more realistic standard for the following year. If the standard was met, such as sales totaled 103,450 units, then rewards are given to those responsible. If the standard was slightly missed, 99,100 units, managers may consider other factors, such as unreported units in December or other variables that contributed to a variance of less than 1%. When the standard has been missed, 91,000 units, corrections will be made. When the standard is badly missed, 63,000 units, then management may consider whether the new product is viable in the marketplace.
Making Decisions Based on the information provided by comparing performance to standards, managers are ready to make decisions. Of the five possible outcomes that arise when comparing performance to standards, some lead to relatively straightforward responses or decisions. A standard that is too low will be raised. A standard that is met should lead to rewards for those involved. A standard that has been slightly missed invites some scrutiny.
TABLE 6.1: TACTICAL/FUNCTIONAL ANALYSES
Function Examples of Factors to Analyze
Production costs, on-time delivery rates, consumer views of quality
Quality Control rates of defects/returns
Marketing market share, brand loyalty or power
Sales by total volume, product lines, individual products
Accounting errors noted by auditors
Finance cost of capital, liquidity, leverage (debt ratio)
Information Technology quality of Web site, online ordering systems, support of internal operations
Research and Development number of innovations adopted
Human Resources rates of absenteeism, tardiness, turnover
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CHAPTER 6Section 6.2 Functional Area Controls
Standards that have been missed—or grossly missed—require the greatest amount of investigation and concern. When the standard has been missed, more substantial correc- tions will be made. When the standard has been grossly missed, managers will meet to consider whether to stop the activity or create some kind of major overhaul (Weiner, 1948).
The controlling process may be considered as a feedback device for company leaders. Decisions reached in the controlling process lead to new plans for the future. Standards allow for effective management of the organizational system at each level: company-wide, departmental/functional area, and individual. We will consider functional area controls next.
6.2 Functional Area Controls Learning Objective #2: What types of specific corrections are made for problems identified at the functional/departmental level?
Each department sets goals for its own operations. At times, these goals not only apply to the department but also to the overall company. For example, if there is only one production department in a manufacturing company, then the departmen- tal goal becomes the company’s goal. Using the areas noted in Figure 6.1, control sys- tems collect information and help managers make decisions as to how to respond. In each department, the fundamentals of the systems approach can be used to make corrections to any problems that have been identified. Figure 6.1 portrays a general system.
In a departmental system, inputs include whatever items come into the area. For produc- tion, it is raw materials; for human resources, it is people. The transformation process is the department’s key function, including the assembly of physical products and the devel- opment of intangible services. Outputs are the finished items sent on to the next depart- ment or to the outside environment. An output for the accounting department would be
Transformation Process
Inputs Outputs
Feedback Mechanism
Figure 6.1: A System
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CHAPTER 6Section 6.2 Functional Area Controls
the annual income summary. The feedback mechanism provides correction and adjustment, keeping the department in tune with other departments and the larger environment. Sys- tems concepts help departmental managers identify problems and find solutions.
Production and Quality Control
Production and quality control are closely linked. Production represents a line function, and quality control is more of a staff function. In the area of production, four standard types of goals will be set:
• quantity • quality • cost • time
Performance figures in these areas are then met with various responses and corrections.
Quantity Goals Quantity goals may be established by unit or by volume. DVD players are counted in units. Beer breweries count liters or gallons. At times quantity goals are more complex. For instance, managers in a construction company that is building a major structure that will take more than one year will still want to know if output levels are sufficient. To assess this, they use benchmarks to note the completion of various tasks. A standard will be set for the completion of the framing. A second standard applies to finalizing the wir- ing system. In this way, the manager knows more about the level of productivity.
Quality Goals Quality goals are applied in various ways. For some operations, quality will be represented by exceeding a threshold. For example, a building must pass all inspections to be considered of high enough quality to be sold and inhabited. A customized insurance plan sold to a company
must be complete before being put into place.
Other standards are set and examined by varia- tion and defect levels. An example of this would be an automated injection molding machine tool that produces golf balls. This particular golf ball specification requires a dimpled cover of thermoplastic with a thickness of .30" and an overall ball diameter of not less than 1.680", as defined by the US Golf Association, but less than 1.685", as defined by the manufacturer. Each ball is carefully and automatically mea- sured as it moves through the production line to make sure it meets design specifications. Balls outside of the specifications are rejected and recycled. If more than .5% of the balls are
Getty Images/Jupiterimages/Thinkstock
Quantity, quality, cost, and time standards are applied to production departments.
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rejected, management intercedes, stops production, and requires process recalibrations. In this way, scrap is limited, costs are managed appropriately, and a high-quality golf ball is produced for the golfer. Quality control tests such as these are found in many forms of manufacturing.
A third set of quality goals examines intangible, qualitative issues. Examples include cus- tomer satisfaction and loyalty. Think in terms of a restaurant—production of food consti- tutes only part of the story. For the production system to work, people must enjoy the food they eat. No hard standard can be set, yet managers still want to know whether custom- ers are pleased with their purchasing experiences. Surveys and questionnaires can make available numbers that provide helpful information, such as where the company ranks in the industry in terms of customer satisfaction.
Cost Goals The production manager needs information about the efficiencies, or lack thereof, of the department’s operations. For instance, what costs are incurred by using raw materials, paying labor, storing merchandise, and shipping products to buyers? Quality control adds information by measuring the number of defective units that were discarded or required additional funds to repair.
Time Goals Time goals reflect whether items have been produced on schedule. These goals are set in various ways, such as the number of units per day, week, and month, or other means. A large project will have a goal established as a deadline. For example, the publication of a book will have a defined production date and release date. Time goals measure the effi- ciency of the department.
Measures of Performance: Production and Quality Control
Production managers and quality control officers prepare reports for purposes of con- trol. Many times these reports are written on a daily basis. For example, a newspaper production manager prepares a report for a daily edition. Each day, the size of the news- paper will be different. In a smaller community, a Monday paper may be as small as 16 pages. Sunday papers are normally four or five times bigger. The production manager notes the size of the edition, the amounts of newsprint and ink used, plus the starting and stopping time for the production run. The report also mentions the number of unusable, discarded papers. In this way the manager has reported on quantity, quality, and time.
Quality control managers also report on defects. They may be asked to provide informa- tion about the causes of defects or problems. This information can be used to make the needed corrections. The accounting department will generate the final set of statistics and information. Cost information will be assessed and stored for future use.
These measures can be combined into quarterly, semiannual, and annual reports about the production department’s level of efficiency (low cost) and effectiveness (high quality).
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CHAPTER 6Section 6.2 Functional Area Controls
Making Corrections: Production and Quality Control
The systems approach most directly applies to the production department. Inputs are the mate- rials and labor needed to manufacture products. Inputs can be changed through improved sourc- ing or acquisition of high-quality raw materials.
The transformation process is the production pro- cess. Production transformation processes can be redesigned or streamlined to reduce defects or improve quantity levels.
Outputs are finished goods and services. Outputs reflect changes in the actual products to be sold. Items such as mobile phones continue to evolve as new technologies make it possible to increase their number of uses.
The feedback mechanism measures performance. Feedback mechanisms can be fine-tuned to identify problems more quickly and correctly. Currently, methods to ensure food safety have been restructured due to outbreaks of E. coli and other bacterial foodborne illnesses.
Marketing and Sales
The marketing department manager considers various goals when creating plans. The manager works in conjunction with other departments, most notably production, to make sure that items are tailored to customer needs. When services are marketed, they must also be of sufficient quality to attract customers and sales. The marketing and sales depart- ments share four common goals:
• market share • sales quotas • share of mind (consumer awareness and loyalty) • marketing and sales costs
If there is only one sales department, these standards become company objectives as well.
Market Share Market share measures the company’s percentage of total sales in an industry or a subset of an industry. The executive team and marketing manager examine statistics about the state of the industry, whether the overall marketing is increasing, remaining stable, or declining. Then market share can be assessed in several ways, including (a) total company share, (b) division share, (c) brand or product line share, or (d) individual product share.
Total company share measures how well a company fares in a market. For example, Pep- siCo would examine its total in the food and drink industries. Division share would be statistics about sales and market shares of the various major components, including snacks
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Sourcing is the acquisition of raw materials.
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(Frito Lay), breakfast drinks (Tropicana), soft drinks, energy drinks (Gatorade), and break- fast foods (Quaker). Brand or product line would divide Pepsi’s soft drinks into products with the Pepsi name and Mountain Dew products. Market share would be assessed at the product level, such as share of Diet Caffeine Free Pepsi.
Sales Quotas Sales quotas are examined at all three levels: company-wide, departmental, and individ- ual. Additional sales quotas can be assigned to divisions, product lines, and individual products. Marketing and sales managers take both an overall view of sales and more specific sales activities.
Share of Mind People won’t buy a product or use a service unless they know about it. Share of mind indi- cates consumers consider a company when they want to buy a product. Loyalty means they will go to a company first when making a purchase decision.
Marketing and Sales Costs Marketing and sales managers spend money to generate money. Marketers create adver- tisements, promotions and sponsorships, contests and sweepstakes, and other activities designed to entice people to come to a store and buy a product. The same will be true for sales, where the sales manager pays travel expenses for salespeople, commissions, and sets up other rewards for increasing a company’s customer base. These managers want to know if the money has been spent wisely.
Measures of Performance: Marketing and Sales
Marketing and sales managers use several devices to measure performance. Market share information will be available in industry and trade publications. Market share statistics
also are prepared by local agencies, including governments and educational institutions, for small businesses in a town or city. Sales quotas can be examined using sales reports by individ- ual employees as well as sales summaries pre- pared by various departments for accounting purposes.
Share of mind and customer loyalty figures are collected in various ways. Share of mind can be measured through ratings of advertise- ments in various forms. Other measures come from redeemed coupons, entries into contests, and Web site hits. Customer loyalty normally requires more in-depth market research. The accounting department reports the costs of mar- keting and sales programs.
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Share of mind and customer loyalty are important marketing and sales standards.
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Making Corrections: Marketing and Sales
Using the systems model, corrections in the area of inputs include attracting and hiring quality marketing experts and salespeople. Most corrections will be made in the trans- formation process, where the marketing manager will consider changes in pricing and discounting programs, product positioning, distribution methods, and methods of pro- motion including advertising, personal selling, promotions (coupons, contests, rebates, bonus packs), and public relations activities such as sponsoring charities or various events. Marketers may have some control over outputs, although it will be limited.
At times, marketers consider changing feedback mechanisms, or how performance is mea- sured. A salesperson may be generating high sales figures but is doing so by spending a great deal of money on travel and offering huge discounts to entice purchases. The mar- keting and sales manager might wish to fine-tune how sales success is measured.
Human Resources
The human resource department often serves the entire company. Departmental goals rep- resent company-wide goals as a result. The standard measures of performance in human resources, in addition to the cost of running the department, include the rates of absen- teeism, tardiness, turnover, accidents, grievances, and vandalism. Statistics like absentee- ism, tardiness, turnover, and so forth reflect the degree of employee satisfaction within the company. Happy, satisfied workers tend to show up to work on time. They pay attention and are less likely to be accident victims. They see no reason to file grievances or damage company property. They wish to keep their jobs. Conversely, if you have ever held a job you did not like, these factors probably came into play. Human resource managers are held accountable for these goals because it is their primary responsibility to attract the right people to the company. Matching people with jobs constitutes a key ingredient in success.
The cost of the department reflects the concept that human resource managers spend money on recruiting and selection processes. They should spend the money carefully and effi- ciently. Human resource managers are also often asked to balance the costs of benefit pro- grams. The accounting department provides cost information for the purposes of control.
Measures of Performance: Human Resources
Typically, human resources will be actively involved in evaluation operations. These man- agers are asked to prepare statistics regarding accidents (lost work time), absenteeism, tardiness, turnover, disciplinary actions, grievances, and instances of vandalism.
Making Corrections: Human Resources
Human resource managers use the systems model to create various corrections. Inputs are associated with recruiting and selection methods. The company needs to identify and utilize the best possible employee sources. The transformation process includes orientation, training, discipline and rules, and workplace safety programs. Each of these can be improved in order to increase worker satisfaction. Outputs are normally not a consideration for human resources.
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The feedback mechanisms include all methods of assessing performance for individuals and for the department. This includes performance appraisal programs and statistics used to evaluate the effec- tiveness of employee placements.
Information Technology and Research and Development
Performance in the areas of information technol- ogy and research and development will be more difficult to assess. The problem is largely due to the inability to create measurable, tangible stan- dards. Company leaders clearly need an effective information technology system; however, what numbers can be assigned to that concept? The same holds true for research and development. Establishing concrete goals is problematic.
A management by objectives system has value in these areas. Individual employees and their managers can establish work-specific goals, such as completing a Web site update or finalizing a product’s physical form. At the least, these goals give company leaders an idea about how well the departments are functioning.
In summary, the four parts of a system can be used to make corrections on a departmental or company-wide basis. Various parts of a systems model are emphasized, depending on the functional area corrections required. Production, quality control, marketing, sales, human resource, information technology, and research and development goals all deserve careful attention as part of the controlling system.
6.3 Accounting and Financial Controls Learning Objective #3: How do managers use accounting and financial controls to improve company-wide performance?
Accounting and financial officers are responsible for planning and control in unique ways. Each department manager will set departmental goals. At the same time, planning processes in these areas affect numerous parts of the company. Three common goals are established for these departments: (a) profitability, (b) cost of capital, and (c) increasing efficiencies in company operations. The first two pertain to departmen- tal activities; the third applies to the entire organization.
Profitability Goals
Profitability goals are assessed using a variety of instruments. The income summary or P & L (profit and loss) statement is the most common. Figure 6.2 provides an example of
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Setting quality standards for information technology and research and development departments can be challenging.
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an income summary. Other profitability standards are calculated, such as the company’s return on investment (ROI), earnings per share of common stock (EPS), and dividends per share (DPS) paid to shareholders. Profits are required to stay in business, making profit- ability goals key elements.
Cost of Capital
The cost of capital is a term used to describe the minimum return that investors expect to see from a company in which they invest. A balance sheet reports on investing and other business financing activities of the organization. It lists amounts for assets, liabilities, and equity at a specified point in time and does so using the accounting balance sheet equation
TABLE 6.2 BALANCE SHEET INFORMATION
Assets
=
Liabilities
+
Equity
cash short term securities accounts receivable
inventory
(short term) trade credit bank loans
commercial paper common stock paid in surplus
retained earnings(Long Term) bonds payable notes payable
INCOME SUMMARY
Amount
Total Sales $ 100,000.00
Cost of Goods (30,000)
Gross Profit $ 70,000.00
Operating Expenses (15,000)
Gross Operating Income $ 45,000.00
Depreciation (5,000)
Net Operating Income $ 40,000.00
Other Expenses (10,000)
Unusual Income 5,000
Net Income Before Takes $ 45,000.00
Taxes (25,000)
Net Income After Taxes $ 20,000.00
Figure 6.2: Income Summary
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(Assets = Liabilities + Equity). Accounting for these amounts allows both the organization’s management and other organizational stake- holders a realistic view of the organization’s financial condition.
Increasing Efficiencies of Company Operations
Accounting and financial managers oversee the operations of the entire company. They hold the responsibility of conducting the types of finan- cial analyses and annual financial planning that will lead to the efficient use of company oper- ating funds. There are three primary methods for conducting this research and making reports to the executive management team: ratios, budgets, and audits.
Ratio Analysis
Ratio analysis takes the financial information made available to the accounting and finance departments and helps company leaders understand how well various operations are running. When problems are identified, managers can make the appropriate adjustments and corrections. Four types of ratios are presented in Table 6.3.
TABLE 6.3: TYPES OF RATIOS
Liquidity Ratios measure the company’s ability to meet its short- term obligations by paying its debts on time
Activity Ratios measure efficiencies in company operations
Leverage Ratios measure company debt and risk
Profitability Ratios assess company profits
Liquidity Ratios To remain solvent, the company must pay bills on time. Liquidity ratios are designed to make sure the company has enough money on hand. Two liquidity ratios are the current ratio and the quick or acid test ratio. A current ratio is calculated as follows:
current assets Current ratio = ________________ = 2:1 current liabilities
Current assets are all items that convert to cash in the coming year, including cash on hand, accounts receivable, inventory, and any other payments due to the company. Cur- rent liabilities are all items that must be paid in the next year. These are normally accounts
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Ratio analysis is used to identify problems throughout the company.
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payable, bond/loan payments, and any other credit accounts. The 2:1 figure suggests that the company has twice as many current assets on hand as current liabilities—a number which is fairly typical in industry.
The quick or acid test ratio is calculated as follows:
current assets − inventory Quick ratio = _______________________ = 1:1 current liabilities
The reason for eliminating inventory is that it normally could not be quickly sold at full value. Therefore, the acid test indicates whether a company could make payments with- out liquidating inventory. A 1:1 ratio suggests that answer is “yes.”
Activity Ratios Activity ratios assist managers in understanding how well certain company activities are being carried out. Two of the more common activity ratios are inventory turnover and aver- age collection period. To calculate inventory turnover, the following formula is used:
total annual sales Inventory turnover = _________________ = 7 times average inventory
The manager will see from this outcome that the store or unit sold its entire amount of inventory 7 times during the course of the year. It will depend on the industry whether this is a good or a bad number. If it were a grocery store, the company would be in trouble. If it were a tractor manufacturer, the retailer would be having a great year.
Average collection period measures the time it takes to collect on debts. It is calculated as follows:
sales per day Average collection period = _________________________ = 23 days average accounts receivable
Sales per day results from dividing total annual sales into 360. The resulting figure tells the manager that, from the time an item was sold until it was paid for, 23 days passed. Some accountants prefer to use a credit sales per day figure rather than total sales per day, thereby eliminating the effects of cash sales from the outcome.
Leverage Ratios Leverage ratios measure company debt and company risk. As noted previously, the greater the amount of borrowed money, the greater the risk. Many formulas are available to assess leverage. One simple version, a debt to equity ratio, is calculated as follows:
total debt Debt to equity ratio = ___________ = 45% total assets
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In this instance, debt represents 45% of the value of all company assets. The manager would know the company owes 45% and owns 55% of its assets. Top management preferences normally dictate the amount of debt to be assumed by the company. Using more debt will likely increase profitability per share of common stock, but will make the risk level increase at the same time.
Profitability Ratios Besides the income summary, company leaders may wish to examine profitability in other ways. Profitability ratios measure company financial success. One common ratio used for that purpose is profit margin.
net income after taxes Profit margin = ____________________ = 12% total annual sales
This figure tells the manager that after every bill has been paid, including the tax bill, the company earned 12 cents on every dollar of sales.
Analyzing Ratios When analyzing ratios, it helps to remember that they can be either used or misused. Two common ways ratios are misused include manipulating the numbers and overemphasiz- ing a single ratio.
Managers can manipulate numbers through tactics such as miscounting inventory and over- or understating sales. Doing so may keep a manager from having poor performance exposed in the short term; however, over time the truth will come out. When top manag- ers overemphasize a single ratio, they are not looking at the full picture. One number might be unusual or off, but without seeing how all other figures fit in, the manager fails to “see the forest for the trees.”
Effective use of ratios begins with having a frame of reference. Two of the best are industry averages and past year’s ratios. The manager can see how a company’s operations com- pare to what happens in the industry. For example, if the company’s average collection period is 23 days, but the industry average is 32 days, it may be other companies are offer- ing more generous repayment terms. The company may lose sales to these competitors as a result. Past year’s ratios provide guideposts to current operations. When numbers begin to trend or drift in a certain way, the manager can respond with corrective action when needed (Bedeian, 1986, pp.561–563).
The Budgeting Process
A budget is an annual financial plan. In most organizations, the budgeting process is com- plex. In government organizations it can be especially complex as public policy and politics come into play. In a business organization, the distribution of precious resources can enhance interdepartmental conflicts and rivalry, further complicating the budgeting process. None- theless, managers are called upon to construct a budget that will allow the organization’s
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goals to be met by following a staged process across the organization. The following lists the typical stages of the budgeting process (Steers, Ungson, & Mowday, 1985):
• Step one: Executive management initiates the budgeting process. The CEO or CFO informs department managers of the periodic organizational goals and advises on estimated resource availability. Normally, this is an annual process.
• Step two: Each operating unit or department prepares a preliminary budget. With the goals and objectives as well as the financial resources, each department man- ager prepares a preliminary budget, which defines how those resources will be used to attain their unit’s productive activities.
• Step three: Executive management—the CEO/CFO (or budget committee report- ing to the CEO and CFO)—reviews, modifies, and approves the preliminary budget. It is at this step in the process that critical coordination of organizational activities is achieved.
• Step four: Budget performance is evaluated during the budget period to assess compliance. Variances from the approved budget are reported to the CEO/CFO by each manager (typically on a monthly or quarterly basis), with correction plans and initiatives designed to bring operating realities into conformance with the approved budget.
The first three steps in this process are planning steps. The final step represents the con- trolling function.
Forms of Budgets Various types of budgets are part of the planning and control system. A pro-form income summary spells out expected revenues and expenses during the course of the year. Depart- mental budgets are generated at that point. Each department manager knows the amount of funds he or she will be assigned to operate over the next twelve months.
As was noted in Chapter 2, three types of budgets are common in business: (a) incre- mental budgets, (b) zero-based budgets, and (c) rolling budgets. These budgets are used to allocate funds to individual departments. Incremental budgets are easier to prepare; however, they exhibit the greatest tendency to allow managers to build “slack” into the system, where they have excess funds. Zero-based and rolling budgets facilitate coordina- tion of activities and tend to reveal process redundancies, excessive spending, and plan- ning problems. Budgets tend to improve resource allocations by helping managers make decisions about what is important in the organization.
Benefits of Budgeting Budgeting programs offer various benefits to company leaders. First, by putting together an annual financial plan, the manager engages in the planning process. In some organiza- tions, that alone is a major accomplishment. Far too often, managers want to run things by the seat of their pants rather than planning ahead. Budgeting forces managers to plan.
Budgeting allocates resources. The budgeting process designates amounts of money to be spent by various departments. Some of the funds are set aside for pay programs, bonuses and pay raises, and other incentives. Budgeting can become part of the motivational system.
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Budgeting establishes priorities. Funded items are clearly more important. Budgets can be used for special projects and assignments as well as for the yearlong, normal funding program. A manager has a sense that his or her project is valued by upper management when it receives money. Budgeting is an excellent controlling device. Budgets can be established for depart- ments along with other standards and objec- tives. In that way, a manager has a clear idea of what needs to be accomplished in the time- frame involved.
Budgeting Problems As was the case with ratios, budgets can be used
or misused. Problems emerge when managers abuse the budgeting process. Issues can arise on both the planning and controlling side of the budgeting program (see Table 6.4).
TABLE 6.4: BUDGETING PROBLEMS
Planning Control
Poor staff Politics over-asking horse trading
Overemphasis on the short term Manipulating outcomes Use as policing device
On the planning side, two major problems that occur are poor forecasts and company politics. Poor forecasts of future sales distort the entire budgeting program. When rev- enues are badly overestimated or underestimated, departmental allocations no longer work. Managers who do not take the time to obtain quality forecasts hurt the budgeting process.
Company politics take two forms. The first, over-asking, means departmental managers put in budget requests with amounts that far exceed their needs. The goal is to build a “war chest” or “slush fund” to hold for use in emergencies. Funds are not allocated efficiently when this occurs, and the budgeting program becomes essentially a guessing game.
The second problem, horse trading, involves trading favors in exchange for larger budget allocations. A manager essentially plays politics rather than seeking to achieve organiza- tional goals. The net result will be companies in which distrust of the budgeting process is commonplace.
On the controlling side, budgets create problems when managers overemphasize the short term. For example, a department manager faces a budget in which 100,000 units were to be produced during the year. It is December, and only 88,000 units have been finalized. Wor- rying about what will happen if the target is not met, the manager authorizes overtime,
iStockphoto/Thinkstock
Quality budgets allocate resources and establish company priorities.
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ignores routine maintenance of equipment, and angrily chastises workers to hit the target. Even if the goal is reached, workers are upset and tired, and the equipment becomes more likely to break down in January (Argyris, 1952).
Some managers simply cut corners in order to manipulate outcomes. They create sales that will be made into returns at the beginning of the next budgeting period. Others count defective items as finished goods in order to reach quotas.
When a budget becomes a policing device, it is used to justify personnel decisions. A man- ager is informed she will not receive a pay raise due to failures to meet standards. Another is told she is being passed over for promotion because she did not adequately manage her budget. At the extreme, a person is terminated with the reason given that she failed to meet budget requirements. These tactics turn budgeting into the enemy of workers. Bud- gets that are used to place blame serve little other purpose (Tosi, 1974).
Creating Quality Budgeting Programs To overcome potential problems with budgets, managers must take proactive steps to make sure the process works properly. Doing so involves activities in three areas: (a) plan- ning, (b) control, and (c) both planning and control (see Table 6.5).
TABLE 6.5: QUALITY BUDGETING PROGRAMS
Planning Control Both
effective forecasting correct problems participation
reduce politics long-term view future oriented
systematic approach
On the planning side of budgeting, quality forecasts of sales and revenues are crucial. Only then do the budget allocations work properly. You can never eliminate politics, but you can become aware of them. Employees who try to play games with the system should be admonished.
On the control side, budgets should be viewed as methods for solving problems rather than placing blame. When employees see the budget as a tool rather than a whip, the sys- tem works better for both short-term and long-term tasks.
On both sides, employee participation should be encouraged when setting standards and creating budgets as well as when measuring results. Doing so creates a sense of empower- ment in the workforce. Individual employees are more likely to “buy in” and try to set and achieve quality standards. Budgets that focus attention on the future rather than dwelling on the past are of greater value. And finally, budgets should be built into the calendar. Every employee should know when it is time to set standards and when performance will be measured. The budgeting process should feel like a natural part of the yearlong work cycle (Welsch, 1967).
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In summary, the budgeting process offers the potential to establish quality links between a company’s planning and controlling systems. The standards set for individuals and depart- ments can be used to increase performance and keep the organization on track. Quality manag- ers take the time to make sure a budgeting sys- tem works as it should.
Auditing
Auditing is a crucial component of any con- trol system, but is especially critical in financial reporting and control activities. Auditing takes many forms, including internal auditing, exter- nal auditing, tax auditing, software auditing, risk-based auditing, and fraud auditing. Our purpose in this section is to discuss auditing as a control function, not as a practice one would experience in an accounting course of study. Auditing is an assessment of a person, orga- nization, system, process, operation, project, or product. Auditing is most commonly used to reconcile financial statements and account- ing systems; however, auditing processes also exist for cost management, project management,
quality management, hotel front desk operations, energy conservation, and, of course, tax return auditing conducted by the IRS, state tax agency, or local government office.
In most organizations, auditing systems (either internal or external) exist to reasonably assure that financial statements are free from material error, accounts reasonably reflect their actual balances, and systems procedures are sufficient to provide accurate and reli- able data. External financial audits for publicly traded companies are often conducted by applying standards defined by the American Institute of Certified Public Accountants and potentially the International Standards on Auditing.
Quality auditing (QA) is conducted to assure conformance with standards defined by the organization or potentially by an externally defined process such as ISO 9001. Quality audits, somewhat like financial audits, require review of objective evidence associated with the defined process, except the quality auditor is an internal agent of the organization with the authority to pass such judgments. QA processes often judge the conformance/noncon- formance but also operational practices that lead to the result that is being evaluated.
Auditing at any level of the organization or individual level is an assurance and confor- mance process intended to assure defined policy, procedure, practice, and compliance are carried out. Auditing serves to benefit the organization and its management as a critical control function, without which both internal and external stakeholders would be unable to make firm judgments and decisions on behalf of the organization.
Hemera/Thinkstock
Auditing standards are used to ensure quality across industries.
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Summary
The accounting and finance departments have major responsibilities that include manag- ing money and assisting in the planning and controlling processes. The use of ratio analy- sis, budgeting programs, and audits make the job of managing run more smoothly. They will be able to make the kinds of corrections that will put the organization back on course when problems have been discovered.
6.4 Other Forms of Control Learning Objective #4: What other aspects of the control process should be finalized?
Controlling systems also allow managers to identify variation from expectations and to suggest actions appropriate to return the process to standards. When not man-aged properly, some workers are bound to view controlling systems (and methods) as unpleasant nuisances. Ensuring employee acceptance of controls is essential to effec- tive organizational management. If organizations fail to be efficient and effective, they are unlikely to survive long in a competitive environment. Managers must be able to measure the utilization of organizational resources (capital, labor, raw materials, etc.) in producing a unit of organizational output and to continuously control variables with the intent to improve the quality and quantity of that output. Managers must also take the initiative to continuously improve the organization’s output methods with the intent of improving the efficiency or the quality of that output. Without doing so, organizations will likely find competitors taking market share. Control is essential to the very success of the organiza- tion. Other forms of control include feedforward controls, concurrent controls, feedback controls, and Total Quality Management systems.
Feedforward Control
Feedforward controls are used to anticipate problems. In this system, managers estab- lish methods to identify potential problems and incorporate solutions into the process in advance. An example of this type of control is a well-conceived employee handbook that defines work rules, clear shift hours (including starting hours, break times, shift end), and other important policies, so most employment problems are anticipated and correction systems are defined before the employee is hired. The use of proficient employment appli- cant screening such as interviewing techniques and background checks allow managers to increase the potential of a satisfied and productive workforce.
Concurrent Control
Concurrent control systems manage problems as they are encountered. This type of con- trol alerts managers when machine parts fail to meet specifications and to immediately address the problem at the point of defect. Concurrent controls are central to continuous improvement initiatives designed to increase quality and reduce defects in production operations. Concurrent controls are used when a salesperson adjusts the sales pitch in response to customer questions. Concurrent controls appear when a building project must
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be modified midcourse due to an unexpected change. Any time an individual employee or manager can respond in real time to a problem or concern, concurrent controls are present.
Feedback Control
Feedback control involves managing problems after the fact. Many of the control systems presented in this chapter have feedback elements, which solve problems after they have been discovered. At the customer or user stage of the product or service cycle, managers use various feedback control systems to gather detailed information, including the use of satisfaction surveys, customer product returns, service complaints reports, sales reports, and so forth. These systems assist managers in making decisions about product quality, product features, pricing, and so forth so that appropriate changes can be made to meet market demands and expectations. Managers may discover a particular design feature can be easily damaged in service and, as such, may require some redesign or complete abandonment to improve product life or use by customers. Managers may have estimated sales to be higher than realized, and production output must be reduced.
Total Quality Management
One form of concurrent control is a Total Quality Management (TQM) program. A key principle of both TQM and a similar program called Six Sigma management is the philos- ophy that it is best to identify and correct defects in any process to produce a more reliable and higher-quality product. In doing so, managers often delegate significant responsibil- ity to workers to stop production lines as soon as they detect a problem.
Quality is one of the significant functions in the value proposition that customers consider in selecting products and services in the broader marketplace. In the modern organiza- tion, quality is everyone’s business. In this section, we explore quality as a value that can be controlled by applying practices and controls.
Quality control emphasizes testing of products and services, typically by applying sampling and statistical analytic techniques (Deming, 1960). The purposes are both to uncover defects in manufacturing or delivering services using predefined quality matrices and to improve, stabilize, and increase production. Quality assurance through quality auditing, as previ- ously discussed, is intended to identify the issues leading to the creation of product service defects and to advise management on measures to correct and improve the processes.
W. Edwards Deming is often rightly credited with initiating the quality movement, first in postwar Japan and later in the United States. His philosophies of quality have become part of virtually every business organization and likely the foundation of the modern quality orientation. Deming emphasized constant quality improvement for the purposes of increas- ing the productivity and profitability of the entire business or TQM (Deming, 2000). While Deming emphasized testing and statistical analysis, he recognized the focus of quality- infused pride of workmanship, job security, and organizational stability.
Modern quality control systems are largely automated and address both corrective and preventive components. Systems now streamline audit management, provide integrated customer complaint modules, and allow all information to be delivered via networked computer systems. Even though automation has emerged, easing the backend workload
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and conducting many statistical processes, atten- tion to quality remains the responsibility of the workforce.
TQM and Organizational Change While control is a central management function intended originally to keep organizations and organizational processes on track, a byproduct of control is the ability of managers to use con- trol systems to help guide organizations through change. One of the best examples of this is the Ford Motor Company, which produced an all- time high of 2.35 million vehicles in one year, 1973. Company leaders discovered during the late 1970s that Japanese automobile competitors were overtaking them in critical areas of consumer satisfaction, quality control, delivery to sales units, cost control, and even sales. These influences were beginning to eat away at Ford’s sales and profitability. The company management at the time was determined to overcome these obstacles by studying Japanese manufacturing systems (influenced by the philoso- phies of W. Edwards Deming) at Toyo Kogyo, the manufacturer of Mazda automobiles.
Ford officials implemented two new approaches to managing the business: Just-In-Time (JIT) manufacturing and TQM. While the implementation of JIT and TQM took nearly three years of difficult change in the organization’s culture, not just in its process, Ford emerged with a profit in 1984. These invaluable control systems created the foundation for advancing a new corporate strategy. The company soon sported new models, includ- ing the then-heralded Ford Taurus and Mercury Sable line and a new company vision statement: “Quality is job one!” Those lessons from 30-plus years ago again helped Ford in its most recent crisis that it experienced during the recession of 2008 through 2011, when Ford found itself as the last domestic brand not in bankruptcy. Company manage- ment’s experience in developing appropriately designed control systems likely provided the foundation for not only maintaining solvency during difficult times but also moving the business forward into the emerging and competitive realities of the market. Ford’s business rebounded again, and customer satisfaction, sales, and profitability increased.
Control System Challenges
While most control systems serve the intended purpose, no control system is perfect and they often do not work as intended. The reasons underlying this phenomenon are many, but often these can be categorized in one of the general systems problem areas attribut- able largely to humans involved in the process. Some of the challenges that affect control systems include
• rigid bureaucratic behavior • invalid data reporting • employee resistance
Each challenge must be overcome to create a quality control program.
iStockphoto/Thinkstock
TQM programs helped many Japanese companies gain a competitive edge in the 1980s.
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Rigid Bureaucratic Behavior The modern, highly productive organization typically demands extremely precise work in large quantities to meet market expectations and pricing demands. Job requirements are specific, and employees must follow process procedures carefully to produce what is expected. In these mechanistic organizations, employees need to be highly skilled and also learn organizational rules and regulations, applying them respectively (Fayol, 1949). In such organizations, the system reinforces process decision making with little or no flexibil- ity. Workers, therefore, continue to execute their duties as defined, and managers respond only to address the exceptional occurrences.
While these processes seem like complete organizational bliss with its emphasis on reliability and repeatability, such conditions can, and often do, lead to unintended and dysfunctional consequences. Workers (like all humans) tend to exhibit forms of behavioral momentum that can lead them to dogmatically follow organizationally sanctioned behavior even when conditions change. Such behavior can and does lead to inflexibility and problems with organizational customers, clients, other employees, vendors, and others.
A restaurant waiter may be disinclined to allow a modification to a menu, a university employee may resist a student’s request for an unusual course schedule change, or a sales- person may not accept an order with specifications different from standard on the product or the billing schedule. Even making simple changes may be rejected by the worker as not following the rigid bureaucratic organization standard.
Invalid Data Reporting This is the most deceitful of the control system challenges in that workers purposely report inaccurate, incomplete, or distorted information. Examples include manipulation of budgets to receive unneeded resources, changing numbers to reach better ratio figures, and altering findings in the control process. The suggestion here is not that workers are particularly dishonest, but often the control system under which they work may cause ordinary workers to feel compelled to provide inaccurate, incomplete, or distorted infor- mation in order to survive and maintain a job in the system.
An infamous example of the problems caused by invalid data reporting comes from Enron. While this story has numerous threads, and many, many people were implicated and dozens tried and convicted in this business scandal of enormous proportion, the real lesson from a control system perspective is that the seemingly honest, hard-working peo- ple in this company and the "Big Six" accounting firm Arthur Andersen were lured into reporting false data.
Until the Enron scandal, Arthur Andersen had a long history of business success, with much of it focused on providing auditing services to publicly traded firms like Enron. Each of the auditors associated with the scandal had spent years preparing to enter the field, earning accounting degrees, certifications, and working up the chain of command in the firm. All had excellent reputations up to that point in time. One could only surmise that the motivation of Arthur Andersen’s lead auditor, David Duncan, to shred docu- ments was to not allow the scandal to leak, and to minimize the impact of the scandal on
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his employer, while also shielding himself from liability in the case. His act was likely one of self- survival. While the U.S. Department of Justice eventually dropped Duncan’s case, accounting giant Arthur Andersen was convicted of crimes and no longer exists (chron.com).
Employee Resistance Workers often resist change in the work environ- ment, even positive change. Control systems can lead to resistance. The resistance can take numer- ous forms, including individual resistance (defi- ance, reduced productivity, etc.), organized resis- tance (unionizing, strikes, slowdowns, “blue
flu,” etc.), or even complete employee disregard for the control system. What is critical when resistance occurs is the response by the worker’s supervisor. Generally, workers do not seek to be controlled and do not appreciate “orders” from supervisors. Yet, control sys- tems, orders, and corrections are a part of every organization. Everyone is subject to these forms of control in one way or another. To overcome resistance, the positive elements must be emphasized (see text box).
Characteristics of Effective Control Systems
Efficient and effective systems of control share several common characteristics. Many of these ideas are associated with the overall control system and with individual programs such as performance appraisals and budgets. Seven key characteristics of control systems are the most important.
Overcoming Resistance to Control Systems
1. Emphasize the value of control systems to workers. How: Explain how feedback can be used to improve performance, leading to rewards
such as positive performance appraisals and pay raises. 2. Incorporate fair and reasonable standards.
How: Encourage participation in setting standards. Do not use them to punish. 3. Use specific, concrete objectives workers can understand and relate to their jobs.
How: Use the tools provided by control systems, including management by objec- tives, budgets, and the performance appraisal system.
4. Aim for improvement. How: In all cases, focus on the improvement of worker skills, abilities, knowledge, and
organizational performance. 5. Be consistent.
How: Build the control system into the calendar. Remain impartial and fair when mak- ing judgments about individual and departmental performance.
Comstock/Thinkstock
Effective control systems achieve acceptance by employees.
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Controls must focus on the critical points or process path in the organization. Specific controls are most effective when they are directed to points in the organizational system that are most susceptible to failure or to where manufacturing or operating cost variances are unaccept- able. Critical points include the areas of an organization’s operations that directly affect its success over time.
Controls must easily integrate into established processes. The control system has to be compati- ble with existing organizational culture and operational realities, and all formal standards for performance must be realistic and achievable.
Controls should achieve acceptance by employees. For a control system to be accepted by orga- nization members, the controls must be related to meaningful and generally accepted goals. If goals are not widely accepted, control systems will be dysfunctional.
Control systems should provide information as needed. Information must be collected, routed, and evaluated quickly if action is to be taken in time to produce improvements. Data delivered
Case Study: Pizza Drop Off
Tony Valencia returned to the United States after a six-month visit to Italy. He discovered major problems in what had been his lifelong labor of love—his own pizza parlor.
Tony came to the United States in the mid-1990s as an immigrant. His main desire was to take care of his parents, who had arrived five years earlier. Tony opened a pizza parlor on the north side of Sioux City, near the agriculture campus of South Dakota University. A large Italian community had grown in that part of the city. Tony’s sales grew quickly. He was mak- ing far more income than he could have ever imagined. The Valencia Pizza location where he worked had so much business that a one-hour wait to be seated was normal. He opened a take-out window to accompany his delivery service.
The secrets to Tony’s success included high-quality food products combined with a pleas- ant dining experience. Tony personally screened every server before the individual was hired. His wife, Louisa, who was a terrific cook with experience in restaurant meal prepara- tion, personally selected his kitchen staff.
Valencia Pizza continued operations smoothly until Louisa’s sister died, leaving behind two small children. Louisa took them into the Valencia home and stopped working at the res- taurant. Tony had to manage the kitchen staff and the dining area by himself. He worked long, exhausting hours.
Tony contacted a business school professor from the university. He wanted to know how to effectively manage his time and keep earning a good income. The professor suggested hiring a store manager for his current location plus opening a second location on the south side of town. Tony hired a nephew, who was 24 years old and eager to please. Tony quickly trained him and believed his unit was in good hands. He then opened the second outlet with the idea that he would repeat the process and hire a store manager for that unit as well. Unfortunately, it took several months to launch the new location. As it began to suc- ceed, Tony realized he was working as many hours as before.
A return visit to his professor friend led to the concept of franchising. His friend taught him how to sell units to other locations in the Upper Midwest, and Tony (continued)
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out of production sequence is of less value and may not appropriately support decision processes. Information on performance must be accurate.
Controls must be economically feasible. The cost of implementing a control system should be less than, or at most equal to, the benefits derived from the control system. Data delivery systems designed in ways that exceed utility are soon abandoned by managers and line staff.
Information must be accurate. Evaluating the accuracy of the information they receive is one of the most important control tasks that managers face. If the control system provides inaccurate and invalid data, it is of no use or value to the managers and the organization.
Controls must be comprehensible. The information generated via control systems should be understandable and be seen as generally objective by those using it to make decisions (Deming, 1968).
quickly made enough money to be comfortable. He maintained ownership of his two origi- nal stores and hired a manager who was able to run the second location.
Many of the new franchise outlets did not fare well. Tony had given up almost total control of the other units to a management firm that was accomplished at franchising small busi- nesses. The new owners quickly cut back kitchen staff pay to slightly above minimum wage. Servers were not chosen as carefully. Food costs were reduced by cutting back on the gen- erous portions of sauces and toppings that had made the store famous in Sioux City. Store managers were instructed to copy any promotion used by other pizza chains. The company was not able to remain competitive with other businesses, and within two years, six of the new franchise locations had closed.
When Tony returned from his visit to Italy, he felt revitalized. He went to have dinner at one of the Valencia franchise locations and did not recognize his own business. He found servers were impersonal and more concerned with a television program playing in the din- ing room than with taking care of customers. The restaurant had plenty of open tables, and it was early Friday night, a prime time in the pizza business. The quality of the food he received frustrated him.
Tony contacted the franchising company. He told them the other units were diminishing the reputations of his two stores. The management group was more than willing to sell the remaining units to Tony. He found himself, in his mid-50s, with twelve restaurants in eight cit- ies that needed attention. He wanted to get back to basics: quality food and friendly service. The challenge would be finding a way to make it happen without sacrificing all of his free time.
1. What kinds of strategic changes will Tony need to implement in the franchise units? 2. What kinds of functional area corrections will be required in each of the departments
of the franchise units? 3. What type of audit should Tony use in the franchise units? 4. When a restaurant has gained a bad reputation in a community, it is hard to change.
Can Tony overcome this problem in his chain of stores? Why or why not?
Case Study: Pizza Drop Off (continued)
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CHAPTER 6Chapter Summary
Chapter Summary Controlling is the process of evaluating performance against established goals and creat- ing methods appropriate to take corrective action to maintain or improve performance in any area of the organization. Effective control systems are applied at the company- wide, departmental/functional area, and individual levels. The standard control process consists of four steps: (a) establish and review standards set in the planning process; (b) measure performance at the strategic, tactical, and operational levels; (c) compare per- formance outcomes with the standards that were set; and (d) make a decision to reward or correct.
Many times, control standards at the functional area level also serve as company-wide goals. Typically, goals are set in the areas of production, quality control, marketing, sales, human resource management, information technology, research and development, and accounting and finance. Accounting and finance officers are charged with reaching goals within their departments and also assisting in assessing overall company operations. Ratios, budgets, and audits assist in this process.
Control can take the form of feedforward, concurrent, feedback, and systems such as Total Quality Management. Numerous challenges to successful control systems exist. Effective managers overcome these challenges to help ensure organizational success over time.
Key Terms
activity ratios ratios that assist managers in understanding how well certain company activities are being carried out.
auditing an assessment of a person, organiza- tion, system, process, operation, project, or product.
balance sheet a report on investing and business financing activities of the organization.
budget an annual financial plan.
concurrent controls controls that manage problems as they are encountered.
controlling the process of evaluating perfor- mance against established goals and creat- ing methods appropriate to taking corrective
action to maintain or improve performance in any area of the organization.
feedback control controls that manage prob- lems after the fact.
feedforward controls controls used to antici- pate problems in advance.
leverage ratios ratios that measure company debt and company risk.
liquidity ratios ratios designed to make sure the company has enough money on hand.
profitability ratios ratios that measure com- pany financial success.
sourcing methods used to acquire raw materials.
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CHAPTER 6Chapter Summary
Review Questions
1. Define controlling and name the four steps involved. 2. What four characteristics should standards have that will aid in the controlling
process? 3. When comparing performance to standards, what five outcomes are possible? 4. What are the four parts of a system? 5. What standards are set and evaluated in the areas of production and quality
control? 6. What standards are set and evaluated in the areas of marketing and sales? 7. What standards are set and evaluated in the area of human resources? 8. What standards are set and evaluated in the accounting and finance departments? 9. Name and define the four main types of ratios used by accountants and
managers. 10. What steps are involved in the budgeting process? 11. What problems are associated with budgeting in the areas of planning and
controlling? 12. Name the things managers can do to create quality budgeting programs. 13. Describe auditing in the context of this chapter. 14. Define feedforward control, concurrent control, and feedback control. 15. What challenges are associated with control programs? 16. What are the characteristics of effective control systems?
Analytical Exercises
1. Using the four elements of quality standards and goals, provide an example of a well-stated goal and a poorly stated goal in the following areas: • production • marketing and sales • human resources • finance and accounting
2. Using four elements of a system, explain how they could be used in the area of performance appraisal for an individual worker.
3. Apply the four production standards of quantity, quality, cost, and time to these two services: • an insurance company • a nonprofit hospital
4. Explain how the four main standards in marketing and sales would be applied to control systems in the following companies: • a local tavern • a local dry cleaning operation • a local radio station • Walmart
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CHAPTER 6Chapter Summary
5. Explain how the following profitability goals are related and how they are different: • total income on income summary • earnings per share of common stock • dividends per share of common stock • profit margin
6. How are the four types of ratios related to each other? Explain why it is impor- tant to look at all four together rather than at a single ratio figure.
7. Make a list of the benefits of budgets and the problems associated with budgets. Explain how these might apply to your own personal finances.
8. Choose the appropriate form or forms of control from feedback, concurrent, and feedforward, for the following situations: • creating a hurricane safety program • managing a major league baseball team • creating and airing a television game show • operating a major airline
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Construction Photography/Corbis
chapter 7
The Five Functions as a Coordinated System
Chapter Goals
After completing this chapter, you should be able to • Evaluate the changes taking place in the world of business. • Understand how many management processes remain the same in the face of change. • Build a successful career in management.
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CHAPTER 7Section 7.1 Introduction
7.1 Introduction Learning Objective #1: What changes are taking place in the world of business?
We conclude this text by first examining the rapidly changing world of enterprise. The chapter continues with an analysis of how these forces impact the five man-agement functions. We then tie together the management functions. The chapter closes with a look at the skills you will need for a successful career in the field of management.
Round Rock Express: Minor League Baseball—Major League Management
Have you ever thought how hard it might be to try to make a year’s worth of money in little more than 90 days over a period of about 5 months? That situation constitutes the challenge for every minor league baseball team in the United States. Teams play about 15 exhibition games followed by around 75 home games each season, and that is it for the year. One organization has risen to the test: the Round Rock Express. Until 2011, the Express was the AAA affiliate of the Houston Astros. More recently, the team has been associated with the Texas Rangers. Round Rock draws the second highest attendance in minor league baseball each year. Sports Illustrated has featured the organization as a prime example of how to build and maintain a successful franchise.
What is the secret to the team’s success? A well-designed management system. Round Rock begins with a clear mission, enthusiastically proclaimed by CEO Reid Ryan who emphasizes, “Awesome customer service.” He adds, “We want to be a top of mind enter- tainment experience. Coming to one of our games should be a rite of passage.”
Next, careful planning guides the team throughout the season. Every game has been care- fully planned to create a family-friendly experience. As part of the plan, fans routinely inter- act with players. The players enter the ballpark by walking through sections where fans are seated. At each game, Little League players and those who have special needs are taken onto the field to stand for the national anthem with an Express player. Young people are invited to play catch with some of the players after games. Players freely sign autographs.
Dell Stadium, home of the Express, is one of the most modern stadiums in Texas, com- plete with comfortable seats with cup holders, a large video scoreboard, and dozens of fun events, from the “kiss cam,” to races on the field, to special events. Each night of the week has a planned feature: fireworks, souvenir giveaways, dollar hot dogs and sodas, half-price beer night, group rates, and fan appreciation days.
The Express organization is well-organized and staffed. Jay Miller, the chief operating offi- cer of the Express, puts it this way: “When you come to our ballpark, we are going to know your name.” Employees are carefully chosen. “We don’t entrust this business with just anybody,” Miller notes. People are hired because they match the fan-first attitude. Many have been with the team since it was formed. Consequently, someone coming to the stadium is likely to be greeted by longtime parking lot attendant Oscar, who works hard at learning as many names as possible. The same is true for employees at the ticket
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CHAPTER 7Section 7.1 Introduction
windows, those who take tickets and sell conces- sions, as well as the ushers.
Round Rock excels at leading. Round Rock’s man- agement team emphasizes three groups that must be effectively served: fans, sponsors, and players. Constant communication with each group has created long-lasting bonds. As one former player put it, “The pay is better in the majors, but it’s more fun playing in Round Rock.”
Employees are empowered to provide the high- est quality service. Reid Ryan noted a time when an obviously angry patron pulled into the ball- park, and Oscar immediately decided to give the
man free parking. Both Miller and Ryan routinely walk the entire stadium, talking with fans and doing what they can to make people feel comfortable. One of their favorite tactics is to find a family in the cheapest seats and move them to their own box seats next to the field.
The management team makes careful use of its controlling function on a daily basis. Miller and Ryan move quickly when a patron is dissatisfied. “We do whatever is needed to make them happy,” Ryan said, “whether it’s a refund, free merchandise, or tickets for another game.” When someone is injured by a foul ball, employees quickly react to do whatever they can to help.
Each year the Express surveys fans at the end of the season. They ask for ways to improve the experience. One year, several fans complained about the long walk around the sta- dium to get to bleacher seats. In response, the team spent over $250,000 on a new entry- way to make them easier to reach.
Ryan and Miller work hard to maintain positive relationships with sponsors, the local community, and players. The approach continues to work. Jay Miller, who has received several Executive of the Year awards, summarizes his work this way, “Our ballpark is Round Rock’s front porch.” In 2011, the group that owns the Express and other teams rewarded Miller for his efforts. He now serves as a vice president for the Texas Rangers in the major leagues (R. Ryan & J. Miller, personal communication with Donald Baack, 2010; www.roundrockexpress.com, 2011).
Questions for Students
1. How is managing a seasonal business different from one that runs year-round? 2. What primary product is the Round Rock Express offering? 3. What differences are there in trying to serve players, the community, and sponsors?
Donald Miralle/Thinkstock
Minor league baseball teams earn almost all of their income in about 90 days.
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The Changing World of Business
The new millennium has brought substantial changes to the world of business. Most would agree that keeping up with new events and trends becomes a little more challenging each year. Managers in the future can expect this dynamic world to continue evolving. The first step of planning, assessing the company’s environment, will be a major priority for manag- ers of the future. As the end of the first decade of 2000 arrived, it was clear that trends such as the following were already shaping the conduct of business and management processes:
• political events • social trends • economic trends • technological developments • the changing nature of competition
Political Events
In 2008, the election of the first African American president made history. Not long after, the Arab Spring began to have a dramatic impact on the Middle East and other nations in the area. Interest groups such as the Tea Party exhibited a major impact on the 2010 elections. Political trends at the national and international levels will require continual monitoring in the future. The following are among the more notable issues that continue to arise:
• the nature of tax policy • the role of government-sponsored social programs (entitlements) • immigration law • corporate oversight
As Congress debates and decides on issues such as these, managers must adjust to the changes that arise.
At the international level, relations between governments continue to make headlines. One initial outcome of the Arab Spring uprisings was a spike in oil prices. The interna- tional community has a major influence on global companies. Acts of terrorism that dis- rupt normal relations have sweeping impacts on business. As an example, consider how much airline travel has changed since September 11, 2001.
Social Trends
Many social trends continue to affect the business world. As was noted in Chapter 2, sev- eral social trends such as the following have made an impact on business:
• rising levels of education but greater educational disparity in the population • changing expectations related to gender roles • family size and composition • population locations and movements of populations (rural to urban; Northwest
United States to the South) • aging of the population
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As a percentage of the population engages in lifelong learning, another significant portion does not graduate from high school. This dis- parity impacts the nature of the management program. Women continue to move into higher ranks in many organizations. Changes in tradi- tional family roles have led to telecommuting jobs in which one spouse stays home and performs work there, using the Internet and other technol- ogies to complete assigned tasks. The size of the American family continues to decline, and fam- ily composition has been affected. Single parent households, divorced and remarried couples, grandparents raising grandchildren, and other new forms of family units continue to increase in numbers. All the while, people are aging. Many move to the South to enjoy a warmer climate during their retirement years. This affects the placement and composition of the workforce in places people leave as well as places to which people move.
Diversity Managing the workforce in the coming years will include working with employees from various backgrounds. Diversity management means finding ways to understand and work with members with noticeable differences such as the following:
• members of minority groups • immigrants • members of the opposite sex • persons with differing sexual orientations • older/younger workers
Controversial social trends in the area of diversity affect the conduct of business. Among these trends, the definition of what constitutes “marriage” can have a dramatic impact on the human resource department.
If there is one truth about social trends, it would likely be that things constantly change. Your grandparents and some of your parents can probably remember a time when girls could not wear pants to school, only dresses. Managers in the future will be expected to monitor and adjust to changing social circumstances.
Economic Trends
The 2008–2009 recession demonstrated once again the importance of monitoring the eco- nomic environment as part of business operations. The value of forecasting remains evi- dent. Managers should prepare procedures and contingency plans based on responses to the economic environment.
One of the primary factors that will continue to shape the economic environment will be the price and availability of natural resources, most notably energy. The 2010 Gulf oil spill
Getty Images/Jupiterimages/Thinkstock
Today’s managers can expect to experience an increasingly diverse workforce.
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changed some national thinking about offshore drilling. As energy prices spike and then recede, company leaders are expected to cope. One response to energy prices has been to shift to alternative sources. Many companies have begun to investigate more efficient methods of production. This trend likely will continue.
The Impact of Technology
Technological forces have changed the business landscape in major ways over the past several decades. In essence, technology has restructured the entire conduct of business. Technology affects planning because it (a) leads to new products, (b) creates product improvements, (c) improves production methods, and (d) changes how jobs are per- formed. Many new products have improved employees’ ability to communicate within the organization and with the outside world. Product improvements are present in prac- tically every industry, as are changes in production methods. In today’s workplace, many employees now need to know how to use the Internet and a laptop to conduct daily busi- ness. Technology has changed business in other ways, including the pace of business and the impact of social networking.
The pace of business continues to increase. Managers are expected to make nearly instant decisions in many instances. Faster shipping networks make it possible to send products to remote places in a timely fashion, thereby increasing the number of competitors that can reach an area.
Social networking constitutes a major new challenge to managers. Facebook serves as an example. In less than a decade, the company grew to the size it now enjoys, dwarfing all other social media, and making founder Mark Zuckerburg a billionaire along the way. In early 2011, Facebook was valued at nearly $50 billion. As Time noted, “We are now run- ning our social lives through a for-profit network. . . .”
The statistics associated with Facebook take on nearly epic proportions. If Facebook users were members of a country, by January 2011, that nation would have had the
third highest population, with only China and India ahead. One out of every twelve people on the planet has an account. And, in the world of Internet hits, 1 of every 4 page views in the United States occurs on this site. Facebook has caused some dramatic shifts in everyday life; at the core are new cultural patterns of inter- personal interactions. Moving quickly into this realm are business professionals and the com- panies they serve.
The international implications of Facebook will test many companies. Internationally, market- ers know that while Facebook has 100 million account holders in the United States, 70% of mem- bers are from other countries. The opportunities
Comstock Images/Thinkstock
Social media is rapidly changing the nature of the business world.
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to contact and connect with potential customers in other nations have become enormous (Grossman, 2010).
In general, the new world of interactivity means that simply presenting a message to an online target audience will no longer be sufficient for management success. International companies will instead engage in a conversation much larger than what a dialog box will allow. Numerous voices influence perceptions of products, brands, and companies. Fans and friends may be hard to find and harder to keep.
The Changing Nature of Competition Competition can now be located down the street or around the globe. Tomorrow’s manag- ers must cope with this new landscape. Competition evolves at the product level, at the company level, and at the industry level. An item as common as a mobile phone must compete in terms of price, apps available, service contracts, and other features. Mobile phones now compete with the Kindle and other mobile readers. Numerous cellular phone service companies try to capture customers. Mobile phones compete against landlines. At the industry level, mobile phones may face other product lines for purchase dollars.
Globalization Two perspectives have been posed regarding the impact of the globalization of interna- tional commerce. One view suggests that the world is changing into one gigantic market- place. In that perspective, you can expect products to become increasingly standardized. For example, there was a long period in which the American hamburger was frowned upon in France. Now, McDonald’s operates throughout the country, and hamburgers are quite popular. Some argue the Internet and social networks will continue to homogenize cultures and people in terms of products as well as methods of selling those items.
The counterargument is that the various cultures will continue to necessitate the need for companies to adapt. This perspective suggests that even a global company, such as one selling refrigerators, must alter products to fit local norms. In some countries, refrigerators are small, about the size of those found in hotels in the United States. Other countries rely on direct cur- rent rather than alternating current. And, of course, the United States tends to be less inclined to use the metric system as the primary form of measurement. The outcome is that, even though a company has a global reach, it still must adapt to individual country circumstances.
In either case, you can expect to have greater interactions with people from other coun- tries during your career. Many products and services originate from various countries. Most large corporations have at least explored the possibility of operating in new nations.
Summary
The future of business presents exciting new opportunities and new challenges. Planning processes will need to adapt to changing political, social, economic, technological, and competitive trends. Managers will lead a more diverse workforce in an increasingly global business environment.
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CHAPTER 7Section 7.2 The Five Management Functions Still Matter
7.2 The Five Management Functions Still Matter Learning Objective #2: How will management processes remain the same in the face of change?
As the world continues to evolve at its dramatic pace, the nature of management will require some adjustments but also will largely remain the same. As your career unfolds, expect to experience a variety of new tasks and new ways of per- forming old tasks. Those who are able to respond quickly to new trends will become the leaders of the next generation of businesspeople. These same individuals will stay true to core management principles.
Planning Processes
Planning is a systematic process in which managers make decisions about future activi- ties and the key goals that the organization will pursue. The necessity of careful environ- mental scanning has an immediate impact on planning processes. The basic principles of planning will remain the same. This means that successful companies will seek to fulfill a well-established mission. Effective companies require a foundation and sense of purpose. This will not change. What might change will be the mission statement itself. Over time, organizational mission statements are updated. In the past two decades, many organiza- tions have rewritten their mission statements to include a more global perspective. Others have increased the emphasis on being more socially responsible and ethical. Others have made it a point to express the desire to become more environmentally friendly. This in turn impacts the five steps of planning displayed in Table 7.1.
TABLE 7.1: THE STEPS OF PLANNING
Scan the environment internal and external environments SWOT analysis
Forecast future events sales, economic, technological
Determine organizational goals strategic, tactical, operational
Develop plans strategic, tactical, operational
Allocate resources budgeting
Following the completion of a SWOT analysis that considers the evolving nature of the external business environment, internal company strengths and weaknesses should con- stantly be reexamined. Forecasting will remain a key element. Managers need to know what to expect in terms of revenues, future economic conditions, and changes in tech- nology. It would not be surprising if many companies increase the emphasis on quality technological forecasting.
Setting strategic, tactical, and operational goals should remain a constant. Without clear per- formance targets, the company can quickly drift off track.What might change? The best guess for what might change would be in the area of contingency planning. An uncer- tain future requires the additional preparation and development of “what if?” plans for
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unforeseen events. At present, companies create plans for cybernetic threats, economic downturns, shortages of raw materials, and terrorist attacks. In the future, should the predictions made by those concerned with global climate change come true, other plans related to weather may be in order.
The final step of planning, allocating resources through budgeting processes, continues. Contingent budgets may be written to cope with unusual circumstances. At the same time, the budgeting process remains largely unchanged.
Organizing
Organizing is the process of bringing people and resources together to create products and services in an efficient and effective manner. Organizing establishes task and author- ity relationships that allow people to work together to achieve the organization’s goals. Organizing consists of the three primary activities shown in the following text box:
Steps of Organizing
Create specific, yet flexible job designs Departmentalize work flow to be adaptable to new circumstances Determine the organizational structure
Job design as an activity takes on new meaning as time passes. The primary challenge will be developing job descriptions that account for new tasks. Many of these will be associated with changes in technology. As a simple example, a visitor to a large hotel chain recently stopped to ask the valet who parked his car for directions to the interstate. Instead of providing a simple verbal description, the valet opened his mobile phone and displayed a map with directions for the traveler. Nearly every type of job incorporates additional technologies over time.
Departmentalization continues to acclimate to new circumstances. One new trend recently inves- tigated by the Academy of Management is the increasing nature of the boundaryless organi- zation, which consists of individuals working together on projects from various companies and institutions, with less regard to traditional borders. As an example, counterterrorism often involves the cooperation of local police, specially trained governmental forces such as the FBI and CIA, persons in foreign governments, and pri- vate citizens.
Many problem-solving types of work now include collaborations of people across boundar- ies. In management, a large international study,
Comstock/Thinkstock
In today’s work environment, many tasks are completed by persons working across traditional organizational boundaries.
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known as Project Globe, has been established to understand cultural differences and their impact on leadership. Members of more than 100 universities in separate countries are engaged in the project.
Many organizational structures have changed to more organic, flexible forms. The use of standard operating procedures may lessen, especially as an economy becomes more ser- vice based. Greater delegation of authority and autonomy has been granted to numbers of employees, in order to meet company needs.
Staffing The staffing function will undergo modification as new conditions necessitate. Staffing is the achievement of organizational goals through the effective and efficient deployment of people. The following text box displays the primary human resource activities.
The influences of new business trends on job design have been mentioned. Technology plays the primary role in changing job descriptions and job specifications.
Human resource planning will undoubtedly experience the effects of increasing globaliza- tion and diversity. Staffing members are likely to become familiar with the concepts of (a) host country employees, (b) expatriate employees, and (c) third-party national employees. A host country employee is someone who lives in the country where the work will be per- formed and will oversee activities in that nation. An expatriate employee is someone sent from a home country (where the home office is located) to the host country. A third-party national is someone who does not live in either the home or host country. At the manage- ment level, ethnocentric management involves the employment of expatriate employees. Geo- centric management uses host country employees. Polycentric management applies mostly to global conglomerates that employ third-party nationals.
Recruiting, selection, and orientation processes are likely to account for increasing diversity. Also, many firms now stress ethics training as part of the orientation process. Human resource managers will continue to abide by legal dictates when making selections of new workers.
Employee training programs must consider issues of diversity as well as educational dispar- ity. Problems associated with employees feeling either over- or underqualified arise due
Job design Human resource planning Recruiting Selection Orientation Employee training
Compensation management Performance appraisal Employee discipline systems Workplace safety Career development Union–management relations
Human Resource Activities
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to the growing divide between those with higher education and those who fail to finish high school.
The biggest challenge to those involved with compensation management will likely emerge from political forces. The health care reform laws passed in 2010 were designed to be fully enacted over a 4-year span. By 2011, there were efforts to overturn the law. Human resource managers will be expected to investigate the impact of these laws on their spe- cific companies. Benefit programs also continue to evolve. The 2011 Congress voted to make dramatic changes in the Medicare program, although the Senate did not enact the changes. Companies should consider the future of retirement programs as they cope with an aging workforce.
Performance appraisals reflect the job description, job specification, and individual goals and standards. As the nature of a job changes, the methods used to measure performance should be adjusted. Keeping rater bias out of appraisal systems remains an important concern.
Employee discipline systems are updated when new rules are required. The recent over- turn of the “don’t ask, don’t tell” policy in the military serves as an example. Manag-
ers now often use social media to make hiring decisions based in part on a review of what a person did at a younger age. What constitutes privacy in this new age presents additional chal- lenges to human resource managers and other supervisors.
Workplace safety involves new issues. As many people are asked to work longer hours, accom- panied by technologies such as GPS tracking systems and mobile phones that can locate them at any time, increases in stress-related problems would not be surprising. Findings by the World Health Organization related to some type of con- nection between mobile phone use and cancer risk also invite additional scrutiny.
Career development programs are the staple of effective business organizations. The methods used to train managers remain largely the same. What may change will be the types of tasks managers are expected to supervise. Challenges associated with diversity and globalization will also have an impact on career development and manager training systems.
Union-management relations will stay unaltered unless changes in the legal system dictate other- wise. In Europe, a greater degree of cooperation
Medioimages/Photodisc/Thinkstock
Workplace health and safety extends beyond safety rules and includes efforts in the area of stress management.
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exists between companies and employee unions. Managers from the United States who work with European Union countries will need to understand the differences. The num- ber of unionized employees continues to dwindle in the United States. Time will tell if that trend will continue, or if new types of jobs will become targets of union organizers. If so, some managers may find themselves dealing with unionized employees for the first time.
Leading
As discussed in Chapter 5, leading in a business context consists of all activities undertaken to help people achieve the highest level of performance. Leadership means influencing behaviors in organizations. Remember that managing is about coping with complexity. Leadership is about coping with change. Both will be high priorities for supervisors, mid- dle managers, and executive managers of the future. Leading functions in the future will continue to involve the processes shown in the following text box.
Leading Functions and Activities
Managing power Providing leadership Motivating employees Directing teams and groups Communicating effectively
Power dynamics can quickly transform in the modern world. One trend has been that experts have a growing source of power. Experts manage uncertainty or anything that threatens an organization’s well-being. Experts are also boundary spanners who deal with external organizations that make demands on a company (the government, suppliers, retail outlets, special interest groups). Because they protect the organization, they have power. As managing uncertainty and boundary-spanning activities continue to increase, the power level of those involved will continue to rise.
Leadership may be provided in various ways. Standard views of people and production- oriented leaders are giving way to new concepts. Many organizations actively seek out transformational leaders; however, others rely on technocrats, or persons well versed in technologies who also exhibit the ability to influence others.
Motivating employees requires adaptation as a new generation of workers enters the business world. While the “greatest generation” worker seemed driven by career success, and the “baby boomer” generation seemed motivated by the intense competition associated with larger numbers of people of the same age, a new generation has emerged. Many current employ- ment experts believe this generation views themselves more as “free agents” who are willing to move between organizations, with a much lower sense of commitment or obligation to any one company. These individuals believe life should be balanced between home and work. As a new group of people come of age, you can expect a different set of values to appear again.
Directing teams and groups is highly likely to be part of your job description. The com- plex nature of tasks makes them necessary. Many managers will succeed and receive
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promotions when they exhibit the ability to create team players and manage inter- and intragroup conflicts.
Controlling
Controlling is the process of evaluating performance against established goals and creat- ing methods appropriate to take corrective action to maintain or improve performance in any area of the organization.
The Standard Control Process
1. Establish and review standards set in the planning process. 2. Measure performance at the strategic, tactical, and operational levels. 3. Compare performance outcomes with the standards that were set. 4. Make a decision:
• successful performance should be rewarded; • unsuccessful performance should be corrected.
The important link between setting standards in the planning process and following up on them in the controlling process remains a vital part of managing. Performance measures will continue to operate on the three main levels. Many conglomerates rely on profit centers and strategic business units to serve as additional layers in the control- ling function.
Companies will modify tactical controls to fit with changing technologies. For exam- ple, most companies now assess the results of online marketing efforts against one set of standards and the use of traditional media using another. Similar modifications are made with the technologies that affect the production process. Also, outsourcing changes the ways in which quality standards are set and evaluated. A company may find itself held responsible for a defect in a part made in another country.
As a manager, your job is to remember the impor- tance of rewarding successful performance. It will be one of the keys to motivating employees and will play a major role in your credibility as a manager. The type of manager destined to fail has always been the one who promises but does not deliver rewards.
Controlling helps companies stay on the track to success. In the coming years, periods for control will continue to shorten. The term real time has taken on new meaning in the business world. Many events and activities can be observed
Creatas Images/Thinkstock
Effective managers remember to reward performance.
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CHAPTER 7Section 7.3 Management Careers
while they are taking place. Reliance on feedback control can be expected to diminish as the use of concurrent and feedforward control increases.
Connecting the Five Functions
The five functions of management—planning, organizing, staffing, leading, and control- ling—have many close linkages. Planning is part of every other management function. Creating and maintaining an organization’s design requires planning. One of the first steps in staffing is human resource planning. Leading requires planning. Leaders rely on motivational programs that are planned in advance. Teams and groups use plans to direct activities. Communication systems and all of the new iterations of those systems necessi- tate careful planning to spot new trends and to implement changes in technologies. Plan- ning is the basis of control through the use of standards.
The organizing function shares similar bonds with other management functions. The first element of organizing, job design, is shared with the staffing function. Job specifications established in the job design aspect of organizing are used to recruit and select employees. Employees who fit are able to effectively work in company-prescribed teams and groups and communicate effectively within the system.
Staffing shares the human element with leading. Staffing involves choosing the right peo- ple. Leading includes enticing the highest levels of performance from those people.
Controlling has one element in common with staffing. Both are involved in the perfor- mance appraisal process for individual employees. Standards link controlling and plan- ning. Further, controlling begins the process of creating the next set of plans.
In summary, the linkages between the five management functions make them insepa- rable activities. Successful managers understand the links and carefully follow through on every aspect of the management program.
7.3 Management Careers Learning Objective #3: What skills will you need to have a successful career in management?
Perhaps the best part of choosing to study management and pursuing a career in management is that you are able to connect it with your personal interests. For those of you with an interest in accounting, the logical career path will become managerial accounting. There you will be able to apply your technical skills with management knowl- edge in an accounting department.
In the area of production, the first step for most will be as a line foreman or supervisor. In those positions, individuals who have been promoted from the rank and file may need the greatest amount of resocialization. They are now supervising those who were their peers and friends. Making the transition to supervision can be difficult.
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In the field of human resources, managing a department requires a great deal of technical knowledge, including an understanding of the legal environment. Preparation in this area will likely concentrate on the wide variety of activities performed in the human resources department, with a healthy dose of cost-control advice mixed in.
For those most comfortable in marketing and sales, expect to manage people with higher levels of creativity in marketing and an interest in financial rewards in sales. The most successful people in marketing are those who create new ideas and methods to attract and keep customers. The Red Bull story in Chapter 2 of this book provides an example of creative thinking, as does the vignette regarding The Richards Group in Chapter 3. Sales- people tend to be most interested in reward structures. As one successful sales manager put it, “Salespeople are into stuff. They like the things that money can buy. They like the lifestyle. It helps to understand that first.”
Managing research and development and information technology involves oversight of processes. Innovations and inventions take time. Setbacks occur along the way. Web sites have to be updated and improved on a continual basis. Each new generation of comput- ing devices alters the best ways to deliver information to employees and customers.
In summary, the job description for “manager” represents a wide range of potential work situations. Managing the staff in a doctor’s office is not the same as managing a police force. The best model for you to follow is the person-organization fit. When you find the right home, take advantage of your knowledge and skills to establish a successful career. Following are some other assets you can acquire to help in that process:
• Learn a second language. • Indicate your willingness to learn. • Improve your social skills. • Be a team player. • Understand the difference between political managers and real managers.
Each of these abilities will help you achieve your career goals.
Learn a Second Language
If you are a U.S. citizen, odds are you speak only English. A fortunate few speak a second lan- guage. Fluency in key languages such as Chi- nese, Hindi, Spanish, and French greatly increase your value to the company. Speaking, reading, and understanding a second language can help in specific companies and circumstances.
Many universities now offer international busi- ness or international management as a major. Part of that educational process includes an overseas experience and training in a second language. You can do both of these things on your own.
Digital Vision/Thinkstock
Learning a second language increases your value to the organization.
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Indicate Your Willingness to Learn
You have already demonstrated a willingness to learn by enrolling in this class. When your formal education is complete, learning continues. The first step might possibly be the employee training program that begins your next job. From there, many of you might hope to be included in a company’s manager training program. At the same time, you can learn on your own. Beyond acquiring a second language, you can keep up on current events, read about technical skills in your field, and learn lessons from others by reading their works as well as attending conferences and seminars. As one manager put it, “Every- thing you learn has the potential to open another door.”
Improve Your Social Skills
Do you know how to “work a room?” The ability to comfortably interact with others comes naturally to some. If you are not one of the lucky ones who can easily interact with others, there is room for improvement. As with any other talent, the key is practice. It may seem silly, but practicing a handshake may be a good place to start. Having a firm but not hard grip exudes confidence. Maintaining eye contact shows you have nothing to hide. Verbally, a good rule to remember is that the best way to lead someone to think that you are intel- ligent is to ask the person about his or her interests. Always try to remember one key thing about a person you meet, whether it is about a hobby, favorite team, recent event, or some other memorable characteristic. It provides a starting point for your next conversation.
Social skills include your manner of dress and table manners. Those who are fashion chal- lenged should seek the advice of people who always seem to be appropriately dressed. Table manners are a must. Most job interviews and many important business meetings include a meal. Knowing what to order and how to dine without making a mess are necessities. Poor table manners distract from the content of the meeting and make you seem unprofessional.
Also, have someone secretly record your conversations. How many times did you fall back on “ya know” and “like”? While the world has changed, and famous people now use these verbal crutches, those who do not maintain an edge. Speaking like a professional is an important part of having good social skills.
Social skills play major roles in people getting jobs and being promoted. Many young people have learned various bad habits. If that includes you, now is the time to start work- ing on getting rid of those unwanted habits.
Be a Team Player
As one cynic put it, “The secret to success is humility. Once you can fake that, you have it made.” In truth, it may be worth your while to have candid conversations with people you trust and love. If they tell you that your ego always seems to be out on your sleeve,
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CHAPTER 7Chapter Summary
you have a problem. An effective team player shares information, encourages others, and does not always have to be the center of attention. Quality team players do get noticed— and are even admired and promoted.
Become a Real Manager, Not a Political Manager
Noted management expert Fred Luthans explains the difference between a political manager and what he terms a “real manager.” A political manager serves his or her own interests first. The person’s readily apparent goals are to build power and be promoted. These types of managers engage in political tactics to get noticed and seem like they are in charge, even when they are not.
In contrast, a real manager is one who actually enjoys managing. This includes paying attention to, and implementing all of the management functions as well as building rela- tionships with employees in the workplace. A real manager coordinates activities with other managers rather than engaging in turf wars. A real manager engages in conversa- tions, not confrontations. Real managers are the kinds of people who get things done and make organizations work effectively (Luthans, Hodgetts, & Rosencranz, 1998).
Summary When thinking about a successful career, the first step is to define what that means to you. For some, a successful career means having enough money and enough free time to enjoy other aspects of life such as hobbies, family, and travel. For others, success can mean only one thing: becoming a CEO or president of a company. In essence, part of your life plan should be establishing a personal mission, which is what you want to achieve in a career.
One view suggests that five components are necessary for career success:
• education • experience • effort • training • opportunity
Each of these is in your hands. You can enhance your educational attainments. Experi- ence is garnered over time and with involvements. Effort shows on performance appraisal forms and in how daily work is conducted. Training takes the form of employee and man- ager training programs and your willingness to excel in those programs. The final compo- nent, opportunity, requires you to pay attention. Do not allow yourself to be trapped in a dead-end job. Always be on the lookout for that next career adventure. Good luck.
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CHAPTER 7Chapter Summary
Key Terms
Case Study: Managing Electrolytes
Enlyten Electrolyte SportStrips represent a new entry into a lucrative market. Athletes and others engaged in strenuous physical activity lose electrolytes. When that happens, the individual becomes tired and is likely to end the workout. Electrolytes provide a boost of energy, greater stamina, and a better recovery from an exercise program.
Enlyten Electrolyte SportStrips replace electrolytes through a buccal absorption process, which means it is placed in the cheek and absorbs into the gum. In essence, the athlete pops a strip into his or her mouth, allows it to dissolve, and enjoys the different flavors. The original flavor was orange.
The primary advantage of using SportStrips over other products is that the method avoids the stomach, which means bypassing gastric absorption and allowing the key ingredient to move directly into the body. One of the company’s claims is that the strips help avoid the over-hydration that often accompanies drinking excessive amounts of fluids, especially sports drinks such as Gatorade and POWERADE.
Naturally, one of Electrolyte SportStrips’ primary competitors, Gatorade, is not too thrilled by the new challenger. Gatorade has protected itself by forming alliances with various sports, most notably the NFL. The iconic Gatorade bath is practically an end-game ritual during the playoff season. The league has agreed that no other electrolyte replacement system can be endorsed by any NFL team. In spite of this challenge, the Enlyten company, which produces and sells the product, notes that at least 10 teams quietly use SportStrips on the sidelines.
Physicians and other professional sports, including soccer and baseball franchises, have endorsed Enlyten Electrolyte SportStrips. Gaining national attention remains a problem. Also, besides the standard sports drinks, a new entry into the same market is pickle juice, which has an even more potent amount of electrolytes accompanied by a tangy taste.
To achieve success, the Enlyten management team must find ways to attract usage in high schools, colleges, and by professional trainers. Time will tell if the company will be able to carve out a share of this multimillion-dollar industry’s market.
1. Prepare a mission statement for the Enlyten company. 2. Develop a strategic plan for the Enlyten company. 3. What types of individuals should Enlyten hire? 4. How should Enlyten compensate salespersons? 5. What kinds of functional area standards should be set for Enlyten, and how should per-
formance be measured? 6. Do you think this product and company will succeed? Why or why not?
boundaryless organization one that consists of individuals working together on projects from various companies and institutions with less regard to traditional borders.
contingency planning preparing and develop- ing “what if?” plans for unforeseen events.
controlling the process of evaluating perfor- mance against established goals and creating methods appropriate to take corrective action to maintain or improve performance in any area of the organization.
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CHAPTER 7Chapter Summary
Review Questions
1. What political issues are likely to affect the world of business in the coming years? 2. What social trends have made an impact on business and will continue to do so
in the future? 3. What individual characteristics are associated with diversity? 4. How does technology affect the planning process? 5. What are the two positions regarding the effects of globalization on interna-
tional commerce? 6. What is contingency planning? 7. What is a boundaryless organization? 8. What is meant by the terms host country employees, home country employees,
and third-party national employees? 9. What is a technocrat? 10. Explain how planning is related to the other four management functions. 11. What assets can you acquire to improve your odds of enjoying a successful career?
Analytical Exercises
1. Which of the five main factors in the external environment—political, social, economic, technological, and competitive forces—do you believe will have the biggest impact on business in the next decade? Defend your answer. Which will have the least impact? Defend your answer.
2. Explain the ways in which the following statement is true: Diversity and commu- nication interact to create greater complexity in today’s business world.
3. Do you think social media Web sites such as Facebook and Twitter will continue to exhibit a dramatic impact on business in the future? Why or why not?
4. Of the five management functions—planning, organizing, staffing, leading, and controlling—which do you expect will experience the most dramatic changes in the next decade? Defend your answer. Which will have the least amount of change? Explain your answer.
5. Which type of leader will be most valuable in the next decade in the following types of organizations, a transformational leader or a technocrat? • professional sports • network television • manufacturing appliances • selling all forms of insurance
organizing the process of bringing people and resources together to create products and ser- vices in an efficient and effective manner.
planning a systematic process in which manag- ers make decisions about future activities and the key goals that the organization will pursue.
staffing the achievement of organizational goals through the effective and efficient deployment of people.
technocrats persons well versed in technolo- gies who also exhibit the ability to influence others.
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CHAPTER 7
6. Construct a personal balance sheet, as follows:
Your Assets Your Liabilities Your Net Value to a Company
Then, write out your plan for increasing your assets, reducing your liabilities, and raising your net value to a company in terms of specific goals and activities.
Chapter Summary
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Glossary
360-degree assessment an employee chooses between 6 and 12 other people to complete evaluations, they then anonymously fill out performance appraisal forms, and the results are then tabulated.
activity ratios ratios that assist managers in understanding how well certain company activities are being carried out.
auditing an assessment of a person, organiza- tion, system, process, operation, project, or product.
authority the right to direct with permission to act.
balance sheet a report on investing and business financing activities of the organization.
boundaryless organization one that consists of individuals working together on projects from various companies and institutions with less regard to traditional borders.
budget an annual financial plan.
centralization/decentralization the degree of delegation of decision making, authority, and power within an organization.
coaching what occurs when an expert observes the employee in his or her job over a period
of weeks or months and provides continuous feedback and guidance on how to improve.
communication an act or instance of transmit- ting information.
concurrent controls controls that manage problems as they are encountered.
consideration a leadership behavior that expresses concern for employees by establish- ing a warm, supportive, friendly climate.
contingency planning preparing and develop- ing “what if?” plans for unforeseen events.
controlling the process of evaluating perfor- mance against established goals and creating methods appropriate to take corrective action to maintain or improve performance in any area of the organization.
core competence the most proficiently per- formed internal activity that is central to the firm’s strategy and competitiveness.
departmentalization organizing people into different departments or divisions in which collections of tasks are placed together, such as accounting, marketing, and production.
distinctive competence something a com- pany does at a level that is better than all its rivals.
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GLOSSARY
effectiveness measures the company’s efforts to achieve the goals that will allow it to sur- vive, grow, and thrive over time.
efficiency measures how productively resources are used to achieve a goal.
employee inventory examining all current employees at all levels as well as projecting future needs in those areas.
equity philosophy reflects the belief that company leaders try their best to make the compensation system fair to employees.
exchange philosophy indicates management’s belief that some work skills and some employees are more valuable to the company than others.
expectancy an employee’s belief that working hard will result in a desired level of task perfor- mance being achieved.
external environment consists of the total set of forces that act on a company but are not within its boundaries.
feedback control controls that manage prob- lems after the fact.
feedforward controls controls used to antici- pate problems.
formal communication system messages that travel through organizationally approved channels.
formalization the presence of rules and procedures.
goal what an individual is trying to accom- plish; it is the object or aim of an action.
group two or more people interacting who share collective norms, goals, and have a com- mon identity.
human resource planning analyzing and pre- paring for future personnel needs.
informal communication messages that travel through social interactions among employees.
initiating structure a leadership behavior that organizes and defines what group members should be doing.
instrumentality an employee’s belief that successful performance will be followed by rewards and other desirable outcomes.
job a set or series of tasks performed by an individual on behalf of an organization.
job analysis the process of assigning tasks to jobs.
job description a formal list of tasks and duties.
job design what occurs when managers determine the tasks that need to be done, who will do them, and what selection criteria will be used to choose employees and place them on the job.
job specification a list of the eligibility requirements or qualifications needed to per- form a job.
leadership influencing behaviors in organizations.
leading in a business context, consists of all activities undertaken to help people achieve the highest level of performance.
leverage ratios ratios that measure company debt and company risk.
liquidity ratios ratios designed to make sure the company has enough money on hand.
management all of the techniques used to lead the human resources in an organization to become productive.
management functions planning, organiz- ing, staffing, leading, and controlling human
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GLOSSARY
and other resources to achieve organizational goals.
management information system consists of the people and technologies used to collect and process organizational information.
management theory the study of the overall management process.
manager the person responsible for helping to achieve an organization’s goals and desired future outcomes.
mechanistic organization characterized by high use of rules and procedures, a greater number of levels in the organization, and formal relationships between workers, and that is, as a result, a less flexible method of operation.
mechanization/computerization measures the reliance on computers and technology to maintain operations.
mentoring occurs when an established employee guides the development of a less experienced worker to increase the employ- ee’s competencies, achievement, and under- standing of the organization.
mission statement a document that expresses a clear and concise reason for why the organi- zation exists.
operational plans plans that direct daily activities.
organic structures that employ few rules and procedures, have a small number of organi- zational levels and ranks, allow for informal relationships among workers and supervisors, and are much more flexible and adaptable as a result.
organization a collection of people who work together and coordinate their actions to achieve a wide variety of goals or desired future outcomes.
organizational design the process by which managers make specific organizing choices that result in the particular kind of organiza- tional structure they will utilize.
organizational structure a formal system of task and reporting relationships that coordi- nates the activities of members so that they work together to achieve organizational goals.
organizing the process of bringing people and resources together to create products and ser- vices in an efficient and effective manner.
planning a systematic process in which man- agers make decisions about future activities and the key goals that the organization will pursue.
power control over formal and informal means of influence.
profitability ratios ratios that measure com- pany financial success.
promote-from-within giving priority to advancing current employees to higher ranks.
responsibility (or accountability) the obliga- tion to complete tasks as assigned.
skills inventory a breakdown of the employ- ee’s resume or performance record into sets of strengths and talents the employee exhibits.
sourcing methods used to acquire raw materials.
staffing the achievement of organizational goals through the effective and efficient deployment of people.
standardization the use of a series of job titles that are exactly the same, and the assignment of workers to perform the same activities.
strategic management coordinating the efforts of all levels of management into a uni- fied course of action.
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GLOSSARY
strategic planning a purposeful effort that is directed by management within an organiza- tion and, which if done effectively, draws on the knowledge, skills, and abilities of employ- ees at all levels of the organization.
strategic vision statement a document that offers direction about where the organization is heading and what it hopes to become.
strategy a cluster of decisions about what goals to pursue, what actions to take, and how to use resources to achieve goals.
SWOT analysis the careful study of a compa- ny’s strengths and weaknesses combined with the opportunities and threats present in the external environment.
tactics the plans that support strategies in the functional area departments.
team a small group of people with comple- mentary skills, who work together to achieve a common purpose, and hold themselves mutu- ally accountable for accomplishing its goals.
technocrats persons well versed in technolo- gies who also exhibit the ability to influence others.
transformational leaders individuals that engender trust, seek to develop leadership in others, and exhibit self-sacrifice, and serve as moral agents, focusing themselves and their followers on objectives which transcend the more immediate needs of the work group.
valence the value an employee assigns to the possible rewards and other work-related outcomes.
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- FM & TOC
- Chapter 1
- Chapter 2
- Chapter 3
- Chapter 4
- Chapter 5
- Chapter 6
- Chapter 7
- Glossary
- References
